Usha Martin (UK) Ltd v Revenue & Customs [2013] UKFTT 793 (TC) (20 December 2012)
DECISION
1. This is an
Application by the Appellant 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
history of the appeal in this case is set out at paragraphs 11-15 below but, in
summary, the appeal commenced in the Vat and Duties Tribunal by Notice of
Appeal dated 22 June 2006 and concluded (subject to resolution of the question
of expenses) on 24 January 2012, when the appeal was withdrawn, HMRC having
withdrawn the assessment under appeal the previous day. Accordingly, this case
commenced before the abolition of The VAT and Duties Tribunal, which had a
different regime for expenses to that which came into force with the
introduction of The First-tier Tax Tribunal on 1 April 2009.
3. It is a matter
of agreement between the parties that in the first instance, since this case
was concluded after 1 April 2009, the 2009 Rules would apply to
the proceedings. That is the default position (see paragraph 10 below).
The Legal Framework
4. The
general powers of the Tribunal in regard to expenses are contained in
Section 29 of the Tribunals, Courts and Enforcement Act 2007 (TCEA) which
provides that expenses of all proceedings are in the discretion of the Tribunal
and that the Tribunal has full power to determine those expenses subject to the
Tribunal Procedure Rules. Section 29 TCEA reads as follows:
29. Costs
or expenses
(1) The
costs of and incidental to—
(a) all
proceedings in the First-tier Tribunal, and
(b) all
proceedings in the Upper Tribunal,
shall
be in the discretion of the Tribunal in which the proceedings take place.
(2) The
relevant Tribunal shall have full power to determine by whom and to what extent
the costs are to be paid.
(3) Subsections
(1) and (2) have effect subject to Tribunal Procedure Rules.
(4) In
any proceedings mentioned in subsection (1), the relevant Tribunal may—
(a) disallow,
or
(b) (as
the case may be) order the legal or other representative concerned to meet,
the
whole of any wasted costs or such part of them as may be determined in
accordance with Tribunal Procedure Rules.
(5) In
subsection (4) “wasted costs” means any costs incurred by a party—
(a) as
a result of any improper, unreasonable or negligent act or omission on the
part of any legal or other representative or any employee of such a representative,
or
(b) which,
in the light of any such act or omission occurring after they were incurred,
the relevant Tribunal considers it is unreasonable to expect that party
to pay.
(6) In
this section “legal or other representative”, in relation to a party to
proceedings, means any person exercising a right of audience or right to
conduct the proceedings on his behalf.
(7) In the application of this section in
relation to Scotland, any reference in this section
to costs is to be read as a reference to expenses.
5. As
indicated in paragraph 3 above the default position is that the 2009 Rules
apply to these proceedings. That position is set out in Rule 10 which reads as
follows:
10—(1) The
Tribunal may only make an order in respect of costs (or, in Scotland, expenses)—
(a) under section 29(4) of the
2007 Act (wasted costs);
(b) if the Tribunal considers that
a party or their representative has acted unreasonably
in bringing, defending or conducting the proceedings; or
(c) if—
(i) the proceedings have
been allocated as a Complex case under Rule
23 (allocation of cases to categories); and
(ii) the
taxpayer (or, where more than one party is a taxpayer, one of them), has not
sent or delivered a written request to the Tribunal, within 28 days of
receiving notice that the case had been allocated as a Complex case, that the
proceedings be excluded from potential liability for costs or expenses under
this sub-paragraph.
(2) The Tribunal may make an order under
paragraph (1) on an application or of its own initiative.
(3) A person making an application for an
order under paragraph (1) must—
(a) send
or deliver a written application to the Tribunal and to the person against whom
it is proposed that the order be made; and
(b) send
or deliver with the application a schedule of the costs or expenses claimed in
sufficient detail to allow the Tribunal to undertake a summary assessment of
such costs or expenses if it decides to do so.
(4) An
application for an order under paragraph (1) may be made at any time during the
proceedings but may not be made later than 28 days after the date on which the
Tribunal sends—
(a)
…
(b) notice
of a withdrawal under rule 17 (withdrawal) which ends the proceedings.
(5) The
Tribunal may not make an order under paragraph (1) against a person (the
“paying person”) without first—
(a) giving
that person an opportunity to make representations; and
(b) if
the paying person is an individual, considering that person’s financial means.
(6) The
amount of costs (or, in Scotland, expenses) to be paid under an order under
paragraph (1) may be ascertained by—
(a) summary assessment by the
Tribunal;
(b) agreement
of a specified sum by the paying person and the person entitled to
receive the costs or expenses (the “receiving person”); or
(c) assessment
of the whole or a specified part of the costs or expenses incurred by the
receiving person, if not agreed.
(7) Following
an order for assessment under paragraph (6)(c) the paying person or the
receiving person may apply—
(a) …
(b) in
Scotland, to the Auditor of the Sheriff Court or the Court of Session (as
specified in the order) for the taxation of the expenses according to the fees
payable in that court; or
(c) … (8) In
this rule “taxpayer” means a party who is liable to pay, or has paid, the tax,
duty, levy or penalty to which the proceedings relate or part of such tax,
duty, levy or penalty, or whose liability to do so is in issue in the
proceedings;
6. However,
this appeal is subject to the Transfer of Tribunal Functions and Revenue and
Customs Appeals Order 2009 (“the TTFO”). Schedule 3 of TTFO contains
transitional provisions which apply in relation to the new Tribunal structure.
Schedule 3 paragraph 7(3) (“paragraph 7(3)”) applies in relation to
“current proceedings” such as the present appeal which commenced before
1 April 2009. It is that provision which gives this Tribunal jurisdiction
to make a Direction such as that sought by the Appellant. Paragraph 7(3)
reads:
"The Tribunal may 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
the commencement date [1 April 2009] or
(b) disapply
any provision of the [2009 Rules].
7. It is a
matter of agreement that the procedural rules referred to in
sub-paragraph (a) immediately above are the 1986 Rules. The relevant
section of those Rules is Rule 29:
Award
and direction as to costs
29(1) A
Tribunal may direct that a party or applicant shall pay to the other party to
the appeal or application —
(a) within
such period as it may specify such sum as it may determine on account of the
costs of such other party of and incidental to and consequent upon the appeal
or application; or
(b) the
costs of such other party of and incidental to and consequent upon the appeal
or application to be taxed by a Taxing Master of the Supreme Court or a
district judge of the High Court of Justice in England and Wales or by the
Auditor of the Court of Session in Scotland or by the Taxing Master of the
Supreme Court of Northern Ireland or by the Taxing Master of the High Court of
Justice of the Isle of Man on such basis as it shall specify.
(2) Where
a Tribunal gives a direction under paragraph 1(b) of this rule in proceedings
in England and Wales the provisions of Order 62 of the Rules of the Supreme
Court 1965 shall apply, with the necessary modifications, to the taxation of the
costs as if the proceedings in the Tribunal were a cause or matter in the
Supreme Court of Judicature in England.
(3) Where
a Tribunal gives a direction under paragraph 1(b) of this rule in proceedings
in Scotland the provisions of chapter 42 of the Act of Sederunt (Rules of the
Court of Session) 1994 shall apply, with the necessary modifications, to the
taxation of the costs as if those proceedings were a cause or matter in the
Court of Session in Scotland.
(4) Where
a Tribunal gives a direction under paragraph 1(b) of this rule in proceedings
in Northern Ireland the provisions of Order 62 of the Rules of the Supreme
Court (Northern Ireland) 1980 shall apply, with the necessary modifications, to
the taxation of the costs as if those proceedings were a cause or matter in the
High Court of Northern Ireland.
(5) Any costs
awarded under this rule shall be recoverable as a civil debt.
8.
If this appeal, having been lodged before 1 April 2009, had been
concluded before that date, then the 1986 Rules would have applied in relation
to both procedure and expenses. Expenses awards under the 1986 Rules are in the
discretion of the Tribunal and a Tribunal would normally award expenses in line
with the expectations of the parties: the party which wins the appeal would
normally expect an order of expenses in their favour. However, an Appellant
who loses an appeal would not expect an award of expenses against them where
the Sheldon Statement applies. There was no suggestion that there was anything
in this case which put it outwith the ambit of Sheldon. It is reasonable to
assume that HMRC would not have sought expenses from the Appellant in this case
had the Appellant lost.
9.
If this appeal had not been lodged with the Tribunal until after 1 April
2009, then the 2009 Rules would have applied. This appeal would then have been
“allocated” under Rule 23. Where an appeal is allocated to the “Complex”
category, then an Appellant has 28 days within which to “opt out” of the
expenses regime. In terms of the 2009 Rules unless an appeal is allocated to
the Complex category then there is no power to award expenses (unless a party
has acted unreasonably or there is a wasted costs order and there is no suggestion
of that in this case).
10.
In summary if the 1986 Rules are applicable in this case then an order
awarding the Appellant its expenses can be made, whereas if the 2009 Rules
apply then no such order can be made. The default position, described by
Warren J in the Upper Tribunal in HMRC v Atlantic Electronics (2012) UKUT 45 TCC (“Atlantic 2”) is that the 2009 Rules will apply unless
there is a Direction of the Tribunal pursuant to paragraph 7(3). Both
parties agreed that paragraph 7(3) gives the Tribunal discretion as to the
application of the appropriate costs regime. The wording of that paragraph is
very simple indeed but it gives rise to difficult issues of principle in
deciding what amounts to a fair and just approach to expenses in this, and any
other case. The principles to be applied in exercising that discretion are
nowhere set out in the legislation or in the Rules. However, the central
question answered in Atlantic 2 is “When is it right for the First-tier
Tribunal to exercise its discretion to disapply, in transitional cases, the
costs provisions of ….the 2009 Rules…and apply the ….1986 Rules?” In the
lengthy judgement, which contained a detailed analysis of this issue, Warren J
identified a number of the difficulties in exercising the discretion not least
because the Tribunal has an unfettered power to act fairly and justly (paragraph
19). He went on to identify the jurisdiction of the Tribunal and the approach
to the exercise of the discretion. Both parties relied on Atlantic 2.
That case is binding upon this Tribunal insofar as the principles applicable to
the exercise of the Tribunal’s discretion are identified. That case also gave
guidance as to the exercise of the discretion but that is persuasive rather
than binding. Atlantic 2 is referred to at greater length below,
distinguished and founded upon. One important point that should be noted at
the outset, however, is that Atlantic 2 involved an Application for
prospective costs rather than, as in this instance, a retrospective Application
once the substantive proceedings had been completed.
11.
Both parties referred to Sri International v The Commissioners for
Her Majesty’s Revenue and Customs FTC/72/2010 (“Sri”) released 3
January 2012. HMRC’s stance was that that decision was wrong and Atlantic 2,
which was released later, should be preferred. The Appellant also referred to Test
Claimants in the Franked Investments Income Group Litigation v Commissioners of
Inland Revenue and Anr [2012] UKSC 19 (“Test Claimants”).
History of the Appeal
12.
The primary facts, and in particular the timing of the procedural stages
in this case are not in dispute.
13.
The Notice of Appeal in this case was dated 22 June 2006 and it related
to a disputed decision dated 24 March 2006, reviewed but unchanged on 26 May
2006. That decision related to the imposition of a charge in respect of
definitive Anti Dumping Duty (ADD) of £85,689.71 and related (Import) VAT of
£14,995.70: a total of £100,685.41 notified in a Post Clearance Demand Notice
(C18 duty demand). HMRC formed the view that steel wire rope (SWR) imported
into the UK did not, for the purposes of the Community Customs Code have a
place of origin in Dubai but rather a place of origin in India and was
therefore subject to ADD whereas the Appellant contended that the SWR had
undergone a manufacturing process in Dubai which was sufficiently substantial
to change the country of origin. The basis for HMRC’s stance was that there was
an alleged contravention (as deemed by the European Anti Fraud Office (OLAF))
of Article 24 Council Regulation 2913/92 and therefore a customs debt under
article 201 of the Council regulation. The review decision set out in some 31
paragraphs the technical reasons as to why the Respondents believed that the
goods were liable for anti dumping duty.
12.
On making the appeal the Appellant entered into negotiation with the
Respondents in regard to a Hardship Application. The outcome of that was that
on 25 October 2006 the Respondents issued a Certificate pursuant to
Section 16(3)(a)(i) Finance Act 1994. The effect of that was that although the
£100,685.41 remained outstanding, the appeal could proceed because HMRC were
satisfied that they held adequate security from the Appellant.
13.
At the outset, both parties sought an extension of time to comply with
the standard procedural matters, and on 15 August 2006, the appeal was sisted
at the Appellant’s request, with the consent of HMRC, pending their appeal to,
and the decision of, the European Court of First Instance Court in case
reference T119/06 as that apparently related to the same issue. On the Application
of the Appellants to the First-tier Tribunal dated 21 September 2010, to which
HMRC took no objection, on the basis that the Judgment in Case T119/06 on 9
September 2010 was not relevant to these proceedings, that sist was recalled
and HMRC lodged their Statement of Case on 31 December 2010. On 10 January
2011, HMRC requested a further sist of the proceedings in order to further
consider matters and as no objection was received, the case was sisted.
Further sists, with the consent of the Appellant, were sought by HMRC and
granted on three further occasions. On 26 October 2011, before the then sist
was due to expire on 31 October 2011, the Appellant sought a sist on the basis
that there was a possibility of negotiation of resolution of the appeal. HMRC
consented and a sist was granted until 31 January 2012.
14.
On 23 January 2012, HMRC intimated both to the Tribunal and to the
Appellants that they had “withdrawn the assessment under appeal”. In
consequence, on 24 January 2012 the Appellants applied to the Tribunal to
withdraw their appeal “pending the parties agreeing the issue of costs”. The
parties did not reach agreement and that is the subject matter of this
decision.
15.
At the outset of the Hearing, Mr Gibbon sought leave to amend paragraph
26 of the written submission for the Appellants to delete the references to 11
August 2009. That was not opposed and it was a matter of agreement that, if
HMRC had withdrawn the assessment at an earlier date, then the appeal would
have been withdrawn earlier but always subject to an Application for expenses.
The formal Application for expenses in the sum of £47,102.29 was accompanied by
supporting documentation, which did not allocate the expenses between the
periods before and after April 2009. It was not disputed that the Application
for expenses was lodged within the time limits prescribed by the 2009 Rules.
The Arguments and Reasons for
Decision
Summary of Arguments for the Appellant
16.
The Appellant’s primary arguments included the propositions that (a)
both in EU and UK law, as at the date that the appeal commenced, the Appellant
had had a legitimate expectation that if it succeeded then it could apply to
the Tribunal for payment of expenses in terms of Rule 29 and that as a
department of the State HMRC could have no such expectation, (b) that there was
no time limit specified in paragraph 7(3) TTFO, (c) that although the
impact of the decision in Atlantic 2 is that consideration must be given
to the elapse of time from 1 April 2009 that should not be considered to be
authority for a general proposition that the Tribunal is barred from using its
discretion simply because of elapse of time, (d) that looking to Atlantic 2
and Sri, the complexity of an appeal suggests that a Direction should be
made because an Appellant who has proceedings which straddle 1 April 2009
cannot have an appeal categorised as Complex and such an Appellant should be in
the same position as an Appellant who commenced a case after that date, (e)
that this case would have been categorised as Complex, and (f) the case should
be dealt with fairly and justly.
Summary of Arguments for HMRC
17.
HMRC’s primary arguments included the propositions that (a) it was too
late to request that the 1986 Rules apply, (b) the Appellant has no legitimate
expectation in the public law sense or in accordance with the EU principle of
legitimate expectations, (c) whilst it is accepted that there is no
explicit time limit which applies to paragraph 7(3), Atlantic 2 is
authority for the proposition that delay beyond a reasonable time after
1 April 2009 is relevant to the exercise of discretion, (d) this case
straddled 1 April in a substantial way, which failing it was in fact conducted
almost entirely under the 2009 Rules, and (e) HMRC had a reasonable expectation
that the 2009 Rules would apply in the absence of an Application by the
Appellants for a prospective Direction.
Reasons for decision
18.
As indicated in paragraph 10 above Warren J in Atlantic 2
sets out the approach to be adopted in Applications for Directions
involving paragraph 7(3). Firstly, and most importantly, “When it comes to
exercising the discretion under paragraph 7(3) in making an order for
costs, the Tribunal must, of course, act judicially and apply the correct
principles whatever they may be” (paragraph 55).
19.
He identifies a number of issues relevant to the exercise of that
discretion and they may be summarised as follows:-
(1)
The discretion cannot be exercised in an arbitrary manner
(paragraph 48).
(2)
The Tribunal should not lose sight of the fact that in exercising its
discretion the Tribunal must do what is fair and just in all the circumstances
of the particular case (paragraph 52). That discretion is wide (paragraph
27) and “there can be no hard and fast rule about which costs regime is to
apply to ‘current proceedings’.” (paragraph 30)
(3)
“The policy of taxpayer choice is not determinative of the costs regime
which should apply although the taxpayer’s preference is one fact which needs
to be taken into account.” (paragraph 33)
(4)
Two policies can be identified in Rule 10 of the 2009 Rules. First, the
taxpayer in a Complex case is given a choice as to the applicable expenses
regime, and second that choice must be exercised at a very early stage thereby
providing certainty. (paragraph 33)
(5)
If Surestone Limited v HMRC [2009] UKFTT 352 (“Surestone”)
is correct, “current proceedings” cannot be allocated to the Complex category.
It is the nature of the case rather than its categorisation as a Complex case,
which is relevant to the exercise of discretion. (paragraph 38).
(6)
Once a reasonable time after 1 April 2009 has passed, there is no longer
a policy imperative to give a taxpayer a choice; on the contrary, the second
policy of certainty suggests strongly that he should no longer have a choice. “He
could not, seeing the wind blowing strongly in his favour, after the passage of
time seek an order for costs when he actually wins his appeal” (paragraph 41).
(7)
The third example to which Warren J refers is current proceedings where
a substantial amount of work and considerable expense has been incurred both
before and after 1 April 2009. In that instance, appeals to policy cannot
resolve the problem of what is fair and just but that can be resolved by
adopting different regimes. (paragraphs 45-46)
(8)
If a single regime is to be imposed, a major factor in the exercise of
discretion will be the relative amount of time and money spent on the
proceedings before and after 1 April 2009. The actual duration of the
proceedings “should carry very little weight compared with the actual work”,
although there will usually be a correlation. (paragraph 47)
(9)
It is incumbent upon the party who wishes to operate in a cost shifting
regime to make an Application disapplying Rule 10 and applying
Rule 29 (paragraph 49).
(10)
“Ideally, any Application to depart from the default regime ought to be
done within a reasonable time after 1 April 2009.” Passage of time,
in light of the policy of certainty, will make it more difficult to obtain a
prospective Direction. If neither party makes such an Application, certainty is
to be found in the default regime and passage of time makes a departure from
that more difficult to justify. (paragraph 50).
(11)
The fact that either party could make a prospective Application
confirming the default position under the 2009 Rules means less weight
should be attached to delay, but this must not be pressed too far. There is
something artificial and contrary to commonsense to expect a party to make an Application
to confirm the default position (paragraph 51).
(12)
The use of the expression “legitimate expectation”, to describe the
reasonable expectations of the parties as to the expenses position in a case
which straddled 1 April 2009 was misleading, as such assumptions
cannot amount to a legitimate expectation in the sense “in which it is
understood in public law cases nor in the sense of the EU principle legitimate
expectations”. (paragraph 25)
(13)
Both parties have a reasonable expectation that the relevant procedural
rules, which for “current proceedings” are the 2009 Rules read with paragraph
7(3), will be applied and have the right to have them applied. Any expectation
of the parties that the discretion in paragraph 7(3) will be exercised in a
particular way must arise from the circumstances of the case and is not a separate
factor to be taken into account over and above those circumstances. It is not
the case that the discretion must be exercised in favour of the application of
Rule 10 because there is a reasonable expectation that it would be: the
reasonable expectation arises because of the way that the party is entitled to
expect that discretion to be exercised. (paragraph 53-56).
(14)
Delay beyond a reasonable time after 1 April 2009 is relevant to
the exercise of discretion. After a reasonable time has expired, “parties who
wait and see how the case develops before making an Application should not
ordinarily expect their application to succeed.” (paragraphs 66 & 68).
(15)
Delay is something that falls to be taken into account, and where it is
present, the reasonable expectation is that discretion will not be exercised to
disapply the default position. (paragraph 66).
20.
Warren J indicated that these various factors must all be weighed in the
balance and none is predominant. Each case must be considered on its own facts
and circumstances.
21.
The clear implication of the reasoning in Atlantic 2 is that it
was generally desirable for a party to make a prospective Application in
relation to costs rather than to wait until after the determination of the
appeal, and that should be done as soon as possible after 1 April 2009.
However, Sadler J in Sri states at paragraph 46 “I agree … that in
most cases the proper time for a party to apply for a costs order is when the
proceedings have been determined in its favour. I also agree with him that, in
most cases, the proper time for that party, if it has engaged in proceedings to
which paragraph 7 applies, to apply for a Direction under
paragraph 7(3) so that a costs order can be made, is when it can apply for
a costs order. Only at that point, when matters have been resolved, is the
Tribunal in a position to assess whether such a Direction is required, in all
the circumstances of the proceedings and their determination, to ensure that
those proceedings are dealt with fairly and justly.” As indicated, HMRC argue
that this decision is wrong and Atlantic 2 is to be preferred.
Of course, the Appellant relied on this case as authority for the proposition
that it was wholly appropriate to make the Application for expenses when they
did so and that a prospective Direction was not required.
22.
Neither party applied for a prospective Direction. It is very clear why
HMRC did not do so since, because the case could not be allocated as Complex
there was no potential exposure to costs for their part. It is equally clear
that the Appellant did not do so since they were unaware of the change in the expenses
regime. In Sri, one of the factors that the Upper Tribunal found
persuasive was that at all times the Appellant had made it explicit to HMRC
that they would seek costs, if successful. That was not the case in this
instance and the question of expenses only arose after the assessment had been
withdrawn. However, Atlantic 2, at paragraphs 41 and 66 (see paragraphs
19(6) and (14) above), when referring to an Application once proceedings had
been completed, does so in the context of a party waiting to see if they had
been successful and effectively deferring matters until then.
23.
Did the Appellant adopt a “wait and see” approach in regard to
expenses? It seemed clear from the history of the appeal, the correspondence
with HMRC on that point copied to the Tribunal and the submissions from the
Appellant that the Appellants were wholly unaware that the costs regime had
changed. The facts in this case are quite exceptional and very different to
the other cases cited where there were substantive proceedings. A significant
factor in this case is that the case was sisted for very long periods, both
before and after 1 April 2009, and that primarily at the request of HMRC. In
fact, in the five years and seven months from the Notice of Appeal to the
withdrawal of the appeal the case was only “live” for less than two months at
the outset and just over three months at the end of 2010. In the latter
three-month period, HMRC were required to lodge their Statement of Case, which
they did only days before requesting a further sist.
24.
Further, the appeal was withdrawn as soon as the assessment was
withdrawn. Mr Pate for HMRC very fairly confirmed that HMRC’s “hands had been
tied” and they had been unable to withdraw the assessment any earlier because
they needed confirmation of the views of their colleagues in Europe. This is
not a case where the outcome turned on the introduction of new evidence or
indeed a substantive hearing or negotiations. There were no negotiations
between January 2011 and January 2012. The proceedings moved at the very slow
pace they did as a result of matters over which neither party had any control.
25.
The amount of work and cost undertaken or incurred in the pre and post
1 April 2009 periods is an important factor to be weighed in the
balance. In this case it was not possible to establish exactly what the
position had been. On the one hand the Appellant argued that approximately 50%
of the costs had been incurred after 1 April 2009 but on the other
hand argued that, because of the repeated sists of the appeal, very little had
been done after that date. HMRC were not prepared to agree that the allocation
of costs or work was 50%. It was agreed that as a very rough guide the
invoices probably could be divided as to 50% for each period but HMRC submitted
that there was an overlap between the issues in the Tribunal and in the
European Court of First Instance so perhaps not all the invoices related to
these proceedings. The Tribunal finds that, insofar as these proceedings could
be called substantive, then, on the balance of probabilities, it may have been
approximately 50% before and 50% after 1 April 2009. Regardless of the
allocation of the invoices, both parties argued that this case straddled 1
April 2009 in a substantial way. That argument is accepted by the Tribunal in
the particular circumstances of this case.
26.
It was argued for the Appellant that because the appeal was lodged when
the 1986 Rules were in force, it had a legitimate expectation of
recovering its costs, were it to succeed in the appeal. HMRC referred to and
relied on paragraph 25 of Atlantic 2 (see paragraph 19(12)) above.
The Tribunal agrees that there can have been no legitimate expectation in the
sense in which it is understood in public law or in the sense of the EU
principle of legitimate expectations.
27.
However, as can be seen from paragraphs 19 (12-13) above, the Tribunal
must consider the reasonable expectations of the parties when exercising
discretion. HMRC’s position was very clear. They were aware of the change in
the expenses regime, that paragraph 7(3) could be invoked and that it was
possible to apply for a prospective Direction. In the absence of an Application
for a prospective Direction, their reasonable expectation would have been that
there would be no exposure to expenses in the event that they lost.
Undoubtedly, the Appellants would have commenced proceedings in the reasonable
expectation that they would be entitled to recover their expenses in the event
that they were successful. However, that changed with the abolition of the VAT
and Duties Tribunal. The Appellant was aware of the existence of the First-tier
Tribunal, no later than September 2010 when they applied to the Tribunal to
lift the sist. The Appellant argued that, because they had not been aware of
the nuances of the new regime, they had a legitimate expectation, in this
context, reasonable expectation, that expenses would follow success.
28.
Their further arguments were that HMRC should have issued guidance on
the change in the costs regime or that they were put at an unfair advantage
because they were or should have been aware of the new regime. The Tribunal is
not persuaded by those arguments. The Appellant was at all times
professionally represented. The Appellant was aware, or should have been
aware, that the VAT and Duties Tribunal had been abolished with effect from
1 April 2009. The Appellant applied to the First-tier Tribunal on
10 September 2010 for a lift of the sist. At that stage they were,
or should have been, aware of the new regime. As from 1 April 2009
the default position was that Rule 10 of the 2009 Rules governed this
appeal. Therefore, after that date, the assumption should have been that Rule 10
(and not Rule 29) would apply in the absence of a Direction from the
Tribunal. Any expectation or assumption that the costs shifting rules of
Rule 29 would apply should have ended on 1 April 2009. The
Appellant could have made an Application for a prospective Direction on
expenses when applying for the sist to be lifted. It did not. The fact that
the Appellant was under a misapprehension as to the expenses regime cannot be
relevant to this Tribunal. HMRC might reasonably have expected that in the absence
of an Application for a prospective Direction the default regime would apply.
29.
In the oral submission for the Appellant, reliance was placed on the
judgement in Test Claimants to support, in broad terms, the contention
that the Appellants legitimate (in this context reasonable) expectation that
expenses could be awarded should not be effectively retrospectively abridged
thereby penalising the Appellant, for example, by the imposition of a de
facto time limit. The reasoning behind that was that Atlantic 2
effectively imposed a de facto time limit because of the issues
identified in paragraph 19 above. Each case must be decided on its merits and
in particular its own circumstances. Although delay is undoubtedly a factor to
be weighed in the balance, it is just that ….a factor. It is clear from Atlantic
2 that no one factor can predominate and that there are no hard and fast
rules. Even if there is substantial delay, the import of that is that a
departure from the default regime is “more difficult to justify” (paragraph
50). Further the wording in regard to parties who wait and see how a case
proceeds is that their Application would not ordinarily be expected to succeed
(paragraph 68). Even in those cases it is anticipated that success is a
possibility. The Tribunal finds that there is not a de facto time
limit.
30.
The Appellant argued that the underlying substantive issues were complex
and if the case had commenced under the 2009 Rules then it would have been
categorised as Complex. HMRC’s stance on that was that they did not concede the
point but that they were not hostile to that approach. However, the fact is
that since the appeal did not commence under the 2009 Rules, it was not
categorised as Complex. In Hawkeye Communications Limited v HMRC [2010] UKFTT 636 (“Hawkeye”), a case in which Judge Berner referred to and
endorsed the rationale in Surestone, he stated at paragraph 6:
"Cases that were current proceedings remain without categorisation under
the 2009 Rules, unless a judge has made a specific direction in an individual
case." There was no direction in this case. Further, for the reasons set
out by Judge Berner at paragraph 10, with which this Tribunal agrees, a case
that commenced before 1 April 2009 cannot be categorised as Complex. Lastly as
is indicated above at paragraph 19(5), it is the nature of the case and not the
classification that is relevant. At the outset of this appeal, partly because
of the underlying complexity, the appeal was sisted. Evidently, given the
reasons for the delay in withdrawing the assessment, it was not a
straightforward matter. The Tribunal finds that the subject matter of this
appeal was certainly Complex.
31.
Whether or not the case would have been classed as Complex, had it been
initiated after 1 April 2009, and it may very well be that it would have been
so allocated, the issue is that it is impossible to say, even with the benefit
of hindsight, whether the Appellant would or would not have exercised the right
to opt out of the costs regime within the 28 day period from receiving notice
that the case had been allocated to the complex category (Rule 10(1)(c)(ii)).
The opt out would have had to have been exercised at a very early stage. Mr
Gibbon was asked about opt out and indicated that he had no instructions as to
what the Appellant’s stance on that might or would have been. In any event,
since they were unaware of the 2009 Rules, any expression of opinion on that
would necessarily have been with the benefit of hindsight. Therefore, although
the Appellant placed great stress on the argument that the case would have been
categorised as Complex and consequently would have fallen within the expenses
regime for the 2009 Rules, the uncertainty on the question of opt out is a
factor to be taken into account in the balancing exercise to be carried out in
order to determine whether or not the Tribunal should exercise discretion in
terms of paragraph 7(3).
32.
It has never been contended by either party that there had been any
explicit or implicit representation as to how expenses would be dealt with so
this case is distinguished from Sri on that point: in Sri (at
paragraph 48-49) it was found that there would be no prejudice to HMRC if a Direction
were granted since they had always known that, if successful, the Appellant would
seek costs.
33.
It is open to the Tribunal to make a Direction allocating different
expenses regimes to different periods if it considered that this would produce
a just and fair result (paragraph 19(7)). The Tribunal could make such a Direction
even if neither party argued for this approach. The Tribunal could not be
“compelled to accede to the parties’ wishes.” However, Warren J also indicated
that the alternative approaches should be considered and raised with the
parties, “if only to be rejected in light of the parties’ clearly expressed
wishes.” In correspondence between the parties, dated 23 April 2012,
produced to the Tribunal, the Appellant referred to Atlantic 2 and to
the possibility of “costs” being split between the two regimes and intimated to
HMRC, that they saw no reason for the costs to be split. HMRC’s position was
that there had been no Application to split expenses so it was unnecessary to
comment other than also to refer to Atlantic 2. The Tribunal did decide
to consider whether there should be an allocation between the two regimes since
there are considerable attractions in that approach as it would reflect the
reality of the two regimes. However, firstly, it was noted that neither party
deemed such a “split” Direction to be appropriate and, indeed, the Appellant
was very clear that it would be inappropriate. Secondly, since this case could
never have been allocated as Complex simply because the Appeal started before 1
April 2009, if there were to be an allocation to both regimes the Appellant
would effectively be prejudiced purely by the timing of the legislative change:
the whole function of paragraph 7(3) is to deal with such potential unfairness.
Accordingly, it was decided that the fair and just decision would be to impose
a single regime in this case.
34.
What then is that regime? In making the decision, the Tribunal has
conducted a balancing exercise in order to weigh the questions of fairness and
justice in all the circumstances of the case, including any prejudice or other
consequences for the parties of making, or refusing to make, an order, all as
identified in Hawkeye and Atlantic 2. As indicated, the
facts in this case are quite exceptional. The length of the proceedings per
se does not have a direct correlation to the work done or the expense incurred.
However, allowing for public holidays, the appeal was not sisted, and therefore
“live” for roughly the same length of time both before and after 1 April 2009.
35.
It is a matter of agreement that there is no time limit in paragraph 7(3),
however Atlantic 2 is certainly authority for the proposition
that delay is a material factor in deliberating whether or not to exercise
discretion. In most cases, a delay of almost three years would almost
certainly be fatal. The long periods of delay in this case were for reasons
which were outwith the control of either party. If matters had been clarified
in Europe earlier, the assessment would have been withdrawn and Application
made for costs much earlier. Effectively, in the unique circumstances of this
case, the appeal was dormant for a very long time. HMRC requested a further
sist days after lodging their Statement of Case, in a holiday period and before
the Appellant would have had the opportunity to consider same in detail. This
was not a case of the Appellant waiting to see which way the wind was blowing.
In August 2009 and February 2011 the Appellant asked HMRC to reconsider their
position following the release firstly, of Council Regulation 283/2009 relating
to Usha Martin Limited and secondly, the Judgement in HEKO
Industrieerzeugnisse GmbH which they considered to be on all fours with
this appeal. If anything, as proved to be the case, these bolstered their
perceived position. HMRC were unable to respond until January 2012 since they required
confirmation from their European colleagues.
36.
Of course, the Appellant could have made an Application for a
prospective Direction in September 2010, or indeed at any time, but did not do
so because of a lack of knowledge and that lack of knowledge is not something
with which this Tribunal can be concerned. The arguments for the Appellant to
the effect that there should have been guidance issued or latitude extended are
not accepted for the reasons set out in paragraphs 27 and 28 above. However,
the reality of the situation in this most unusual case is that after 1 April
2009, apart from approximately three months, which included the Christmas
period, the case was dormant whilst HMRC were awaiting clarification, which
clarification they were powerless to expedite. As soon as HMRC withdrew the
assessment, for reasons which have not been communicated formally to the
Appellant, but which related to clarification of OLAF’s views, the Appellant
immediately informally intimated an intention to seek expenses. Subsequently,
albeit, not with the appropriate statutory references, the Appellant formally
sought expenses timeously. In these circumstances, solely because of the facts
that the case was sisted for almost the entire period and because of the
reasons for those sists, the Tribunal finds that there was not an unreasonable
delay in seeking expenses.
37.
In summary, the default position can and should be displaced where to do
so ensures that the proceedings are fair and just. In this instance, for all
the reasons set out above, the Tribunal finds that (a) the proceedings
“straddled 1 April 2009 in a substantial manner, (b) it would not be fair to
allocate expenses between the regimes, and neither party seeks to have the
expenses, if any allocated, (c) the perceived delay in these proceedings was
not the fault of either party, (d) the reality is that the effective delay in
the particular circumstances of this case was only a matter of approximately
three months, so the justification for the delay is that the case was
effectively dormant for most of the time, (e) since the passage of time has
been largely discounted, it is not as material as it might be in other
circumstances. Looking to the totality of the evidence, and the unique factual
background, the Tribunal weighed the other factors described above, such as the
complexity, the fact that it was HMRC who requested most of the sists, that
apart from a prospective Application in regard to expenses which would not have
impacted on the proceedings themselves, that there was nothing the Appellant
(or indeed HMRC) could do to expedite matters. The status quo was
exactly as it had been at the outset. The Tribunal has decided that in order
to achieve fairness and justice, in the particular and unusual circumstances of
this case, the 1986 Rules should apply and that therefore the Appellant’s Application
should be granted.
38.
HMRC objected to the quantum of the claim for expenses inter alia
on the basis that it was not clear which elements were (a) truly agent and
client items, and (b) party and party items. Further, they averred that there
was an overlap between the issues in the Tribunal and in the European Court of
First Instance. Accordingly, they invoked Rule 29(1)(b) if the 1986 Rules
applied and sought that the expenses be taxed by the Auditor of the Court of
Session. Although the Appellant opposed that motion, the Tribunal finds that
the claim submitted is of a magnitude and complexity which makes it appropriate
to be remitted to the Auditor.
Conclusion
39.
The Appellant’s Application for a Direction that Rule 29 of the 1986
Rules be applied to these proceedings and consequently that Rule 10 of the 2009
Rules be disapplied, pursuant to paragraph 7(3), is granted.
40.
Accordingly, HMRC shall pay the Appellant’s expenses incidental to and
consequent upon this appeal, which expenses will be as taxed by the Auditor of
the Court of Session to whom the account of expenses for the Appellant is
remitted for taxation.
41.
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.
ANNE
SCOTT, LLB, NP
TRIBUNAL JUDGE
RELEASE DATE: 20 December 2012
