TC09539 - [2025] UKFTT 00599 (TC)

I agree with HMRC that the evidence included in Dr Farjo’s witness statement relating to the existence of a reasonable excuse was, at best, cursory. I also agree that, in the light of the UHY Hacker Young email, it was reasonable for HMRC to cross-examine Dr Farjo about it. However, once that cross-examination had been concluded, it was very clear that AHT had been neither careless nor negligent in their decision to treat supplies of hair transplant services as exempt, and that they had a reasonable excuse for their actions. I find that with effect from the conclusion of the cross-examination of Dr Farjo, it was obvious that AHT had a reasonable excuse for treating their supplies of hair transplantation services as exempt. I acknowledge that HMRC were entitled to a reasonable period of time after the conclusion of Dr Farjo’s cross-examination in which to consider whether to continue to pursue the penalty. However, after the expiry of that reasonable period, I find that it was unreasonable for HMRC to continue to pursue the penalty assessment.

I consider that the circumstances of this appeal are very different from the circumstances in Generator Power. In Generator Power there was a substantial amount of new evidence, described by counsel for the appellants as including printouts from the internet, and “pages and pages of people claiming to offer a 24/7 service”. HMRC subsequently described the new evidence as including: contracts, market analysis, further witness evidence and new oral evidence. The volume of new documentary evidence produced in Generator Power was clearly very substantial indeed. In contrast, in this case, the new evidence was a short, and easily understood, email, on which Dr Farjo was cross-examined. I find that it would be but a few minutes of work to assess that evidence and reach a conclusion that it was no longer sustainable nor reasonable for HMRC to continue to pursue penalties.

HMRC’s decision maker was Mr Olatoye, and he was the witness produced by HMRC to justify the imposition of the penalty. Mr Olatoye is a senior officer of HMRC, was present throughout the hearing. Mr Olatoye was aware of the UHY Hacker Young email at least from the commencement of day 1 of the hearing, and he heard Mr Farjo’s oral evidence. I appreciate that Mr Olatoye would have wanted to take legal advice from HMRC’s counsel, and may have also wanted to consult colleagues. I find that this could easily have been done after the conclusion of the hearing on day 2, or during the lunch adjournment on day 3. No satisfactory explanation has been given as to exactly when the decision to withdraw penalties was made, and why the decision was not communicated to AHT until after the commencement of the hearing on day 4.

I find that HMRC’s conduct in continuing to pursue the penalty assessment became unreasonable following the conclusion of the lunch adjournment on day 3, and the failure of Mr Olatoye (or the failure of his colleagues) to withdraw the penalty and communicate that decision to AHT until after the commencement of the hearing on day 4 amounted to unreasonable conduct for the purposes of Rule 10.

I find that it was only following the conclusion of Dr Farjo’s oral evidence on day 2 that HMRC were in possession of evidence demonstrating that AHT had a reasonable excuse for their conduct. HMRC would require a reasonable period of time following that point in which to take stock of the evidence and make a decision. I have found that this period would have expired at the conclusion of the lunch adjournment on day 3.

In these circumstances, I find that it would be disproportionate to award costs on a percentage basis – namely 13.04% of Dr Farjo’s total costs. I find that any award of costs must be restricted to costs incurred by AHT relating to the penalty assessment after the lunch adjournment on day 3 – and in particular (but not necessarily limited to) the time taken by counsel for AHT to prepare for the cross-examination of Mr Olatoye after the conclusion of the hearing on day 3.

AHT submit that taking an approach on “costs from a certain date” operates unfairly in circumstances where an appellant has agreed a single composite fee for a hearing rather than being charged on an hourly basis – particularly if the fee has been incurred prior to the hearing. In the case of this appeal, AHT’s counsel were paid a brief fee (without “refreshers” – i.e. charges based on a hearing lasting more than a day) which was incurred prior to the hearing, and they did not charge for the resumed hearing. Whilst I appreciate the difficulty faced in these circumstances, counsel (and those instructing them) in agreeing a fixed fee must have estimated the likely time needed to be spent on preparation and for the anticipated four listed days for the hearing. So it should be possible to calculate an imputed hourly rate. Alternatively, if AHT’s counsel and other advisors kept time records, it should be possible to determine an effective hourly rate for the period from when the fixed fee took effect until the conclusion of the fourth day of the hearing. No doubt other reasonable methods of allocating costs to the relevant time frame may be available. As the hearing was originally listed for four days (and counsel did not charge for the additional day) I consider that any method for the allocation of costs should ignore the final day of the hearing.

AHT have applied that the requirement to file a schedule of costs should be waived on the grounds that preparation of a schedule of costs would be inappropriate, as such costs would be assessed by the Senior Courts Costs Office, and would not be assessed summarily. I appreciate that if costs were to be awarded as a percentage of the total costs incurred by AHT, it might be arguable that such costs ought to be assessed by a specialist Costs Judge. In any event, given that the basis on which costs should be awarded (either a percentage of a fixed fee or “from a certain date”) was in dispute, a schedule of costs could not usefully be prepared until after this decision is released. But, in the light of my decision that costs should be limited to those incurred after the lunch adjournment on day 3, I consider that it is possible that they could now be assessed summarily.

I direct that HMRC pay to AHT the costs incurred by AHT following the lunch adjournment on 28 February 2024 which relate to the penalty assessment, and that costs be assessed on the standard basis.

If the parties are unable to agree the amount of costs, AHT are directed to file with the Tribunal (and copy to HMRC) no later than 28 days after the date of release of this decision a schedule of the costs or expenses claimed in sufficient detail to allow the Tribunal to undertake a summary assessment of such costs or expenses if it decides to do so. HMRC may file their representations on the schedule of costs no later than 14 days after the schedule of costs is filed.

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.