Aftab Ahmed v The Commissioners for HMRC

On 8 December 2023, having succeeded in his appeal, the Appellant, Mr Aftab Ahmed, made an application for costs (the “Application”). The Application is opposed by HMRC who provided their written submissions in response to the Application on 12 February 2024. On 1 March 2024 the Tribunal received written submissions, on behalf of Mr Ahmed, in reply

Mr Ahmed, a director of five companies, filed his 2013-14 personal self-assessment tax return on 31 December 2014. On 2 March 2016 he “signed off”, as director, each of companies accounts for accounting periods ended 31 December 2014. These showed that the loans from the companies to Mr Ahmed had been written off with the effect, of which Mr Ahmed accepted he knew, of increasing his 2013-14 liability to income tax. However, the exact amounts written off (and therefore the increased tax due) remained uncertain and was not finalised or agreed with HM Revenue and Customs (“HMRC”) for some years with the result that it was too late for Mr Ahmed to amend his 2013-14 tax return (see s 9ZA Taxes Management Act 1970).

On 19 March 2020 Mr Ahmed was issued with a ‘discovery assessment’ made by HMRC under s 29 TMA of the Taxes Management Act 1970 (“TMA”). Having first appealed to HMRC, Mr Ahmed notified his appeal to the First-tier Tribunal on 26 May 2022. At the conclusion of the hearing, on 7 November 2023, the Tribunal (Judge Brooks and Mrs Neill) in an extempore decision allowed Mr Ahmed’s appeal. On 13 November 2023 the Tribunal issued a “short” decision pursuant to Rule 35(3) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 as both parties agreed that it was unnecessary for the decision to include full or summary reasons of fact and reasons for the decision.

At the hearing HMRC argued that the assessment was to recover a loss of tax that had arisen as a result of Mr Ahmed’s careless behaviour in relation to income he had received in 2013-14 as a result of the written off loans. Accordingly, because of Mr Ahmed’s carelessness, HMRC contended that the extended time limit under s 36 TMA applied, and the assessment was therefore in time, valid and should be upheld.

Mr Ahmed, who was represented at the hearing (and in relation to the written submissions made for this application) by Mr Liban Ahmed of CTM Tax Litigation Limited, did not dispute that if his actions were found to be careless the extended time limit under s 36 TMA did apply and the assessment was valid. However, he contended that he was not careless and, as such, the assessments were out of time, invalid and his appeal should succeed.

It was only when the skeleton argument on behalf of Mr Ahmed had been filed and served, 14 days before the hearing, that it had become apparent that the sole issue before the Tribunal was whether Mr Ahmed was careless, ie whether Mr Ahmed failed to take reasonable care to avoid bringing about a loss of tax (see s 118(5) TMA). This was confirmed by the parties at the commencement of the hearing. Until then it had been understood that in addition to the carelessness issue there was a separate issue regarding the date on which the assessment was raised and sent to Mr Ahmed and whether that assessment was in time even if extended time limit contained in s 36 TMA was applied. Indeed in his Notice of Appeal Mr Ahmed had argued that as he had not received the assessment until 9 April 2020 it was out of time.

HMRC’s case was that Mr Ahmed, who was aware that the loans had been written off on 2 March 2016 and the consequent tax effect of this, was careless because he failed to notify HMRC of the position as he was required to do so by s 118(6) TMA. In his evidence, Officer Smethurst, the HMRC officer who had made the discovery assessment, said that Mr Ahmed would not have been careless if he had notified the “income tax department” of HMRC.

Although Mr Ahmed did not notify HMRC’s “Income Tax Department”, HW Fisher and Company, the auditors of the five companies of which he was a director did write to HMRC on 8 April 2016 referring to the written off loans. This was shortly after the companies corporation tax returns had been filed on 30 March 2016. That correspondence resulted in a telephone conversation between HMRC Officer Keith Alexander and Mr Gary Window of HW Fisher and Company on 5 July 2016.

A contemporaneous note taken by Officer Alexander of that conversation included the following paragraph:

In the light of this evidence the Tribunal concluded that Mr Ahmed had, through his accountants/auditors, taken reasonable steps to notify HMRC of the written off loans and consequent increase in his liability to tax.

In reaching that conclusion the Tribunal noted that s 118(6) TMA referred to “Her [now His] Majesty’s Revenue and Customs” and not any particular department of HMRC. Although subsequent correspondence may not have referred specifically to Mr Ahmed’s personal tax affairs and an enquiry was not opened until some time later, given Officer Alexander’s comments that the review would be looking at Corporation Tax, Income Tax (including reviews of the directors’ private and personal spending), the Tribunal found that Mr Ahmed did take reasonable care and that his actions could not be described as careless.

The ability of the Tribunal to make an order for costs is derived from s 29 of the Tribunals Courts and Enforcement Act 2007 (“TCEA”) which provides:

As is clear from s 29(3) TCEA, the power of the Tribunal to award costs is also subject to Tribunal Procedure Rules. Insofar as it applies to standard category cases, such as the present, rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the “Tribunal Procedure Rules”) provides:

The Upper Tribunal (“UT”) in Market & Opinion Research International Ltd v HMRC [2015] UKUT 12 (TCC) (“MORI”) observed at [15] that:

MORI has been endorsed by the UT in Distinctive Care Ltd v HMRC [2018] UKUT 155 (TCC) (“Distinctive Care”). At [38] – [39] of its decision the UT referred to the earlier decision of the UT in Catanã v HMRC [2012] UKUT 172 (TCC) saying;

At [44], the UT summarised the approach set out in relation to whether a party had acted unreasonably as follows:

At [45] the UT added the following, which it described as a “small gloss”, to the summary:

The decision of the UT in Distinctive Care was upheld by the Court of Appeal in Distinctive Care Ltd v HMRC [2019] EWCA Civ 1010.

Mr Ahmed contends that HMRC, by persisting with an argument that on the evidence they knew could not succeed, have acted unreasonably in defending these proceedings. In essence HMRC’s case is that just because their argument that Mr Ahmed was careless was unsuccessful it does not follow that they acted unreasonably by pursuing it.

HMRC also contend that if they had acted unreasonably in defending or conducting the appeal the Tribunal would have referred to it either in the extempore decision given at the conclusion of the hearing or in the subsequent short decision. The fact that this was not mentioned by the Tribunal confirms that HMRC were not unreasonable in conducting or defending the appeal.

However, I consider this argument to be misconceived. In giving its decision in this case the Tribunal was concerned with the issue before it, ie whether Mr Ahmed was careless. The question of costs or whether HMRC had been unreasonable was not before the Tribunal as this was a “standard” as opposed to a “complex” (cost shifting) category of appeal. As such, the absence of any comment or observation by the Tribunal does not assist HMRC.

Although it was only shortly before the hearing that it became apparent that the sole issue before the Tribunal was whether Mr Ahmed had been careless, the argument abandoned by Mr Ahmed, regarding whether the assessment had been raised and sent to him in time, could only have arisen if it had first been established that Mr Ahmed had been careless.

HMRC’s case (as summarised at paragraph 7, above), that was maintained at the hearing, was that Mr Ahmed had been careless because he failed to notify HMRC that the loans had been written off on 2 March 2016.

However, given that under the case management directions issued by the Tribunal on 19 December 2022 HMRC were required to, and did, prepare the Hearing Bundle which included the auditors letters of 8 April 2016 and the contemporaneous note of the 5 July 2016 telephone converstion, it must follow that HMRC were aware, or certainly should have been aware had a rigorous review been undertaken, that Mr Ahmed through his auditors had notified HMRC shortly after the loans had been written off.

In such circumstances I consider that HMRC’s reliance on the argument, up to and throughout the hearing, that Mr Ahmed was careless by not notifying HMRC of his position when he clearly did so to be unreasonable and as a result his application for costs must succeed.

Mr Ahmed sought a summary assessment of his costs and included a schedule of these costs (totalling £26,208 with an additional £1,800 incurred in respect of the Reply to HMRC response to the Application). HMRC, in their response to the Application requested further time to provide a detailed response on the issue of quantum, Mr Ahmed objects to further time being allowed as this matter should have been dealt with together with the response to the Application.

Other than note that the sums sought by Mr Ahmed are clearly within the range of a summary assessment by the Tribunal I shall leave it to the parties to reach an agreement on costs with the option of applying to the Tribunal within 28 days for a summary assessment in the absence of agreement.

I therefore allow the application and direct that HMRC pays Mr Ahmed his costs of and incidental to the appeal with such costs to be agreed. In the absence of agreement either party may apply to the Tribunal within 28 days for a summary assessment of costs.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.