Tribunal awards costs against HMRC due to its unreasonable conduct

In Daniel Witton v HMRC [2024] UKFTT 489 (TC), the First-tier Tribunal (FTT) awarded costs against HMRC, despite its applications to amend its list of documents and to admit further evidence being successful.

Background

HMRC primarily holds employers responsible for unpaid PAYE liabilities. However, under regulation 72 of the Income Tax (Pay As You Earn) Regulations 2003 (for income tax) and the Social Security Contributions (Transfer of Functions) Act 1999 (for National Insurance Contributions (NICs)), HMRC can recover unpaid income tax and NICs from employees if the employer has deliberately failed to deduct these amounts and the employee was aware of this failure.

Daniel Witton appealed to the FTT against HMRC's decisions requiring him to pay £424,930.50 in income tax and NICs in respect of payments he received from Direct Sharedeal Ltd (DSL) during tax years 2006/07 and 2010/11. For tax years 2008/09 to 2010/11, Mr Witton was an employee of DSL, and HMRC had exercised its recovery powers under regulation 72.

At a time when the appeal proceedings were advanced, with documents and witness statements exchanged, but with a hearing date yet to be fixed, HMRC applied to the FTT for permission to: (1) amend its list of documents to include two additional documents; and (2) admit a second witness statement from the HMRC case officer. Mr Witton applied to the FTT for an order that HMRC: (1) be barred from participating further in the proceedings; and (2) pay his costs. 

Both parties objected to each other's applications.

FTT decision

The FTT granted HMRC's applications for permission to amend its list of documents and admit a second witness statement and refused Mr Witton's application for HMRC to be barred from the proceedings but did make a costs order in his favour in relation to his barring application and HMRC's application for permission to admit a second witness statement.

Application to amend HMRC's list of documents

The FTT was of the view that there was no serious or significant default in a party identifying documents whilst preparing a witness statement and then making an application to amend their list of documents. This application was therefore granted. 

Application to admit a second witness statement 

The FTT considered that the delay of 72 days before making the application for permission to admit a second witness statement was serious and significant, for which HMRC's reason was inadequate. However, the application was granted because no hearing date had been fixed and the prejudice to Mr Witton, by allowing a further statement to be admitted in evidence, was not significant whereas the prejudice to HMRC would be significant. 

Application barring HMRC from participating in the proceedings

In determining this application, the FTT adopted the approach of the Upper Tribunal in First de Sales Ltd Partnership and others v HMRC [2018] UKUT 396 (TCC) and asked itself whether HMRC had a "realistic", as opposed to a "fanciful", prospect of successfully defending the appeal. It concluded that HMRC did have a realistic prospect of successfully defending the appeal and should not therefore be barred from participating in the proceedings. 

Costs application

In considering this application, the FTT applied the principles discussed in Market & Opinion Research International Ltd v HMRC [2015] UKUT 12 (TCC) and concluded that HMRC's conduct was unreasonable to the extent that it had:

- made a submissions to the FTT regarding the burden of proof in relation to an allegation of wilful failure to deduct income tax and NICs, which did not align with its statement of case; and
- failed to address the principles enunciated in Martland v HMRC [2018] UK FT 178 (TCC), in its application to admit a second witness statement.

As a result, the FTT awarded Mr Witton his costs in relation to his barring application and HMRC's application for permission to admit a second witness statement. The FTT refused Mr Witton his costs in relation to HMRC's application for permission to amend its list of documents.

Comment 

The FTT itself noted that it is unusual to grant costs to an unsuccessful party, but in this case the FTT was satisfied that HMRC's conduct, in relation to the barring application and the application for permission to admit a second witness statement, was sufficiently unreasonable to justify a cost order being made against it.

This decision also serves as a warning to litigants in tax appeals that it is important to carefully consider which issues are in dispute and to ensure that their pleadings and evidence is sufficient to discharge their burden of proof.

The decision can be viewed here.