[2010] UKFTT 395 (TC)

TC00677

Appeal number: TC/2009/16529

Procedure – costs – rule 10, Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 – whether Respondents had acted unreasonably in defending or conducting the proceedings

FIRST-TIER TRIBUNAL

TAX

BULKLINER INTERMODAL LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

TRIBUNAL: JUDGE ROGER BERNER

Sitting in public at 45 Bedford Square, London WC1 on 18 August 2010

David Massie, Director, for the Appellant

Simon Chambers, Advocate, HMRC, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       This is an application by the Appellant for costs of the appeal.

Background

2.       Mr Massie explained the background to me.  He said that the appeal had to be considered in its context.  The Appellant had suffered a very significant fraud, as a result of which it took injunctive action against the perpetrator in High Court proceedings.  During those proceedings it became apparent that the fraudster had been illegally using the Appellant’s VAT registration number.  The Appellant advised the Respondents of this through a system known as “Customs Confidential”.

3.       Subsequently, the Appellant was due to have a routine VAT inspection.  The Appellant contacted the Respondents in advance of this and drew their attention to the history and details of the fraud.  However, Mr Massie said, when they arrived the HMRC officers were unprepared.  They were unaware of the notification of the fraud, or even of the existence of “Customs Confidential”.  At the meeting the officers found nothing wrong, except that they proposed to assess for output VAT based on the fraudulent invoices.  Mr Massie said that the officers chose to ignore the facts and went ahead and issued the assessments.

4.       The Appellant asked for a review, but, Mr Massie claimed, this came to nothing because the Respondents would not listen to the arguments.  The upshot was this appeal, which was made on 11 November 2009.  The proceedings were then stayed pending acceptance of the Appellant’s hardship application by the Respondents; this was accepted on 4 December 2009.  On 6 January 2010 the appeal was assigned to the Standard category, transferred to the London tribunal centre, and the Respondents were given the usual 60 days to produce a statement of case.

5.       On 8 March 2010, a little outside the 60-day period, the Respondents applied for an extension of time for the filing of the statement of case, to 22 March 2010.  This was granted by the Tribunal on 16 March 2010, subject to any objection by the Appellant.  The Appellant did object by letter of 23 March 2010, but in the meantime the Respondents had sought a further extension, this time to 29 March 2010.  This extension was also granted by the Tribunal, subject to objection by the Appellant.  On 29 March 2010 the Respondents made a further application for an extension, to 12 April 2010, but on 1 April 2010 the Respondents notified the Tribunal that they had withdrawn the assessment.  On the Appellant’s application, on 17 May 2010 the Tribunal allowed the appeal.

6.       Mr Massie told me that the practical effect of all this was that the Appellant had been put out of business.  Although he had been arranging financing for the company to enable it to recover following the fraud on it, the VAT assessment pending over the Appellant had caused this to fall apart.  He argued that in these circumstances, although he recognised the constraints on the Tribunal’s jurisdiction over costs, it would be proper for the Tribunal to order the Respondents to pay the Appellant’s costs of this appeal.

7.       Mr Chambers did not comment on Mr Massie’s description of the events up to the making of the Appellant’s appeal.  He argued that the Tribunal was concerned only with costs of the proceedings, in accordance with rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the 2009 Rules”).  He submitted that it could not be said that the Respondents had acted unreasonably.  They had applied for extensions of time for delivery of the statement of case as they were considering internally whether to proceed with the appeal, and those extensions had been granted by the Tribunal.  By acting in this way, up to the time when they withdrew the assessments appealed against, and not serving a statement of case so as to put the Appellant to the trouble and expense of considering it, the Respondents had acted reasonably.

Discussion

8.       For VAT appeals commenced from 1 April 2009, the introduction of the new system for tax tribunals heralded a change to the Tribunal’s jurisdiction to award costs.  Formerly there had existed, under rule 29 of the Value Added Tax Tribunals Rules 1986, what can be described as a “cost-shifting” regime, under which the Tribunal had a general discretion to award costs of and incidental to and consequent upon the appeal.  Under rule 10 of the 2009 Rules, there are basically two costs regimes.  One, which retains the cost-shifting jurisdiction, is for cases that have been classified as Complex, but only where the taxpayer has not opted-out of that regime.  In all other cases, the general rule is that there is no cost-shifting.  Parties bear their own costs.  However, there are exceptions.  First, the Tribunal can order “wasted costs”.  This does not apply here, as it relates only to costs awarded against a legal or other representative.  Secondly, and relevant to this application, the Tribunal may make an order in respect of costs (rule 10(1)(b)):

“if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings”

9.       This has echoes of the costs jurisdiction of the former Special Commissioners, contained in reg 21 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994.  But there are crucial differences.  First, the power of the Special Commissioners to award costs was confined to a case where a party had acted “wholly unreasonably”.  It was not enough that from time to time there had been unreasonableness (see Gamble v Rowe [1998] STC 1247, per Park J at p 1257).  The need for the behaviour to be wholly unreasonable is not included in the 2009 Rules.  Secondly, the wholly unreasonable behaviour had to be “in connection with the hearing in question”.  The power under the 2009 Rules is wider than this, and does not merely, as was held in Gamble v Rowe, encompass the hearing or preparation for a hearing.

10.    What this means is that the Tribunal can find the actions of a party to be unreasonable, and can make an order for costs on that basis, where the unreasonable actions are related to any part of the proceedings, from the time of the commencement of proceedings up to final determination, and whether they are part of any continuous or prolonged pattern or occur from time to time.

11.    However, one thing that has not changed is that the Tribunal’s jurisdiction continues to be limited to considering actions of a party in the course of “the proceedings”, that is to say proceedings before the Tribunal whilst it has jurisdiction over the appeal.  It is not possible under the 2009 Rules, any more than in was under the Special Commissioners’ regulations, for a party to rely upon the unreasonable behaviour of the other party prior to the commencement of the appeal, at some earlier stage in the history of the tax affairs of the taxpayer, nor, even if unreasonable behaviour were established for a period over which the Tribunal does have jurisdiction, can costs incurred before that period be ordered.  In these respects the principles in Gamble v Rowe, and Carvill v Frost [2005] STC (SCD) 208 remain good law.  That is not to say that behaviour of a party prior to the commencement of proceedings can be entirely disregarded.  Such behaviour, or actions, might well inform actions taken during proceedings, as it did in Scott and another (trading as Farthings Steak House) v McDonald [1996] STC (SCD) 381, where bad faith in the making of an assessment was relevant to consideration of behaviour in the continued defence of an appeal.

12.    In Carvill v Frost the Special Commissioners, in awarding costs to an appellant on the basis of the “wholly unreasonably” test, held that there should have been a rigorous review of the assessments at the time they were referred to the Special Commissioners (the equivalent of the making of this appeal to the Tribunal).  No such review had taken place and instead the Revenue had allowed matters to drift on and had fought a number of preliminary hearings.  They had, as a result, greatly increased the scope of the factual matters the appellant had to prove at the hearing that was ultimately fixed and increased the time spent in reviewing the documentary evidence and preparing witness statements.  Taking all these factors into account, in that case the Special Commissioners found that the Revenue had acted wholly unreasonably.

13.    As I have described, the test under the rules applicable to the Special Commissioners required the acts of the party concerned to have been wholly unreasonable.  That required a more prolonged or wholesale pattern of unreasonable conduct than does the test under rule 10.  But even though the test in rule 10 enables individual acts of unreasonableness from time to time to be considered sufficient to enable a costs order to be made, I find in this case no individual act or acts of unreasonableness in the defending or conducting of the proceedings by the Respondents.  In contrast to the position in Carvill v Frost, the Respondents did not put the Appellant here to the trouble and expense of considering a statement of case or any evidence.  They took the proper course of reviewing matters at the inception of the appeal at a policy level before putting forward in these proceedings a case to be answered by the Appellant.  They quite properly, in my view, applied to the Tribunal to be granted further time in order that they could obtain policy comments and obtain further instructions.  There was no undue delay in conducting the review, and the decision to withdraw the assessment was taken and notified in a timely fashion in the context of the commencement of the appeal process.

14.    For these reasons, I do not consider that the Respondents have acted unreasonably in defending or conducting these proceedings, and accordingly I must refuse the application of the Appellant for costs under rule 10.

15.    I have considerable sympathy for the case made by the Appellant, but, as the Appellant itself makes plain in its correspondence with the Tribunal, its real complaint is that the Respondents did not act reasonably in the making of the original assessment, and that the Appellant should never have had to make the appeal.  For the reasons I have explained, that is not a circumstance that can found a claim for costs under rule 10.

16.    Whilst the jurisdiction of the Tribunal in relation to costs does not, in my view, afford the Appellant a remedy, the Appellant might consider making a complaint to the Adjudicator, whose office looks into complaints about HMRC.  The Adjudicator cannot look into matters that can be considered by the Tribunal, but the Appellant may take the view that there are aspects of the conduct of the original assessment that could form the basis of a complaint.

Right to apply for permission to appeal

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.

ROGER BERNER

TRIBUNAL JUDGE

RELEASE DATE: 20 August 2010