Taxpayer awarded costs over HMRC’s unreasonable conduct

A recent VAT case heard by the First-Tier Tribunal (Gekko & Company Ltd v HMRC (TC06029)) highlighted worrying aspects of HMRC’s handling of the case and even awarded costs against HMRC. The Tribunal clearly felt strongly about the case, with the decision stretching over 29 pages for a case involving an assessment to VAT of £69 and three assessments of penalties of £780, £8.85 and £10.35 respectively.

The decision begins by stating that it , “is a great deal longer than we would ordinarily write in a case involving such small amounts: this is because there are a number of disturbing features about the way the case has been conducted by the respondents (HMRC).”

The case involved a property developer company who HMRC claimed had made errors on their VAT returns, with the biggest one being an omission of £5,200 of output tax (which the Tribunal later found to actually be £4,880).

The penalty notices were found to be invalid because the original assessments had been withdrawn and new ones had not in fact been issued. The tribunal found that, even if they had been valid, the penalty of £780 should have been reduced to nil as the behaviour was careless but the disclosure was unprompted and that the other two penalties should be cancelled as there was no inaccuracy.

In deciding to award costs to the taxpayers, the Tribunal were particularly critical of HMRC. We enclose a passage from this below regarding HMRC’s change of opinion from an unprompted to prompted disclosure:

“We consider, having thought about this long and hard, that there are two possible explanations for this volte face. One is that there was incompetence on a grand scale. The other is that there was a deliberate decision to keep the dispute alive, when on the basis of the reviewing officer’s remarks it would have been discontinued, by seeking to revisit the “prompted” issue. The facts that have caused us not to dismiss this possibility include the minimal information about the change with no explanation and the hopelessly muddled response with its spurious justification that Miss Pearce sent when the appellant spotted the change. Of course we have had no evidence from those involved and do not intend in this decision to make any findings about the matter. But it is something we have to take into account in deciding whether HMRC’s conduct in this case was unreasonable.”

The Tribunal cancelled the VAT and penalties and awarded costs to the taxpayer.

Overall, this case seems to echo our recent experiences with HMRC and shows a worrying trend in decreasing quality of HMRC case handling and emphasis on winning at all costs, regardless of the merits of individual cases.

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