Guides

Unreasonable Conduct Costs: When The Tribunal Can Award Costs Against You (Or HMRC)

In most FTT cases each side pays its own costs. But when one side has been unreasonable, the tribunal can shift them. Here's how the test works, what the case law says, and how to make or defend a costs application.

Liam Williams

Liam Williams

— 13 min read

You won your case—or you're about to win—and you think HMRC should pay your costs. Or you've received a costs application from HMRC and you want to understand what you're facing. Either way, you need to know how the tribunal decides whether conduct was unreasonable enough to shift costs.

In most First-tier Tribunal (FTT) cases, each side pays its own way. There is no automatic costs order against the loser. But Rule 10(1)(b) of the Tribunal Procedure Rules creates an exception: the tribunal can order costs where a party has "acted unreasonably in bringing, defending or conducting the proceedings." This power applies on every track—Default Paper, Basic, Standard, and Complex.

Our guide to tribunal tracks and costs covers the general rule and the three costs exceptions. This guide goes deeper into the unreasonable conduct test—how the tribunal applies it, what the leading cases have established, and the practical mechanics of making or defending a costs application.

What Counts As "Unreasonable Conduct"

The starting point is Catana v HMRC [2012] UKUT 172 (TCC), the Upper Tribunal decision that first defined the scope of Rule 10(1)(b). At paragraph [14], Judge Bishopp explained what the rule covers:

"It is, 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."

Three categories of unreasonable conduct. Judge Bishopp used "appellant" and "respondent" as examples, but the rule is symmetrical—each category can apply to either side:

  1. Bringing a hopeless case: A party pursues a case they should know cannot succeed.
  2. Unreasonably resisting a meritorious case: A party defends against an obviously strong case instead of conceding.
  3. Procedural abuse: Either party persistently fails to comply with rules or directions.

Catana also drew a boundary. At paragraphs [7]–[9], Judge Bishopp addressed whether HMRC's conduct before proceedings could ground a costs order. The answer was no—the restriction in section 29 of the Tribunals, Courts and Enforcement Act 2007 limits costs recovery to costs "of and incidental to" proceedings. HMRC's investigation, however objectionable it may have felt, was not part of proceedings.

But—and this is a crucial nuance—behaviour before proceedings can inform the tribunal's view of actions taken during proceedings. If HMRC knew from the investigation that their case was hopeless, and then defended it anyway, the pre-proceedings knowledge is relevant to assessing conduct during proceedings.

The "Acid Test": Where It Comes From

When the tribunal asks whether conduct was unreasonable, what standard does it apply? The answer traces back to Ridehalgh v Horsefield [1994] Ch 205, a Court of Appeal decision on wasted costs—costs ordered against legal representatives for improper or unreasonable conduct. Sir Thomas Bingham MR formulated the test:

"The acid test is whether the conduct permits of a reasonable explanation. If so, the course adopted may be regarded as optimistic and as reflecting on a practitioner's judgment, but it is not unreasonable."

Ridehalgh was about solicitors, not parties. It was about wasted costs, not unreasonable conduct under Rule 10(1)(b). But the formulation migrated. It was adopted in Cancino v SSHD [2015] UKFTT 59 (IAC) for the immigration tribunal's equivalent costs power, and from there into GC Field & Son Ltd v HMRC [2022] UKFTT 314 (TC), where Judge Amanda Brown QC distilled it into a four-part framework at paragraph [51]. In summary:

  1. The costs-shifting regime should be applied "only in the clearest of cases and only where there is good reason."
  2. The relevant species of unacceptable conduct is unreasonable conduct—improper conduct (vexatious) will naturally fall within it, but mere negligence (in an untechnical way) is less clear.
  3. The acid test for unreasonable conduct is whether the conduct permits of a reasonable explanation.
  4. Three-stage approach: (a) Has the party acted unreasonably? (b) Did the unreasonable conduct cause the other side to incur unnecessary costs? (c) Is it just in all the circumstances to make a costs order?

A note of caution. In MORI v HMRC [2015] UKUT 12 (TCC), the Upper Tribunal declined to provide a "compendious test" of reasonableness (paragraph [49]). Instead, it said the standard "requires the tribunal to consider what a reasonable person in the position of the party concerned would reasonably have done, or not done." The GC Field formulation is a helpful FTT-level synthesis, but it is not binding UT authority. The two approaches are complementary rather than contradictory: the "acid test" asks whether conduct permits of a reasonable explanation; the MORI standard asks what a reasonable person would have done. Both get at the same question from different angles.

The Standard Adapts To The Party

One further dimension from MORI, at paragraph [56]:

"The test of reasonableness must be applied to the particular circumstances of a case, which will include the abilities and experience of the party in question. … There is a single standard, but its application, and the result of applying the necessary value judgment, will depend on the circumstances."

This matters for unrepresented appellants. You are not held to the standard of a qualified tax lawyer. But the standard is not infinitely elastic. As GC Field put it at paragraph [48]:

"The conduct of a litigant in person cannot be evaluated by reference to the standard of qualified lawyers, but neither may that be permitted to operate as a carte blanche to misuse the process of the Tribunal."

Being unrepresented lowers the bar for what counts as reasonable—but it does not remove it.

The Six Principles The Tribunal Applies

In HMRC v Jackson Grundy Ltd [2017] UKUT 180 (TCC), the Upper Tribunal pulled together the case law into six principles (paragraph [47]). These were "not in dispute between the parties" and remain the framework the tribunal applies today:

  1. Threshold, not discretion. Whether a party has acted unreasonably is a value judgment, not a discretion. Only if the tribunal concludes conduct was unreasonable does the question of awarding costs arise.

  2. High bar for appeal. On appeal, a costs decision should only be overturned if the tribunal applied the wrong law, took into account irrelevant matters, ignored relevant ones, or reached a conclusion no reasonable judge could have reached.

  3. "Bringing, defending or conducting" is inclusive. It captures hopeless appeals, unreasonable defences, and procedural abuse—the three Catana categories.

  4. Wrong does not equal unreasonable. HMRC would be acting unreasonably in defending an appeal only if they ought to have known their view had no reasonable prospect of success—not merely because they turned out to be wrong. This draws on Roden and Roden v HMRC [2013] UKFTT 523 (TC), which adopted the formulation from Wallis v HMRC [2013] UKFTT 081 (TC) that "before making a wrong assertion constitutes unreasonable conduct in an appeal that party must generally persist in it in the face of an unbeatable argument that he is wrong."

  5. Pre-proceedings conduct is outside scope. The restriction in section 29 TCEA means there is no power to make an order for costs of the investigation or decision that preceded proceedings.

  6. But pre-proceedings conduct is not irrelevant. Behaviour before proceedings can inform the tribunal's assessment of actions taken during proceedings—a point approved in Catana itself and in Bulkliner Intermodal Ltd v HMRC [2010] UKFTT 395 (TC).

Jackson Grundy: The Principles In Action

The principles come alive in the facts. Jackson Grundy Ltd, an estate agency, faced a penalty of £169,652 for breaches of the Money Laundering Regulations. The FTT reduced the penalty to £5,000—a reduction of over 97%. The UT examined whether HMRC's defence of the full penalty was unreasonable and, at paragraph [85], reached a striking conclusion:

"It should have been apparent to HMRC, reviewing the matter dispassionately, and by reference to the information available to them when the notice of appeal was served on them, that the review decision was so flawed that it could not properly be defended."

The word "dispassionately" carries weight. The UT was asking not what HMRC believed, but what HMRC ought to have recognised if they had looked at the case objectively when the appeal arrived. The UT remade the costs decision and ordered HMRC to pay Jackson Grundy's costs on the standard basis.

When HMRC Withdraws: Two Different Outcomes

HMRC sometimes withdraws from a case before the hearing. Does that mean they were unreasonable? Not necessarily. The case law shows two contrasting outcomes.

Tarafdar: Withdrawal Without Costs

In Tarafdar v HMRC [2014] UKUT 362 (TCC), HMRC assessed Mr Tarafdar—who ran a restaurant—for underpaid VAT. When it came time for the hearing, the HMRC officer who had conducted the investigation had retired. HMRC couldn't produce their key witness or supporting documents, and they withdrew.

Mr Tarafdar applied for costs. The UT established the three-stage test for withdrawal cases (paragraph [34]):

(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?

Applying this test, the UT found HMRC's withdrawal was not unreasonable. The reason for withdrawal—the missing officer and documents—only became apparent when the tribunal directed attendance. HMRC couldn't have withdrawn earlier because they didn't know earlier that their evidence would be unavailable. Costs refused.

Jackson Grundy: Withdrawal With Costs

Contrast that with Jackson Grundy. There, the flaws in HMRC's case were apparent from the moment the appeal was served. HMRC had the information. They could have reviewed it dispassionately. They didn't. Instead, they defended a penalty that turned out to be overstated by 97%.

Advanced Hair Technology: The Middle Ground

Advanced Hair Technology Ltd v HMRC [2025] UKFTT 599 (TC) sits between these two. HMRC assessed penalties for careless VAT returns. At a four-day hearing, cross-examination on day 2 made it clear that the company had a reasonable excuse—"it was very clear that AHT had been neither careless nor negligent" (paragraph [21]). The tribunal invited HMRC to reconsider during a lunch adjournment on day 3. HMRC withdrew on the morning of day 4.

The tribunal found HMRC's failure to withdraw until day 4 was unreasonable (paragraph [24]). But costs were limited to the period after the lunch adjournment on day 3—not the entire hearing. This illustrates how the tribunal can apportion costs to the period of unreasonable conduct rather than awarding all-or-nothing.

The pattern across these three cases: Tarafdar (costs refused—the problem only emerged at the hearing), Advanced Hair Technology (costs from the point it became obvious), Jackson Grundy (full costs—the problem was visible from the start). The question is always the same: when should HMRC have known, and did they act on it?

Obviousness Is Not The Test

This is the analytical core of the framework, and the point most often misunderstood.

In MORI, HMRC settled on day two of a hearing after submissions revealed the significance of evidence they had not previously appreciated. The appellant argued it should have been obvious from the start. The UT disagreed (paragraphs [47]–[54]).

Being wrong is not the same as being unreasonable. HMRC turned out to be wrong. But they had a view of the case that, until the evidence was tested at hearing, permitted of a reasonable explanation. The tribunal stressed that Rule 10(1)(b) "should not become a backdoor method of costs-shifting"—a warning drawn from [Eastenders Cash and Carry v HMRC [2012] UKFTT 219 (TC)]. If every losing party faced a costs application, the protection of the general rule would be meaningless.

The dividing line comes from Wallis, as adopted in Roden: a wrong assertion becomes unreasonable when a party "persists in it in the face of an unbeatable argument that he is wrong." It is the persistence—the refusal to engage with clearly contrary evidence—that crosses the line, not simply being on the losing side.

Hare Wines Ltd v HMRC [2023] UKFTT 536 (TC) illustrates the line clearly. The appellant relied on an invoice that HMRC's evidence showed was not genuine. The tribunal found there was "overwhelming and unchallenged evidence" that the invoice was fabricated—an "unbeatable reason" why the case could not succeed—yet the appellant persisted. Costs of £20,764.85 were awarded against the appellant.

This guards against hindsight bias. After the tribunal has decided, it is always tempting to say the result was obvious. But the question is what was reasonable at the time, not what turned out to be right.

When Proceedings Begin

The Court of Appeal settled this question in Distinctive Care Ltd v HMRC [2019] EWCA Civ 1010. Lady Justice Rose, sitting with Lewison LJ and Floyd LJ, held that proceedings begin when the notice of appeal is lodged with the FTT under Rule 20—not when HMRC made the original decision, and not when HMRC conducted their enquiry.

This means the tribunal cannot award costs for HMRC's conduct during an investigation. If HMRC were obstructive, delayed without reason, or made demands you consider unfair during the enquiry phase, those complaints fall outside Rule 10(1)(b). The focus, as the Court put it (citing [Maryan v HMRC [2012] UKFTT 215 (TC)]), should be on "the standard of handling the case rather than the quality of the original decision."

But as Catana established (paragraphs [8]–[9]), pre-commencement behaviour can inform the assessment of in-proceedings conduct. If HMRC knew their position was untenable before you appealed—because their own investigation had revealed it—and then defended the appeal anyway, the pre-proceedings knowledge is relevant evidence of in-proceedings unreasonableness.

How To Apply For Costs

If you've won your case and believe HMRC acted unreasonably in defending it, here is the procedure under Rule 10.

The deadline. The application must be made within 28 days of the date the tribunal sends the decision notice—or 28 days of HMRC's withdrawal notice, if they withdrew (Rule 10(4)). This deadline is strict. If you win and HMRC was unreasonable, the 28-day clock starts running straight away.

The application. Your application must be in writing and must include a schedule of costs in sufficient detail for the tribunal and the other party to assess (Rule 10(3)). Send it to both the tribunal and HMRC. There is no prescribed form.

What to include. Your written application should set out:

  • The conduct you say was unreasonable. Be specific. Identify what HMRC did or failed to do, when, and why it was unreasonable. Refer to the Catana categories and the Jackson Grundy principles.
  • How the conduct caused you to incur costs. The three-stage GC Field approach requires a causal link between the unreasonable conduct and the costs you incurred. If HMRC's late withdrawal forced you to prepare for a hearing that never happened, quantify the preparation time and any professional fees. If you are unrepresented, you can claim for your own time spent on the case—but at a much lower rate than a solicitor would charge (typically the litigant-in-person rate, currently £19 per hour).
  • Why it is just to make an order. This is the third stage—the discretion. Even where conduct is unreasonable and causes costs, the tribunal must be satisfied it is just to order payment in all the circumstances.

Assessment. If the tribunal decides costs are payable, they can be determined by summary assessment (the tribunal decides the amount there and then), agreement between the parties, or detailed assessment (a more formal process for larger sums) (Rule 10(6)).

The tribunal can also make costs orders on its own initiative (Rule 10(2))—you don't always have to apply. But relying on the tribunal to act spontaneously is not a strategy.

How To Respond To A Costs Application

If HMRC—or the tribunal—makes a costs application against you, do not ignore it. The lesson from Wheeler v HMRC [2019] UKFTT 336 (TC) could not be clearer. Mr Wheeler filed appeals but attended neither hearing and provided no evidence. The costs order followed. Engagement is the single most effective protection.

The tribunal must give you an opportunity to respond before making an order (Rule 10(5)). The tribunal's letter will set a deadline for your response—check it carefully and reply within the time allowed. Your response should address:

Was the conduct unreasonable? Apply the acid test. Even if your conduct was wrong or optimistic, could it be reasonably explained? A genuine belief in your case, even if mistaken, may be enough to clear the threshold. The question is not whether you won, but whether your position permitted of a reasonable explanation at the time.

Financial means. If you are an individual (not a company), the tribunal must consider your financial means before making a costs order (Rule 10(5)). This doesn't prevent the order, but it can reduce the amount or affect enforcement terms. Set out your income, assets, and liabilities honestly.

Proportionality. Even if the tribunal finds unreasonable conduct and a causal link, it retains discretion over whether to make an order and in what amount. If the costs claimed are disproportionate to the conduct or the sums at stake, say so.

If you're facing a hearing at which costs may be raised, our guide to preparing for your hearing covers what to expect and how to present your case effectively.

What This Means For Your Case

The bar for unreasonable conduct costs is high—but the consequences when it's met are real. Here is the practical summary.

If you're bringing or defending a case: Engage with the process. Respond to directions. Attend your hearings. If your position becomes unsustainable—because new evidence emerges, or because HMRC's arguments turn out to be stronger than you expected—consider withdrawing or settling rather than pressing on. Persistence in the face of an unbeatable argument is the line between being wrong and being unreasonable.

If you've won and HMRC was unreasonable: The 28-day deadline for a costs application starts when the tribunal sends the decision notice. A detailed schedule, specific identification of the unreasonable conduct, the causal link, and an argument on why an order is just are all essential. See our post-decision guide for the full timeline.

If you're unrepresented: The tribunal adapts its assessment to your abilities and experience. You are not held to a solicitor's standard. But being unrepresented is not a shield. The tribunal expects engagement with the basics: responding to directions, attending when directed, and not pursuing a case that cannot succeed.

If you're worried about costs risk: In the overwhelming majority of FTT cases, costs are not awarded. The general rule—each side pays its own way—protects you. As long as you engage honestly with the process, a costs order is unlikely. Draft your grounds of appeal carefully, comply with directions, and participate in good faith.

Key Legislation And Resources

Cases discussed:

Further reading:

Legislation:

On this site:

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax adviser, accountant, or solicitor.

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