Tribunal Success & Costs for Taxpayer Due to HMRC’s Unreasonable conduct

In the recent case of Aftab Ahmed v HMRC [2024] UKFTT 00236 (TC), the First-tier Tribunal (FTT) granted the taxpayer’s application for costs, ruling that HMRC acted unreasonably in defending the appeal.

Aftab Ahmed, a director of five companies, filed his 2013/14 personal self-assessment tax return on 31 December 2014. On 2 March 2016, he signed off the accounts for the companies for the accounting periods ending 31 December 2014. These accounts revealed that loans from the companies to Mr. Ahmed had been written off, thereby increasing his 2013/14 liability to income tax. Despite knowing the tax implications, the exact amounts written off were not finalised or agreed with HMRC for several years, making it too late for Mr. Ahmed to amend his 2013/14 tax return as per section 9ZA of the Taxes Management Act 1970 (TMA).

The Discovery Assessment and Tax Appeal

On 19 March 2020, HMRC issued a discovery assessment under section 29 of the TMA. Mr. Ahmed appealed to the FTT, which eventually allowed his appeal. The FTT issued a short decision under rule 35(3) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, as both parties agreed that detailed reasons were unnecessary.

HMRC’s position was that the assessment sought to recover tax lost due to Mr. Ahmed’s carelessness regarding the written-off loans. They argued that due to his carelessness, the extended time limit under section 36 TMA applied, making the assessment valid. Mr. Ahmed did not dispute that the extended time limit would apply if he were found careless, but he argued that he was not careless, rendering the assessment out of time and invalid.

Carelessness

The core issue was whether Mr. Ahmed was careless, defined as failing to take reasonable care to avoid a loss of tax under section 118(5) TMA. This became apparent only after Mr. Ahmed’s skeleton argument was filed 14 days before the hearing. Initially, both parties also considered whether the assessment was in time, but this was clarified at the start of the hearing.

HMRC contended that Mr. Ahmed was careless for not notifying HMRC’s “Income Tax Department” after the loans were written off on 2 March 2016. However, Mr. Ahmed’s auditors had informed HMRC of the written-off loans on 8 April 2016, following the filing of the companies’ corporation tax returns on 30 March 2016. This led to a telephone conversation between HMRC and the auditors on 5 July 2016.

Tax Tribunal’s Decision on Carelessness

The FTT ruled that Mr. Ahmed, through his auditors, took reasonable steps to notify HMRC about the written-off loans and the consequent tax liability. The FTT did not accept HMRC’s argument that Mr. Ahmed was careless for not notifying HMRC immediately after signing off the accounts on 2 March 2016.

Download the Judgment Here

Costs Application at First-tier Tribunal

Following the favourable decision, Mr. Ahmed applied for costs under rule 10 of the Tribunal Rules. The FTT granted this application, directing HMRC to pay Mr. Ahmed’s costs of and incidental to his appeal. Mr. Ahmed argued that HMRC acted unreasonably by persisting with an unsustainable argument. HMRC countered that losing the appeal did not mean their defence was unreasonable and argued that if they had acted unreasonably, the FTT would have mentioned it in the substantive appeal decision.

The FTT disagreed with HMRC, finding that HMRC’s reliance on the carelessness argument, when Mr. Ahmed had clearly notified them through his auditors, was unreasonable.

Costs Order Against HMRC

This case is a reminder that the FTT can order costs against HMRC under rule 10 of the Tribunal Rules when HMRC acts unreasonably in defending or conducting proceedings. The FTT had no difficulty concluding that HMRC’s conduct in defending Mr. Ahmed’s appeal was unreasonable.

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