HMRC Barred After Breaching Unless Order (Carbon Six Engineering Ltd v HMRC)

The decision in Carbon Six Engineering Ltd v HMRC is one of the clearest recent examples of the First-tier Tribunal enforcing procedural discipline against HMRC. At the heart of the case was a failure to comply with an Unless Order, the Tribunal’s most serious case management tool. Despite arguments about administrative oversight, team handovers and related Managed Service Company (MSC) lead litigation, the Tribunal refused to grant relief from sanctions. Applying the structured test in Martland v HMRC and following the approach endorsed in Chappell v HMRC, the Tribunal concluded that HMRC’s breach was serious, inadequately explained, and that maintaining the barring order was proportionate. The appeal was then summarily allowed. The case provides essential guidance for taxpayers engaged in MSC and complex tax appeals before the First-tier Tribunal. Furthermore, the case underscores the necessity of engaging specialist tax litigation firms.

Case Background: HMRC’s Procedural Failures

HMRC issued income tax and National Insurance (NIC) determinations against Carbon Six Engineering Ltd on the basis that it was a Managed Service Company. The original decision letter incorrectly referred to the MSC provider CKA. That error was later corrected in correspondence, with HMRC asserting that the relevant provider was TAAG.

The company appealed before the First-Tier Tribunal (Tax Chamber).

From that point forward, the litigation became defined less by the substantive MSC issues and more by HMRC’s procedural non-compliance. Over a period of months, HMRC failed to comply with six Tribunal directions, including:

• Late provision of a contact email address;
• Failure to serve a statement of case;
• Late and incomplete responses to case management directions;
• Failure to comply with an Unless Order requiring a fully reasoned response to the taxpayer’s barring applications.

The decisive failure concerned the second Unless Order.

Read the Full Judgment Below:

The Central Issue: Breach of the Unless Order

An Unless Order is not an ordinary direction. It is the Tribunal’s clearest warning: comply by the stated deadline, or a specified sanction will automatically follow. In this case, the sanction was barring HMRC from further participation in the proceedings.

The Unless Order required HMRC to provide a fully reasoned response to the taxpayer’s applications under rule 8(3). The deadline passed without compliance.

Under rule 8(1) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, the effect was automatic. HMRC was barred. HMRC subsequently applied to set aside the barring order and sought relief from sanctions. The Tribunal’s refusal to do so is what makes this decision so significant.

Applying the Martland Three-Stage Test

The Tribunal followed the now well-established approach to relief from sanctions derived from Martland and confirmed in Chappell. Read more on Martland here.

Stage 1: Was the Breach Serious or Significant?

The Tribunal held unequivocally that failure to comply with an Unless Order is inherently serious and significant.

Unless Orders represent a “second chance.” They are typically imposed following earlier non-compliance. The breach must therefore be assessed in context, including the underlying procedural history. HMRC had already failed to comply with multiple earlier directions. The Unless Order was not an isolated event. It was the culmination of repeated defaults.

The Tribunal rejected HMRC’s characterisation of the breach as “moderate.” Failure to comply with an Unless Order goes to the heart of effective case management. It undermines procedural fairness and the Tribunal’s ability to control proceedings efficiently. Therefore, it is necessary to instruct experts well versed in Tribunal proceedings.

Stage 2: Was There a Good Reason?

HMRC argued that:

• There had been a change in the legal team;
• The appeal had been mistakenly assumed to be stayed;
• Communications sent to the clearing house email address had not been properly passed on.

The Tribunal accepted that the breach was not deliberate. However, it concluded that these explanations were “bad” reasons in relief-from-sanctions jurisprudence.

Internal administrative errors, ineffective handovers, and mistaken assumptions about a stay do not amount to good reason. The Tribunal also found that it was not reasonable for HMRC to assume a stay had been granted without formal confirmation.

This is why instructing experts is necessary. Procedural assumptions, particularly in grouped MSC litigation, can carry fatal consequences if not rigorously checked and managed by specialists.

Stage 3: All the Circumstances of the Case

At the third stage, the Tribunal evaluated proportionality and fairness, giving particular weight to:

• The need for litigation to be conducted efficiently;
• The importance of enforcing compliance with rules and directions;
• The cumulative history of non-compliance.

HMRC argued that barring it would create an unjust “windfall” for the taxpayer, particularly given that Carbon Six’s appeal formed part of wider TAAG-related MSC litigation.

The Tribunal rejected this submission. The authorities demonstrate that “windfall” arguments carry little weight except in exceptional circumstances. None existed here.

The Tribunal also rejected the suggestion that the appeal should be stayed behind the TAAG lead cases. Granting a stay would effectively allow HMRC to influence the outcome indirectly, undermining the sanction imposed. The barring order was therefore maintained.

Summary Determination in the Taxpayer’s Favour

Having refused relief, the Tribunal exercised its discretion under rule 8(8) to summarily allow the appeal.

HMRC had filed no statement of case and advanced no pleaded factual or legal position. In those circumstances, the Tribunal was entitled to determine the issues against HMRC.

This outcome demonstrates that procedural discipline can determine the result of tax litigation independently of the substantive merits. In MSC disputes, often involving hundreds of related appeals, parties sometimes assume that procedural defaults can later be remedied. This case demonstrates otherwise.

This is why instructing experts is necessary. Tribunal litigation is not merely about substantive tax law. It is about procedural strategy, compliance, and tactical timing.

Wider Implications for MSC and Tax Tribunal Litigation

Although fact-specific, this decision carries broader significance:

First, it confirms that the First-tier Tribunal will enforce Unless Orders robustly, even against HMRC.

Secondly, it reinforces that institutional litigants are not afforded special indulgence. Administrative disorganisation is not a shield against sanctions.

Thirdly, it demonstrates that related lead litigation does not automatically justify relaxation of procedural discipline in individual appeals.

For taxpayers engaged in MSC disputes, IR35 appeals, PAYE determinations or NIC challenges, this judgement underscores the strategic importance of proactive case management and specialist representation.

At LEXLAW, our specialist team regularly advises on Tribunal strategy, relief from sanctions applications, and procedural enforcement within MSC and employment status disputes. Our expertise across tax litigation ensures that procedural positioning is treated as seriously as substantive law.

Instruct Expert London Tax Lawyers

Complex tax appeals are not won on technical arguments alone. They are won through disciplined procedural strategy, forensic case management, and meticulous compliance with Tribunal rules.

The Carbon Six decision demonstrates what happens when procedural obligations are not treated with sufficient seriousness. Unless Orders are not administrative formalities, they are decisive instruments.

At LEXLAW, our tax litigation solicitors specialise exclusively in complex tax disputes and First-tier Tribunal appeals, bringing focused expertise to every stage of contentious proceedings. We provide strategic, commercially astute advice on barring applications, relief from sanctions, and applications for summary determination, ensuring that procedural opportunities are identified and acted upon decisively.

Where HMRC fails to comply with Tribunal directions, we move swiftly and tactically to protect our clients’ positions. At the same time, we ensure that our clients’ own compliance record is beyond challenge, delivering a robust and carefully managed litigation strategy designed to achieve the strongest possible outcome. Early strategic intervention can protect your position and prevent avoidable procedural missteps.

If you are facing an HMRC enquiry, MSC determination, or active Tribunal appeal, specialist representation is critical. Contact now for specialist advice!