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Cite as: [2003] UKSC SPC00375, [2003] UKSC SPC375

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Lavery v HM Inspector of Taxes [2003] UKSC SPC00375 (31 July 2003)

COSTS - Appellant's appeal listed before General Commissioners in 1997 - Inland Revenue identified the Appellant's appeal as a lead case and requested that jurisdiction be transferred to the Special Commissioners - meanwhile appeals of other taxpayers heard by General Commissioners from which Inland Revenue appealed to the High Court - whether the Respondent behaved "wholly unreasonably" in connection with the hearing before the Special Commissioners - no - application dismissed - Special Commissioners (Jurisdiction and Procedure) Regulations 1994 SI 1994 No. 1811 Reg 21(1)

THE SPECIAL COMMISSIONERS

JOSEPH LAVERY

Appellant

- and -

IAIN MACLEOD

(HM INSPECTOR OF TAXES)

Respondent

SPECIAL COMMISSIONERS: DR A N BRICE

T H K EVERETT

Sitting in London on 14 May 2003

Mr G F Robertson, of Diss Accounting and Taxation Services (European ) Limited, for the Appellant

Ms A Markham of Counsel, instructed by the Solicitor of Inland Revenue, for the Respondent

© CROWN COPYRIGHT 2003

DECISION

The application

seq level0 \h \r0 seq level1 \h \r0 seq level2 \h \r0 seq level3 \h \r0 seq level4 \h \r0 seq level5 \h \r0 seq level6 \h \r0 seq level7 \h \r0 seq level0 \*arabic. On 21 June 2002 Mr Joseph Lavery (the Appellant) made an application for an order awarding the costs of the hearing of his appeal against Mr Iain MacLeod (the Respondent). The application stated that the amount of the costs claimed was £54,728.22 and that the amount of travelling expenses claimed was £1,622.00.

seq level0 \*arabic. The Appellant's appeal was heard on 8 and 9 December 1999 and our Decision allowing his appeal was released on 20 January 2000. It is reported at [2000] STC (SCD) 118. The issue in the appeal was whether a jack-up rig was a ship within the meaning of paragraph 3(2A) of Schedule 12 of the Income and Corporation Taxes Act 1988 (the 1988 Act) thus entitling the Appellant to a deduction for foreign earnings under section 193(1) of the same Act. In allowing the appeal we found that a jack-up rig was a ship for the purposes of the 1988 Act.

The legislation about costs

seq level0 \*arabic. The procedure before the Special Commissioners is governed by the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 SI 1994 No. 1811. Regulation 21(1) provides:

"21(1) ... a Tribunal may make an order awarding the costs of, or incidental to, the hearing of any proceedings by it against any party to those proceedings ... if it is of the opinion that the party has acted wholly unreasonably in connection with the hearing in question."

The issue

seq level0 \*arabic. Thus the issue for determination in the application was whether the Respondent had acted wholly unreasonably in connection with the hearing before us on 8 and 9 December 1999. (It was suggested to us that, if an award of costs were to be made, we should defer determination of the amount to a later date in the hope that the amount could be agreed between the parties.)

The evidence

seq level0 \*arabic. A bundle of documents was produced by the Appellant and another bundle was produced by the Respondent. Oral evidence was given on behalf of the Appellant by Mr G F Robertson, of Diss Accounting and Taxation Services (European) Limited (Diss); Mr Robertson also represented the Appellant at the hearing of the application. Oral evidence was given on behalf of the Respondent by Mr Michael Edgar Harmon. Mr Harmon qualified as an Inspector of Taxes in 1992 and in 1995 was transferred to the Personal Tax Technical Section as a Technical Adviser.

seq level0 \*arabic. The Appellant did not attend the hearing of the application but submitted a signed statement dated 24 April 2003. The Respondent argued that, as it was not possible to test this evidence orally, we should place no weight upon it. Regulation 17(6) provides that we may receive evidence of any fact notwithstanding that such evidence would be inadmissible in proceedings before a court of law and that we must not refuse to admit any evidence which would be admissible in such proceedings. However, regulation 17(4) provides that, in assessing the truth and weight of any evidence, we may take account of its nature and source and the manner in which it is given. We therefore admitted the statement of the Appellant but, in assessing the weight to be given to it, we bore in mind that the Appellant could not be questioned about it.

The facts

From the evidence before us we find the following facts relevant to this application.

In 1988, and again in 1991, the legislation about the foreign earnings deduction was amended to introduce less restrictive tests for persons who performed the duties of their employment on a ship. Thereafter the Inland Revenue received a number of claims for foreign earnings deduction from workers on drilling rigs. These claims were refused on the ground that a drilling rig was not a ship. When Mr Harmon took up his post as Technical Adviser in 1995 he reviewed a number of such appeals, including that of the Appellant.

At that time a number of appeals were proceeding separately to different Divisions of the General Commissioners and the majority of the decisions given were in favour of the taxpayers. The Inland Revenue could have appealed to the High Court against any of those decisions. However, none was considered suitable for such appeal either because of procedural defects or because the facts about the rigs were not thought to be typical. The Inland Revenue then formed the view that it would be desirable to identify a suitable lead case to be heard by the Special Commissioners.

In September 1996 the Appellant instructed Diss to claim foreign earnings deduction for periods during which he was employed on jack-up rigs. The claim was rejected and an assessment was issued on 27 January 1997. (It appears that no formal appeal against the assessment was lodged on behalf of the Appellant until 5 January 1998 and that the appeal was accepted on 13 January 1998. However, after January 1997 matters proceeded on the basis that the appeal had been lodged in time.) The hearing of the Appellant's appeal was arranged to take place on 21 October 1997 before the General Commissioners at Morpeth, Northumberland.

The General Commissioners

In July 1997 Mr Harmon identified the Appellant's appeal as a suitable lead case for hearing by the Special Commissioners. One reason was because the jack-up rig on which the Appellant worked had characteristics in common with many other such rigs. On 17 September 1997, and again on 16 October 1997, the Inland Revenue wrote to the General Commissioners seeking an adjournment of the hearing fixed for 21 October 1997 and proposing that the appeal be transferred to the Special Commissioners. The reasons for the transfer were said to be that: the issue for decision was one of law; the decision would have significant ramifications for a large number of taxpayers; and that the matter was complex and the hearing might last for two days. The letter of 16 October 1997 stated that the Appellant had been asked to apply jointly for the transfer but that, if no joint approach were possible, then the Inland Revenue would make the application alone. On 20 October 1997 the Inland Revenue wrote again to the General Commissioners to say that the Appellant had declined to make a joint application for the transfer.

At the hearing on 21 October 1997 the Respondent was represented by Mr Harmon, who applied for the appeal to be transferred to the Special Commissioners, and the Appellant was represented by Mr Robertson of Diss, who opposed the transfer. After hearing submissions the General Commissioners decided to transfer the appeal to the Special Commissioners. They were concerned that the appeal should be heard without delay and urged that the hearing be arranged at the first available opportunity and that the Inland Revenue should endeavour to get its case ready in less than six months.

There was some dispute about four matters concerning the hearing on 21 October 1997.

First, the Appellant, in his statement of 24 April 2003, claimed that the Inland Revenue told the General Commissioners that, if the Appellant won before the General Commissioners, then the Inland Revenue would appeal to the High Court, which would take time and involve the Appellant in the expense of legal representation. Mr Harmon, on the other hand, stated in evidence that he could not remember saying that to the General Commissioners but accepted that, if the Inland Revenue had lost, then it was likely that they would have sought advice about an appeal to the High Court. Having considered this disputed evidence we find that it was understood by all concerned on 21 October 1997 that, if the General Commissioners had heard the Appellant's appeal, and if the Inland Revenue had lost, then the Inland Revenue would most probably appeal against that decision to the High Court.

Turning to the second area of dispute, both the Appellant and Mr Robertson claimed that the Inland Revenue told the General Commissioners that the Special Commissioners would be able to hear the Appellant's appeal within six months. Mr Harmon denied that he had said this. We find that the General Commissioners did consider the issue of the speed with which the appeal could be heard by the Special Commissioners and expressed the hope that the Inland Revenue would get its case ready in less than six months.

The third area of dispute was that the Appellant claimed that Mr Harmon had said that one reason for the transfer of the appeal to the Special Commissioners was that the Special Commissioners would give a decision which would be a legal precedent for other cases. Mr Harmon told us in evidence that he knew that the decisions of the Special Commissioners do not establish binding precedents. In the absence of the Appellant we prefer the evidence of Mr Harmon.

Finally the Appellant claimed that both he and Mr Harmon agreed to accept the decision of the Special Commissioners and not to appeal from it to the High Court. Mr Harmon stated that he had never said that he would abide by any decision of the Special Commissioners and would not appeal it. Again, in the absence of the Appellant, we prefer the evidence of Mr Harmon and so we do not find that there was any agreement not to appeal against any decision of the Special Commissioners.

However, we do find that the Appellant did not want to have his appeal transferred to the Special Commissioners; he wanted to have his appeal heard by the General Commissioners because all he wanted was a decision in his own appeal; he did not want to be a lead case and he did not want to be involved with expensive legal and professional fees.

Nevertheless, on 29 January 1998 the Appellant did formally agree to join with the Inland Revenue to apply for the case to be transferred to the Special Commissioners and on 10 February 1998 the application to transfer was granted by the General Commissioners. Thereafter the Appellant's representatives were told that the Inland Revenue would be instructing counsel and appointing an expert.

On 23 April 1998 the appeal of Mr Perks for the year 1992/93 was heard by the General Commissioners at Norwich and his appeal was allowed. The Respondent Inspector of Taxes was Mr Clark. A case stated was requested by the Inland Revenue and sent to the High Court on 9 December 1998. On 17 November 1998 the appeal of Mr Perks for the year 1991/92 was heard by the General Commissioners at Norwich and the appeal was allowed. The Respondent in that appeal was Mr Iain Macleod, the Respondent in this application. A case stated was requested by the Inland Revenue and sent to the High Court on 15 July 1999. On 28 January 1999 the appeals of Mr Granger and Mr Newrick were heard by the General Commissioners at Great Yarmouth and their appeals were allowed. A cases stated was requested by the Inland Revenue and sent to the High Court on 23 June 1999.

The Special Commissioners

Meanwhile preparations were being made for the hearing of the Appellant's appeal by the Special Commissioners. In July 1998 the Appellant's then Counsel said that he did not consider that the appeal would be ready for hearing "for a number of months" and that the Appellant had not yet appointed an expert. On 30 September 1998 the Inland Revenue asked the Appellant whether he had an expert's report and if it might be possible to agree it. The Appellant forwarded a copy of his expert's report to the Inland Revenue on 15 January 1999. On 8 February 1999 the Inland Revenue wrote to the Appellant to say that they could not agree the report and would commission their own. On 19 February 1999 the Inland Revenue wrote further to the Appellant to give full details as to why they could not agree with the Appellant's expert's report. The Inland Revenue then appointed their own expert.

The dates for the hearing before us were fixed on 5 August 1999 and on 8 and 9 December 1999 we heard the appeal of the Appellant. The Appellant was represented by solicitors and Counsel. Our Decision was released on 20 January 2000 and the Inland Revenue appealed against that Decision to the High Court.

Shortly afterwards, the appeals by Mr Perks and Mr Newrick to the High Court were heard on 23 February 2000 and the Inland Revenue were successful. Judgment was given on 19 April 2000 and is reported as Clark v Perks and other appeals [2000] STC 428. In June 2001 Mr Perks' and Mr Newricks' appeals were heard by the Court of Appeal together with the appeal of Mr Granger. Judgment was given in favour of the

taxpayers on 27 July 2001 and is reported as Clark v Perks and other appeals [2001] STC 1254. In November 2001 it was known that there would be no further appeal from the judgment of the Court of Appeal. Thereafter the Inland Revenue withdrew their appeal against our Decision in favour of the Appellant and the Appellant prepared his application for costs which was submitted on 21 June 2002.

The evidence put in after the hearing

During the hearing of the application we asked Mr Harmon why he had proceeded with the appeal of the Appellant before us when the similar appeals of Mr Perks, Mr Newrick and Mr Granger were proceeding before the higher courts. On the day after the hearing the Inland Revenue asked for an opportunity to consider the papers relating to these other appeals and to put in further written evidence if necessary. We acceded to that request on the basis that any additional written evidence would be sent to the Appellant who would be given an opportunity to comment on it. Accordingly, on 29 May 2003 Mr Harmon submitted an additional witness statement and exhibit. These indicated that the Appellant had known about the other appeals in September 1999 but had not wished to request an adjournment of his hearing before us.

A copy of Mr Harmon's second witness statement and exhibit was sent to Mr Robertson, the Appellant's representative, who commented in writing on 18 June 2003 and said that he did not consider that a further hearing would be required. He stated that he did not know of the other appeals until "shortly before" the hearing on 8 and 9 December 1999. However, on 30 June 2003 the Inland Revenue submitted further comments disputing the assertion that Mr Robertson only became aware of the appeal in the case of Mr Perks one week before the appeal of the Appellant was heard by us and said that he became so aware no later than 30 September 1999. The Inland Revenue asked that, if we were minded to base our Decision on the date upon which the Appellant became aware of the appeal of Mr Perks to the High Court, the hearing should be re-listed for further evidence. Mr Robertson replied on 1 July 2003 saying that there was no evidence that he heard about the appeal of Mr Perks two months before the appeal of the Appellant was heard but in any event the issue was why the Inland Revenue had not informed him at the outset that they were taking the appeal of Mr Perks to the High Court and why they had not proposed that the Appellant's appeal should be deferred until the outcome of the appeal was known. He rejected the suggestion that the appeal be re-listed.

For the purposes of this Decision we do not have to decide when the Appellant was informed about the progress of the appeals of Mr Perks, Mr Newrick and Mr Granger. Suffice it to say that he was so informed before the hearing before us and did not ask us for a postponement of that hearing.

The arguments of the Appellant

For the Appellant Mr Robertson argued that the Inland Revenue had acted wholly unreasonably in connection with the hearing on 8 and 9 December 1999 because of their decision to treat the Appellant as a lead case. The Inland Revenue had forced the Appellant to have his appeal heard by the Special Commissioners when he had wanted it heard by the General Commissioners and the Appellant had had to incur the substantial extra expense of instructing solicitors and Counsel.

Mr Robertson referred to Article 6 of the Convention in Schedule l of the Human Rights Act 1998 and first argued that the Appellant had not had a fair hearing because there had been no equality of arms and because the Appellant had been put at a procedural disadvantage. Because the Inland Revenue had instructed Counsel in the hearing before the Special Commissioners the Appellant had had to have similar representation. Next, Mr Robertson argued that the Appellant had not had a hearing within a reasonable time; he had wanted his appeal heard in September 1996 but it was put not before the General Commissioners until October 1997. Thirdly, Mr Robertson argued that there had been bias because the Inland Revenue had treated the Appellant as a lead case for other workers and the Appellant's appeal was not treated on its own merits.

Finally Mr Robertson referred to paragraphs 10-16 of a document entitled "An Access to Justice Consultation Paper - Civil Procedure Rules About Costs - August 1997". Paragraph 10 stated the general principle that successful parties were entitled to their costs and he argued that the Appellant had been successful and so costs should follow the event. Paragraph 15 stated that the conduct of the parties which could be taken into account included whether the parties refused unreasonably to try any alternative dispute resolution procedures and whether a party was forced to use a procedure against his will. The Appellant had been forced to come to the Special Commissioners against his will. If the appeal had been heard by the General Commissioners then all the Appellant's costs relating to a subsequent appeal to the High Court would have been payable by the Inland Revenue, as had been the case for Mr Perks, Mr Granger and Mr Newrick. Mr Robertson referred to Antonelli v Allen and Another (2000) Times 8 December and relied upon Scott and Another (trading as Farthings Steak House v McDonald [1996] STC (SCD) 381 at page 388.

The arguments for the Respondent

Ms Markham argued that the Respondent had not acted "wholly unreasonably" and that the conduct complained of did not occur "in connection with the hearing". The conduct complained of by the Appellant was that which took place at the hearing before the General Commissioners in October 1997. The Respondent disputed the allegations of the Appellant about that conduct but, in any event, the conduct was not "in connection with the hearing" before the Special Commissioners. Ms Markham relied upon Gamble v Rowe (1998) 71 TC 190 at 191 for the principle that "in connection with the hearing" meant either at, or in the preparation for, the hearing and not in any earlier stages. She cited Salt v Young [1999] STC (SCD) 249 at 250a where a party had been unreasonable but not "wholly unreasonable" and where the unreasonableness was only connected with the hearing to a minor extent. She also referred to Self-assessed v Inspector of Taxes (No 2) [2000] STC (SCD) 47 and relied upon Homeowners Friendly Society Limited v Barrett [1995] STC (SCD) 90 for the principle that the Inland Revenue were entitled to run test cases even if they had little confidence in the prospects of success.

Ms Markham also argued that the Appellant had received a fair trial before the Special Commissioners at which he had been represented by Counsel. The Human Rights Act 1998 came into force in October 2000 and so could not apply to the hearing before the General Commissioners in October 1997. In any event she relied upon Ferrazini v Italy [2001] STC 1314 for the principle that the Convention did not apply to tax disputes. In particular, she refuted the allegation that the Inland Revenue had contributed to the delay in the hearing of the appeal before the Special Commissioners.

Finally, Ms Markham argued that the Civil Procedure Rules did not apply to the proceedings before the Special Commissioners which were governed by the 1994 Regulations.

Reasons for decision

In considering the arguments of the parties we start with the words of Regulation 21(1) and ask whether the Inland Revenue "acted wholly unreasonably in connection with the hearing", the relevant hearing being the hearing before us on 8 and 9 December 1999. Of the authorities cited to us we have been most assisted by Gamble v Rowe where Park J said at 202C:

"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."

We cannot therefore look at the proceedings before the General Commissioners in 1997. We must consider only the preparation for the hearing before us. Here there are two questions which could be relevant. First, whether there was "wholly unreasonable" delay on the part of the Inland Revenue which delay was "connected with the hearing". Secondly, whether the insistence of the Inland Revenue that the Appellant's appeal be transferred to the Special Commissioners while at the same time pursuing the appeals of Mr Perks, Mr Newrick and Mr Granger from the General Commissioners to the High Court, and failing to inform the Appellant of the progress of these appeals, was "conduct which was wholly unreasonable in connection with the hearing" (being the hearing before us on 8 and 9 December 1999).

Turning first to the question of delay, the facts we have found are that the appeal was transferred to the Special Commissioners in February 1998; in July 1998 the Appellant's then Counsel said that he did not consider that the appeal would be ready for hearing for a number of months and that the Appellant had not yet instructed an expert; on 30 September 1998 the Inland Revenue asked the Appellant whether he had an expert's report and if it might be possible to agree it; the Appellant forwarded a copy of his expert's report to the Inland Revenue on 15 January 1999; on 8 February 1999 the Inland Revenue wrote to the Appellant to say that they could not agree the report and would commission their own; and on 19 February 1999 the Inland Revenue wrote further to the Appellant to give full details as to why they could not agree with the Appellant's expert's report. The Inland Revenue then appointed their own expert and the dates of the hearing were fixed in August 1999.

In the light of these facts we find that the delay between the transfer of jurisdiction in February 1998, and the hearing in December 1999, was due as much to the Appellant as to the Inland Revenue. The facts about the delay do not support the conclusion that, in all the circumstances, the Inland Revenue acted wholly unreasonably in connection with the hearing on 8 and 9 December 1999. Neither do the facts support the conclusion that the Appellant did not have a fair hearing within a reasonable time.

Turning to the matter of the inter-action of this appeal with the appeals of Mr Perks, Mr Newrick and Mr Granger, Mr Harmon told us in evidence that he knew that a decision of the Special Commissioners did not create a binding precedent but he said that he wanted a lead case heard by the Special Commissioners so that all the facts would be found, expert evidence could be adduced, and the law could be considered.

The facts make it clear that in October 1997, when the Appellant's appeal was transferred to the Special Commissioners, there had been other successful appeals before the General Commissioners but no appeals to the High Court. As a decision of the Special Commissioners does not establish a binding precedent for other appeals we find it difficult to understand why the Inland Revenue wanted the Appellant's appeal to be heard by the Special Commissioners rather than by the General Commissioners at first instance, followed by an appeal to the High Court. If the appeal of the Appellant had been heard by the General Commissioners, and then appealed to the High Court (as was the case with Mr Perks, Mr Newrick and Mr Granger) the Appellant would automatically have been entitled to his costs from the date of the decision of the General Commissioners. In addition, the appeal would have been heard at a much earlier date and the decision of the High Court would have established a binding precedent.

After the transfer of the Appellant's appeal, the two appeals of Mr Perks were heard by the General Commissioners in April and November 1998 and were allowed. The Inland Revenue then appealed these decisions to the High Court. Similarly, the appeals of Mr Newrick and Mr Granger were heard by the General Commissioners on 28 January 1999 and allowed. The Inland Revenue appealed these decisions to the High Court. Thus these appeals would have been in progress while the appeal of the Appellant was being prepared for the Special Commissioners. We consider that the Inland Revenue should have told the Appellant at an early stage (and before September 1999) that these other appeals were proceeding to the High Court

Also, the Inland Revenue should have considered whether to ask for a postponement of the hearing of the Appellant's appeal before us pending the outcome of the decision of the High Court and/or the Court of Appeal in the other appeals. This could have saved the Appellant the expenses of solicitors, counsel and an expert if he had agreed with the postponement. He may of course have preferred to proceed before us.

Although we have expressed our views about the inter-action of the progress of the Appellant's appeal with the other appeals, what we have to decide is whether the conduct was wholly unreasonable "in connection with the hearing" before us. We conclude that it was not. The conduct was in connection with the general conduct of all the relevant appeals taken as a whole.

Turning to the other arguments put forward by Mr Robertson we find that the Appellant did have a fair hearing on 8 and 9 December 1999 at which he was represented by solicitors and Counsel. The Civil Procedure Rules do not apply to proceedings before the Special Commissioners. We are governed by the 1994 Regulations and, in particular, the words of Regulation 21(1).

Decision

Our decision on the issue for determination in the application is that the Respondent did not act wholly unreasonably in connection with the hearing within the meaning of Regulation 21(1).

The application is, therefore, dismissed.

It is always open to the Appellant to pursue his arguments with the Revenue Adjudicator if he so desires.

DR A N BRICE

T H K EVERETT

SPECIAL COMMISSIONERS

RELEASE DATE:

_{SC 3013/98}

_21.07.03