In HMRC v Cheshire Centre for Independent Living [2020] UKUT0275, the Upper Tribunal (UT) ordered HMRC to pay the taxpayers costs despite HMRC’s case being successful. It had acted unreasonably in introducing new grounds of appeal.

Where the UT remakes a decision of the First Tier Tribunal (FTT) it can make any order for costs which the FTT itself could have made.

  • The rules state the FTT can make a costs order if it considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings.

In the original hearing, the FTT found that a supply of payroll services to disabled people was so closely linked to the provision of welfare services that payroll charges were VAT exempt.

  • HMRC appealed to the UT and introduced an entirely new ground of appeal which the taxpayer, CCIL, accepted and the case was settled in HMRC’s favour without a UT hearing.
  • The new grounds of appeal (Ground 2) was that the payroll services could not be ancillary to a principal supply of exempt care provided by a personal assistant (PA) as the principal supply itself was not exempt. It was made by the PA as an employee of the disabled person meaning the PA was neither a body governed by public law nor another body recognised by the UK as being devoted to social welfare within Article 132(1)(g) of the Principal VAT Directive.

Despite conceding the point, the Cheshire Centre for Independent Living (CCIL) appealed to the UT for costs on the basis HMRC had acted unreasonably in handling the case by failing to run what turned out to be a winning argument sooner, resulting in CCIL unnecessarily incurring £44,706 in costs.

The UT pointed out that whilst there was plenty of case law about the approach to be taken where the alleged unreasonable conduct concerned an unsuccessful party continuing to run what turned out to be a bad argument and not settling sooner, there was little for the type of circumstances present here, however, the same principles applied.

(1) What was the reason for HMRC raising Ground 2 as a new ground before the UT?

(2) Having regard to that reason, could HMRC have raised Ground 2 at an earlier stage in the proceedings?

(3) Was it unreasonable for HMRC not to have raised Ground 2 at an earlier stage?

The UT found that HMRC could, and should, have raised the new grounds of appeal sooner and included it in their statement of case. The relevant facts and legal foundations were known about from the outset of the proceedings.

The FTT Rules at 25(2)(b) provide that a statement of a case must “…set out the respondent's position in relation to the case”.

  • The UT considered that HMRC took too narrow a view of its obligation to set out its position and in doing so acted unreasonably.
  • HMRC should have dealt with CCIL’s grounds of appeal by considering the wider context of the appeal and applying the legislation to the relevant facts about the actual supplies in question.

The appeal was therefore allowed and HMRC ordered to pay 70% of CCIL’s costs. CCIL bore some responsibility for not evaluating the strength of its case when viewed in the round.


How to appeal an HMRC decision
What type of decision can you appeal? What are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Appeals: Grounds for Appeal Toolkit
How you make your appeal depends on the type of penalty and your grounds for appeal. This guide is part of our series 'How to appeal tax penalties'.

VAT: Health & Welfare services
Reduced rating, zero-rating and VAT exemption can apply to various services relating to medical care, health and welfare.

External link

HMRC v Cheshire Centre for Independent Living [2020] UKUT 0275