The underlying case concerned a dispute over input VAT recovery in a broadcasting business.
The taxpayer, Governance Ministries, operated a TV channel generating income from programme and advertising fees. While it was ultimately agreed that these activities constituted taxable supplies, HMRC argued that some content broadcast free of charge amounted to a non-economic activity.
On that basis, it said that only partial input VAT recovery was due.
So far, so familiar. But what followed was anything but routine.
Eleventh-hour withdrawal
The tax at stake was around £6m and detailed preparation was required on both sides. The taxpayer filed its skeleton argument on 16 September 2025. HMRC’s skeleton argument was due on 23 September.
At 4.46pm on that date, just 14 minutes before the 5pm deadline, HMRC emailed the FTT to withdraw completely from the appeal, offering no explanation for the sudden change of heart. The hearing was due to begin just two weeks later.
For the taxpayer, this was more than an inconvenience. Significant time and cost had already been incurred preparing for a complex, high-value hearing.
With HMRC’s case evaporating at the eleventh hour, much of that work was rendered redundant and, perhaps unsurprisingly, the taxpayer sought costs.
Standard vs indemnity basis
The key issue for the FTT was not whether costs should be awarded, but on what basis.
Most tax tribunals are settled on the standard basis, which requires costs to be reasonable and proportionate. Indemnity costs are more generous than the standard basis and are sometimes awarded when HMRC (or the taxpayer) has behaved unreasonably.
For indemnity costs to be awarded, there must be evidence of conduct that is out of the ordinary and unreasonable to a high degree.
The question for the FTT was: had HMRC’s conduct crossed the high bar required?
The judge concluded that HMRC’s eleventh-hour withdrawal was indeed conduct “out of the norm”. Withdrawing from an appeal is not in itself unusual. Doing so minutes before a critical deadline in a complex, high-value case is another matter entirely.
The absence of any explanation only compounded matters. The FTT found that HMRC’s conduct crossed the threshold of serious unreasonableness required to justify indemnity costs.
The taxpayer’s total costs were said to be around £780,000, including £473,000 in counsel’s fees. A sizable bill, but one the FTT considered in the context of the millions of pounds at stake.
The indemnity costs will be decided by a detailed assessment. In the meantime, the FTT only needed to decide on the amount of an interim payment on account.
With very little to go on, the judge settled on the amount requested by the taxpayer, £400,000 (against HMRC’s suggested £350,000) to be paid by HMRC within 14 days of the decision.
Uncomfortable questions
Shocking as it may be, this is by no means the first time HMRC has withdrawn an appeal at short notice.
The infamous top-slicing case, Silver vs HMRC, was decided in favour of the taxpayer in the FTT. HMRC initially appealed the ruling but withdrew its appeal on the day on which its skeleton argument was due and just two weeks before the scheduled Upper Tribunal hearing date, the taxpayer and her advisers having thrown countless hours of preparation down the drain.
Tim Good, who represented Mrs Silver pro-bono, said: “HMRC agreed to pay the taxpayer’s costs of £8,430. But the HMRC litigators took it to the wire, perhaps in the forlorn hope that I would blink first.”
This raises uncomfortable questions about HMRC’s approach to litigation.
Building flexibility
The department has long emphasised that it seeks to pursue only the “right” cases. Last minute sea-changes of this nature risk undermining confidence in that message. If appeals can be advanced and then abandoned without explanation, taxpayers and advisers may reasonably question how robust those arguments were to begin with.
Taxpayers, or so-called “customers”, typically operate with more limited resources than HMRC. When a case collapses shortly before the deadline, absorbing the cost of responding to arguments that are then dropped is not just frustrating, it can be ruinous.
HMRC’s handling of this case risks eroding taxpayer confidence in its own system, built on fairness and voluntary compliance.
Advisers supporting clients in litigation with HMRC should always be prepared for late changes of tack. Build flexibility into preparation, keep detailed records of time and costs, and be ready to challenge procedural unfairness where appropriate.
