Madeleine Clark v The Commissioners for HMRC [2026] UKFTT 559 (TC)

[2026] UKFTT 00559 (TC)

Case No TC 09839

FIRST-TIER TRIBUNAL

TAX CHAMBER

Hearing Heard on: 26 March 2026

Date Judgment date: 09 April 2026

Taylor House, London

Appeal reference: TC/2024/04051

Costs – Appeal allocated to ‘standard’ category – HMRC’s decisions withdrawn subsequent to receipt of notice of appeal – Appellant’s application for costs – Whether application within Tribunal’s jurisdiction – Whether appropriate to re-allocate appeal as a Basic case or a Complex case– Whether HMRC acted unreasonably in bringing, defending or conducting proceedings – Application dismissed

Before

TRIBUNAL JUDGE BROOKS

Between

MADELEINE CLARKAppellant

THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondent

Madaleine Clark in person for Appellant

Colm Kelly of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for Respondents

DECISION

Introduction

[1]The Appellant, Ms Madeleine Clark, by an application of 31 July 2025 (the “Application”), seeks:(1) an order against the Respondents (“HMRC”) for the costs of, and incidental to, her appeal, pursuant to rule 10(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“FTT Rules”), on the grounds that HMRC have acted unreasonably in defending the proceedings;

(2) that her costs in the sum of £161,472 be summarily assessed on the indemnity basis; and

(3) that this matter, which was allocated as a Standard case by direction of the Tribunal on 23 January 2025 when Ms Clark’s appeal was acknowledged and notified to HMRC, be re-allocated as a Complex case pursuant to rule 23 FTT Rules.

[2]The Application was opposed by HMRC as was the oral application made by Ms Clark during the hearing, which was for the case to be re-allocated as a Basic case on the grounds that HMRC had not provided a statement of case (see rules 24 and 25 FTT Rules).

[3]Ms Clark represented herself. Mr Colm Kelly, of counsel appeared on behalf of HMRC. Their helpful submissions, both written and oral, were very much appreciated and I have taken these into account together with all of the materials and authorities to which I was referred, even if not mentioned in this decision.

Background

[4]The underlying facts and chronology are not disputed.

[5]Ms Clark is a barrister (called in 1996) practising at the independent bar from chambers in Lincoln’s Inn.

[6]In March 2017, Ms Clark was contacted by a recruitment agency acting on behalf of Harney Westwood and Riegels LLP (the “Employer”), an international law firm with offices in various locations including London, the Cayman Islands and British Virgin Islands. This was to offer her a position, with a tax free salary, in the Employer’s Cayman Islands office. She was subsequently interviewed by a London based partner of the Employer who confirmed the tax free basis of the position – without which, as Ms Clark explained, the salary offered would not have been sufficient for her to have accepted the Employer’s offer of employment.

[7]On 11 April 2017, Ms Clark entered into a contract of employment with the Employer. Although the contract was signed at the Employer’s London office it was governed by the laws of the Cayman Islands. Under the terms of the contract, Ms Clark was to be based in the Cayman Islands for an initial term of two years commencing 1 May 2017. However the Employer terminated Ms Clark’s employment on 29 January 2018 and, on 2 February 2018, paid her three months’ salary in lieu of notice for the termination of her employment.

[8]As it had a UK presence, the Employer was required to deduct tax from Ms Clark’s salary under the Pay As You Earn (“PAYE”) system (see Clark v Oceanic Contractors Inc

[1983] 2 AC 130

). However, it did not do so and paid the salary and termination payment to Ms Clark without any deduction of tax. As a result, because she had returned to the UK sooner than she had expected, Ms Clark was liable to UK income tax on her 2017-18 earnings. Additionally, as she did not satisfy the automatic overseas test for the next tax year, as required by paragraph 44(4) of schedule 45 to the Finance Act 2013, Ms Clark was not eligible to claim split year treatment.

[9]Knowing this to be the case, Ms Clark, having taken the advice of leading counsel, wrote to HMRC on 29 August 2018:

“… to provide information to HMRC about what has happened, to seek HMRC assistance on PAYE and NIC, To ask for an appropriate Tax coding for my employment, To ask that notice of it is provided both to me and to my Employer including individual partners in the UK at its London office, with a demand for payment to HMRC from the Employer, including individual partners in the UK of the PAYE and NICs …”

[10]Enclosed with the letter, as evidence of the UK presence of the Employer, were biographies of four of the partners of the Employer which were taken from the Employer’s website; an article published in The Lawyer weekly magazine, dated 8 July 2013, announcing the opening of the Employer’s London office by one of the partners; the Employer’s website page for its London office; the first two and the last pages of the judgment of the Grand Court of the Cayman Islands in Saad, dated 31 May 2018 – a case which was described as the “largest fraud case ever heard in the Cayman courts”, which was conducted by one of the London resident equity partners of the Employer. Also enclosed was the contract of employment dated 11 April 2017 and the 29 January 2018 letter by which Ms Clark’s employment was terminated.

[11]HMRC responded to Ms Clark’s letter on 1 October 2018. Although the points raised in her letter were “noted”, the letter was “passed” to a “Specialist Team to review and investigate the matter further” and Ms Clark told she would be contacted “in due course”. HMRC’s letter also stated that Ms Clark would need to return the foreign income she received in her 2017-18 self-assessment tax return. As she understood HMRC’s letter to constitute notice, under s 8(1) of the Taxes Management Act 1970 (“TMA”), to file a self-assessment tax return for 2017-18, Ms Clark submitted a return to HMRC including all of the information in her letter of 29 August 2018 in the “white space” for “additional information” in that return.

[12]On 11 March 2020, having received a tax calculation for 2017-18, Ms Clark’s accountant wrote to HMRC stating that:

“Our client believes that the underpayment in question arose through a failure by [the Employer] to operate PAYE correctly and accordingly we believe that the law requires you to seek any tax you believe to be underpaid from [the Employer] …”

[13]The letter continued, stating that Ms Clark had twice provided HMRC with these details, first in her 2017-18 tax return, and secondly in writing in her letter of 29 August 2018.

[14]Ms Clark’s accountant wrote again to HMRC on 1 February 2021 noting that there had still not been a substantive response to her letter of 29 August 2018. Attached to that letter was a copy of the final judgment and order of the Employment Appeal Tribunal (“EAT”) in a case Ms Clark had brought against the Employer which had held that the Employer had employed Ms Clark and had confirmed “the facts and matters” as set out in Ms Clark’s letter of 29 August 2018 to HMRC.

[15]HMRC finally replied to Ms Clark’s 29 August 2018 letter on 31 December 2021. HMRC’s letter to her accountant stated that Ms Clark was liable to pay the tax on her 2017-18 income from the Employer and that if the Employer agreed to pay the tax “that is a matter to be resolved between” her and the Employer. The letter also confirmed that the information in the 29 August 2018 letter had been “passed to our relevant compliance department”. It continued:

“… However, for reasons of confidentiality, we cannot provide your client or yourself with an update on how any further inquiries are proceeding and on whether PAYE assessments have been issued to [the Employer].”

[16]On 16 February 2022, the accountant wrote to HMRC stating that Ms Clark was awaiting the outcome of the further enquiries by HMRC’s “relevant compliance department”. The letter also reminded HMRC that, as explained in the letter of 29 August 2018, it was the contractual and legal obligation of the Employer to operate PAYE and to pay the tax liability. The accountant disagreed with the assertion in HMRC’s letter that Ms Clark was liable to pay the tax, referring to HMRC’s own view as stated in their PAYE Manual at PAYE1610.

[17]HMRC issued a ‘holding’ response to the accountant’s letter on 28 October 2022. On 13 September 2023, HMRC wrote to Ms Clark’s accountant apologising for “the length of time it has taken” and, even though a copy of the EAT decision confirming Ms Clarks employment status had been provided on 1 February 2021, stated:

“My colleagues have advised me that because of the complex nature of the situation, [Ms Clark] would need to have confirmation of her employment status.”

[18]The accountant replied by letter to HMRC on 9 October 2023. The letter referred to Ms Clark’s employment status with the Employer having been “conclusively determined” by the EAT on 21 December 2020 and that a copy of that decision had been provided to HMRC. The letter concluded by requesting that HMRC “pursue” the Employer for the “PAYE tax outstanding” and credit Ms Clark’s self-assessment statement of account for 2017-18. It also requested HMRC to remove the case from the Debt management team which had regularly sought payment from Ms Clark causing her “significant distress”.

[19]HMRC, by letter of 14 November 2023 to Ms Clark’s accountant, apologised for the delayed response. However, they confirmed that under the legislation (s 13 Income Tax (Earnings and Pensions) Act 2003 (“ITEPA”)), “it is clear that the taxable person is the person to whose employment the earnings relate”, ie Ms Clark. HMRC’s letter continued stating that as Ms Clark was liable to pay “any income tax from their employment. HMRC will continue to assess the tax against them directly.”

[20]Unfortunately, Ms Clark’s accountant did not receive HMRC’s letter of 14 November 2023 and, following a telephone conversation between the accountant and HMRC on 30 November 2023, a copy of the letter was provided on 1 December 2023. In a letter of 11 December 2023, in response to HMRC, the accountant noted that HMRC had not confirmed Ms Clark’s right to appeal or explained how she could appeal. The accountant also requested that Ms Clark’s case be reviewed by an “Officer not previously involved” with the matter.

[21]Ms Clark herself wrote to HMRC on 21 December 2023 requesting a response to her accountant’s letter of 11 December 2023 which, she noted, had not been acknowledged by HMRC. Ms Clark also requested her case be reviewed by an officer not previously involved in the matter and explained that she would do all she could to assist HMRC with their enquiries. Her letter also referred to s 13 ITEPA which only took matters so far. As she explained in the letter:

“… Section 13 identifies the taxpayer but not the amount of tax payable. This is in section 59B TMA and PAYE Regulation 185. In addition to the content of the 2018 letter which included reference to the PAYE Manual 81610 (last updated 6 December 2023) on the House of Lords judgment in Clark v Oceanic 56 TC 183, it is my case that the correct analysis is that in the judgment of the Master of the Rolls, Sir Geoffrey Vos, in HMRC v West (Upper Tax Tribunal) [2018] UKUT 100 (TCC), with which the other member of the UT panel in West agreed. Their analysis is clearly correct. In West it was the unanimous view of the UT that the amount paid or payable in that case was taxable, but that the employee was entitled to deduct what should have been paid to HMRC by the employer, subject to a contrary direction by HMRC. No such contrary direction was made by HMRC in West nor has any been made in my case. …”

[22]On 28 December 2023, HMRC wrote to Ms Clark’s accountant to confirm that the letter of 11 December 2023 had been forwarded to “colleagues” within HMRC’s Solicitors Office to “review the case”. However, written in red in a letter from HMRC’s Enforcement Taskforce to Ms Clark, dated 17 April 2024, was a warning: “Pay now to avoid legal action £203,954.83”.

[23]Ms Clark wrote again to HMRC on 23 April 2024. The letter noted that despite their letter of 28 December 2023, the only communication she had received from HMRC had been the letter from the Enforcement Office. Ms Clark concluded her letter by explaining that until she had received a decision letter, she was not able to appeal to the Tribunal. She also stated that HMRC should not be pursuing the debt against her, but against the Employer as it owed the debt and had no defence against payment to HMRC.

[24]HMRC responded on 14 May 2024. The letter confirmed that Ms Clark’s case had been reviewed by HMRC Solicitor’s Office and that HMRC’s view was “unchanged”, ie Ms Clark was liable to pay the income tax on her earnings. On 10 June 2024 HMRC wrote to Ms Clark to confirm their view remained unchanged. Having explained that it was now too late to make an amendment to her 2017-18 return or make a claim for overpayment relief, that letter concluded:

“As the return was never amended and no claim to overpayment relief was made, your tax liability for 2017-18 remains due based on your own self-assessment. Although I understand that you may still not agree with this, as you have no appeal route available you may want to consider a Judicial Review. Guidance on requesting a Judicial Review is available on GOV.UK.”

Guidance on requesting a Judicial Review is available on GOV.UK.”

[25]Ms Clark replied, by letter of 24 June 2024, stating that she did not consider an appeal was out of time as she had not received any correspondence from HMRC marked “Review Conclusion Letter” or a letter from an independent officer within HMRC setting out that officer’s reasoning for upholding the position following a review.

[26]On 26 June 2024 Ms Clark filed her Notice of Appeal with the Tribunal. The Tribunal acknowledged the Notice of Appeal and served it on HMRC on 23 January 2025. At the same time the Tribunal directed the appeal be allocated to the standard category (under rule 23 FTT Rules) and that HMRC provide a statement of case to Ms Clark and the Tribunal within 60 days.

[27]However, before the Tribunal had acknowledged and served the appeal, on 15 July 2024 Ms Clark issued a Letter Before Claim in accordance with Annex A of the Pre-Action Protocol for Judicial Review (“JR”). The issues raised by Ms Clark in the JR claim were that:(1) she had not been issued with a decision by HMRC against which she could appeal;

(2) she was and is outside the statutory timeframe in which she is entitled to make an amendment to her 2017-18 self-assessment tax return;

(3) she was outside of the statutory timeframe in which she was entitled to claim overpayment relief; and

(4) she must pay the tax liability calculated by HMRC in regard to her 2017-18 self-assessment tax return.

[28]On receipt of the JR Letter Before Claim, the matter was referred to HMRC’s Legal Group which responded to the issues raised by Ms Clark on 6 August 2024, in accordance with Annex B of the JR Pre-Action Protocol, as follows:

“i. The proposed Defendants [ie HMRC] do not intend to defend this claim. ii. Whilst the proposed Defendants maintain their position in regards to grounds i, ii and iii, (as set out above) they here concede on ground iv. iii. The proposed Defendants consider that there existed an entity which should have operated Pay As You Earn (PAYE) on the income received by the proposed Claimant [Ms Clark] as a result of her employment in the 2017/18 tax year. iv. In those circumstances, the Income Tax (PAYE) Regulations 2003 required the employer to deduct income tax from relevant payments of PAYE income made to the proposed Claimant, which it failed to do. v. As a result, the proposed Defendants consider that the proposed Claimant is entitled to a Regulation 185 adjustment to her 2017/18 tax liability, in the amount of £97,007.15. They have applied this adjustment to the proposed Claimant’s self-assessment account. vi. In the interests of clarity, this adjustment does not prevent the proposed Claimant from being liable to the income tax. Rather, it simply adjusts the amount that she has to pay. 6. Future of the proposed Claim i. Given the above concession in regard to ground iv and the adjustment requested by the proposed Claimant being granted in full, the proposed Defendants consider this matter resolved.”

[29]Ms Clark contacted HMRC Legal Group on 11 September 2024 to request that penalties that had been raised on her account be cancelled. On 4 October 2024, in an email to Ms Clark, HMRC confirmed that the entirety of both the late filing and late payment penalties for the 2017-18 self-assessment tax year had been reduced to nil by way of special reduction.

[30]Having received Ms Clark’s Notice of Appeal on 23 January 2025, and as they had applied the Regulation 185 adjustment and cancelled all penalties, HMRC made an application that, save for Ms Clark’s claim for costs, the appeal be struck out and that the direction requiring them to produce a statement of case be withdrawn. That application was granted when the Tribunal (Judge Brown KC) by letter of 5 July 2025, other than in relation to costs, struck out Ms Clark’s appeal on the grounds that there was no substantive matter within its jurisdiction (see rule 8(2) FTT Rules). Although the Tribunal’s letter made no reference to the provision of a statement of case, as the substantive appeal had been struck out, none was produced by HMRC.

[31]On 31 July 2025, Ms Clark made the Application.

Law

[32]In relation to the allocation of cases to categories, rule 23 FTT Rules provides (insofar as material): Allocation of cases to categories(1) When the Tribunal receives a notice of appeal, application notice or notice of reference, the Tribunal must give a direction— (a) …; and (b) in any other case, allocating the case to one of the categories set out in paragraph (2).

(2) The categories referred to in paragraph (1) are— (a) Default Paper cases, which will usually be disposed of without a hearing; (b) Basic cases, which will usually be disposed of after a hearing, with minimal exchange of documents before the hearing; (c) Standard cases, which will usually be subject to more detailed case management and be disposed of after a hearing; and (d) Complex cases, in respect of which see paragraphs (4) and (5) below.

(3) The Tribunal may give a further direction re-allocating a case to a different category at any time, either on the application of a party or on its own initiative.

(4) The Tribunal may allocate a case as a Complex case under paragraph (1) or (3) only if the Tribunal considers that the case— (a) will require lengthy or complex evidence or a lengthy hearing; (b) involves a complex or important principle or issue; or (c) involves a large financial sum.

(5) If a case is allocated as a Complex case— (a) rule 10(1)(c) (costs in Complex cases) applies to the case; and (b) rule 28 (transfer of Complex cases to the Upper Tribunal) applies to the case.

[33]Although not referred to by either party, a Practice Direction, Allocation of Cases to Categories in the Tax Chamber (the “Practice Direction”), was issued by the President of the Tax Chamber with the approval of the Senior President of Tribunals and the Lord Chancellor on 2 May 2022. After referring to Rule 23, and citing the categories of cases in Rule 23(2), the Practice Direction continues, stating:

“The Tribunal may, either on the application of a party or on its own initiative, give a further direction at any time re-allocating a case to a different category. This Practice Direction sets out the practice of the Tribunal with regard to the allocation of cases to categories. The fact that a case falls within the descriptions set out in this Practice Direction for a particular category does not mean that the case must, or will, be allocated to that category. Nothing in this Practice Direction affects the ability of any party to a case to make an application regarding the categorisation of that case.”

[34]In relation to Complex cases it states:

“4. Rule 23 provides that the Tribunal may allocate a case as a Complex case only if the Tribunal considers that the case: (1) will require voluminous or complex evidence or a lengthy hearing; (2) involves a complex or important principle or issue; or (3) involves a large financial sum. 5. A hearing is generally considered ‘lengthy’ if it is expected to last more than five days. 6. A financial sum is generally considered ‘large’ in relation to taxes and duties if the amount in dispute in the proceedings is: (1) £750,000 or more of direct taxes; and (2) £2,000,000 or more of indirect taxes and duties.” 7. The Tribunal will assess whether, having regard to the nature of a particular case, any one or more of these criteria are satisfied. In making this assessment the Tribunal will take into account all the circumstances, including the implications of the costs-shifting regime (subject to the right of the taxpayer to opt out) and the fact that cases allocated to the Complex category are eligible, subject to various consents, to be transferred to the Upper Tribunal. 8. If on such an assessment the Tribunal considers that a case meets one or more of the stated criteria it will, in the absence of special factors, allocate the case to the Complex category.” (1) will require voluminous or complex evidence or a lengthy hearing; (2) involves a complex or important principle or issue; or (3) involves a large financial sum. (1) £750,000 or more of direct taxes; and (2) £2,000,000 or more of indirect taxes and duties.”

[35]The ability of the Tribunal to make an order for costs is derived from s 29 of the Tribunals Courts and Enforcement Act 2007 (“TCEA”) which provides:(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.

(2) The relevant Tribunal shall have full power to determine by whom and to what extent the costs are to be paid.

(3) Subsections (1) and (2) have effect subject to Tribunal Procedure Rules.

[36]As is clear from s 29(3) TCEA, the power of the Tribunal to award costs is subject to the FTT Rules, Rule 10 of which provides: Order for costs(1) The Tribunal may only make an order in respect of costs (or, in Scotland, expenses)— (a) … (b) if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings; … (c) if— (i) the proceedings have been allocated as a Complex case under rule 23 (allocation of cases to categories); and (ii) the taxpayer (or, where more than one party is a taxpayer, one of them) has not sent a delivered a written request to the Tribunal, within 28 days of receiving notice that the case had been allocated as a Complex case, that the proceedings be excluded from potential liability for costs or expenses under this sub-paragraph; or …

(2) The Tribunal may make an order under paragraph (1) on an application or of its own initiative.

(3) A person making an application for an order under paragraph (1) must— (a) send or deliver a written application to the Tribunal and to the person against whom it is proposed the order be made and; (b) send or deliver with the application a schedule of the costs or expenses claimed in sufficient detail to allow the Tribunal to undertake a summary assessment of such costs or expenses if it decides to do so.

(4) An application for an order under paragraph (1) may be made at any time during the proceedings …

[37]The jurisdiction of the Tribunal to award costs to a party in an appeal where the opposing party has acted unreasonably in “bringing, defending or conducting” the proceedings was carefully considered by the Court of Appeal in Distinctive Care Ltd v HMRC

[2019] EWCA Civ 1010

(“Distinctive Care”). Rose LJ (as she then was, with whom Floyd and Lewison LJJ agreed), noted, at [7]:

“The broad power to award costs conferred by section 29(1) is therefore expressed to be subject to the FTT Rules. Those Rules, by rule 10, reflect the intention that the First-tier Tribunal is designed in general to be a ‘no costs shifting’ jurisdiction, not least because many appellants are not legally represented. Rule 10 should therefore be regarded as an exception to this general expectation that both sides will bear their own costs, whatever the result of the appeal.”

[38]In Distinctive Care counsel for the Appellant had contended that both the Appellant and HMRC were responsible for “bringing” the proceedings within the meaning of rule 10(1)(b) FTT Rules, HMRC because they had issued the appealable decision and the Appellant because it had lodged the appeal with the FTT, and that the existence of an appealable decision was an essential first step in the FTT’s proceedings because without that step there can be no appeal. However, Rose LJ rejected this argument at [19], saying:

“Ingenious though this argument is, in my judgment it cannot succeed. The earliest conduct that is relevant for the purposes of rule 10(1)(b) is the bringing of the proceedings, that is the proceedings before the FTT. There is no ambiguity in the FTT Rules as to what is involved in the bringing of proceedings in this appeal; it is the sending or delivering of the notice of appeal pursuant to rule 20 of the FTT Rules. …”

[39]Rose LJ, at [23] in Distinctive Care, referred to the application of cost rules, drafted in the same terms as rule 10(1)(b) FTT Rules, in other tribunal Chambers. She cited, with approval, Cancino v Secretary of State for the Home Department

[2015] UKFTT 59 (IAC)

at [24] in which McCloskey J, then President of the Upper Tribunal (Immigration and Asylum Chamber), sitting with Mr Clements, the then President of the First-tier Tribunal (IAC), considered the newly introduced power in those First-tier and Upper Tribunal Chambers to make costs awards where a person has acted unreasonably in bringing, defending or conducting proceedings. They described the test to be applied in the following terms:

“The scope of rule 9(2)(b) is identifiable by listing the several types of enquiry which, depending on the context, may be required of the Tribunal. These are: a. Has the Appellant acted unreasonably in bringing an appeal? b. Has the Appellant acted unreasonably in his conduct of the appeal? c. Has the Respondent acted unreasonably in defending the appeal? d. Has the Respondent acted unreasonably in conducting its defence of the appeal? The rule clearly embraces the whole of the “proceedings”

. Thus the period potentially under scrutiny begins on the date when an appeal comes into existence and ends when the appeal is finally determined in the Tribunal in question. … .” (emphasis added) a. Has the Appellant acted unreasonably in bringing an appeal? b. Has the Appellant acted unreasonably in his conduct of the appeal? c. Has the Respondent acted unreasonably in defending the appeal? d. Has the Respondent acted unreasonably in conducting its defence of the appeal?

[40]Given her conclusion that proceedings, and therefore the Tribunal’s jurisdiction under rule 10(1)(b) FTT Rules, commenced with the sending or delivering of the notice of appeal to the Tribunal, it was not necessary for Rose LJ to consider whether costs incurred before the start of tribunal proceedings can be recovered as “costs of and incidental to” those proceedings. However, as there appeared to be some inconsistency in practice and the point was of a wider significance, she considered it convenient for the Court of Appeal to consider it. Having referred to Part 44.2(6)(d) of the Civil Procedure Rules (“CPR”), which contains an express provision that a court may make an order that a party must pay costs incurred before the proceedings have begun, Rose LJ said, at [38]: “Although there is no equivalent in the FTT Rules to the express provision in CPR 44.2(6)(d), I consider that the power in rule 10(1)(b) to award costs of and incidental to the proceedings can include costs incurred before the appeal was notified to the FTT. Which costs are properly recovered is a matter for the costs officer who is experienced in these matters to decide. I would, however, say this as regards the costs incurred by the parties in steps taken before the FTT appeal is lodged. The ability of the applicant to recover the costs of notifying the appeal to HMRC does not, in my view, turn on whether the taxpayer chooses the option of internal review or decides to bring the appeal straight to the tribunal. I agree with the UT's comment that defining the scope of a possible order for costs by reference to the subjective intentions of a potential appellant at a particular stage is "hedged around with too many difficulties and uncertainties to form a reliable basis for decision": [71].

[41]Given that HMRC accept that Ms Clark was entitled to the Regulation 185 adjustment and have applied it to her 2017-18 tax liability and cancelled the related penalties, it is not necessary for me to set out the statutory provisions, authorities and relevant part of HMRC’s PAYE Manual. Discussion Re-allocation

Discussion

[42]It is common ground that on being notified of Ms Clark’s appeal, the Tribunal allocated it to the category of a Standard case (see paragraph 26, above). In the absence of any subsequent directions re-allocating it to another category, the appeal remains a Standard case. The effect of this, in relation to costs, is that as the appeal has not been allocated as a Complex case under rule 23 FTT Rules, rule 10(1)(b) FTT Rules applies and an order for costs may only be made if HMRC has acted unreasonably in bringing, defending or conducting the proceedings.

[43]The position would be identical if the appeal was re-allocated as a Basic case. As it would not be a Complex case, rule 10(1)(b) FTT Rules would apply and Ms Clark would still be required to establish unreasonable behaviour on the part of HMRC in bringing, defending or conducting the proceedings to succeed in her claim for costs. In such circumstances, I do not consider it appropriate to direct the re-allocation of this matter as a Basic case and dismiss Ms Clark’s application to do so.

[44]I should briefly also refer to the fact that HMRC did not produce a statement of case which, given the underlying decisions have been withdrawn leaving the Application as the only issue before the Tribunal, I do not consider is needed. It appears that HMRC’s application to dispense with the statement of case was overlooked by the Tribunal when striking out the substantive appeal and, insofar as it is necessary to do so, as there is sufficient material before the Tribunal to determine the Application, I retrospectively set aside the direction requiring the production of a statement of case.

[45]With regard to Ms Clark application for the Application to be re-allocated as a Complex case, I am afraid that, in the light of rule 23(4) FTT Rules and the Practice Direction, this too must fail. The Application did not require lengthy or complex evidence or a lengthy hearing; it did not involve a complex or important principle or issue; and neither did it concern a large financial sum.

[46]The hearing lasted for half a day. It concerned an application for costs in the sum of £161,472, while not an insignificant amount in itself, it is nevertheless somewhat less than the financial sums envisaged in the Practice Direction as being “large”. Although I accept that the matter is important to Ms Clark, a costs application such as the present does not raise a complex or important issue to be determined by the Tribunal.

Costs

[47]The Tribunal’s jurisdiction in relation to costs is engaged, under rule 10(1)(b) FTT Rules if it “considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings”. It is clear from the passage in Distinctive Care cited above (at paragraph 38) that the earliest conduct that is relevant for these purposes is the bringing of the proceedings before the Tribunal and that the bringing of proceedings “is the sending or delivering of the notice of appeal pursuant to rule 20 of the FTT Rules.” As such, conduct before the sending or delivering of the notice of appeal, no matter how unreasonable, cannot be taken into account to bring the matter within the jurisdiction of the Tribunal.

[48]Also, as is clear from Distinctive Care (see paragraph 40, above) it is only when the Tribunal’s jurisdiction is engaged that it can consider the extent of, and what is to be included in the “costs of and incidental to” the proceedings.

[49]Ms Clark sought to distinguish Distinctive Care on the basis that it concerned whether HMRC had been unreasonable in “bringing” and conducting the proceedings, not “defending” the proceedings as in the present case and that the considerations on defending proceedings are different and have not been considered in previous cases including Distinctive Care.

[50]However, no such distinction was made in Distinctive Care which cited, at [19] the decision of Judge Bishopp, the then President of the Tribunal, in Catanã v HMRC

[2012] UKUT 172 (TCC)

at [14], who described the phrase “bringing, defending or conducting the proceedings” as:

“… quite plainly, an inclusive phrase designed to capture cases in which an appellant has unreasonably brought an appeal which he should know could not succeed, a respondent has unreasonably resisted an obviously meritorious appeal, or either party has acted unreasonably in the course of the proceedings, for example by persistently failing to comply with the rules or directions to the prejudice of the other side.”

[51]In the present case most, if not all, the costs sought by Ms Clark were incurred before she notified her appeal to the Tribunal. I also agree with Mr Kelly’s submission that HMRC’s conduct after the appeal had been notified, the withdrawal of the underlying decisions and penalties, was not unreasonable.

[52]Although HMRC conceded that their conduct leading up to the issue of proceedings in this case had been “unreasonable” (which in my view is something of an understatement given that the information on which the decision was withdrawn in August 2024 had been provided to HMRC in August 2018), I have come to the conclusion that, as the conduct with which the Application is concerned occurred prior to the appeal coming into existence, it does not fall within the Tribunal’s jurisdiction and the Application cannot, therefore succeed.

[53]As such it is not necessary for me to consider the quantum or basis of costs and whether these were of, or incidental, to the proceedings.

Conclusion

[54]Therefore, for the reasons above, I have no alternative but to dismiss the Application.

Right to apply for permission to appeal

[55]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: 09 April 2026