When is a Party's Conduct 'Unreasonable' Enough for a Costs Order in the Tax Tribunal?

Neutral Citation Number: [2026] UKFTT 00977 (TC) Case Number: TC 09932 FIRST-TIER TRIBUNAL TAX CHAMBER Location: Decided on the papers Appeal reference: TC/2024/00318 Civil procedure – corporation tax (research & development) Judgment date: 30 June 2026 Between M-SPORT WHEELS LIMITED Appellant and THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS Respondents TRIBUNAL JUDGE JUDITH HARRISON The Tribunal determined the Respondent’s application of 24 March 2026 on 22 June 2026 without a hearing under the provisions of Rule 29 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. DECISION Introduction 1. This is an application by the Respondent for a costs order under Rule 10(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the “ FTTTC Rules ”) on the basis that the Appellant has acted unreasonably in bringing, defending or conducting the proceedings (the “ Application ”).

2. The background to the Application is that the Appellant appealed the denial of research and development tax relief (“ R&D claims ”).

3. For the reasons set out below, the Application is denied. Background The underlying appeal 4. On 15 January 2024, the Appellant submitted a notice of appeal against HMRC’s refusal of its R&D claims for the 2020 and 2021 periods.

5. The Tribunal issued directions on 18 February 2025 requiring, among other matters, the service of witness statements by 2 May 2025.

6. The Appellant wished to rely on two witnesses to give evidence on its behalf.

7. The Appellant encountered a number of difficulties in obtaining the second witness statement.

8. The Appellant initially hoped [NAME] would provide a witness statement. The Tribunal understands that at the time [NAME] was asked to provide a witness statement he had changed jobs.

9. After a number of delays and requests for extensions of time, the Appellant notified the Respondent on 19 August 2025 that [NAME]’s current employer would not agree to him providing a witness statement and asking for 7 days to get a witness statement from the manufacturer.

10. On 2 September 2025 the Respondents emailed the Appellant asking for a copy of the new witness statement to be provided by 5 September 2025. On the same day the Appellant confirmed the witness needed corporate approval to release the statement which they hoped to secure by 5 September 2025.

11. On 5 September 2025, the Appellant provided an unsigned witness statement from [NAME], who was based in China, and that a signed version would follow during the next week.

12. On 29 October 2025, the Tribunal wrote to the Appellant and expressed concern regarding the delays caused by the absence of a signed witness statement. The Appellant was given 7 days to provide a signed copy of [NAME]’s witness statement.

13. On 6 November 2025, the Appellant applied to the Tribunal for (among other things) an additional 14 days to provide a signed copy of [NAME]’s witness statement. This application was refused on 19 November 2025 and the Tribunal set out the steps that the Appellant would need to take if it wished to rely on [NAME]’s evidence.

14. On 4 February 2026, the appeal hearing was listed for 5 and 6 March 2026.

15. On 19 February 2026, the Appellant’s agent told the Respondent by telephone that it was likely that the Appellant would withdraw its appeal due to its inability to get a signed witness statement from [NAME]. This was confirmed in an email on the same day.

16. The Respondent told the Appellant that it should notify the Tribunal if it wished to withdraw the appeal.

17. On 23 February 2026, the Respondent emailed the Appellant asking if the Appellant would be withdrawing its appeal and the Appellant notified the Tribunal that it would be withdrawing its appeal.

18. On 25 February 2026, the appeal was vacated. The Application and Response 19. The Application is dated 24 March 2026. It contends that the Tribunal should exercise its jurisdiction to award costs to the Respondent on the basis that the Appellant acted unreasonably. In particular, the Respondent submits that, by 2 September 2025 (at the latest) the Appellant had decided to rely on [NAME]’s evidence and it was incumbent on the Appellant to investigate, as a matter of priority, whether the procedural steps necessary to obtain and rely on that evidence could realistically be taken. Instead, the Appellant continued the appeal without resolving those matters, notwithstanding that the appeal had already been subject to delay arising from difficulties with witness evidence.

20. The Respondent submits that the Appellant’s conduct during the litigation, viewed as a whole shows: (a) repeated omissions in producing witness evidence; (b) continuous breaches of Tribunal directions throughout litigation; (c) a failure to investigate whether its proposed evidential strategy was workable; (d) continuation of the appeal for months without resolving those issues; and (e) a late and poorly communicated withdrawal which caused avoidable costs.

21. The Appellant provided a response to the Application dated 7 April 2026. This contends that the Appellant did not act unreasonably as they withdrew their appeal promptly once it became clear they would not be able to produce the evidence required to succeed.

22. The Appellant also argues that even if they did act unreasonably, the costs claimed are excessive, disproportionate and in part unnecessary because: (a) Nearly £4,000 of internal drafting and review work is being claimed for; (b) £931.67 of Counsel fees are being claimed, much of which took place after being notified that withdrawal was likely on 19 February 2026; (c) Several entries appear administrative or duplicative, and there is no explanation as to why such expenditure was proportionate in circumstances where the appeal was on the verge of being abandoned.

23. The issues for determination are therefore: (a) Whether the Appellant has acted unreasonably in bringing, defending or conducting the appeal; and (b) If the Appellant has so acted, whether the Tribunal should exercise its discretion to award costs. Papers before the Tribunal 24. In considering the Respondents’ cost application, the Tribunal has been provided with the following papers: (a) A costs application, which contains a schedule setting out the time spent by the Respondent and counsel (the costs claimed being £6,202.07); and (b) An objection to the costs application. Legal tests 25. Rule 10(1)(b FTTTC Rules states that: “(1) The Tribunal may only make an order in respect of costs (or, in Scotland, expenses)— … (b) if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings;” 26. The Tribunal considers it should apply the principles upheld by the Court of Appeal in Distinctive Care Limited v HMRC ( [2019] EWCA Civ 1010 ) to determine whether the Respondents’ have acted unreasonably. In particular (a) The threshold implied by the words “acted unreasonably” is lower than the threshold of acting “wholly unreasonably”. (b) It is possible for a single piece of conduct to amount to acting unreasonably. (c) Acting unreasonably can include omissions. (d) A failure to undertake a rigorous review of the subject matter of the appeal when proceedings are commenced can amount to unreasonable conduct. (e) There is no single way of acting reasonably, there may well be a range of reasonable conduct. (f) The focus should be on the standard of handling the case rather than the quality of the original decision (g) The fact that an argument fails before the Tribunal does not necessarily mean that the party running that argument was acting unreasonably in doing so; to reach that threshold, the party must generally persist in an argument in the face of an unbeatable argument to the contrary. (h) The power to award costs under Rule 10 should not become a “backdoor method of costs shifting”. (i) Questions of reasonableness should be judged by reference to the facts known at the time.

27. Given the late withdrawal of the appeal, the Tribunal also applied the Upper Tier decision in Tarafdar (t/a Shah Indian Cuisine) v Revenue and Customs Commissioners ( [2014] UKUT 362 (TCC) ) which sets out the questions the Tribunal should ask to determine whether the Appellant was unreasonable to withdraw its appeal when it did so. These questions are: (a) What is the reason for the withdrawal of that party from the appeal? (b) Having regard to the reason for withdrawal, could that party have withdrawn at an earlier stage in the proceedings? (c) Was it unreasonable for that party not to have withdrawn at an earlier stage? Discussion Reason for withdrawal 28. The Tribunal accepts that the reason for the Appellant withdrawing its appeal was due to it realising that it would not be able to obtain the witness evidence necessary to support the appeal.

29. The Appellant’s evidence shows that it attempted to obtain statements from alternative witnesses, including an overseas witness, but was ultimately unable to secure a signed statement or ensure attendance.

30. The Tribunal accepts that, at least in part, these difficulties arose from external constraints, including employer restrictions and corporate approval processes which potential witnesses needed to comply with to give witness evidence on the Appellant’s behalf. Could the Appellant have withdrawn earlier? 31. The Respondents’ position is that the Appellant could have withdrawn by 2 September 2025, and that once it became clear that it would not be possible to obtain [NAME]’s evidence, the Appellant ought to have reasonably required what was needed for [NAME] to give witness evidence. The Appellant disagrees, saying that it continued to seek to obtain alternative evidence until it decided to withdraw, and that it had a reasonable belief that it would be able to obtain such alternative evidence.

32. The Appellant knew by 19 August 2025 that it would not be able to obtain witness evidence from [NAME] and would need alternative evidence. The Appellant at that time indicated that it hoped to obtain evidence from an alternative witness. That alternative witness was [NAME], and on 2 September 2025, the Appellant knew that [NAME] would need corporate approval to sign his witness statement. The Respondents rightly submit that on 2 September no information was provided as to what approval was required, and no evidence has been provided of the steps taken to secure that approval.

33. There is no direct evidence in front of the Tribunal exactly how (and when) the Appellant came to realise that it would be unable to evidence its case. The evidence available (for example, the provision of an unsigned witness statement for [NAME] and requests for extensions of time to provide alternative evidence) means that the Tribunal considers that on the balance of probabilities, after 2 September 2025, the Appellant was trying to obtain alternative evidence and so would have been assessing the strength of its case depending upon the evidence ultimately available. This is consistent with the Respondents’ submissions.

34. On (or shortly after) 19 November 2025 (when the Tribunal refused the extension of time application regarding the provision of [NAME]’s witness statement and told the Appellant what it would need to do to rely on [NAME]’s evidence) it should have been clear that additional steps needed to be taken by the Appellant to be able to rely on [NAME]’s evidence. There is no evidence that the Appellant took any steps to comply with the 19 November 2025 directions. The Tribunal considers that the 19 November 2025 directions should have triggered a rigorous reassessment of the viability of the appeal. The Tribunal has not been provided with any explanation by the Appellant of what it did between 19 November 2025 and 19 February 2026, when the Appellant’s representative informed HMRC that they were likely to withdraw. Given the change in the Appellant’s position in this three-month period, the Tribunal finds that the Appellant must have been reassessing its case to determine whether the appeal was likely to succeed. However, given the lack of information available, it is not possible to conclude whether the Appellant could have undertaken this reassessment more quickly, such that it could have withdrawn the appeal earlier.

35. Given the evidence available, the Tribunal does not consider that there was a single clear point at which it became objectively apparent that the appeal could no longer proceed. As a result, an earlier withdrawal by the Appellant may have been possible after the 19 November 2025 direction were issued. The Tribunal does not accept that the Appellant knew (or should have known) its appeal was hopeless by 2 September 2025. In reaching this conclusion, the Tribunal has assessed the Appellant’s conduct by reference to the information available at the time and has not applied hindsight. Was it unreasonable for the Appellant not to have withdrawn earlier? 36. The Tribunal has found that although the Appellant’s conduct was not without criticism, it did not fall outside the range of reasonable conduct. In reaching this conclusion, the Tribunal has considered the Appellant’s conduct in the round rather than focusing on individual procedural defaults.

37. The Respondents emphasise the Appellant’s repeated failure to comply with directions and its continuation of the proceedings without securing the necessary evidential foundation. These criticisms have some merit. The Appellant did not obtain a signed witness statement from [NAME], they did not take the steps set out in the Tribunal’s directions of 19 November 2025 and they continued the appeal until February 2026. However, the test in Rule 10 is not whether the Appellant made mistakes, but whether they acted unreasonably. This involves taking a holistic view of what the Appellant did.

38. Repeated procedural failures, without more, do not automatically amount to unreasonable conduct for the purposes of Rule 10. Although the delays impacted the procedural progress of the appeal, the Tribunal is not satisfied that this prejudice alone elevates the Appellant’s conduct into unreasonableness.

39. In assessing the reasonableness for the Appellant to continue its appeal, the Tribunal notes that the fact the appeal ultimately fails does not mean that the Appellant acted unreasonably in defending it. The Tribunal accepts it is reasonable for an Appellant to take some time to reassess its position and to obtain alternative evidence, where issues arise during proceedings.

40. The Tribunal accepts that the Appellant did make sustained efforts to obtain alternative evidence, including identifying a new witness and preparing a draft witness statement. The difficulties encountered by the Appellant in obtaining witness evidence were not wholly within its control. The Appellant maintained a continuing (if ultimately misplaced) expectation that the evidential issues could be resolved. Whilst the Appellant could have taken a more decisive approach after the 19 November 2025 directions, such that the Respondents’ criticisms have some merit, the Tribunal is not satisfied that by spending 3 months reassessing the position and seeking to resolve the evidential issues, the Appellant has crossed into acting unreasonably for the purposes of Rule 10.

41. The Tribunal does not accept that the Appellant’s failure to fully investigate the procedural requirements for overseas evidence at an earlier stage, of itself, renders its conduct unreasonable. While such steps could have been taken sooner, the Tribunal considers that this omission reflects imperfect case management rather than conduct falling outside the range of reasonable behaviour.

42. The burden rests on the Respondents to demonstrate unreasonable conduct, and the Tribunal is not satisfied that this burden has been discharged. This conclusion is also consistent with the threshold for a costs order. While the threshold is not ‘wholly unreasonable’, it nonetheless requires conduct falling outside the range of reasonable litigation behaviour and is applied cautiously given that costs are not the default in this jurisdiction. CONCLUSION 43. The Respondents’ application for costs is refused. The Tribunal accepts that the Appellant’s conduct was not without criticism. However, Rule 10(1)(b) does not require perfection. The question is whether the Appellant’s conduct fell outside the range of reasonable conduct when viewed in the round and in light of the information available at the time.

44. The Tribunal is satisfied that the Appellant made genuine, albeit ultimately unsuccessful, efforts to secure alternative witness evidence in circumstances that were not wholly within its control, including employer restrictions and cross-border approval requirements.

45. While the Appellant could have taken a more proactive and earlier decision to withdraw, the Tribunal is not persuaded that the delay in doing so crossed the threshold into unreasonable conduct.

46. Standing back and considering the chronology as a whole, the Tribunal is not satisfied that the Appellant’s conduct crossed the threshold from imperfect case management into unreasonable conduct.

47. Accordingly, the Respondents have not discharged the burden of establishing that the Appellant acted unreasonably, and the application for costs is refused.

48. Since the Application has been refused, it is not necessary for the Tribunal to consider whether the Respondents costs were reasonable incurred. In light of that conclusion, it is not necessary to determine the precise amount of costs recoverable. However, the Tribunal notes that a proportion of the Respondents’ costs were incurred after they were aware that withdrawal was likely, which would in any event have been relevant to the exercise of discretion.

49. 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: 30 June 2026