Judgment summary
This decision concerns two applications by Mr Colin Sagar for costs under rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, following HMRC's withdrawal of the decisions under appeal in appeal references TC/2024/03145 (the Input Tax Appeal) and TC/2024/05097 (the Penalties Appeal) (1).
The Tribunal, Judge Kim Sukul, heard the applications together because they arose from related facts, but reached different conclusions in each appeal (4). In the Input Tax Appeal, the Tribunal found HMRC had acted unreasonably in conducting the proceedings, because material documents relied upon had already been supplied to HMRC during the underlying enquiry and HMRC ought to have appreciated this on review after notification of the appeal (5). In the Penalties Appeal, the Tribunal found HMRC had reviewed the matter promptly, identified an error, and withdrawn before serving a Statement of Case, and so had not acted unreasonably (6).
Mr Sagar's applications for indemnity costs and a wasted costs order were both refused (7).
Background
The Input Tax Appeal concerned HMRC's decision to deny Mr Sagar's claim for input tax relating to VAT periods ending in March 2021, April 2021 and May 2021, following a lengthy compliance check (9).
On 20 February 2022, Mr Sagar emailed HMRC's officer attaching sales invoices, customer agreements and related correspondence later relied upon in the appeal (10). The officer who conducted the compliance check had left the department by the time the appeal commenced (10). Following separate proceedings concerning unredacted bank statements, Mr Sagar provided those statements to HMRC in June 2024, but HMRC maintained its position and, after an internal review, upheld its decision (11).
On receipt of the Notice of Appeal, HMRC reviewed the matter and filed a Statement of Case on 19 August 2024, continuing to contend the evidence was insufficient (12). Mr Sagar served his hearing bundle on 20 December 2024, and on 7 February 2025 HMRC notified the Tribunal it no longer intended to defend the appeal, withdrawing the decision under appeal (14).
The Penalties Appeal concerned two Personal Liability Notices and associated penalties issued to Mr Sagar in September 2024, appealed on 22 September 2024 (15). Following review, HMRC concluded the penalties had been issued in error, informing the Tribunal on 7 January 2025 that it would not defend the appeal, and confirming withdrawal by letter dated 8 January 2025 (16).
Mr Sagar's costs application in the Penalties Appeal was made outside the time limit in rule 10(4) of the Tribunal Rules, but HMRC withdrew its objection to the late application during the hearing (17).
Core dispute
The dispute was whether HMRC had acted unreasonably in bringing, defending or conducting the proceedings in either or both appeals, for the purposes of rule 10(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, following its withdrawal of the decisions under appeal in both cases (1).
Mr Sagar contended that HMRC already possessed the material documents required to determine the Input Tax Appeal but continued to seek those documents, maintained opposition to the appeal, and only withdrew shortly before the substantive hearing (27). He also sought indemnity costs and a wasted costs order in relation to the proceedings (1).
HMRC contended it had acted reasonably throughout and had withdrawn promptly once it had sufficient visibility of the relevant material (27).
Court findings
Applying the framework in Tarafdar v HMRC [2014] UKUT 362 (TCC), the Tribunal accepted that HMRC withdrew the Input Tax Appeal decision after reviewing documents relied upon by Mr Sagar, but found that HMRC could and should have reached that position materially earlier (28, 35).
The Tribunal found that documents provided by Mr Sagar on 20 February 2022 had previously been supplied to HMRC during the enquiry, and that HMRC accepted at least some documents had been provided to the enquiry officer even though they could not later be located (29). The Tribunal held that HMRC, upon receipt of the Notice of Appeal, was required to undertake a proper and rigorous review, and that such a review ought to have revealed the material documents had already been supplied (30).
The Tribunal considered but rejected HMRC's submissions that it was entitled to seek replacement copies of missing documents, that some documents were first provided during the appeal in November 2024, and that Mr Sagar's own conduct contributed to delay, concluding that the primary cause of continued defence was HMRC's failure to identify and evaluate information already available to it (31-33). Accordingly, HMRC was found to have acted unreasonably in defending and conducting the Input Tax Appeal within rule 10(1)(b) (36).
By contrast, in the Penalties Appeal, the Tribunal found HMRC reviewed the matter shortly after the Notice of Appeal, identified the penalties had been issued in error, and withdrew before serving a Statement of Case and before putting Mr Sagar to a substantive defence, which fell within the range of conduct reasonably open to a litigant (40). HMRC's maintenance of its objection to the lateness of the costs application was not found to amount to unreasonable conduct (43).
On indemnity costs, the Tribunal held that HMRC's conduct in the Input Tax Appeal, while unreasonable for rule 10(1)(b) purposes, was not unreasonable to a high degree and did not arise from bad faith, deliberate disregard of the evidence, abuse of process or improper ulterior motive, distinguishing Governance Ministries v HMRC [2026] UKFTT 371 (TC) (46-47).
On wasted costs, the Tribunal found no evidence that any individual HMRC representative acted improperly, unreasonably or negligently within the meaning set out in Bedale Golf Club Ltd v HMRC [2014] UKUT 99 (TCC), the unreasonable conduct identified being institutional rather than attributable to personal fault (51).
Outcome
The Tribunal allowed Mr Sagar's application for costs in appeal TC/2024/03145 (the Input Tax Appeal), ordering HMRC to pay his costs of and occasioned by that appeal on the standard basis, to be assessed if not agreed (55(1)-(2)).
The Tribunal dismissed Mr Sagar's application for costs in appeal TC/2024/05097 (the Penalties Appeal) (55(3)). The applications for indemnity costs and for a wasted costs order were both dismissed (55(4)-(5)).
No findings were made regarding quantum, with all issues concerning the amount recoverable reserved for subsequent assessment if the parties could not agree (54).
Major issues / areas of contention
- Whether HMRC acted unreasonably in defending and conducting the Input Tax Appeal under rule 10(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.
- Whether HMRC acted unreasonably in defending and conducting the Penalties Appeal under rule 10(1)(b).
- Application of the Tarafdar three-question framework to appeals resolved by HMRC's withdrawal of the underlying decision.
- Whether HMRC's failure to identify, on review after notification of appeal, documents already in its possession amounted to unreasonable conduct.
- Whether Mr Sagar's own conduct in the disclosure process affected the assessment of HMRC's conduct.
- Whether the circumstances justified an award of indemnity costs.
- Whether the requirements for a wasted costs order against a representative were met.
- Whether Mr Sagar's late application for costs in the Penalties Appeal should be admitted under rule 10(4).