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Cite as: [2004] UKSC SPC00436, [2004] UKSC SPC436

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Conlon V HM Inspector of Taxes [2004] UKSC SPC00436 (25 October 2004)

SPC00436

Taxes Management Act 1970, s.56C – Special Commissioners (Jurisdiction & Procedure) Regulations 1994 (S.I. 1994 No.1811) para. 21(2) – Costs of hearing – "acted wholly unreasonably in connection with the hearing in question

THE SPECIAL COMMISSIONERS

JOSEPH P CONLON Appellant

- and -

MRS J HEWITT

(HM INSPECTOR OF TAXES) Respondent

Special Commissioner: B M F O'BRIEN

Sitting in Belfast on 4 October 2004

J Quinn for the Appellant

B G Murray HM Inspector of Taxes, for the Respondent

© CROWN COPYRIGHT 2004

DECISION

On 4 October 2004, in Belfast, I heard Mr Conlon's application for costs against the Inland Revenue in connection with the hearing of appeals which had come before me in November 2003. As I will explain, I adjourned that hearing part heard; and the substantive issues were subsequently determined by agreement between the parties. More or less immediately after that, Mr Conlon's accountant, Mr Quinn, raised the question of costs.

Before addressing that question, it is necessary that I summarise the course of the enquiry into Mr Conlon's affairs, which led to the appeal hearing.

The tax years involved were 1997/98 and 1998/99; but the appealed assessment for the earlier year was based on figures derived from the 1998/99 enquiry and it played no independent part in the proceedings.

Mr Conlon is a bricklayer by trade. When working, he works as a subcontractor; and the contractor for whom he works gives him a certificate (SC60) setting out his earnings, and the income tax deducted therefrom. (This tax, unlike PAYE tax, is deducted at the full basic rate, and a claim for repayment is usually in order in respect of allowances.)

On 9 January 2000 Mr Conlon delivered Income Tax Returns for 1997/98 and 1998/99. These showed that he was wholly unemployed during the earlier year and employed only between 18 June 1998 and 20 December 1998 during the second. He delivered a single SC60 covering that period of employment.

On 22 September 2000 the Inspector gave Mr Conlon Notice of enquiry into the 1998/99 Return, and a very important interview took place on 10 October 2000. At that meeting a so called 'means test' was drawn up – a schedule itemising all items of expenditure, together with all income items. The expenditure figures, totalling £31,428, were estimates provided by Mr Conlon, and they included three items of a non-recurring nature (mostly home improvements) amounting to £6,900. The available family income – Mr Conlon's subcontracting earnings, his wife's earnings as a full-time nurse (which I have adjusted to accord with the figure known to the Inspector) and family allowance – amounted to £17,645 only.

At that first interview the Inspector also learned of a further potential resource. Mrs Conlon's father had died in August 1998 and in December 1998 Mrs Conlon received the major part of what I presume was the residue, or a share of the residue, of his estate. At the meeting Mr Conlon thought the sum was £12,000-£14,000 : in fact it turned out to have been £15,841. However, it was not suggested that Mr Conlon's inheritance was resorted to to meet any of the household expenditure other than the three exceptional items and the Inspector pointed out to Mr Conlon that there appeared to be a substantial deficiency of income even if the exceptional items of expenditure were omitted.

A second interview took place on 25 January 2001 after Mr Conlon had had an opportunity of considering his original expenditure estimates with his wife. (That exercise merely increased the total slightly). This interview did not advance matters significantly; but Mr Conlon told the Inspector that the home improvements, which had been carried out over a fairly lengthy period, were completed in December 1998. That fact suggested to the Inspector that Mrs Conlon's inheritance might not have been available to meet the cost of that work.

During 2001 Mr Quinn unearthed further SC60s for 1998/99 – although Mr Conlon had, at the interviews, clearly denied having done any paid work outside the June – December period in that year – thereby increasing the income resources by some £1200. This went very little way towards eliminating the apparent deficit in resources, and on 6 November 2001 the Inspector issued a Notice of Closure (of the enquiry into the Return for 1998/99) amending Mr Conlon's income figure of £5617 to £14517. At the same time, the Inspector informed Mr Quinn that she would also be making an assessment for the previous year. If the figures provided by Mr Conlon for the original 'means test' were anything like correct, there was an apparent shortage of resources in 1997/98 also, bearing in mind in particular that in that year Mr Conlon had no income of his own. That assessment was made on 20 November 2001.

The Notice of Closure and the assessment were duly appealed, the former on the ground that the "basis used is flawed" and the latter on the ground that it was raised on the basis of the conclusions concerning the 1998/99 uplift. At the same time, Mr Quinn made points about two of the items on the expenditure side of the 'means test', which the Inspector accepted in a new edition of the test. The deficit problem was still not solved.

At some date during the run-up to the hearing of the appeals, Mr Quinn presented the Inspector with a substantially revised edition of the 'means test', reducing Mr Conlon's original expenditure total (for 1998/99) of £31,428 to £25,052, of which the three non-recurring items accounted for £8400. On those figures, assuming that Mrs Conlon had paid for the non-recurring items out of her inheritance, the year's expenditure was less than the known joint family income; and no amendment of Mr Conlon's Return was called for, beyond adding the amounts of the lately-discovered SC60s (giving rise to no additional tax liability). Indeed, it would not have been necessary for the inheritance to have been resorted to for all the non-recurring expenditure.

The Inspector accepted Mr Quinn's new figures. As a result, the only issue of substance left for my decision for 1998/99 was the question of the funding of the non-recurring items. The acceptance of the new figures fundamentally undermined the 1997/98 assessment (which explains why it was hardly mentioned at the hearing last November).

At the hearing evidence was given by Mr Conlon, but much more important was that of Mrs Conlon. She testified that the non-recurring items had been paid for by herself out of the money received in December 1998 from her father's estate, and that the payments had been made early in 1999. There was no documentary evidence before me to corroborate that evidence. In particular, the Inspector had never been offered a sight of Mrs Conlon's personal savings account (where the inherited money had been placed on receipt) and I was somewhat reluctant to come to a firm conclusion on the critical issue without any attempt being made to satisfy me at least that the relevant bank statement or statements did not show a picture inconsistent with Mrs Conlon's evidence. Mrs Conlon agreed to obtain copies of such statements covering the period from December 1998 to Easter 1999 (approximately) and to give them to the Inspector. On that basis, I adjourned the hearing to the end of February 2004. It appears that the Inspector was sufficiently satisfied by what he saw to settle the appeals for both years by agreement under s.54, Taxes Management Act 1970, effectively in Mr Conlon's favour, and the hearing before me was accordingly never resumed.

I now turn to the separate issue of costs, actually before me. The jurisdiction is to be found in para.21(2) of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 (S.I. 1994 No.1811):

"… 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 first question, is this: how wide a meaning is to be given to the expression ".. in connection with the hearing …"? It seems to me that those words mirror the limitation on the quantum of awardable costs to costs "of, or incidental to, the hearing", so that just as costs attributable to the preceding investigation, as such, are not awardable, so action (or inaction) during the investigation period would not normally be "connected with" the hearing. In short, the provision is primarily aimed at conduct which has caused the awardable hearing costs to be greater than they should have been.

Mr Quinn contended for a wider interpretation, that the course of the investigation was relevantly connected with the hearing. He cited in support a decision of a Special Commissioner in Farthings' Steak House v MacDonald SPC91, in which undoubtedly it was the investigation which went wrong. In that case the Commissioner accepted evidence indicating that the investigation had been inspired by the Inspector's desire to get his own back on the taxpayers' accountant. The bad faith infected the whole process. But for it, there might have been no hearing at all. I regard that case as very special on its facts, and I see no parallel with the present one.

Even if I am wrong about that, I do not find that the Inspector acted unreasonably (let alone "wholly" unreasonably) in the course of the investigation. Mr Quinn made the following points in connection with that, as follows:

The whole process took an inordinate length of time, from September 2000 to January 2004. I agree that that is a long time for a relatively straightforward case. However, the matter would have been brought to a head much sooner by a hearing of the appeals by the General Commissioners – perhaps as early as the summer of 2002. The subsequent delay was largely caused by the transfer of jurisdiction to the Special Commissioners, at Mr Quinn's request.

The original 'means test' on which the whole investigation was based, was "flawed". It is perfectly true that the Inspector eventually accepted that the original expenditure figures were seriously exaggerated: but they were provided by Mr Conlon himself (and had been effectively confirmed by him a little later).

Mr Quinn contended that the Inspector ignored the letter from the solicitors dealing with Mrs Conlon's father's estate, setting out the dates and amounts of the payments made to Mrs Conlon. From what I have said above about the first interview with Mr Conlon in October 2000, that contention was factually incorrect. The inheritance was, however, of relevance only to the question of the funding of the exceptional items: it did not explain how the apparent ordinary family expenditure had been met. (That came much later with Mr Quinn's revised 'means test' figures). The actual relevance of the inheritance was a bone fide issue right up to the end, bearing in mind that the bulk (at least) of the expenditure on the exceptional items was incurred before Mrs Conlon received the money, coupled with the absence of any independent evidence as to when the items were actually paid for.

Finally, Mr Quinn draws attention to the fact that the original 'means test' (and subsequent editions of it prepared by the Inspector) set down Mrs Conlon's 1998/99 income at £12,000, whereas the Inspector knew that it was £12,558. This is a very slender point. In June 2003, in response to Mr Quinn's suggestion that Mrs Conlon's income had been even greater, the Inspector explained that the £12,000 figure had been Mr Conlon's estimate but that the actual figure would be supplied if Mrs Conlon agreed to the disclosure.

In fine, Mr Quinn has not succeeded in satisfying me that this is a proper case for the exercise of the Tribunal's discretion to award costs against the Revenue. I am not of the opinion that the Inspector acted wholly unreasonably in connection with the hearing itself, or at all in this matter. The application must accordingly be refused.

B M F O'BRIEN

SPECIAL COMMISSIONER

Release Date: 25 October 2004

SC 3038/2003