Judgment summary
This decision concerns an application by HMRC under Rule 10(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 for a costs order against M-Sport Wheels Limited, following the Appellant's withdrawal of its appeal against HMRC's refusal of research and development tax relief claims (paras 1 to 3).
The Tribunal determined the application on the papers, without a hearing, under Rule 29 (headnote).
The Tribunal reviewed the chronology of the litigation, including repeated difficulties the Appellant faced in obtaining witness evidence, and applied the tests set out in Distinctive Care Limited v HMRC and Tarafdar v HMRC (paras 26 to 27). It concluded that, although the Appellant's conduct was not without criticism, it did not fall outside the range of reasonable conduct, and refused the application for costs (paras 43, 47).
Background
The Appellant submitted a notice of appeal on 15 January 2024 against HMRC's refusal of its R&D claims for the 2020 and 2021 periods (para 4). The Tribunal issued directions on 18 February 2025 requiring service of witness statements by 2 May 2025 (para 5).
The Appellant wished to rely on two witnesses. It initially hoped Mr Campbell would provide a witness statement, but he had changed jobs, and on 19 August 2025 the Appellant notified HMRC that Mr Campbell's new employer would not agree to him providing a statement (paras 6 to 9). The Appellant then sought a witness statement from the manufacturer.
On 5 September 2025, the Appellant provided an unsigned witness statement from Mr Kuo, based in China, saying a signed version would follow (para 11). On 29 October 2025, the Tribunal expressed concern about delays and gave the Appellant 7 days to provide a signed copy (para 12). On 6 November 2025, the Appellant applied for a further 14 days, which the Tribunal refused on 19 November 2025, setting out the steps needed to rely on Mr Kuo's evidence (para 13).
The hearing was listed for 5 and 6 March 2026 (para 14). On 19 February 2026, the Appellant's agent told HMRC it was likely the appeal would be withdrawn due to the inability to obtain a signed statement from Mr Kuo (para 15). The appeal was formally withdrawn and vacated on 25 February 2026 (paras 17 to 18).
Core dispute
HMRC applied for a costs order dated 24 March 2026, arguing the Appellant acted unreasonably in bringing, defending or conducting the proceedings, contending that by 2 September 2025 at the latest the Appellant should have investigated whether it could realistically obtain and rely on Mr Kuo's evidence, and that the appeal continued for months without resolving that issue, culminating in a late and poorly communicated withdrawal (paras 19 to 20).
HMRC pointed to repeated omissions in producing witness evidence, continuous breaches of Tribunal directions, and a failure to investigate the viability of its evidential strategy (para 20). The Appellant responded that it had not acted unreasonably, having withdrawn promptly once it became clear it could not produce the required evidence, and further argued that the costs claimed (nearly £6,202.07 in total, including nearly £4,000 of internal drafting and review work and £931.67 of Counsel fees) were excessive and disproportionate (paras 21 to 22, 24).
The issues for determination were whether the Appellant had acted unreasonably in bringing, defending or conducting the appeal, and if so, whether the Tribunal should exercise its discretion to award costs (para 23).
Court findings
The Tribunal applied the principles in Distinctive Care Limited v HMRC ([2019] EWCA Civ 1010) as to the meaning of acting unreasonably under Rule 10(1)(b), and the questions set out in Tarafdar (t/a Shah Indian Cuisine) v HMRC ([2014] UKUT 362 (TCC)) concerning late withdrawal (paras 26 to 27).
The Tribunal accepted that the reason for withdrawal was the Appellant's realisation it could not obtain the necessary witness evidence, and that the difficulties, at least in part, arose from external constraints such as employer restrictions and corporate approval processes (paras 28 to 30).
On whether the Appellant could have withdrawn earlier, the Tribunal found it did not know, or should have known, that its appeal was hopeless by 2 September 2025 (para 35). It found that the 19 November 2025 directions should have triggered a rigorous reassessment of the appeal's viability, but there was no evidence of what the Appellant did between 19 November 2025 and 19 February 2026, and it was not possible to conclude the reassessment could have been undertaken more quickly (para 34). There was no single clear point at which it became objectively apparent the appeal could no longer proceed (para 35).
On whether it was unreasonable not to withdraw earlier, the Tribunal found that although the Appellant's conduct was not without criticism, it did not fall outside the range of reasonable conduct when considered in the round (para 36). Repeated procedural failures, without more, did not automatically amount to unreasonable conduct (para 38). The Tribunal accepted the Appellant made sustained efforts to obtain alternative evidence, including identifying a new witness and preparing a draft statement, in circumstances not wholly within its control (para 40). The failure to fully investigate procedural requirements for overseas evidence sooner reflected imperfect case management rather than unreasonable conduct (para 41).
The Tribunal held that HMRC, bearing the burden of proof, had not discharged it (para 42, 47).
Outcome
The Tribunal refused HMRC's application for costs (paras 43, 47).
Having refused the application, the Tribunal did not need to consider whether HMRC's costs were reasonably incurred or to determine the precise amount recoverable, though it noted that a proportion of HMRC's costs were incurred after HMRC was aware withdrawal was likely, which would in any event have been relevant to the exercise of discretion (para 48).
The decision records full findings of fact and reasons, with a right to apply for permission to appeal within 56 days pursuant to Rule 39 of the FTTTC Rules (para 49).
Major issues / areas of contention
- Whether the Appellant acted unreasonably in bringing, defending or conducting the appeal under Rule 10(1)(b) of the FTTTC Rules (para 23(a))
- If so, whether the Tribunal should exercise its discretion to award costs (para 23(b))
- Whether the Appellant could and should have withdrawn its appeal at an earlier stage, applying the Tarafdar questions (para 27)
- Whether repeated delays and breaches of Tribunal directions in obtaining witness evidence amounted to unreasonable conduct (paras 36 to 41)
- Whether the costs claimed by HMRC, totalling £6,202.07, were reasonable and proportionate (paras 22, 24, 48)