The Khan Partnership LLP v The Commissioners for HMRC [2026] UKFTT 43 (TC)

[2026] UKFTT 00043 (TC)Case No TC09744
FIRST-TIER TRIBUNAL
TAX CHAMBER
Date Judgment date: 09 January 2026
[Location/By remote video hearing]
Appeal reference: TC/2022/14064
COSTS – claim by HMRC for unreasonable conduct in claim for hardship – whether conduct in the proceedings – yes because there were hardship proceedings – whether conduct unreasonable – yes – application allowed in part
Determined on: 30 December 2025
Before
TRIBUNAL JUDGE AMANDA BROWN KC
Between
THE KHAN PARTNERSHIP LLPAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondentThis application was determined, with the consent of the parties, pursuant to rule 29 Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (FTT Rules). The papers available to me were the application from HM Revenue & Customs (HMRC) for costs, the objection served by The Khan Partnership LLP (Appellant) and submissions from both parties requested by the Tribunal regarding the meaning and scope of “proceedings”.DECISION

Introduction

[1]This is the judgment determining HMRC’s application (Application)for costs made pursuant to rule 10(1)(b) FTT rules for costs incurred in the period 16 November 2022 to 29 May 2025 in the sum of £8,006.70. The Application was made on 15 July 2025. By a response dated 5 August 2025 the Appellant objects to the Application (Objection).[2]For the reasons set out below I have decided to award HMRC their costs for the period from 11 April 2024 to 29 May 2025. I summarily assess the sum in the amount of £3.151.80 representing the costs incurred by HMRC in the period from 22 April 2024 up to and including the preparation of their costs claim (as calculated from the chronological breakdown of time provided by HMRC). That sum is payable by the Appellant within 14 days of the date of this judgment.

Chronology

[3]The chronology of events, discerned from the narratives provided by the parties and the documents available, is set out in the table below. Date Event 16-11-2022 The Appellant filed a Notice of Appeal in respect of VAT assessments issued by HMRC. Pursuant to section 84(3)(b) Value Added Tax Act 1994, prior to making an appeal, a taxpayer is required to pay the VAT in dispute unless HMRC, or the Tribunal, are satisfied that payment of the sum assessed would cause the Appellant hardship. The Notice of Appeal stated that the tax due had been made. 19-01-2023 The Tribunal notified the appeal and directed HMRC to serve their Statement of Case within 60 days. 02-02-2023 HMRC applied for a stay of the proceedings, and thereby suspension of the time limit for service of their Statement of Case, until the Appellant had either paid the tax claimed on the assessment or made a hardship application. 06-02-2023 The Appellant consented to the stay but neither paid the tax nor made a hardship application submitted at that time. 12-06-2023 The Appellant notified HMRC that it intended to make a hardship application no later than 31-07-2023. 02-11-2023 Having received no information from either party, the Tribunal asked the Appellant for an update. Such update to be provided within 14 days. 16-11-2023 The Appellant wrote to HMRC stating that no application for hardship had been made because it had received no response to its June letter. The Appellant asked what information HMRC was required for the hardship application. 19-12-2023 The Appellant called HMRC and agreed that a hardship application would be made by 05-01-2024 including supporting information. 20-12-2023 Tribunal directed Appellant to provide a copy of the hardship application within 14 days. 05-01-2024 The Appellant finally made a hardship application to HMRC and provided some supporting documentation though notably not copies of the statements for all bank accounts and not for a current period. 10-01-2024 On the basis that a hardship application had been made the Tribunal stayed the appeal to allow HMRC time to determine whether hardship would be granted. 08-02-2024 HMRC requested additional information to assess hardship. 23-02-2024 HMRC sent a reminder email requesting the information. 11-03-2024 The Appellant requested an extension in which to provide the information requested. HMRC agreed and extension to 15-03-2024. 15-03-2024 The Appellant provided HMRC with substantially the same documents as had been previously provided. Some additional documents were provided but notably, again, not the relevant and current bank statements which had been requested. 18-03-2024 HMRC emailed the Appellant stating items remained out of date or outstanding and requested management accounts, updated reports, cash-flow forecast, and bank statements for all accounts. 02-04-2024 Appellant emailed HMRC stating it intended to provide documentation within the next seven days. 03-04-2024 HMRC replied explaining that current information up to the end of March 2024 was required. 08-04-2024 Appellant replied that its senior partner was ill and unable to review the management accounts. The Appellant anticipated providing the requested information by 19-04-2024. 11-04-2024 Despite this indication, HMRC issued a decision letter opposing the hardship application on the basis of insufficient evidence. 22-04-2024 Appellant emailed Tribunal initiating proceedings under section 84(3B) VATA for the Tribunal to determine the hardship application. 03-05-2024 The Tribunal issued case-management Directions in order to progress and determine the Appellant’s hardship application. The Appellant was directed to provide its list of documents no later than 31 May 2024. The directions also required that “copies of any documents on that documents list which have not already been provided to the other party” was to be served within 7 days of a request for them to be provided. The covering email provided that non-compliance with this direction cause the appeal to be referred to a judge and it was likely that the appeal would be struck out. 31-05-2024 The Appellant served its list of documents. The document listed the documents previously provided with some additional documents not so provided. 12-06-2024 HMRC filed its List of Documents and specifically requested certain items from Appellant's list. When HMRC served this request on the Appellant they received an email notification that the recipient had left the Appellant’s employment. HMRC reserved the list and request to the new email address notified. The Appellant did not comply with the request for the additional documents to be served within the requested 7 days or in compliance with the directions. 24-07-2024 HMRC served a witness statement prepared by Officer Parton explaining the decision to refuse hardship. That statement set out that hardship had been refused due to insufficiency of evidence to support it and explained the deficiencies including failure to provide current management accounts, cash flow statements and bank statements for all bank accounts. The email serving the statement on both the Tribunal and HMRC requested that the Tribunal direct Appellant to provide copies of documents listed on the Appellant’s list of documents which had been requested but not provided. The Appellant served no witness statements. 13-11-2024 Tribunal issued an order directing that unless Appellant provided the requested items within 14 days the appeal may be struck out. It was sent to the email address for the Appellant as shown on the Notice of Appeal no other email address having been provided by the Appellant contrary to the requirement that the Tribunal be provided with a current email address for electronic communications. 25-11-2024 The unless order dated 13-11-2024 was resent as HMRC had noted that the unless order had been sent to an email account for the Appellant which HMRC knew to be for an employee who had left the Appellant and duly notified the Tribunal. The covering email requested and update by return. 03-12-2024 The Appellant told the Tribunal that it would provide the documents by 05-12-2024. 06-12-2024 The requested documents were sent by email to HMRC but were password-protected; HMRC received the password on 09-12-2024. 31-03-2025 Tribunal issued a Notice of Hearing for a preliminary hardship hearing on 29-05-2025. 01-05-2025 HMRC served the joint documents bundle. 15-05-2025 HMRC served an authorities bundle. 28-05-2025 Less than 24 hours before the hearing, Appellant served the 10-page witness statement from Mr Casey and new documents not previously listed or provided including current bank statements. 29-05-2025 At the preliminary hearing, based on the new information and documents, HMRC accepted the Appellant's application the appeal to proceed in the absence of payment.

Findings of fact

[4]From the documents available to me from the Tribunal file, including correspondence and the witness statements I find the following facts:(1) The Appellant is a firm of solicitors registered with the Solicitor’s Regulation Authority whose business involves representing taxpayers before this Tribunal. It should therefore be familiar with the Tribunal processes and the requirement for a VAT assessment to be paid or hardship established before an appeal can be entertained by the Tribunal.(2) A material misstatement of fact was provided in the Appellant’s notice of appeal when it stated that the VAT in dispute had been paid when it had not been paid.(3) A hardship application was not made until 5 January 2024, and therefore 14 months after the notice of appeal was submitted.(4) Following the rejection of the application by HMRC the Appellant commenced hardship proceedings before the Tribunal on 22 April 2024.(5) In those proceedings the Appellant failed to comply with directions issued by the Tribunal in the following regards: (a) Failed to update the Tribunal of a current email address for service of correspondence. (b) Failed to comply with a “may” unless order, in particular by not providing the documents requested by HMRC on or before 27 November 2024 (as directed on 13 November 2024 as resent on 25 November 2024). (c) Not providing an update “by return” when resent the unless order. (d) Failing to list all relevant documents on which reliance was ultimately intended to support its hardship application were not fully listed until 28 May 2025.

Relevant law

[5]Section 29 Tribunals, Courts and Enforcement Act 2007 (TECA):
"29 Costs or expenses. (1) The costs of and incidental to- (a) all proceedings in the First-tier Tribunal; and (b) all proceedings in the Upper Tribunal, shall be in the discretion of the Tribunal in which the proceedings take place…"
[6]Rule 10(1)(b) FTT Rules:
"10(1) The Tribunal may only make an order in respect of costs (or, in Scotland, expenses) - … (b) if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings;"
[7]Rule 22 FTT Rules, Hardship applications “(1) This rule applies where an enactment provides, in any terms, that an appeal may not proceed if the liability to pay the amount in dispute is outstanding unless HMRC or the Tribunal consent to the appeal proceeding. (2) When starting proceedings, the appellant must include or provide the following in or with the notice of appeal—(a) a statement as to whether the appellant has paid the amount in dispute;(b) if the appellant has not paid the amount in dispute, a statement as to the status or outcome of any application to HMRC for consent to the appeal proceeding; and(c) if HMRC have refused such an application, an application to the Tribunal for consent to the appeal proceeding. (3) An application under paragraph (2)(c) must include the reasons for the application and a list of any documents the appellant intends to produce or rely upon in support of that application. (4) If the appellant requires the consent of HMRC or the Tribunal before the appeal may proceed, the Tribunal must stay the proceedings until any applications to HMRC or the Tribunal in that respect have been determined.” (a) a statement as to whether the appellant has paid the amount in dispute; (b) if the appellant has not paid the amount in dispute, a statement as to the status or outcome of any application to HMRC for consent to the appeal proceeding; and (c) if HMRC have refused such an application, an application to the Tribunal for consent to the appeal proceeding. Parties submissions HMRC’s submissions

Parties submissions

[8]HMRC’s application for costs is made under rule 10(1)(b) the FTT Rules which allows the Tribunal to award costs if a party or their representative has acted unreasonably in bringing, defending, or conducting the proceedings. The central issue addressed is whether the conduct of the Appellant in relation to its hardship application and the associated appeal proceedings meets the threshold of unreasonableness required for a costs award.[9]A key point of contention is the definition of ‘proceedings’ for the purposes of rule 10(1)(b). HMRC submits that the relevant “proceedings” began when the Notice of Appeal was filed, not when hardship was granted or when the appeal is ‘entertained’ by the Tribunal. In support, HMRC cites relevant case law, including SNM Pipelines Ltdv HMRC [2022] UKFTT 231 (SNM), 4Site Services London Ltd v HMRC [2024] UKFTT 143 (4Site) and Minicloud Ltdv HMRC [2025] UKFTT 00501 (Minicloud), which distinguish between an appeal being ‘made’ and being ‘entertained.’ These authorities are said to confirm that an appeal can be validly made and proceedings commenced even if the Tribunal cannot yet entertain the appeal due to non-payment or pending hardship determination. As such the Appellant’s persistent failure to make a hardship application and then to progress it efficiently represents conduct in the proceedings and meeting the terms of section 29 TECA and rule 10(1)(b) FTT Rules.[10]HMRC further addresses the Appellant’s arguments that the hardship application is separate from the main appeal proceedings. HMRC maintains that these are not separate proceedings but are part of the same appeal process. The Respondents also clarify that their costs application does not seek costs for HMRC’s actions during the underlying tax enquiry, but only for conduct in the appeal and hardship application process.[11]HMRC reference the relevant test for determining whether, in a case outside to normal costs shifting regime, costs should be payable as that set out by the Upper Tribunal in in Distinctive Care Ltd v HMRC [2018] UKUT 155 (TCC) at [44] – [45](Distinctive Care)as endorsed by the Court of Appeal [2019] EWCA Civ 1010.[12]HMRC contends that the Appellant’s conduct was unreasonable. They point to significant delays in providing explanations and documents relevant to the hardship application, noting that the Appellant could have supplied this information from the outset but did not do so until the eve of the hardship hearing. HMRC argues that this delay was egregious and caused unnecessary additional costs. They defend the reasonableness of their requests for all business bank accounts, given unexplained transfers between accounts, and state that only at the last minute did the Appellant provide sufficient explanation regarding client accounts.

Appellant’s submissions

[13]The Appellant opposes HMRC’s application for costs in its entirety, arguing that no order for costs should be made. The Appellant’s primary submission is that, under the Tribunal’s standard-track allocation, the default position is that each party bears its own costs, and HMRC has not demonstrated conduct justifying a departure from this rule. The Appellant further contends that the Tribunal lacks jurisdiction to award costs for the period before hardship was granted. The Appellant relies on the decision in Minicloud as confirming that costs cannot be awarded for pre-hardship conduct.[14]The Appellant addresses HMRC’s reliance on the authorities of SNM and 4Site arguing that these cases do not support HMRC’s position. While these authorities confirm that lodging a Notice of Appeal is a valid procedural step, the Appellant submits that they do not establish that costs jurisdiction under Rule 10(1)(b) extends to the period before hardship is granted. The Appellant maintains that these cases only permit limited case-management steps prior to hardship being determined and do not allow for costs sanctions for conduct during this phase.[15]The Appellant also emphasises the policy rationale behind the hardship regime, which is to protect taxpayers from the unfairness of being required to pay disputed tax up-front. Allowing costs to be awarded for the pre-hardship period would undermine this protection and expose taxpayers to additional risks at a time when they are unable to advance their appeal.[16]On the facts, the Appellant submits that its conduct was reasonable throughout. It provided hardship evidence as requested, explained any delays (such as those caused by illness or misdirected correspondence), and voluntarily supplied updated financial information ahead of the hearing. The Appellant argues that evolving disclosure to keep the Tribunal and HMRC informed does not amount to unreasonable conduct, particularly where there is a reasonable explanation for any delay. The Appellant also contends that its handling of client accounts was proper and in accordance with professional rules.

Discussion

[17]My jurisdiction to award costs for an appeal allocated to the standard track is as provided in section 29 TECA and rule 10(1)(b) FTT Rules. I may award costs where the conduct of the paying party “in the proceedings” is unreasonable.

Distinctive Care

[18]Distinctive Care represents the leading and binding authority on the approach I am to adopt when considering an application for costs made pursuant to rule 10(1)(b) FTT Rules. In summary, and so far, as relevant to the present claim, it provides:(1) When considering a claim for costs for unreasonable conduct pre-commencement conduct is excluded from consideration unless there is bad faith, it is the handling of the case rather than the quality of the original decision which is relevant to entitle a claim to costs (paragraphs [19] and [25]).(2) There are no relevant proceedings until they are commenced and notified to the other party (paragraph [31]).(3) It is important to identify the nature of the proceedings as “only when it is seen what is being claimed can it be seen what the proceedings are to which the costs relate” (paragraph [36] quoting from In re Gibson’s Settlement trusts [1981] CH 179)[19]The Court of Appeal in Distinctive Care is clear I have no jurisdiction to consider conduct prior to the lodging of the notice of appeal when considering conduct in the proceedings. The first issue in determining HMRC’s application for costs is what are “the proceedings”.

Other relevant cases

[20]I was referred to three other relevant matters.[21]SNM concerned the validity of an appeal in which the disputed tax had not been paid, and no hardship application had been made pursuant to rule 22 FTT Rules. The Tribunal determined that it was a validly made appeal protecting the taxpayer’s position on time limits for appeal. The Tribunal considered the terms of section 84© VATA and rule 22 FTT Rules and concluded that there was a distinction between the making of an appeal or the commencement of proceedings and their progression or entertainment.[22]4Site considered a series of interrelated applications including an application for costs bought by the Appellant. I was the judge in that case. I summarised mu view of the decision in SNM as follows: “61. … the practical effect of section 84(3) Value Added Taxes Act 1994 (which provides that an appeal against an assessment to VAT cannot be entertained unless the amount assessed as payable has been paid or deposited with HMRC) and Rule 22 FTT Rules (which provides the requirement that when starting proceedings the taxpaying appellant must confirm that payment has been made or that a hardship application has been made) is that an appeal brought without payment and absent HMRC having accepted hardship are proceedings but proceedings which should not proceed further until hardship is determined.[23]In Minicloud the Tribunal considered an application for costs made by the taxpayer when HMRC withdraw from an appeal prior to producing their statement of case and shortly after accepting that the taxpayer would suffer hardship. The Tribunal considered, in that context and by reference to the test to be applied in determining whether withdrawal from proceedings represents unreasonable conduct, that the proceedings did not commence until hardship was determined. In doing so the Tribunal quoted from the Upper Tribunal in Distinctive Care concluding that an award of costs was dependent on the Tribunal having the relevant jurisdiction when the costs were incurred.

Appeal proceedings

[24]In both SNM and 4Site the Tribunal determined that the appeal proceedings were made i.e. commenced, with the service of a notice of appeal. As such there were unquestionably proceedings on foot from 16 November 2022. However, as provided for by section 84(3) VATA those proceedings may not be entertained or progressed until the tax in dispute is paid/deposited or there has been accepted by either HMRC or the Tribunal that payment of the disputed tax would cause hardship to the taxpayer such that non-payment prior to the determination of an appeal is justified. Rule 22(4) FTT Rules provides that the proceedings so commenced will be stayed pending the outcome of the hardship application (whether that is to HMRC or to the Tribunal).[25]As such, I consider that whilst there were appeal proceedings, there was no jurisdiction within those proceedings once they were made. As a consequence, the only action taken in respect of the appeal proceedings, before they were suspended/stayed as not capable of being entertained, was the lodging of the notice of appeal itself. A notice of appeal which, as I have found, included a material inaccuracy as to the payment of the disputed tax made. That misstatement being by a party that holds itself out as assisting taxpayers with appeals before this Tribunal (as referenced in the witness statement of Mr Casey and who might therefore reasonably be expected to know when a hardship application is required.[26]A single act of misconduct and/or omission can be sufficient to justify a claim to costs under rule 10(1)(b) FTT Rules. No explanation was given by the Appellant for this misstatement, and it took 14 months of prevarication before any application for hardship was made. I do not consider that conduct to have been reasonable and I would therefore have been prepared to make an award of costs of and incidental to the appeal proceedings. However, the costs incurred by HMRC in the appeal proceedings in the period 16 November 2022 to 29 May 2025 are extremely limited. The only costs that can be said to have been so incurred relate to the application for a stay of proceedings made on 2 February 2023. These costs have not been included in the summary schedule of costs I therefore do not exercise my discretion to award any such costs.

Hardship proceedings

[27]The proceedings before this Tribunal bought by the Appellant were not, however, limited to the appeal proceedings. Unlike the position in Minicloud, in this appeal there were also hardship proceedings. By application dated 22 April 2024 the Appellant initiated such proceedings.[28]In my view those proceedings are severable from the appeal proceedings. They were brought pursuant to section 84(3B) VATA which gives the Tribunal jurisdiction to determine a taxpayer’s entitlement to hardship despite a lack of jurisdiction to entertain or progress the underlying appeal proceedings.[29]I consider that the Appellant’s conduct within the hardship proceedings was unreasonable. The Appellant failed to comply with the Tribunal’s directions willingly and on time. Compliance was either forced or unreasonably late. It cannot be reasonable to refuse to provide documents which have been listed on a list of documents and for which there are direction for production unless and until threatened with the sanction of the appeal being struck out. Neither can it be reasonable to withhold the relevant information which would have permitted HMRC to have accepted hardship only to provide it less than 24 hours before a Tribunal hearing to determine the issue. The Appellant unreasonably and without any explanation wasted the Tribunal’s and HMRC’s time in managing and preparing for a hearing that became unnecessary. The documents produced and the explanation provided could have been provided months and possibly years earlier. The Appellant chose not provide documents routinely requested and required to determine hardship dragging out both the hardship proceedings.[30]The costs of and incidental to those proceedings are all costs reasonably incurred by HMRC in the period 22 April 2024 to 29 May 2025. The Appellant has not challenged the detail of HMRC’s summary schedule of costs as to the reasonableness of the time spent in progressing the hardship proceedings. I have considered the noted time and rates and agree them to be reasonable. I have been unable to fully reconcile the breakdown of tasks and the chronology of costs incurred and therefore giving the Appellant (as paying party) the benefit of any doubt I have used the lower amounts shown as incurred in the period 22 April 2024 to 29 May 2025 as the basis of my summary assessment.[31]Finally, I considered whether, applying the judgment of the Court of Appeal in Distinctive Care, to include the costs incurred by HMRC prior to 22 April 2024 and in making the original decision on hardship as costs of or incidental to the hardship proceedings. On balance I consider that they are not, they are the costs of making the hardship decision which became the subject of the proceedings. In this regard I agree with the position taken in Minicloud.They are not therefore recoverable.[32]Accordingly, I limit the award of cost to £3.151.80.[33]In reaching my decision to award these costs I do not consider, as alleged by the Appellant, that I am undermining the protective function of the hardship application or impermissibly allowing cost shifting by the back door. Had the Appellant provided the documents requested by HMRC, and which it would have well known were required to determine a hardship application in its favour, prior to 11 April 2024 its hardship application would have been determined without the need for hardship proceedings to have commenced and when the Tribunal has no relevant jurisdiction to award costs. Further, had the Appellant behaved reasonably within the hardship proceedings it would not have rendered itself liable to costs. Instead, the Appellant behaved in a dilatory and obstructive manner for which it now bears the costs consequences.

Order

[34]In exercise of the power under section 29(1) and (2) of the TECAand pursuant to rule 10(1)(b) of the FTT Rules that:(1) The Appellant shall pay the Appellant’s costs of and incidental to the hardship proceedings appeal determined on the standard basis summarily assessed in the sum of £3,151.80.(2) The Appellant shall pay £3,151.80 no later than 14 days from the date of this order.

Right to apply for permission to appeal

[35]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: 09th JANUARY 2026