Richard Donald Baines Isaac v The Commissioners for HMRC [2026] UKFTT 1227 (TC)

[2026] UKFTT 01227 (TC)

Case No TC 09996

FIRST-TIER TRIBUNAL

TAX CHAMBER

Hearing Heard on: 9 June 2026

Date Judgment date: 21 August 2026

[Location/By remote video hearing]

Appeal reference: TC/2022/13611

COSTS - Tribunal Procedure Rules 10(1)(a) and 10(1)(b) – HMRC application for costs following withdrawal of Appellant’s late appeal application – Alternative application for wasted costs – Whether the Appellant acted unreasonably in bringing or conducting the proceedings – Whether the Appellant’s representative acted improperly, unreasonably or negligently – Application refused

Before

TRIBUNAL JUDGE KIM SUKUL

Between

RICHARD DONALD BAINES ISAACAppellant

THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondent

Sally Hutching, legal director solicitor, Morr & Co LLP for Appellant

John McKee, senior litigator of HM Revenue and Customs’ Solicitor’s Office for Respondents

DECISION

Introduction

[1]This is an application by the Respondents (“HMRC”) for a costs order under rule 10(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the Tribunal Rules”). In the alternative, HMRC seeks a wasted costs order against the Appellant's representatives under rule 10(1)(a).

[2]The hearing was conducted by video using the Microsoft Teams platform. Prior notice of the hearing had been published on the gov.uk website, with information about how representatives of the media or members of the public could apply to join the hearing remotely in order to observe the proceedings. As such, the hearing was held in public.

[3]The documents to which I was referred were contained within the 156-page document bundle, the 216-page authorities bundle, the parties' skeleton arguments, and a statement of costs produced by HMRC. I also heard oral submissions from Mr McKee on behalf of HMRC and Ms Hutching on behalf of the Appellant.

[4]The application arises following the Appellant's withdrawal on 6 January 2026 of his application for permission to make a late appeal in respect of assessments and closure notices relating to his participation in a remuneration trust arrangement. The withdrawal occurred shortly before the hearing listed for 9 January 2026.

[5]Having carefully considered the submissions made and evidence adduced by both parties, I am not satisfied that HMRC have discharged the burden of establishing that either the Appellant or his representatives acted unreasonably within the meaning of rule 10 of the Tribunal Rules. Accordingly, HMRC's application for costs is refused. The reasons for that decision are set out below.

Background

[6]Background On 30 September 2022, the Appellant lodged a notice of appeal together with an application for permission to make a late appeal. HMRC objected to the application.

[7]On 5 April 2023, the Tribunal notified the parties of the decision in Northwood v HMRC [2023] TC 08778 ("Northwood”) which it considered relevant to the proceedings, and invited the parties to indicate how they wished to proceed.

[8]On 19 April 2023, the Appellant informed the Tribunal that he wished to continue with the proceedings. Morr & Co LLP were instructed in June 2023 and thereafter assumed conduct of the matter. The proceedings continued and the Appellant’s application for permission to bring a late appeal was listed for hearing on 9 January 2026.

[9]The parties exchanged skeleton arguments on 2 January 2026. HMRC's position was that the Appellant's arrangements were materially indistinguishable from those considered in Northwood and that the appeal had no realistic prospect of success. The Appellant maintained his application and advanced submissions in support of it.

[10]On 6 January 2026, HMRC filed further evidence in response to an issue raised in the Appellant's skeleton argument concerning receipt of the review conclusion letter. Later that day, the Appellant notified the Tribunal that he wished to withdraw the appeal. The reason given was his personal financial position. The hearing was subsequently vacated.

[11]HMRC then made the present application for costs dated 14 January 2026. HMRC contend that, following the notification of Northwood in April 2023, it should have been apparent to the Appellant and his advisers that the proceedings had no realistic prospect of success. They submit that the continued pursuit of the proceedings, culminating in a withdrawal shortly before the hearing, amounted to unreasonable conduct for the purposes of rule 10(1)(b).

[12]In the alternative, HMRC seek a wasted costs order against Morr & Co LLP. They submit that the firm acted improperly, unreasonably and/or negligently by continuing to pursue the proceedings after taking over conduct of the case, by failing properly to engage with the implications of Northwood and by raising additional matters shortly before the hearing which caused HMRC to incur further costs.

[13]The Appellant disputes those contentions. His position is that the withdrawal was prompted by financial considerations and the personal impact of continuing litigation. He further submits that Northwood was not determinative of his case, that there were potentially material distinctions between the two cases and that neither he nor his representatives acted unreasonably in continuing the proceedings until the decision was taken to withdraw.

Legal framework

[14]Legal framework Rule 10 of the Tribunal Rules permits an order for costs only in limited circumstances. So far as relevant to this application, those circumstances include where a party has acted unreasonably in bringing, defending or conducting the proceedings under rule 10(1)(b) and where a wasted costs order is sought against a representative under rule 10(1)(a).

[15]I have considered the guidance of the Upper Tribunal in Distinctive Care Ltd v HMRC

[2018] UKUT 155 (TCC)

(“Distinctive Care”), upheld by the Court of Appeal, and Market & Opinion Research International Ltd v HMRC

[2015] UKUT 12 (TCC)

. Whether a party has acted unreasonably is an objective question which depends on the particular facts and circumstances of the case. The conduct complained of must be assessed by reference to the circumstances as they existed at the time and not with the benefit of hindsight. There may be a range of reasonable conduct open to a litigant and the fact that an argument ultimately fails does not, of itself, establish unreasonable conduct.

[16]The issue is therefore not whether different or better decisions could have been made. The question is whether the conduct complained of fell outside the range of conduct reasonably open to a party in the circumstances in which it found itself. As the Upper Tribunal observed in Distinctive Care at [44], a party will generally have to persist in a position despite an effectively unanswerable case to the contrary before the threshold of unreasonable conduct is crossed.

[17]The present application arises following the withdrawal of proceedings shortly before the hearing. In those circumstances, the Upper Tribunal guidance in Tarafdar v HMRC

[2014] UKUT 362 (TCC)

is directly relevant. The Tribunal should consider:(1) the reason for the withdrawal;

(2) whether the proceedings could have been withdrawn at an earlier stage; and

(3) whether it was unreasonable not to have withdrawn earlier.

[18]The fact that proceedings are withdrawn shortly before a hearing does not, without more, establish unreasonable conduct. The Tribunal must determine the reason for the withdrawal and then assess whether, viewed objectively, it was unreasonable for the proceedings to have continued until that point.

[19]HMRC also seek, in the alternative, a wasted costs order against the Appellant's representatives. I have therefore considered the principles set out in Bedale Golf Club Ltd v HMRC

[2014] UKUT 99 (TCC)

at [23] to [27]. A wasted costs order may only be made where costs have been incurred as a result of any improper, unreasonable or negligent act or omission on the part of any legal or other representative, or which, in the light of any such act or omission occurring after they were incurred, the Tribunal considers it is unreasonable to expect that party to pay. In this context, "improper" conduct generally involves a significant breach of a professional duty, "unreasonable" conduct includes conduct that is vexatious or designed to harass rather than advance the proceedings, and "negligent" conduct involves a failure to act with the competence reasonably to be expected of an ordinary member of the profession. The jurisdiction is compensatory rather than punitive and requires a causal connection between the conduct complained of and the costs said to have been unnecessarily incurred.

[20]It is against that legal framework that I consider HMRC's application.

Discussion

[21]Discussion Reason for withdrawal The first point to be identified, as set out in Tarafdar, is the reason for the Appellant's withdrawal. The Appellant's position is that the withdrawal was prompted by his financial circumstances and the personal impact of continuing litigation. The contemporaneous reason given for the withdrawal was the Appellant's "personal financial position". In subsequent correspondence, Morr & Co explained that, following the Christmas period, the Appellant had become extremely concerned about the ongoing costs and pressures associated with the proceedings.

[22]HMRC dispute that the withdrawal was attributable to the Appellant's financial circumstances. They rely on the fact that the Appellant continued actively to pursue the late appeal application, including filing a skeleton argument and advancing an amended argument concerning the review conclusion letter shortly before the hearing, by which time the Appellant would have incurred the majority of costs in relation to the matter. HMRC submit that the withdrawal, approximately 48 hours before the hearing, is difficult to reconcile with the explanation now advanced and is more consistent with a late reassessment of the merits of the appeal.

[23]I accept that the explanation advanced by the Appellant is supported by only limited evidence and that the timing of the withdrawal naturally gives rise to some scepticism. However, I am not satisfied that HMRC have established that the withdrawal occurred because the Appellant accepted that the proceedings were bound to fail. A late withdrawal does not necessarily lead to that conclusion. Considering the general circumstances of the proceedings, I am satisfied that concerns regarding the financial and personal impact of the litigation formed at least part of the reason for the decision to withdraw. Even if concerns regarding the merits also played a part in that decision, that would not in itself establish unreasonable conduct.

Could the Appellant have withdrawn earlier?

[24]Could the Appellant have withdrawn earlier? The second Tarafdar question is whether, having regard to the reason for withdrawal, the Appellant could have withdrawn at an earlier stage. The answer to that question is plainly yes. Opportunities existed following notification of the Northwood decision in April 2023, after Morr & Co assumed conduct of the proceedings in June 2023 and during the period leading up to the hearing. However, that is not determinative of HMRC's application. The question is whether it was unreasonable not to withdraw earlier. In answering that question, I bear in mind that reasonableness must be assessed by reference to the circumstances as they existed at the time and not with the benefit of hindsight.

Was it unreasonable not to withdraw earlier?

[25]Was it unreasonable not to withdraw earlier? HMRC's application depends upon establishing that, following Northwood, the proceedings were so obviously hopeless that no reasonable litigant would have continued them. I am not satisfied that HMRC have done so.

[26]There is force in HMRC's submission that a party may act unreasonably by continuing proceedings after it becomes clear that the case is hopeless. However, the issue is not whether the Appellant would ultimately have succeeded if the substantive issues had been determined. Nor is the issue whether HMRC's assessment of the merits was correct. The question is whether the Appellant's decision to continue with the proceedings fell outside the range of conduct reasonably open to a litigant in his position.

[27]Whilst Northwood was clearly relevant and was properly brought to the parties' attention by the Tribunal, the real question is whether it so clearly undermined the Appellant's position that a reasonable litigant ought to have recognised that continued pursuit of the proceedings was futile. I accept that Northwood was a significant development and plainly weakened the Appellant's position. The decision contained not only findings of fact based upon the evidence in that appeal, but also conclusions on a number of legal issues relating to the deductibility of contributions to remuneration trusts, the application of UK GAAP and the wholly and exclusively test. It would therefore be wrong to treat Northwood as relevant only to its own facts. The question, however, is whether it resolved all material issues arising in this appeal such that a reasonable litigant was bound to conclude that the proceedings could not succeed.

[28]HMRC's submission was that the present case was materially indistinguishable from Northwood and that the Appellant was therefore bound to fail. I am not satisfied that HMRC demonstrated that to be the case. During the hearing, Ms Hutching identified a number of matters which were not present, or at least not obviously identical, to those considered in Northwood. These involved issues relating to the validity of the discovery assessment for the year ended 5 April 2013, including issues regarding disclosure, time limits and carelessness, together with issues dependent upon the evidence available in the individual case. It was also pointed out that Northwood contained factual findings, including findings relating to sham, personal benefit and control of trust funds, which were based on the evidence before the Tribunal in that appeal. The Appellant was entitled to rely upon his own evidence regarding those matters and the findings made in Northwood did not determine how those issues would be resolved in a different case.

[29]I express no view as to whether those arguments would ultimately have succeeded. The question before me is not whether the appeal was likely to succeed, but whether no reasonable litigant could continue to pursue it. In circumstances where the Appellant had raised issues which were not determined in Northwood, particularly in relation to the discovery assessment, and was entitled to rely upon his own evidence in relation to matters such as purpose, personal benefit, control and sham, I am not satisfied that HMRC have established that continuation of the proceedings fell outside the range of reasonable conduct.

[30]I have also considered HMRC's submissions regarding the amended arguments advanced in the Appellant's skeleton argument and the additional evidence produced by HMRC shortly before the hearing. Whilst the timing of those matters is relevant, I do not consider that they materially advance HMRC's application. Litigation commonly involves refinement of issues as a hearing approaches and I am not satisfied that the matters relied upon fell outside the range of conduct ordinarily encountered in litigation.

[31]I accept that HMRC incurred costs which could have been avoided had the appeal been withdrawn earlier. However, rule 10 is not engaged merely because a different or better decision could have been taken during the course of proceedings. Having regard to all the circumstances, I am not satisfied that HMRC have established that the Appellant acted unreasonably in bringing or conducting these proceedings. Accordingly, HMRC have not discharged the burden of establishing unreasonable conduct for the purposes of rule 10(1)(b).

[32]I should make clear that this conclusion turns on the facts and issues arising in the present case and, in particular, HMRC's failure to establish that the appeal was materially indistinguishable from Northwood. It should not be taken as suggesting that continued pursuit of proceedings involving similar remuneration trust arrangements could never amount to unreasonable conduct. Northwood contains significant conclusions of both fact and law and there may be cases in which the issues arising, and the evidence available, are so closely aligned with those considered in Northwood that a reasonable litigant ought to recognise that the proceedings have no realistic prospect of success. This is not such a case.

Wasted costs

[33]Wasted costs HMRC alternatively seek a wasted costs order against Morr & Co under rule 10(1)(a). Their submission is, in substance, that Morr & Co failed properly to appreciate the significance of Northwood after assuming conduct of the proceedings and continued to advance a case that lacked merit. HMRC also rely upon the amendments advanced shortly before the hearing.

[34]I do not accept those submissions. Morr & Co did not commence these proceedings. They assumed conduct of the matter after it had already been brought. For the reasons already given, I am not satisfied that HMRC have established that the proceedings became so obviously hopeless following Northwood that no reasonable representative could continue to pursue them. It follows that Morr & Co cannot be criticised simply because they formed a different view of the merits from HMRC. Nor am I satisfied that the amendments advanced shortly before the hearing involved any significant breach of professional obligations, any vexatious conduct or any failure to act with the competence reasonably expected of a professional representative. There is therefore no basis for concluding that Morr & Co acted improperly, unreasonably or negligently for the purposes of rule 10(1)(a).

[35]In any event, I have significant reservations regarding causation and the scope of the costs claimed given that HMRC's costs schedule was not prepared by reference to the period from which HMRC ultimately contended costs should be recoverable and required amendment during the hearing.

[36]Accordingly, HMRC have not established any basis for a wasted costs order under rule 10(1)(a).

Conclusion

[37]Conclusion For the reasons set out above, HMRC’s application for costs is refused.

Right to apply for permission to appeal

[38]Right to apply for permission to appeal This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: 21 August 2026