HMRC's unreasonable conduct leads to costs award against it

20 May 2019. Published by Michelle Sloane, Partner

In E v HMRC [2018] UKFTT 771 (TC), the First-tier Tribunal (FTT) has found that HMRC acted unreasonably in not withdrawing an information notice earlier than it did and awarded the taxpayer his costs.


On 4 July 2017, HMRC  issued to Mr E (the taxpayer) a notice pursuant to paragraph 1, Schedule 36, Finance Act 2008 (the information notice) requesting certain documents.

On 22 December 2017, the taxpayer appealed the information notice to the FTT.  

On 23 January 2018, HMRC wrote to the taxpayer advising him that it  intended to issue third party notices pursuant to paragraph 2,  Schedule 36, Finance Act 2008, to various banks in relation to his tax affairs.  HMRC also issued the taxpayer with a penalty notice in respect of his failure to provide the material requested by the information notice.  

On 26 January 2018, the taxpayer wrote to HMRC informing it  that the information notice was subject to an appeal in the FTT and inviting HMRC to withdraw both the penalty and information notice.

On 5 March 2018, after further correspondence between the parties, HMRC gave notice of its intention to withdraw the information notice as it  no longer considered the information notice to be sustainable. HMRC did this despite no new arguments or evidence having been received by it since receipt of the taxpayer's letter of 26 January 2018. 

On 7 March 2018, the FTT confirmed its receipt of HMRC's notification of withdrawal and allowed the taxpayer's appeal.

The taxpayer subsequently applied for his costs under Rule 10(1)(b), Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the Rules), on the basis that HMRC had acted unreasonably in 'bringing, conducting or defending proceedings' within the meaning of that rule. 

FTT decision

The application was successful.

At the beginning of the hearing, the taxpayer successfully applied, under Rule 32 of the Rules, for the hearing to be conducted in private and for the decision to be anonymised. HMRC did not object to that application which was allowed by the FTT.

With regard to the issue of costs, the FTT considered that the questions to be asked in determining whether HMRC had acted unreasonably were:

1.  what was HMRC's reason for withdrawing from the appeal;
2.  could HMRC have withdrawn at an earlier stage; and
3.  was it unreasonable for HMRC not to have withdrawn at an earlier stage.

1. What was HMRC's reason for withdrawing from the appeal?

HMRC had decided that, upon examining the arguments presented on the taxpayer's behalf, the information notice was unsustainable. There was no evidence that any of the arguments or evidence produced on the taxpayer's behalf were provided in his notice of appeal or after proceedings had begun. All such evidence and arguments were available to HMRC at the commencement of the appeal proceedings. 

2. Could HMRC have withdrawn earlier?

The FTT concluded that the earliest HMRC could have withdrawn was upon receipt of the taxpayer's letter of 26 January 2018, informing it of his appeal to the FTT. Prior to this, HMRC was unaware that the taxpayer had commenced proceedings in the FTT and so it could not have withdrawn. 

3. Was the failure to withdraw unreasonable?

As there was no evidence that HMRC's decision to withdraw the information notice on 5 March 2018 was based on new arguments or evidence, the FTT decided that it was unreasonable for HMRC to not have withdrawn the information notice after receipt of the taxpayer's letter of 26 January 2018. 

In the view of the FTT, some internal consideration would have been needed upon receipt by HMRC of the taxpayer's letter of 26 January 2018 and the FTT therefore decided that 2 February 2018 was the earliest date on which HMRC should have withdrawn the information notice if it had been acting reasonably.  Accordingly, the FTT awarded   the taxpayer his costs from this date.  


This decision provides some helpful guidance on determining the earliest date from when a taxpayer can recover his costs from HMRC when it has acted unreasonably in 'bringing, conducting or defending proceedings', within the meaning of rule 10(1)(b) of the Rules. 

Where HMRC has acted unreasonably, a taxpayer is entitled to the costs he has incurred during the period HMRC acted unreasonably. In the view of the FTT, it is not the case that once it has been  established that a party has acted unreasonably in conducting the proceedings, the award should extend to all of the costs incurred by the other party which were of, or incidental to, the proceedings, including those not incurred as a result of the unreasonable conduct. The award should be limited to the costs incurred in consequence of the unreasonable conduct. Therefore, in this instance, the taxpayer was not entitled to his costs incurred before 2 February 2018. 

A copy of the decision can be viewed here.

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