Tribunal awards taxpayer his costs due to HMRC's unreasonable conduct

In Aftab Ahmed v HMRC [2024] UKFTT 00236 (TC), the First-tier Tribunal (FTT) granted the taxpayer's application for costs due to HMRC acting unreasonably in defending the appeal.

Background

Aftab Ahmed was a director of five companies and filed his 2013/14 personal self-assessment tax return on 31 December 2014. On 2 March 2016, he 'signed off', as director, each of the companies' accounts for accounting periods ending 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 HMRC for some years with the result that it was too late for Mr Ahmed to amend his 2013/14 tax return (see section 9ZA, Taxes Management Act 1970 (TMA)).

On 19 March 2020, Mr Ahmed was issued with a discovery assessment by HMRC, under section 29, TMA (the Assessment). Mr Ahmed appealed to the FTT. At the conclusion of the appeal hearing the FTT, in an extempore decision, allowed Mr Ahmed’s appeal. Shortly thereafter,  the FTT issued a 'short' decision, pursuant to rule 35(3) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the Tribunal Rules), 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. Because of Mr Ahmed’s carelessness, HMRC contended that the extended time limit under section 36, TMA, applied, and the Assessment was therefore in time, valid and should be upheld.

Mr Ahmed did not dispute that if his actions were found to be careless the extended time limit (under section 36) would apply and the Assessment would be valid. However, he contended that he was not careless and, as such, the Assessment was out of time, invalid and his appeal should therefore be allowed.

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, namely, whether Mr Ahmed failed to take reasonable care to avoid bringing about a loss of tax under section 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 the Assessment was in time, even if the extended time limit contained in section 36 TMA 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 by section 118(6), TMA. In his evidence, the HMRC Officer who had made the 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”, the auditors of the five companies of which he was a director did write to HMRC on 8 April 2016, informing it of 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 another HMRC Officer and the auditors on 5 July 2016.

The sole issue before the FTT was whether Mr Ahmed had been careless, specifically, whether he had failed to take reasonable care to avoid bringing about a loss of tax under section 118(5) TMA.

In allowing Mr Ahmed's appeal the FTT held that:

• Mr Ahmed had, through his auditors, taken reasonable steps to notify HMRC of the written-off loans and consequent increase in his liability to tax.

• The reasonable steps taken by Mr Ahmed were demonstrated on the facts because, after the companies' accounts had been filed on 30 March 2016, the auditors wrote to HMRC on 8 April 2016, referring to the written-off loans; there was also a subsequent telephone conversation between HMRC and the auditors on 5 July 2016.

• The FTT did not accept HMRC's argument that Mr Ahmed was careless because he failed to notify HMRC of the position relating to the loans on 2 March 2016, which HMRC argued was when Mr Ahmed was aware that the loans had been written-off (when he had signed-off the companies' accounts).   

Following the FTT's decision, Mr Ahmed applied to the FTT for his costs under rule 10 of the Tribunal Rules (the Application).  

FTT decision 

The FTT granted the Application and HMRC was directed to pay Mr Ahmed's costs of and incidental to his appeal.

Mr Ahmed argued that HMRC, by persisting with an argument that on the evidence it knew could not succeed, acted unreasonably in defending the appeal. HMRC submitted that just because its argument was unsuccessful in the appeal this did not mean that it acted unreasonably in defending the appeal. Further, and rather surprisingly, HMRC also argued that if it had acted unreasonably in defending or conducting the appeal, the FTT would have referred to such conduct in its decision in the substantive appeal and it had not done so.

The FTT agreed with Mr Ahmed and held that HMRC's reliance on the argument, up to and including throughout the hearing, that Mr Ahmed was careless by not notifying HMRC of his position, when he had clearly done so, was unreasonable.  

In reaching its decision, the FTT found that:

• HMRC's argument that the FTT did not say anything in the appeal decision to suggest that HMRC had acted unreasonably was misconceived as the question of costs, and whether HMRC had been unreasonable, was not before the FTT in the appeal – the FTT was concerned with the issue of whether Mr Ahmed was careless and it was that issue which it had to determine.

• HMRC was 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, demonstrating that he had not been careless.

Comment 

This case is a timely reminder that the FTT is willing to make a costs order against HMRC under rule 10 of the Tribunal Rules, in circumstances where HMRC (or its representative) has acted unreasonably in defending or conducting proceedings. In this case, the FTT does not appear to have had any difficulty in concluding that HMRC's conduct in defending Mr Ahmed's appeal was unreasonable.

The decision can be viewed here.