Tribunal refuses HMRC's application for costs in R&D tax relief dispute

First-tier Tribunal (FTT) decisions can provide valuable insight into how R&D tax incentives legislation is interpreted and applied in practice, offering useful lessons for businesses that currently claim or are considering claiming R&D tax incentives.

A recent FTT decision in M-Sport Wheels Limited v HMRC [2026] UKFTT 977 (TC) provides useful insight into the Tribunal's approach to costs applications in R&D tax relief disputes and highlights the importance of evidential planning both when preparing claims and when pursuing or defending an appeal.

While the case does not consider the substantive technical merits of an R&D claim, it offers an important reminder that the Tribunal will distinguish between imperfect litigation conduct and conduct that crosses the threshold into unreasonable behaviour for the purposes of awarding costs.

Background

The appeal arose following HMRC's refusal of R&D tax relief claims submitted by M-Sport Wheels Limited for its 2020 and 2021 accounting periods. The company appealed HMRC's decision and intended to rely upon witness evidence to support its appeal. However, significant difficulties emerged in obtaining that evidence. One proposed witness was no longer able to assist after moving to a new employer, while an alternative witness based overseas required corporate approvals before providing evidence. These issues resulted in delays, requests for extensions of time and ongoing difficulties in complying with Tribunal directions regarding witness statements.

The company ultimately provided an unsigned witness statement from an overseas witness, Mr Kuo, but was unable to secure a signed version despite continued efforts. Following further procedural developments, including a Tribunal refusal to extend deadlines in November 2025, the company eventually informed HMRC that it was likely to withdraw its appeal and formally withdrew shortly before the scheduled hearing in March 2026.

HMRC's costs application

Following the withdrawal, HMRC applied for a costs order under Rule 10(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. HMRC sought approximately £6,200, arguing that the taxpayer had acted unreasonably in its conduct of the proceedings.

HMRC's primary arguments were that the taxpayer had:

• repeatedly failed to comply with Tribunal directions
• delayed the progression of the case through difficulties in producing witness evidence
• failed to properly investigate whether its evidential strategy was practicable
• continued to pursue the appeal despite ongoing evidential deficiencies
• withdrawn late in the process, causing HMRC to incur unnecessary costs.

The taxpayer disagreed, arguing that it had acted reasonably throughout and had withdrawn the appeal once it became apparent that the evidential hurdles could not be overcome.

The legal framework

The Tribunal considered Rule 10(1)(b), which permits costs to be awarded where a party has acted unreasonably in bringing, defending or conducting proceedings. However, the Tribunal reiterated that such powers should not become a "backdoor method of costs shifting".

In reaching its decision, the Tribunal referred to established authorities including:

• Distinctive Care Ltd v HMRC [2019] EWCA Civ 1010, which provides guidance on what constitutes unreasonable conduct
• Tarafdar (t/a Shah Indian Cuisine) v HMRC [2014] UKUT 362 (TCC), concerning the assessment of whether a party has acted unreasonably by withdrawing an appeal at a particular stage.

Importantly, the Tribunal noted that whilst the threshold for "unreasonable conduct" is lower than "wholly unreasonable conduct", it remains a meaningful threshold and requires more than simple mistakes or imperfect case management.

The Tribunal's findings

Genuine attempts to obtain evidence

A central factor in the Tribunal's reasoning was its acceptance that the taxpayer had made genuine efforts to obtain alternative witness evidence after it became apparent that its original witness could not assist. The Tribunal accepted that the difficulties encountered were not entirely within the taxpayer's control and arose partly from external factors, including employer restrictions and overseas corporate approval processes.

No clearly identifiable point

HMRC argued that the taxpayer should have realised much earlier that its appeal could not realistically succeed. However, the Tribunal did not accept this position.

While acknowledging that the taxpayer should have undertaken a rigorous reassessment of its position after the Tribunal's November 2025 directions, the Tribunal considered there was no single point at which it became objectively clear that the appeal was no longer viable. The Tribunal specifically rejected the suggestion that the appeal was clearly hopeless as early as September 2025.

Procedural failings do not automatically mean unreasonable conduct

The Tribunal accepted that the taxpayer's conduct was "not without criticism". There had been delays, repeated procedural defaults and failures to take all available steps following the November 2025 directions. However, the Tribunal emphasised that the relevant test was not whether mistakes had been made, but whether the taxpayer had acted outside the range of reasonable litigation behaviour.

In the Tribunal's view, the taxpayer's actions reflected imperfect case management rather than unreasonable conduct. The fact that the appeal was ultimately withdrawn did not retrospectively make its earlier conduct unreasonable.

HMRC failed to discharge the burden of proof

Ultimately, the Tribunal concluded that HMRC had not established that the taxpayer's conduct crossed the required threshold. Although the Tribunal found merit in certain criticisms raised by HMRC, it was not satisfied that the conduct viewed "in the round" was unreasonable for the purposes of Rule 10. The costs application was therefore refused.

Key lessons for R&D incentives claimants:

Although this decision relates to procedural matters rather than the technical definition of R&D, several practical lessons emerge.

• Witness evidence can be critical
  The case illustrates how important witness evidence can become during an R&D tax dispute, particularly where key technical facts, project uncertainties or decision-making processes need to be evidenced before a Tribunal. Organisations should consider evidential requirements ideally as part of the claim compilation process and at the very least long before litigation reaches an advanced stage.
• Assess evidential risks early
  Where evidence will need to come from former employees, subcontractors, manufacturers, overseas personnel or third-party specialists, advisers should understand at an early stage whether those individuals are willing and able to participate in proceedings. Obtaining evidence can often present practical challenges that may not be immediately apparent. Such evidence could be compiled as part of the actual claim process, and this may mitigate the risk of key technical personnel leaving after a claim has been filed. 
• Document efforts to obtain evidence
  A notable aspect of the decision was the Tribunal's acknowledgement of the taxpayer's continuing efforts to secure alternative evidence. Maintaining a clear audit trail of those efforts may assist if questions later arise regarding the reasonableness of a party's conduct during litigation.
• Withdrawal does not necessarily lead to costs exposure
  The decision confirms that withdrawing an appeal does not automatically expose a taxpayer to a costs order. The Tribunal will examine the circumstances carefully and assess the conduct of the parties based on the information available to them at the relevant time rather than with the benefit of hindsight.
• Robust case management remains essential
  While the taxpayer was ultimately successful in resisting HMRC's costs application, the Tribunal was clear that aspects of the conduct attracted criticism. The decision therefore also serves as a reminder of the importance of complying with directions, proactively addressing evidential issues and regularly reassessing the viability of an appeal as litigation progresses.

Conclusion

The decision in M-Sport Wheels Ltd v HMRC does not alter the substantive principles governing R&D tax relief claims. However, it provides a useful illustration of how the Tribunal approaches questions of litigation conduct, evidential difficulties and costs applications within the R&D tax incentives landscape.

As HMRC continues to increase scrutiny of R&D claims, ensuring that both the technical and evidential foundations of a claim are robust from the outset remains one of the most effective ways to manage risk throughout the enquiry and appeals process. This case serves as a reminder of the importance of documenting assessments contemporaneously and maintaining sufficient evidence to support claims. With people moving on and knowledge potentially leaving with them it is vital to build a body of evidence when compiling a claim to avoid any issues when defending claims.

Please feel free to reach out to the Crowe team for more information or support with an R&D claim or enquiry.