England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		14 January 2009

MR JUSTICE LEWISON:

1. This is an appeal from a decision of the VAT and Duties Tribunal, dated 27 August 2008 following a hearing on 23 July 2008. The decision was in effect a decision given on a directions hearing. The particular paragraph which is complained of is paragraph 20(b) of the decision, by which the tribunal dismissed an application by HMRC for the appeal to be struck out or dismissed. The substantive appeal to the tribunal is made by Grattan plc against a refusal by HMRC to pay compound interest on overpaid VAT.
2. The most recent correspondence leading up to the initiation of the substantive appeal was triggered by a letter from KPMG, who are the tax advisors to Grattan, of 13 June 2007. The relevant parts of the letter read as follows:

"We write on behalf of Grattan plc in order to make a claim for compound interest. On 22 December 2004, the Commissioners made a repayment of £12,759,690 to Grattan plc. The repayment was in respect of VAT overpaid in relation to agents' commissions."

3. The letter went on to say that that was in accordance with a decision of the Court of Appeal, and also recorded that a payment of interest had been received as well. The letter then continued:

"However, the interest was calculated on a simple basis, in line with HMRC's policy. Our client does not accept that this amounts to appropriate compensation for the financial loss that it suffered in consequence of being deprived of the £12,759,690.

We therefore make a claim for compound interest after deduction of the sum of interest already paid as set out in Appendix 1, the total amount due on this basis at 31 May 2007 being £1,352,297.88."

4. It will be noted that the terms of the letter do not refer to any particular section of the VAT Act under which the interest is claimed. Rather, the claim appears to be based on an allegation that simple interest is not appropriate as "compensation for financial loss". Compensation for financial loss appears to me to be more akin to a claim for damages or a restitutionary remedy, rather than statutory interest. Be that as it may, the matter was considered by HMRC. Mr Bennett, the officer dealing with the case, replied on 19 July 2007, saying that the Commissioners had no jurisdiction to pay interest, except at the rate specified in section 197 of the Finance Act 1996, and said that he was "unable to progress your claim".
5. KPMG asked for a review of the view that Mr Bennett had expressed, and that was taken up and accommodated in a letter of 12 February 2008, in which Mrs Avery, another officer of HMRC, said that the Commissioners were in a position to provide "a full response" regarding HMRC's position. The letter continued:

"HMRC take the view that restitutionary claims for interest/compensation are excluded by section 78 and section 80 of the Value Added Tax Act 1994. Therefore, your client, Grattan plc, has no right to a payment of compound interest."

6. It is that communication which is the subject matter of Grattan's appeal to the tribunal.
7. HMRC allege that the substantive appeal was made out of time, and in addition, that the tribunal had no jurisdiction to hear it. That contention was advanced by HMRC by way of an application made under rule 6 of the VAT Tribunals Rules 1986. Rule 6.1 provides:

"Where the Commissioners contend that an appeal does not lie to, or cannot be entertained by, a tribunal they shall serve a notice to that effect at the appropriate tribunal centre containing the grounds for such contention, and applying for the appeal to be struck out or dismissed, as the case may be, as soon as practicable after receipt by them of the notice of appeal."

8. The application under rule 6 was made on 26 March and at the same time, HMRC also applied for a six-month stay of the substantive appeal on the ground that it raised similar issues to other cases then pending at different tribunal centres.
9. On 30 April, the VAT and Duties Tribunal sent out a notice that applications would take place at Manchester Tribunal Centre on 23 July 2008. The form of notification consists of a number of boxes or different kinds of applications, and those which are listed to take place have ticks in the appropriate box. Two of the boxes are relevant for present purposes: the first under the heading "Respondent's Applications" is box 1, which is:

"The appeal of the appellant to be struck out [see notice dated (and then a blank is given)]."

10. That box was left blank. The other relevant box is box 4, and that is for the appeal to be stood over, and that box is ticked. The notification was sent to KPMG and it records that it was copied to HMRC. It is plain from that notification that the notification that HMRC received at that time was that the application for a stay be heard on 23 July 2008, but no other application.
11. On 1 May 2008, the VAT and Duties Tribunal sent another notification which read as follows:

"The Commissioners of Revenue and Customs have filed a Notice of Application dated 28 March 2008. Since an application hearing has been listed for 23 July 2008, the hearing of this notice will also be heard at the same time."

12. In fact, there was no notice of application of 28 March because, as I have said, the two applications made by HMRC were made on 26 March, but I think nothing turns on that. What is of more significance is that there is no indication on that letter that it was copied to HMRC, and HMRC say that they never received it. There was some communication between KPMG and HMRC, and indeed, between counsel instructed on behalf of the two parties in the very few days leading up to the hearing on 23 July, but those communications (whatever they were) were only a few working days before the hearing.
13. It is now necessary to refer to rule 23 of the tribunal rules. Rule 23(2) provides:

"Unless a tribunal otherwise directs, an application made at a hearing shall be heard forthwith, and no notice thereof shall be sent to the parties thereto."

14. Sub-rule (3) provides:

"Subject to paragraph (2) of this rule, a proper officer shall send a notice stating the date and time when, and the place where, an application will be heard, which, unless the parties shall otherwise agree, shall be not earlier than 14 days after the date on which the notice is sent [I leave out (a) and (b)]; (c) in the case of an other application, to the parties to the application."

15. An application under rule 6 falls within rule 23(3)(c) and consequently, unless the parties otherwise agree, the hearing date must not take place earlier than 14 days after the date on which notice of the hearing is sent to the parties to the application.
16. HMRC appeared at the hearing on 23 July on the basis that they were there to deal with the stay application alone. Grattan, on the other hand, were there on the basis that the rule 6 application was to be dealt with too, and they had instructed leading counsel for that purpose. Had they considered only the stay application that was in contention, leading counsel would not have been instructed. HMRC, on the other hand, were represented by junior counsel only, who told the tribunal at the outset of the hearing that HMRC were not prepared to deal with rule 6 at that hearing, and he explained that the relevant case officer had not been in a position to give him instructions and that HMRC were not ready.
17. I have referred to rule 23. There is a power under the rules to extend time, but there is no general power under the rules to abridge time. It is also plain that the parties (or at least HMRC) did not agree that there should be a hearing of the rule 6 application earlier than the expiry of the 14-day period to which they were entitled.
18. It appears that at the hearing (although it does not appear in the tribunal's decision) that some consideration was given to the question whether there was evidence that notification had indeed been sent in accordance with rule 23. There was in fact no evidence that it had been sent, and certainly the tribunal did not make a finding of fact that it had been. Subsequent to the hearing before the tribunal, with the consent of both parties, I have admitted evidence from both Ms Foster for the Commissioners and Ms Stone for KPMG, dealing with what did or might have happened to the notice.
19. The evidence suggests, to put it no higher, that the notification was not sent in due time, and that even if it was, HMRC did not receive it. However, I make no finding to this effect, because what happened to the notice is a question of fact for the tribunal, rather than a question of law for me.
20. However, Mr Lasok QC, appearing on behalf of Grattan, helpfully accepted that this appeal should proceed on what he described as the working hypothesis that there had not been compliance with rule 23(3). What he did however submit was that rule 23(3) was not the applicable rule. At the hearing before the tribunal, he urged the tribunal to deal with at least part of the application made under rule 6, namely that part which dealt with the question of the appeal being out of time. That, he said, was an application made at a hearing (i.e. the hearing before the tribunal), and therefore fell under rule 23(2). Consequently, in the absence of a direction to the contrary by the tribunal, his application had to be heard forthwith.
21. In my judgment, that argument cannot be accepted. The application that the tribunal was considering was HMRC's application under rule 6. That, to my mind, is plain from the terms in which the tribunal were considering the application in paragraph 20(b), to which I have referred. It cannot, in my judgment, be the case that the respondent to an application can in effect hijack an application simply by urging the tribunal to deal with it in circumstances where the applicant himself has not been given proper notice of a hearing under rule 23(3). I consider therefore that there was a procedural irregularity in the proceedings in the tribunal, namely that rule 23(3) had not been complied with and HMRC did not have the notification to which they were entitled.
22. Under part 52(11) of the Civil Procedure Rules:

"The appeal court will allow an appeal where the decision of a lower court was: (a) wrong; or (b) unjust because of a serious procedural or other irregularity in the proceedings in the lower court."

23. Having come to the conclusion that there was a procedural irregularity in the proceedings below, there are therefore two further questions to be answered. First, was the procedural irregularity serious; and second, if it was, did the serious irregularity cause injustice? Given the mandatory nature of the rule 23 and the importance of the rule 6 application, it seems to me that the irregularity was serious. Rule 23 is couched, as I have said, in mandatory terms and it requires the agreement of the parties, not a decision of the tribunal, to override its timetable. I accept Mr Mantle's submission that the draftsman of the rules no doubt envisaged that the taxable person, rather than HMRC, was the one really to be protected by this, but as he also submitted, the rules must be evenhanded as between different parties to an appeal.
24. Moreover, the tribunal does not (at least in its written reasons) appear to have given any consideration to the question whether rule 23 had been complied with and, if not, whether to proceed or not. The essence of the procedure of any tribunal must be to give each party an opportunity to be heard. Moreover, under rule 27 of the VAT Tribunals Rules, an applicant is entitled to adduce evidence in support of its application. HMRC have not adduced evidence and have not been given the opportunity to do so. Mr Lasok submits that even now, after many months' delay since the tribunal hearing, HMRC have still not indicated precisely what evidence it is they wish to call, and that the court should not proceed on the basis of speculation that there might be evidence somewhere out there which might affect the outcome.
25. Although it is only an analogy, I think there is some help to be gained from the decision of the Court of Appeal in Checkpoint Limited v Strathclyde Pension Fund [2003] EWCA Civ 84. That was a case which involved the consideration whether a serious procedural irregularity had caused substantial injustice within the meaning of section 68 of the Arbitration Act. The Court of Appeal held that the correct approach in deciding whether there had been substantial injustice was not to compare the actual outcome of the decision of the tribunal alone with what the outcome would have been if the case had been dealt with differently. As Ward LJ put in paragraph 58:

"In my view, the approach has to be much more amorphous. The court should not make its own guess at the rental figure and make a comparison with the amount awarded. Rather the court should try to assess how the tenant would have conducted his case but for the procedural irregularity. It is the denial of the fair hearing, to summarise procedural irregularity, which must be shown to have caused a substantial injustice. A technical irregularity may not. The failure to deal with a substantial issue probably will."

26. In my judgment, there is considerable force in the point that in identifying the decision against which Grattan is or may be entitled to appeal, the HMRC should be given the opportunity to put in evidence and should have been given the opportunity to have prepared its case on the law and the relevant arguments relevant to its rule 6 application. I take the view that to shut out HMRC in the way that the tribunal's decision actually did was unjust, since it prevented them from effectively deploying their case.
27. Mr Mantle has also argued that insofar as the tribunal were exercising a discretion to proceed, that discretion was flawed, and flawed in a manner which enables an appeal court to interfere. As he puts it, the tribunal did not consider a number of relevant questions: first, whether rule 23 had been complied with; second, whether HMRC had had adequate notice of the hearing even if short of rule 23; third, whether there was evidence that HMRC might wish to rely on; fourth, whether HMRC were indeed prepared to argue the rule 6 application. The objection and the protests of HMRC's counsel appear to me simply to have been brushed aside by the tribunal, which proceeded to consider the rule 6 application. I accept this submission
28. In my judgment, that was a legally flawed exercise of discretion. There was a serious procedural irregularity which has caused injustice, and in my judgment, the right course is to allow the appeal and to remit the rule 6 application to a differently constituted tribunal.