Recent evidence would strongly suggest that the answer is yes, given a recent string of both botched and unnecessary cases. HMRC’s litigation conduct has come under particular scrutiny in a recent first-tier tax tribunal (FTT) case in which our ‘wonderful’ tax authority made a last-minute U-turn at the eleventh hour.
What happened?
The underlying case concerned a dispute over input VAT recovery in a broadcasting business. The taxpayer, Governance Ministries, operated a TV channel generating income from programme and advertising fees. While it was ultimately agreed that these activities constituted taxable supplies, HMRC argued that some content broadcast free of charge amounted to a non-economic activity. On that basis, it said that only partial input VAT recovery was due. So far, so familiar. But what followed was anything but routine.
Withdrawal at the eleventh-hour
The tax at stake was approximately £6m and detailed preparation was required on both sides. The taxpayer filed its list of proposed arguments early on 6th September 2025. HMRC’s written arguments, due by no later than 5pm on 23rd September, were not filed. Instead, at 4.46pm on the 23rd, just 14 minutes before the deadline set by the FTT for submissions, HMRC emailed them withdrawing completely from the appeal, offering no explanation as to why they were withdrawing from the case at the last minute.
As the hearing was due to begin just a few days later, for the taxpayer, this was a lot more than just an inconvenience they had already spent a lot of time and incurred significant costs, preparing for a complex, high-value hearing.
With HMRC’s case evaporating at the eleventh hour, virtually all of their preparatory work was rendered redundant overnight and as a result, not unsurprisingly, the taxpayer sought costs from HMRC.
What costs were due?
The tax tribunal (FTT) first ruled that Governance Ministries were due their costs in the matter, but the key issue for the FTT was not whether costs should be awarded, but on what basis.
Most costs in tax tribunals are settled on the standard basis, which requires costs to be reasonable and proportionate. Indemnity costs are far more generous than the standard basis and are sometimes awarded when HMRC (or the taxpayer) has behaved unreasonably.
Though they’re not actual called penalty costs, indemnity costs are only awarded when a judge decides that one of the two parties involved has displayed bad or unreasonable behaviour. For indemnity costs to be awarded, there must be evidence of conduct that is out of the ordinary and unreasonable to a high degree. The question for the FTT was: had HMRC’s conduct crossed the high bar required?
The judge concluded that HMRC’s eleventh-hour withdrawal was indeed conduct “out of the norm”. Withdrawing from an appeal is not in itself unusual. However, doing so minutes before a critical deadline without explanation in a complex, high-value case, is another matter entirely. The absence of any excuse only compounded matters. The FTT found that HMRC’s conduct crossed the threshold of serious unreasonableness required to justify indemnity costs.
The taxpayer’s total costs were said to be £780,000, including £473,000 in counsel’s fees. A sizable bill, but one the FTT considered to be reasonable in the context of the millions of pounds of tax at stake.
The calculation of indemnity costs involves a detailed assessment, before the final figure is agreed by the FTT. In the short term, the FTT only needed to decide on the amount of an interim payment on account. With very little to go on, the judge settled on the amount requested by the taxpayer, £400,000 to be paid by HMRC within 14 days of the decision.
Uncomfortable questions for HMRC to answer
Shocking as it may be, this is by no means the first time HMRC has withdrawn an appeal at short notice recently. A few weeks earlier, the case of Barbara Silver vs HMRC, was decided in favour of the taxpayer in the FTT. HMRC initially appealed the ruling but withdrew its appeal on the day on which its written arguments were due and, once again, just a handful of days before the scheduled Upper Tribunal hearing date, with the taxpayer and her advisers having thrown countless hours of preparation down the drain.
Barrister Tim Good, who represented Mrs Silver pro-bono, said: “HMRC agreed to pay the taxpayer’s costs of £8,430, but the HMRC litigators took it to the wire, perhaps in the forlorn hope that I would blink first.” This raises uncomfortable questions about HMRC’s approach to litigation.
Our tax department has long publicly emphasised that it seeks to pursue only the “right” cases. Last minute sea-changes of this nature risk undermining confidence in that message. If appeals can be advanced and then abandoned without explanation, taxpayers and advisers may reasonably question how robust those arguments were to begin with.
Taxpayers, or so-called “customers”, typically operate with more limited resources than HMRC. When a case collapses shortly before the deadline, absorbing the cost of responding to arguments that are then dropped is not just frustrating, it can be ruinous. HMRC’s handling of this case risks eroding taxpayer confidence in its own system, built on fairness and voluntary compliance.
Accountants supporting their clients in tax tribunal cases with HMRC, have long realised that HMRC often make late changes of tack and should always be prepared for this. But what accountants do not and should not expect, is a last-minute withdrawal by HMRC, which invariably results in unnecessary costs for their client, not all of which may be recoverable.
Accountant’s view
The two cases that I’ve highlighted today are just the tip of a seemingly ever-growing mountain of abandoned cases by HMRC. From comments made by recently retired senior inspectors at HMRC, there appears to be a culture in their litigation department of doing minimal work and then pressuring the taxpayer to concede or face significant costs.
It is a very lazy way to run the department and there needs to be a root and branch reform of the culture at the litigation section. In the meantime, if you become embroiled in a case with HMRC, keep detailed records of time and costs and be ready to challenge procedural unfairness where appropriate.
My final thought is that we the taxpayers ultimately foot the bill for HMRC’s lazy doctrinal approach to court cases, with seemingly total disregard for the costs incurred. As the new head of HMRC, JP Marks, has been in post for a year now, his stated aim of modernization, improving customer service and reducing unnecessary expenditure, is now under the spotlight!
