Governance Ministries v The Commissioners for HMRC

1. This decision concerns the costs of this appeal.

2. HMRC agree that they should pay the Appellant's costs of the appeal, and the parties agree that those should go to a detailed assessment.

3. The two matters in dispute are: (1) The basis of assessment (ie, whether standard or indemnity basis); (2) The size of the interim payment on account (whether £400,000 or £350,000).

4. This appeal concerned the Appellant's recovery of input VAT in the course of its broadcasting business. The Appellant broadcast a TV channel to the UK public, charging fees for broadcasting programmes and advertisements. It was (eventually) common ground that, in doing so, the Appellant was making non-exempt taxable supplies. However, HMRC sought to contend that the Appellant was also carrying on a non-economic activity in respect of some programmes that it broadcast without charge, and was thereby entitled only to deduct a proportion of its input VAT. The total amount in dispute was about £6m

5. The following facts are not in dispute: (1) An investigation began in 2018; (2) The appeal was against notices of assessment and adjustments made in 2020; (3) The Notice of Appeal was dated 11 November 2020; (4) The Appeal was allocated to the Complex category, and there was no opt-out; (5) There was a stay for ADR; (6) The Tribunal gave directions in November 2023; (7) In August 2023, the parties provided Lists of Documents; (8) In April 2024, the Appellant produced witness statements including from Messrs Fleming and Brumley and lengthy exhibits; (9) On 28 January 2025, a final hearing was listed for 9 days, to begin on 7 October 2025; (10) In May 2025, the Appellant filed a round of responsive evidence; (11) On 10 September 2025, the Appellant applied to rely on a third witness statement from Mr Fleming; (12) On 16 September 2025, the Appellant filed its Skeleton Argument; (13) HMRC was due to file its Skeleton Argument by no later than 5pm on 23 September 2025; (14) At 4.46pm on 23 September 2025, HMRC emailed the Tribunal withdrawing from the appeal. Nothing further was said as to the reasons for withdrawal. That was a fortnight before the hearing of the appeal was due to start. The basis of assessment

6. The award of indemnity costs is a high hurdle, requiring demonstration of "some conduct or some circumstance which takes the case out of the norm": Excelsior Commercial (2002) per Lord Woolf MR, recently approved and reiterated by the Court of Appeal in Thakkar v Mican [2024] EWCA Civ 552 at [19]. "Out of the norm" is sometimes expressed as "exceptional".

7. The discretion to award indemnity costs is a wide one; and is to a high degree fact sensitive, but it is necessary to show that conduct has been "unreasonable to a high degree". The parties disagree as to whether HMRC acted unreasonably, but agree that unreasonableness does not mean merely wrong or misguided in hindsight.

8. In Tarafdar v HMRC [2024] UKUT 0362 (TC), the Upper Tribunal expressly addressed the issue of how to assess whether a party's withdrawal from proceedings constitutes unreasonable conduct. The Upper Tribunal said (at Para [34]): "In our view, a tribunal faced with an application for costs on the basis of unreasonable conduct where a party has withdrawn from the appeal should pose itself the following questions: (1) What was the reason for the withdrawal of that party from the appeal? (2) Having regard to that reason, could that party have withdrawn at an earlier stage in the proceedings? (3) Was it unreasonable for that party not to have withdrawn at an earlier stage?

9. Some preliminary observations: I agree with the Appellant that HMRC withdrew at a very late stage. To all intents and purposes, the Appellants had completed their last substantive step, which was the Skeleton Argument. Skeletons were to be sequential. Until quarter of an hour before the deadline, and as far as the Appellants were concerned, all that remained to be done was for HMRC to produce its Skeleton Argument. It is not said that HMRC, at any time earlier than 14 minutes before the deadline for production of its Skeleton Argument, gave any indication that the Appellants could (in effect) stand down, and hold themselves in readiness not for a Skeleton Argument but for a withdrawal.

10. Although not unsympathetic, I am not minded to give any weight to the Appellant's submission that a factor weighing in favour of indemnity costs is the fact that late withdrawal wastes the Tribunal's resources, which are public resources, bearing in mind that a judge would have been rostered to hear the case, and a courtroom set aside, and other arrangements such as clerking put in place. The same argument could be made whenever a listed hearing is vacated; it does not seem to me that the fact that the hearing was for 9 days rather than (say) one makes any material difference when it comes to the basis of assessment, even though the impact on the Tribunal is obviously greater.

11. I now turn to applying the Tarafdar guidance.

12. As to (1), I do not really know why HMRC withdrew, save its assertion that it did so 'following careful consideration of the Respondents' position".

13. I give this little weight.

14. Firstly, the Appellant was entitled to expect that HMRC would carefully consider HMRC's position throughout the entirety of the proceedings.

15. Secondly, HMRC lay great store by the receipt of Mr Fleming's third witness statement, dated 10 September 2025, as the cause of its withdrawal from the appeal. It was filed on the basis that Mr Fleming "has identified certain points already raised in his existing evidence which would benefit from clarification, including through further detail and additional supporting information. None of the points raised are new; they are merely developments of the points raised in the existing evidence." I have considered that witness statement; the description of it seems to me accurate.

16. HMRC does not say - with any degree of particularity, or so as to enable its otherwise bare assertion to be assessed - exactly what there was in Mr Fleming's third statement which caused such a sea-change in HMRC's approach.

17. That omission does carry weight, because it seems to me that HMRC could, if it wanted to, have identified such material, in an evidentially admissible way, and without any wider waiver of its litigation or legal advice privilege, but has not done so. Therefore, I cannot accept HMRC's assertion, made only in its submission (which is not a species of evidence), that Mr Fleming's third witness statement was the catalyst for HMRC's withdrawal.

18. (2) largely overlaps with (1). It cannot have been the case that Mr Fleming's third witness statement happened to reveal some absolutely crucial new fact, changing the landscape and the likely outcome, because HMRC do not point to one. Nor can I identify one such a key new fact in this case concerning whether activities such as the broadcast of free programmes were or were not part of the Appellant's economic activity. If there was something unexpected in Mr Fleming's third statement (perhaps akin to something unexpected emerging in cross-examination) compelling the withdrawal, HMRC does not say what it was.

19. As to (3), the above remarks apply. The best material before me is that HMRC knew what it needed to know in order to rationally assess its prospects, and whether it should continue to stand behind it assessments and adjustments, by April 2024, at the latest. Therefore, on the face of it, HMRC had almost 18 months to decide what to do.

20. This very late withdrawal was out of the norm; especially in relation to such a heavy case. It seems to me amount to a significant level of unreasonableness.

21. For the above reasons, and reminding myself of the high threshold, I have formed the view that the unreasonable level of HMRC's conduct is high enough that the appropriate basis of assessment (save as to the costs of the costs application, dealt with below) is the indemnity basis throughout. The size of the interim payment

22. The stated costs are approximately £780,000, of which £473,000 were Counsels' fees.

23. This is a big bill, but it has to be looked at in the context of the overall value at risk, which was in the millions.

24. The usual basis for the determination of the interim payment on account is the minimum amount which the receiving party can expect to receive on the detailed assessment.

25. In my view, £350,000 is too low. I am not sure how it has been arrived at. I am to some degree sceptical whether 45% would have been high enough even had costs fallen to be assessed on the standard basis.

26. Moreover, HMRC have not pointed to any item in the fairly detailed Schedule to say that they consider it unreasonable in amount or unreasonably incurred. Hence, I am left to simply choose between two competing figures.

27. The Appellant asks for £400,000, which is the sum which I award as an interim payment, to be paid within 14 days of the release of this decision. The costs of the costs application

28. The costs application has been treated by the parties as a discrete exercise.

29. The costs of and incidental to the costs application should follow the event - that is to say, should be paid by HMRC, which has not been the successful party.

30. But those costs, if not agreed, should be assessed on the standard basis and not on the indemnity basis.

31. The costs application is an application of a conventional kind, which has produced a winner and a loser.

32. It does not seem to me as if there is anything in relation to HMRC's conduct of the costs application which justifies an award on the indemnity basis. The best that can be said is that HMRC did not accept the Appellant's invitation to accede to an order that it pay the costs of the substantive proceedings on the indemnity basis, thereby making the costs application necessary. But in my view that was not an offer refusal of which carried indemnity costs consequences. Release date: 11 th MARCH 2026