Introduction

The case Tarafdar v. Revenue & Customs ([2014] UKUT 362 (TCC)) presents a pivotal moment in the interpretation of reasonableness concerning costs orders within tax tribunal proceedings. Mr. Shahjahan Tarafdar appealed against the First-tier Tribunal (FTT)'s decision to refuse his application for costs following His Majesty's Revenue and Customs (HMRC) withdrawal from the case. Central to this appeal was the contention that HMRC had acted unreasonably in pursuing a VAT assessment that Mr. Tarafdar deemed fundamentally flawed.

This commentary explores the intricacies of the judgment, elucidating the legal principles established, the precedents cited, and the broader implications for future tax-related litigation.

Summary of the Judgment

Mr. Tarafdar operated ten restaurant/take-away businesses and was subjected to an HMRC VAT investigation initiated in May 2007. Officer Reed conducted the investigation, which culminated in a VAT underpayment assessment based on his calculations. Mr. Tarafdar contested the assessment, arguing methodological flaws in the calculation of the average markup. Despite initial negotiations and revisions to the calculations by HMRC's Officer Lewis, the case progressed to the FTT.

During the FTT hearing, HMRC eventually withdrew from defending the appeal due to missing documentation and Officer Reed's inability to provide substantial evidence. Mr. Tarafdar then sought costs from HMRC, alleging unreasonable conduct in pursuing a "hopeless" appeal. The FTT refused the costs application, prompting Mr. Tarafdar to elevate the matter to the Upper Tribunal (Tax and Chancery Chamber).

The Upper Tribunal identified an error of law in the FTT's approach to evaluating the costs application. Specifically, the FTT had inappropriately conflated the issue of whether the VAT assessment was made to the "best judgment" with the assessment of HMRC's reasonableness in conducting proceedings. However, despite recognizing this error, the Upper Tribunal concluded that rectifying the approach would not alter the outcome, thereby dismissing the appeal.

Analysis

Precedents Cited

The judgment references several key cases that shaped the tribunal’s reasoning:

• Catanã v Revenue and Customs Commissioners ([2012] UKUT 172 (TCC)): Established the criteria for awarding costs based on unreasonable conduct in tribunal proceedings.
• Stomgrove v Revenue and Customs Commissioners (PTA/480/2014): Clarified the scope of costs associated with tribunal proceedings.
• Argosy Co v IRC ([1971] 1 WLR 514): Interpreted the term "best judgment" within VAT assessments, emphasizing that it does not denote an extraordinary standard.
• Rahman (No 2) v Customs and Excise Commissioners ([2003] STC 150): Provided insight into the assessment of whether HMRC’s judgment was honest and genuine.
• Pegasus Birds Ltd v Customs and Excise Commissioners ([2004] STC 1509): Affirmed that tribunals should focus primarily on determining the correct tax amount rather than scrutinizing the judgment exercised during assessment.
• Van Boeckel ([1981] STC 290): Highlighted that discrepancies between tribunal and commission assessments do not inherently indicate unreasonable judgment by HMRC.

Legal Reasoning

The crux of the Upper Tribunal’s analysis rested on disentangling the evaluation of HMRC’s conduct from the substantive merits of the VAT assessment. The tribunal underscored that costs orders under rule 10(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 hinge on the reasonableness of a party's conduct in managing proceedings, rather than on the correctness of the underlying tax assessment.

The Upper Tribunal criticized the FTT for conflating the determination of HMRC’s "best judgment" in tax assessment with its assessment of HMRC’s reasonableness in conducting the appeal. It elaborated that evaluating reasonableness should involve examining whether HMRC unnecessarily prolonged the proceedings or failed to withdraw an untenable case at an opportune moment, independent of the merits of the tax assessment itself.

Despite identifying this procedural error, the Upper Tribunal concluded that correcting the FTT’s approach would not have materially affected the outcome. HMRC had provided a legitimate basis for defending the VAT assessment, as it was based on the information available and represented an honest effort to ascertain VAT liabilities.

Impact

This judgment reinforces the principle that costs orders in tax tribunal proceedings are predicated on the conduct of the parties rather than the substantive merits of the case. It delineates a clear boundary between evaluating reasonableness in procedural conduct and assessing the correctness of a tax-related judgment.

Future cases will likely reference this judgment when determining whether a party has acted unreasonably in the course of tribunal proceedings. It emphasizes that tribunals should maintain a narrow focus on the conduct of the parties, ensuring that costs orders are awarded based on procedural fairness and reasonableness, rather than being influenced by the substantive outcomes of assessments.

Complex Concepts Simplified

Best Judgment in VAT Assessment

The term "best judgment" refers to HMRC’s authority to assess VAT due when a taxpayer's returns appear incomplete or incorrect. This does not imply an infallible or exceptionally meticulous standard but rather an informed estimation based on available data. The assessment should stem from an honest and reasoned analysis, even if it involves some degree of extrapolation or assumption.

Reasonableness in Conduct

Reasonableness, in the context of tribunal costs, pertains to whether a party acted appropriately and proportionately throughout the proceedings. Unreasonable conduct might include persistently failing to comply with procedural rules or pursuing a clearly baseless appeal. However, the assessment of reasonableness is distinct from evaluating the correctness of the underlying tax judgment.

Costs Orders Under Rule 10(1)(b)

Rule 10(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 allows tribunals to award costs if a party or their representative has conducted the proceedings unreasonably. This provision is designed to deter frivolous actions and ensure fair play within tribunal processes.

Conclusion

The Tarafdar v. Revenue & Customs case serves as a significant reference point in understanding how tribunals assess reasonableness in the conduct of proceedings, particularly concerning costs orders. By distinguishing between the evaluation of procedural conduct and the substantive merits of a tax assessment, the Upper Tribunal provided clarity on the scope and application of rule 10(1)(b).

The decision underscores the importance of maintaining procedural integrity and fairness, ensuring that costs orders are awarded based on the reasonableness of actions rather than the outcomes of the disputes themselves. This establishes a robust framework for future adjudications, promoting equitable and efficient resolution of tax-related disputes.