HM Revenue & Customs (HMRC) was “unreasonable in defending and conducting” an appeal where the case workers assigned to the litigation were insufficiently experienced to deal with it.
The First-tier Tribunal judge said that, if HMRC’s solicitor’s department had handled the case in the same way, its actions may have amounted to serious professional misconduct.
Costs are rarely awarded in the First-tier Tribunal. Judge Nicholas Aleksander in the tax chamber was ruling in First Choice Recruitment Ltd v Revenue & Customs  UKFTT 412 (TC) , a case about deductions which, in HMRC’s view, should have been paid under the Construction Industry Scheme.
At issue in the appeal was whether First Choice took reasonable care to verify the “gross payment status” of a subcontractor, and whether First Choice’s view that the subcontractor had such status was due to an error made in good faith.
HMRC accused two First Choice directors of payroll fraud. In response, First Choice pointed out that this had the effect of shifting the burden of proof onto HMRC, which then withdrew from the appeal. First Choice sought costs.
Judge Aleksander said HMRC did not challenge First Choice’s submissions that the allegations of fraud were unsupported by evidence.
“HMRC admit that an appropriately qualified and experienced caseworker would never have made the allegations included in their statement of case.
“I find that HMRC’s conduct in alleging fraud in their statement of case, and particularising that fraud by reference to emails which are not produced in evidence, to be egregious.
“It is unacceptable for a public authority to make allegations of fraud where they have no credible evidence upon which to make even a prime facie case.”
It was, the judge said, no excuse that the team dealing with the appeal had no experience of dealing with fraud.
“HMRC should have an appropriate system of supervision and training in place to ensure that their litigators deal with matters in an appropriate manner and in accordance with the law (including the laws of procedure and evidence).
“If this matter was being managed by HMRC’s solicitor’s department, HMRC’s actions might well amount to serious professional misconduct.”
The judge set out in detail how the conduct would have fallen foul of the Solicitors Regulation Authority’s Code of Conduct, which requires a solicitor making an allegation of fraud to ensure it is supported by reasonable grounds.
“The fact that HMRC alleged in their statement of case that directors of First Choice were parties to emails which suggest that they were aware of the fraud taking place, yet did not produce such emails in evidence, would indicate that there may have been a breach of IB(5.7)(b) and IB(5.8)(b) [of the code].
“I find it particularly worrying that HMRC submit that their conduct in this case was entirely reasonable – and therefore (implicitly) that they would not do anything differently in future.”
As a result, he ruled that HMRC should never have made the allegations of fraud and so was unreasonable in defending and conducting the appeal from the outset.
He ordered that the costs be assessed by a costs judge if the parties were unable to reach agreement.