First-tier Tribunal (Tax)

[2010] UKFTT 141 (TC)

TC00447

Appeal number TC/2009/10843

Costs- appeal brought before 1 April 2009 – reg 21, Special Commissioners (Jurisdiction and Procedure) Rules 1994 - whether HMRC acted wholly unreasonably in connection with the hearing – no – application dismissed

FIRST-TIER TRIBUNAL

TAX

                                            JOSEPH HANNIGAN                           Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (Income tax/NICs)                                                                Respondents

                                                TRIBUNAL: JUDGE ROGER BERNER

Sitting in public in London on 29 March 2010

The Appellant appeared in person

David Lewis, Inspector, HMRC Local Compliance and Reviews, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.     On 19 November 2009 I released my decision striking out the whole of the proceedings of Mr Hannigan’s appeal apart from his appeal in relation to Class 2 national insurance contributions in respect of Mr Hannigan’s self assessment from May 1999 to May 2005, which was allowed.  The basis on which I allowed that part of the appeal was that, unlike the other aspects of the appeal, HMRC had withdrawn its claim in respect of the Class 2 NICs on 2 June 2009 only after Mr Hannigan had appealed on 30 March 2009.

2.     The purpose of this hearing was to consider an application by Mr Hannigan for costs.

3.     At the outset of the hearing I explained, and the parties agreed, that since this appeal commenced before the reorganisation of the tax tribunal service on 1 April 2009, certain transitional provisions applied to the matter of costs.  By para 7(7), Sch 3, Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009, an order for costs can only be made if, and to the extent that, an order could have been made before 1 April 2009.  In the case of an appeal to the Special Commissioners, this means that the ability of the Tribunal to order costs is limited to the jurisdiction that the Special Commissioners had under reg 21, Special Commissioners (Jurisdiction and Procedure) Regulations 1994.

4.     The power of the Special Commissioners to award costs conferred only a limited jurisdiction.  Costs could only be awarded in relation to the hearing and where a party had acted wholly unreasonably in connection with the hearing in question (reg 21(1); Clark v Green [1995] STC (SCD) 99).  This did not include power to make an order in respect of costs of protracted negotiations even where the taxpayer had earlier offered to settle (in a share valuation case) at the value proposed by the Revenue in the appeal.

5.     The limited nature of the Special Commissioners’ powers in this regard becomes starkly apparent from a consideration of the judgment of Park J in Gamble v Rowe [1998] STC 1247 (at p 1257):

“There are two particular restrictive aspects of the wording to which I should draw attention. The first is that the party concerned must act 'wholly unreasonably'. It will be a very rare case where a tribunal can say that a party has acted wholly unreasonably. It is not enough to be able to say that from time to time there has been unreasonableness. The party must act wholly unreasonably—a very exacting standard. The second restrictive point is that the party must act wholly unreasonably 'in connection with the hearing in question'. The commissioners may or may not take the view that the party concerned acted unreasonably or wholly unreasonably at some earlier stage in the history of the tax affairs of the person in question. But if that earlier stage was before the matter was either before the commissioners and being heard or was being prepared for a hearing before the commissioners, they have no power to award costs.”

6.     Gamble v Rowe was applied by the Special Commissioners in Carvill v Frost [2005] STC (SCD) 208, a case on which Mr Hannigan placed some reliance.  There it was confirmed that the costs jurisdiction covered costs incurred only whilst the Special Commissioners had jurisdiction over the appeal.  So it was not possible for a party to seek to rely upon the unreasonable behaviour of the other party prior to the commencement of the appeal before the Special Commissioners, nor, even if wholly unreasonable behaviour were established for a period in which the Special Commissioners had jurisdiction, could costs incurred before that period be ordered.

7.     Mr Hannigan took me through some of the history of this matter to which I had referred in my earlier decision.  Mr Hannigan had been declared bankrupt on 3 May 2005 in the High Court on HMRC’s petition.  The background was a failure on the part of Mr Hannigan to produce self assessment tax returns for the period of 10 years from 1996/97 to 2005/06.  When, in May 2008, the returns were provided, all the income tax assessments were withdrawn leaving only a debt of £765.08 in respect of Class 2 NICs and costs of the bankruptcy petition.  Mr Hannigan raised a number of issues in respect of the legality of the statutory demand and bankruptcy petition that are not relevant to this application.

8.     Mr Hannigan said that HMRC had acted wholly unreasonably.  They had accepted his late returns only after much pressure from himself and his advisers.  In relation to the claim for NICs, he said that this had been something “dreamed up” by someone in the Revenue at the last moment in order that the amount of the debt under the bankruptcy petition was over £750, and was purely a device to protect the claim in bankruptcy.  Mr Hannigan claimed that there had been no formal determination of the liability to NICs under s 8 of the Taxes Management Act 1970.  Mr Jones was unable to confirm whether there had been such a determination.  No claim had been made for the NICs in the county court, and the debt was in any event unenforceable.

9.     Mr Hannigan referred me to a report of House of Commons debates of 24 February 1978 which referred to a statement by the then Secretary of State for Social Services and which related to standing instructions for officials of the department to waive proceedings for arrears of national insurance contributions in various cases, including those where the person concerned would have been entitled to exception from liability for contributions if he had claimed it.  Mr Hannigan had been entitled to claim the small earnings exception relief, but had not done so, and on a review that HMRC carried out after the appeal was lodged on 30 March 2009 an absolute waiver of the NIC liability was granted and notified to Mr Hannigan by letter dated 2 June 2009.  The burden of Mr Hannigan’s argument in this connection was that the waiver ought to have been granted before any claim for the NICs had been made, and that failure to do this was wholly unreasonable.

10.  Applying the legal principles to which I have referred earlier, I am unable to award costs on the basis of behaviour prior to the issue of the appeal on 30 March 2009.  At that time all the income tax assessments had been withdrawn, and so the Tribunal never had jurisdiction in those respects.  The only appeal in respect of which the Tribunal had jurisdiction was the appeal in respect of the Class 2 NICs.  Has Mr Hannigan satisfied me that HMRC have acted wholly unreasonably in relation to the hearing on that appeal or in the preparation for that hearing?  The answer is no.  In my judgment the review that was undertaken by HMRC following Mr Hannigan’s appeal on 30 March 2009 was carried out without delay, and HMRC acted wholly reasonably at that stage in agreeing by concession to withdraw their claim in respect of the NICs.  This is a case very far removed from the facts of Carvill v Frost, to which I have referred earlier, and on which Mr Hannigan sought to rely.  In that case the Special Commissioners held that there should have been a review of the appeal assessments at the time the appeal was referred to the Special Commissioners.  Instead the Revenue had allowed matters to drift on and had fought a number of preliminary hearings.  Here, by contrast, HMRC did carry out an immediate review and withdrew the NICs claim in timely manner.  That was wholly reasonable.

11.  Mr Hannigan also referred me to Scott and another (trading as Farthings Steak House) v McDonald [1996] STC (SCD) 381, but this case too cannot in my judgment assist his argument.  There the Special Commissioner found bad faith on the part of a Revenue official.  I am not, on the basis of what Park J said in Gamble v Rowe, able to award costs on the basis of anything that took place before Mr Hannigan made his appeal, although questions of bad faith in the making of an assessment might be relevant to consideration of behaviour in the continued defence of an appeal.  In my view there is no evidence on which to base a finding of bad faith on the part of HMRC in respect of the claim for NICs, and only good faith in their review following the appeal and the withdrawal of that claim.

12.  For these reasons I dismiss Mr Hannigan’s application. 

This notice contains full written findings of fact and reasons for the decision.  The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  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.

ROGER BERNER

TRIBUNAL JUDGE

RELEASE DATE: 30 March 2010