First-tier Tribunal (Tax)

[2010] UKFTT 636 (TC)

TC00875

Appeal number: LON/2008/1475

Procedure – costs – application for tribunal to apply rule 29, VAT Tribunals Rules 1986 – para 7(3), Sch 3, Transfer of Tribunal Functions and Revenue and Customs Order 2009

FIRST-TIER TRIBUNAL

TAX

                        HAWKEYE COMMUNICATIONS 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 22 November 2010

Abbas Lakha QC, instructed by Jeffrey Green Russell, for the Appellant

Stuart Biggs, instructed by Howes Percival LLP, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       This is an application by HMRC for a direction that rule 29 of the Value Added Tax Tribunals Rules 1986 (“the 1986 Rules”) be applied to these proceedings, and that consequently rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the 2009 Rules”) should be disapplied.

2.       The power of the tribunal to make a direction of this nature is contained in para 7(3) of the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009 (“the TTF Order”).  These proceedings commenced prior to 1 April 2009, and are consequently “current proceedings” (para 1(2)).  In those circumstances para 7(3) gives the tribunal the power to give any direction to ensure that proceedings are dealt with fairly and justly, and in particular may (a) apply any provision in procedural rules which applied to the proceedings before 1 April 2009, or disapply any provision of the 2009 Rules.  In the case of these proceedings, which concern the refusal of HMRC to accept a claim for input VAT in respect of transactions which HMRC say were connected to MTIC (Missing Trader Intra-Community) fraud, the applicable Rules prior to 1 April 2009 were the 1986 Rules.

3.       The issue is an important one, as it concerns the costs regime that will apply to the appeal.  Put shortly, HMRC want the tribunal to have the wide discretion formerly afforded to the VAT and Duties Tribunal in respect of costs shifting; the Appellant opposes this and says that the more restrictive costs regime under the 2009 Rules should apply.

4.       Under rule 29 of the 1986 Rules the tribunal could direct a party to pay to the other party such sum as it might determine on account of the costs of the other party “of and incidental to and consequent on the appeal.  This discretion enabled the tribunal to direct costs to be paid both by an appellant to HMRC and by HMRC to an appellant.  In most cases, as a matter of practice, known as the Sheldon statement, HMRC did not normally seek costs against an unsuccessful appellant.  But in a case of this nature that practice did not apply, and HMRC made clear in their statement of case dated 28 August 2008 that the circumstances of this appeal were such that they would seek costs against the Appellant if the appeal were dismissed.

5.       With effect from 1 April 2009, and as part of a wholesale reorganisation of the tax tribunal system, the VAT and Duties Tribunal ceased to exist, and its functions were transferred to the First-tier Tribunal (Tax Chamber).  As current proceedings this appeal continued as proceedings before the First-tier Tribunal.  As part of the reorganisation new Rules were adopted in the form of the 2009 Rules.  These new Rules provided for a different costs regime to that which had hitherto applied under the 1986 Rules.  Subject to an exception for cases that are categorised as Complex, the 2009 Rules do not provide for a general costs shifting regime of the nature that operated under the 1986 Rules.  Instead, for most cases, the power of the tribunal to award costs is confined to wasted costs (which can in certain circumstances be awarded against a representative), and to cases where the tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings (rule 10(1)(a) and (b)).

6.       In conducting this application before me the Appellant proceeded on the assumption that this appeal had been allocated to the Standard category.  This was understandable, as the tribunal had written to the solicitors acting for the Appellant on 26 August 2010 to the effect that appeals that were already before the tribunal on 1 April 2009 had been categorised, as a general matter, as Standard cases.  This was an error.  There has been no such general categorisation.  Cases that were current proceedings remain without any categorisation under the 2009 Rules, unless a judge has made a specific direction in an individual case.

7.       In HMRC’s notice of application they refer to rule 23 of the 2009 Rules, which provides for categorisation, and requires the tribunal to give a direction allocating a case to a category “[w]hen the Tribunal receives a notice of appeal, application notice or notice of reference”.  HMRC argue that this appeal could not be categorised, and in particular could not be categorised as a Complex case, pursuant to rule 23, as the only time when such a direction could be made was at the date of the notice of appeal, which was delivered on 27 June 2008, well before the 2009 Rules came into effect.

8.       HMRC refer to the decision of the President, Sir Stephen Oliver QC, in Surestone Limited v Revenue and Customs Commissioners [2009] FTT 352 (TC) as supporting their position.  There the President said (at [18]):

“Rule 23 and the allocation of appeals and “application notices” has no application to “current proceedings”; it applies only to appeals or appeal notices (e.g. to extend time for appealing) that have been made from 1 April 2009 onwards.  There is no power in paragraph 7(3) of Schedule 3 to the TTF Order to make rule 23 apply in order to enable an allocation of an appeal to the complex category. In any event, the Tribunal’s power to make any costs award after 1 April 2009 is constrained by paragraph 7(7) of Schedule 3.”

9.       The President’s comments in Surestone were made in a context where he had decided to apply the 1986 costs rules so that an application by HMRC for costs on a withdrawal of the appellant’s appeal could be made, and had been made in time.  His remarks were in response to a submission made to him that a costs award could only be made after 1 April 2009 where the tribunal had already allocated the appeal to the Complex category.  I respectfully agree with the President that Rule 23 itself cannot apply to cases where the relevant notice of appeal or notice of application has been made prior to 1 April 2009, and that para 7(3), Sch 3, of the TTF Order has no application in this respect.  Furthermore, although I had earlier formed the view that categorisation was nevertheless possible under the tribunal’s general case management powers, I have now concluded that this is not the case.

10.    The only power that the tribunal has to categorise a case is under rule 23.  The various categories are all defined terms under rule 1(3) that in each case depend on the categorisation having been made under rule 23.  No exercise of any other power, including the general case management powers under rule 5(2), can bring a case within the relevant defined category.  Rule 23(1) imposes an obligation on the tribunal to categorise on receipt of the notice of appeal or application, and rule 23(3) allows the tribunal to re-allocate a case to a different category, which can only apply if there has been an earlier categorisation.  Rule 23(4) sets out the criteria to be considered by the tribunal in allocating a case as a Complex case, but according to its own terms it does not itself give the tribunal any allocation power beyond those in rule 23(1) and (3).  Accordingly, and contrary to the earlier view I had adopted on this point, I agree with HMRC that this appeal could not have been categorised as a Complex case.

11.    As I have noted earlier, this appeal commenced with the delivery of a notice of appeal on 27 June 2008.  HMRC served their statement of case on 28 August 2008, and included in it a notice that a costs order would be sought if the Appellant’s appeal was dismissed.  A notice of joint application for directions dated 11 November 2008 asked that the costs of the application be costs in the cause.  Subsequent applications, by both parties, were drafted in the same terms.  Five witness statements were prepared and served on behalf of HMRC on the Appellant on 31 March 2009.

12.    Since 1 April 2009 further witness evidence has been served by both parties.  Further directions have been applied for and made by the tribunal.  The Appellant served its list of issues on 17 November 2009, putting in issue all the substantive matters that fall to be considered by the tribunal in an MTIC case.  This was supplemented by an amended (and extended) list of issues dated 9 February 2010.  HMRC responded to that amended list on 30 March 2010.  Directions were given by Judge Hellier at a pre-trial review held on 19 July 2010 including for the appeal to be listed for the substantive hearing with a time estimate of 7 to 8 days (including one reading day following opening submissions).  At that time the question of the applicable costs regime was raised, and the judge directed that the parties were at liberty to apply for further directions in that respect.

13.    Mr Biggs, for HMRC, made the following submissions in support of the application that rule 29 of the 1986 Rules should be applied to this appeal:

(1)        The proceedings had been commenced and had been contested at the risk of costs.  Mr Biggs referred to the fact that the statement of case had included express reference to costs, and that both parties had made reference to costs in interlocutory applications, both before and after 1 April 2009.  There had been no escalation of costs as contended by the Appellant.

(2)        The majority of the work had been completed prior to the introduction of the 2009 Rules.

(3)        If the case had been commenced under the 2009 Rules it would have been categorised as Complex in the first instance, and the parties could have made decisions accordingly.

(4)        If it is proved that the Appellant knew or ought to have known of the fraud there are good reasons for the costs to be laid at its door.

(5)        It appears that the Appellant did not turn its mind to this question until July or August 2010.

14.    I can deal immediately with the second of Mr Biggs’ submissions, namely that the majority of the work in this appeal had been completed before 1 April 2009.  That is clearly not the case.  I accept that the service the statement of case and list of documents during 2008 and of substantial witness evidence of HMRC shortly before 1 April 2009 demonstrates that HMRC had been engaged in much preparatory work up to that time, but there has been further evidence served by both parties, and a number of applications, including one for disclosure that remains outstanding.  The issues raised by the Appellant are in themselves substantial, and there remains the impending substantive hearing of 7 or 8 days and the preparation for that hearing.

15.    Mr Lakha submitted that the costs regime that had been introduced by the 2009 Rules was to ensure that appellants were not dissuaded from accessing the tribunal nor from continuing with their appeals by the fear of mounting costs.  He argued that this elimination of a costs barrier was at the heart of the 2009 Rules, and had itself been drafted in accordance with the overriding objective (in rule 2) that cases should be dealt with fairly and justly.  He submitted accordingly that it should be comparatively rare for an application of the 2009 Rules to give rise to unfairness or injustice such that an application of the 1986 costs rules should be directed.  Only where there was an overwhelming reason in the interests of fairness and justice should such a direction be made.

16.    With effect from 1 April 2009, the 2009 Rules are the applicable rules for all proceedings in the tribunal, including for “current proceedings”, subject only to a discretion under para 7(3), Sch 3 to the TTF Order to disapply them, or to apply parts of the 1986 Rules (per Briggs J in Atec Associates Ltd v Revenue and Customs Commissioners [2010] UKUT 176 at [42]).  The starting point, therefore, subject to any such direction, is that it is the 2009 Rules that apply, and the conduct of the parties since that date must be considered in that context.

17.    It is evident that, when framing the 2009 Rules, and subject to the special rules that apply in cases that are categorised as Complex, the former costs shifting rule applicable to cases that had proceeded under the 1986 Rules was rejected for the future.  Instead the tribunal was given only the more limited powers that I have described earlier.  However, it was equally recognised that, notwithstanding that the overriding objective of the 2009 Rules themselves is to enable the tribunal to deal with cases fairly and justly, injustice might arise if the 2009 Rules were to apply in all respects to proceedings commenced under the former rules.

18.    In my view, in the light of these provisions, what is required in considering the proper approach to be adopted in the case of “current proceedings” is a balancing exercise, weighing the question of fairness and justice in all the circumstances of the individual case, and the prejudice that would be suffered by either party were the tribunal, on the one hand, to exercise its discretion to apply the 1986 Rules or, on the other, not to do so.  I do not agree with Mr Lakha that the threshold for the exercise of the discretion under para 7(3) is higher than that.  As a general matter of course rule 10 of the 2009 Rules does not of itself prevent the tribunal dealing with cases fairly and justly.  But what para 7(3) recognises in the special circumstances of current proceedings is that fairness and justice might require application of the former rules in certain respects.

19.    Mr Lakha argued that in determining whether to exercise its power under para 7(3) the tribunal should be reluctant to disapply a provision of the 2009 Rules if the tribunal was not compelled to.  To do so, he submitted, relying on Atec Associates, would be a retrograde step in the light of the objectives sought to be achieved by the framers of the 2009 Rules.

20.    Atec Associates was not, of course, a case concerned with the application of the costs rules.  The question there was whether rule 26(4) of the 1986 Rules should be applied so as to deny an appellant who had not appeared on a hearing of an application to set aside a decision or direction the right to apply to have a decision or direction at that hearing itself set aside.  Mr Justice Briggs held (at [45]) that it would be a retrograde step to apply that old rule (where no such rule applied under the 2009 Rules, and the framers of the 2009 rules had evidently decided against such an inclusion), unless effectively compelled to do so, for example where a party had relied upon it to his detriment.

21.    In my view, Atec Associates does not introduce any general principle of “retrograde step”, nor does it require compelling reasons for the exercise of a discretion in favour of the 1986 Rules in every case.  Rule 26(4) of the 1986 Rules was a particularly draconian provision.  As Briggs J said (at [44]) that rule operated automatically, regardless of the particular circumstances of any special case, and regardless of whether the absence of an applicant through no fault of his own.  In those circumstances the nature of the particular old rule was an element in weighing the question of fairness and justice, and tilted the balance decisively in favour of the 2009 Rules.  However, that will not always be the case: the exercise of the discretion to apply the 1986 Rules must depend on the individual circumstances of the case and of the rule in question.

22.    The circumstances in which this application now falls to be made include the reasonable expectations of the parties.  At the inception of this appeal, and in its conduct up to the time of the promulgation of the 2009 Rules, the parties would have been aware that the 1986 costs shifting rule would apply.  That this was the case is confirmed by the references to costs in HMRC’s statement of case and in the agreed applications for directions.  Substantial work was done, particularly by HMRC and its advisers, in the period prior to 1 April 2009.

23.    On the other hand, in my view, the larger part of the work on this appeal has taken place and will continue to take place after 1 April 2009.  From that time, in the absence of any clear indication to the contrary, including an application for the 1986 costs Rules to apply, there was in my view a reasonable and legitimate expectation on the part of the Appellant at least that the 2009 costs rules would apply.  The default position is that the 2009 Rules apply to all tribunal proceedings, and although this is subject to the exercise of a discretion by the tribunal to apply the 1986 Rules, unless or until such a direction is made, a party is entitled to conduct the proceedings on that basis.  I do not agree with Mr Biggs when he argues that delay in making an application for such a direction ought not to weigh in the balance.  In my view, in weighing the issue of fairness and justice, I must consider all the circumstances, including the respective periods where the application of different rules would give rise to different expectations.  In doing so, I note that it was not for the Appellant to make any application that the 2009 Rules should apply (though it did in the event apply for clarification of that position), so that the submission of Mr Biggs as to the conduct of the Appellant in this respect is not in my view material.

24.    I accept that a case of this nature, if it had fallen to be categorised, would have been classified as a Complex case.  If the appeal had commenced on or after 1 April 2009, and had been categorised as Complex, that could have resulted in the tribunal having a general costs shifting power even under the 2009 Rules.  But although in a suitable case such a circumstance can weigh in the balance, in my view it cannot do so on an application by HMRC in these circumstances.  Even if an appeal is categorised as Complex, that does not mean that the tribunal will necessarily have a general costs shifting power.  It will not do so if the appellant taxpayer has effectively opted out of that costs regime by sending a written request to the tribunal within the prescribed period (rule 10(1)(c)(ii)).  Where an appellant opposes the application of the costs shifting regime in the 1986 Rules, and it can thus be assumed that it would have opted out of any Complex case costs regime, the effect of categorisation as Complex can be taken to be of no effect on the limited power of the tribunal to award costs under the more restricted 2009 costs rules.  On this basis the nature of the case as one fitting the Complex category does not weigh in favour of the application of a general costs shifting regime such as that under the 1986 costs rules.

25.    For the same reason, I am not persuaded that the fact that the appeal concerns alleged MTIC fraud can weigh very heavily in the balance.  Essentially, that factor is one that affects the reasonable expectations of the parties in the period before 1 April 2009; the Appellant was aware at that time that HMRC would seek costs given the nature of the case.  It does not weigh in the balance in respect of the period since 1 April 2009.  The 2009 Rules do draw a distinction between non-Complex and Complex cases, but even there the taxpayer has the right to opt out of the Complex case costs regime.  The nature of the case cannot therefore create any expectation on the part of HMRC under the 2009 Rules, except in a case where the case has been categorised as Complex and the appellant has not opted out.  Nor is there any special category of case where a costs award has stronger merit than the general run of cases for which HMRC might seek costs.  Each case must be considered on its individual merits.

26.    Mr Biggs argued that, in favour of the 1986 Rules for costs, those rules were more flexible than the 2009 Rules.  He argued that this would enable any costs order to take account of the period before 1 April 2009 and the period after that date.  I accept those points, and agree that this is a factor in weighing the balance of fairness and justice.

27.    Taking all these circumstances into account, I have come to the conclusion that a direction that rule 29 of the 1986 Rules should apply to this appeal is not required to ensure that the proceedings are dealt with fairly and justly.  Although both parties were well aware of the costs shifting regime that applied to this appeal prior to 1 April 2009, the position changed, with respect to the entirety of the proceedings, with the introduction of the 2009 Rules.  From 1 April 2009, when the larger part of these proceedings will take place, the Appellant was entitled to assume that the 2009 Rules would apply to the whole appeal, and that those rules would operate in the more restricted manner, irrespective of any allocation of the appeal to the Complex category, having regard to the Appellant’s opt-out right.  I accept that there continued to be references in the parties’ applications to the subject of costs, but that does not mean that the Appellant is to be taken to have implicitly accepted that a direction that the 1986 Rules would apply was inevitable.  References to costs at a time when the 2009 Rules apply will normally be a reference to such costs as may be awarded under those Rules; the fact that the Appellant made such references in this case does not persuade me that its expectation was that the 1986 Rules should apply.

28.    There is no explanation for the failure of HMRC to seek a direction of the tribunal to apply the 1986 Rules at an earlier stage.  The longer the period from 1 April 2009 during which no application is made, and no other indication is given that the tribunal will be asked to make a direction, the greater the weight that must be attached to the reasonable expectation that the other party will have as to the applicability of the 2009 Rules to the entire appeal; that must then be weighed against the expectation for the comparative period prior to that date.  In this case, in my view, the post - 1 April 2009 expectations weigh more heavily than those before that date.  In my view the prejudice to the Appellant in once more being exposed to a costs shifting regime that, absent any contrary indication, it was entitled to expect had ceased to apply from 1 April 2009 outweighs any prejudice to HMRC in not being able to seek costs on the former costs shifting basis.  And it is of course the case that the same constraints will apply to the Appellant if it succeeds in its appeal.

29.    Furthermore, although application of the 1986 Rules would enable a costs order to be made that distinguishes between the periods before and after 1 April 2009, in my view the failure on the part of HMRC to apply for a direction and to make clear its intentions regarding costs after 1 April 2009 created an expectation on the part of the Appellant in respect of the whole period of the appeal, so that such a split order would not be fair and just.

30.    For all these reasons I consider that the interests of fairness and justice are in these circumstances met by the application of rule 10 the 2009 Rules, and that accordingly I should decline to exercise my discretion under para 7(3), Sch 3 to the TTF Order to apply rule 29 of the 1986 Rules.

31.    Accordingly, I refuse HMRC’s application.

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: 10 December 2010