The Khan Partnership LLP v The Commissioners for HMRC

HMRC’s application for costs is made under rule 10(1)(b) the FTT Rules which allows the Tribunal to award costs if a party or their representative has acted unreasonably in bringing, defending, or conducting the proceedings. The central issue addressed is whether the conduct of the Appellant in relation to its hardship application and the associated appeal proceedings meets the threshold of unreasonableness required for a costs award.

A key point of contention is the definition of ‘proceedings’ for the purposes of rule 10(1)(b). HMRC submits that the relevant “proceedings” began when the Notice of Appeal was filed, not when hardship was granted or when the appeal is ‘entertained’ by the Tribunal. In support, HMRC cites relevant case law, including SNM Pipelines Ltdv HMRC [2022] UKFTT 231 (SNM), 4Site Services London Ltd v HMRC [2024] UKFTT 143 (4Site) and Minicloud Ltdv HMRC [2025] UKFTT 00501 (Minicloud), which distinguish between an appeal being ‘made’ and being ‘entertained.’ These authorities are said to confirm that an appeal can be validly made and proceedings commenced even if the Tribunal cannot yet entertain the appeal due to non-payment or pending hardship determination. As such the Appellant’s persistent failure to make a hardship application and then to progress it efficiently represents conduct in the proceedings and meeting the terms of section 29 TECA and rule 10(1)(b) FTT Rules.

HMRC further addresses the Appellant’s arguments that the hardship application is separate from the main appeal proceedings. HMRC maintains that these are not separate proceedings but are part of the same appeal process. The Respondents also clarify that their costs application does not seek costs for HMRC’s actions during the underlying tax enquiry, but only for conduct in the appeal and hardship application process.

HMRC reference the relevant test for determining whether, in a case outside to normal costs shifting regime, costs should be payable as that set out by the Upper Tribunal in in Distinctive Care Ltd v HMRC [2018] UKUT 155 (TCC) at [44] – [45](Distinctive Care)as endorsed by the Court of Appeal [2019] EWCA Civ 1010.

HMRC contends that the Appellant’s conduct was unreasonable. They point to significant delays in providing explanations and documents relevant to the hardship application, noting that the Appellant could have supplied this information from the outset but did not do so until the eve of the hardship hearing. HMRC argues that this delay was egregious and caused unnecessary additional costs. They defend the reasonableness of their requests for all business bank accounts, given unexplained transfers between accounts, and state that only at the last minute did the Appellant provide sufficient explanation regarding client accounts.

The Appellant opposes HMRC’s application for costs in its entirety, arguing that no order for costs should be made. The Appellant’s primary submission is that, under the Tribunal’s standard-track allocation, the default position is that each party bears its own costs, and HMRC has not demonstrated conduct justifying a departure from this rule. The Appellant further contends that the Tribunal lacks jurisdiction to award costs for the period before hardship was granted. The Appellant relies on the decision in Minicloud as confirming that costs cannot be awarded for pre-hardship conduct.

The Appellant addresses HMRC’s reliance on the authorities of SNM and 4Site arguing that these cases do not support HMRC’s position. While these authorities confirm that lodging a Notice of Appeal is a valid procedural step, the Appellant submits that they do not establish that costs jurisdiction under Rule 10(1)(b) extends to the period before hardship is granted. The Appellant maintains that these cases only permit limited case-management steps prior to hardship being determined and do not allow for costs sanctions for conduct during this phase.

The Appellant also emphasises the policy rationale behind the hardship regime, which is to protect taxpayers from the unfairness of being required to pay disputed tax up-front. Allowing costs to be awarded for the pre-hardship period would undermine this protection and expose taxpayers to additional risks at a time when they are unable to advance their appeal.

On the facts, the Appellant submits that its conduct was reasonable throughout. It provided hardship evidence as requested, explained any delays (such as those caused by illness or misdirected correspondence), and voluntarily supplied updated financial information ahead of the hearing. The Appellant argues that evolving disclosure to keep the Tribunal and HMRC informed does not amount to unreasonable conduct, particularly where there is a reasonable explanation for any delay. The Appellant also contends that its handling of client accounts was proper and in accordance with professional rules.

My jurisdiction to award costs for an appeal allocated to the standard track is as provided in section 29 TECA and rule 10(1)(b) FTT Rules. I may award costs where the conduct of the paying party “in the proceedings” is unreasonable.

Distinctive Care represents the leading and binding authority on the approach I am to adopt when considering an application for costs made pursuant to rule 10(1)(b) FTT Rules. In summary, and so far, as relevant to the present claim, it provides:

The Court of Appeal in Distinctive Care is clear I have no jurisdiction to consider conduct prior to the lodging of the notice of appeal when considering conduct in the proceedings. The first issue in determining HMRC’s application for costs is what are “the proceedings”.

I was referred to three other relevant matters.

SNM concerned the validity of an appeal in which the disputed tax had not been paid, and no hardship application had been made pursuant to rule 22 FTT Rules. The Tribunal determined that it was a validly made appeal protecting the taxpayer’s position on time limits for appeal. The Tribunal considered the terms of section 84© VATA and rule 22 FTT Rules and concluded that there was a distinction between the making of an appeal or the commencement of proceedings and their progression or entertainment.

4Site considered a series of interrelated applications including an application for costs bought by the Appellant. I was the judge in that case. I summarised mu view of the decision in SNM as follows:

“61.

… the practical effect of section 84(3) Value Added Taxes Act 1994 (which provides that an appeal against an assessment to VAT cannot be entertained unless the amount assessed as payable has been paid or deposited with HMRC) and Rule 22 FTT Rules (which provides the requirement that when starting proceedings the taxpaying appellant must confirm that payment has been made or that a hardship application has been made) is that an appeal brought without payment and absent HMRC having accepted hardship are proceedings but proceedings which should not proceed further until hardship is determined.

In Minicloud the Tribunal considered an application for costs made by the taxpayer when HMRC withdraw from an appeal prior to producing their statement of case and shortly after accepting that the taxpayer would suffer hardship. The Tribunal considered, in that context and by reference to the test to be applied in determining whether withdrawal from proceedings represents unreasonable conduct, that the proceedings did not commence until hardship was determined. In doing so the Tribunal quoted from the Upper Tribunal in Distinctive Care concluding that an award of costs was dependent on the Tribunal having the relevant jurisdiction when the costs were incurred.

In both SNM and 4Site the Tribunal determined that the appeal proceedings were made i.e. commenced, with the service of a notice of appeal. As such there were unquestionably proceedings on foot from 16 November 2022. However, as provided for by section 84(3) VATA those proceedings may not be entertained or progressed until the tax in dispute is paid/deposited or there has been accepted by either HMRC or the Tribunal that payment of the disputed tax would cause hardship to the taxpayer such that non-payment prior to the determination of an appeal is justified. Rule 22(4) FTT Rules provides that the proceedings so commenced will be stayed pending the outcome of the hardship application (whether that is to HMRC or to the Tribunal).

As such, I consider that whilst there were appeal proceedings, there was no jurisdiction within those proceedings once they were made. As a consequence, the only action taken in respect of the appeal proceedings, before they were suspended/stayed as not capable of being entertained, was the lodging of the notice of appeal itself. A notice of appeal which, as I have found, included a material inaccuracy as to the payment of the disputed tax made. That misstatement being by a party that holds itself out as assisting taxpayers with appeals before this Tribunal (as referenced in the witness statement of Mr Casey and who might therefore reasonably be expected to know when a hardship application is required.

A single act of misconduct and/or omission can be sufficient to justify a claim to costs under rule 10(1)(b) FTT Rules. No explanation was given by the Appellant for this misstatement, and it took 14 months of prevarication before any application for hardship was made. I do not consider that conduct to have been reasonable and I would therefore have been prepared to make an award of costs of and incidental to the appeal proceedings. However, the costs incurred by HMRC in the appeal proceedings in the period 16 November 2022 to 29 May 2025 are extremely limited. The only costs that can be said to have been so incurred relate to the application for a stay of proceedings made on 2 February 2023. These costs have not been included in the summary schedule of costs I therefore do not exercise my discretion to award any such costs.

The proceedings before this Tribunal bought by the Appellant were not, however, limited to the appeal proceedings. Unlike the position in Minicloud, in this appeal there were also hardship proceedings. By application dated 22 April 2024 the Appellant initiated such proceedings.

In my view those proceedings are severable from the appeal proceedings. They were brought pursuant to section 84(3B) VATA which gives the Tribunal jurisdiction to determine a taxpayer’s entitlement to hardship despite a lack of jurisdiction to entertain or progress the underlying appeal proceedings.

I consider that the Appellant’s conduct within the hardship proceedings was unreasonable. The Appellant failed to comply with the Tribunal’s directions willingly and on time. Compliance was either forced or unreasonably late. It cannot be reasonable to refuse to provide documents which have been listed on a list of documents and for which there are direction for production unless and until threatened with the sanction of the appeal being struck out. Neither can it be reasonable to withhold the relevant information which would have permitted HMRC to have accepted hardship only to provide it less than 24 hours before a Tribunal hearing to determine the issue. The Appellant unreasonably and without any explanation wasted the Tribunal’s and HMRC’s time in managing and preparing for a hearing that became unnecessary. The documents produced and the explanation provided could have been provided months and possibly years earlier. The Appellant chose not provide documents routinely requested and required to determine hardship dragging out both the hardship proceedings.

The costs of and incidental to those proceedings are all costs reasonably incurred by HMRC in the period 22 April 2024 to 29 May 2025. The Appellant has not challenged the detail of HMRC’s summary schedule of costs as to the reasonableness of the time spent in progressing the hardship proceedings. I have considered the noted time and rates and agree them to be reasonable. I have been unable to fully reconcile the breakdown of tasks and the chronology of costs incurred and therefore giving the Appellant (as paying party) the benefit of any doubt I have used the lower amounts shown as incurred in the period 22 April 2024 to 29 May 2025 as the basis of my summary assessment.

Finally, I considered whether, applying the judgment of the Court of Appeal in Distinctive Care, to include the costs incurred by HMRC prior to 22 April 2024 and in making the original decision on hardship as costs of or incidental to the hardship proceedings. On balance I consider that they are not, they are the costs of making the hardship decision which became the subject of the proceedings. In this regard I agree with the position taken in Minicloud.They are not therefore recoverable.

Accordingly, I limit the award of cost to £3.151.80.

In reaching my decision to award these costs I do not consider, as alleged by the Appellant, that I am undermining the protective function of the hardship application or impermissibly allowing cost shifting by the back door. Had the Appellant provided the documents requested by HMRC, and which it would have well known were required to determine a hardship application in its favour, prior to 11 April 2024 its hardship application would have been determined without the need for hardship proceedings to have commenced and when the Tribunal has no relevant jurisdiction to award costs. Further, had the Appellant behaved reasonably within the hardship proceedings it would not have rendered itself liable to costs. Instead, the Appellant behaved in a dilatory and obstructive manner for which it now bears the costs consequences.

In exercise of the power under section 29(1) and (2) of the TECAand pursuant to rule 10(1)(b) of the FTT Rules that:

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.