United Kingdom Special Commissioners of Income Tax Decisions

SPC00468

COSTS – Basis for award – Indemnity costs – Whether Special Commissioners have power to award costs on the indemnity basis – Yes – Whether costs should be awarded on the indemnity basis – Yes – Special Commissioners (Jurisdiction and Procedure) Regulations 1994, SI 1994/1811, reg 21(1)

THE SPECIAL COMMISSIONERS

R K CARVILL Appellant

- and -

K FROST

(HM INSPECTOR OF TAXES) Respondent

(No.2)

Special Commissioners: STEPHEN OLIVER QC

EDWARD SADLER

Sitting in Chambers on 9 March 2005

© CROWN COPYRIGHT 2005


 


FURTHER DECISION

1. We heard Mr R K Carvill's application for costs and on 29 November 2004 released our decision ("the Costs Decision") with an order that the application for costs be allowed of an amount to be agreed. The direction provided that the matter should be referred to us for further directions if the amount could not be agreed. The matter has been referred back to us on paper for further directions on two points. First, we are asked to direct that the award of costs covers an application made to the Special Commissioners on 8 October 2004 for disclosure, and second Mr Carvill asked that our order should award the costs on an indemnity basis.

The Application heard on 8 October 2004

2. The 8 October 2004 application was made by Mr Carvill, who sought and obtained an order requiring the Inland Revenue to disclose certain documents referred to by Mr Middleton in his witness statement on the strength of which Mr Middleton had based his opinion that careful judgment had been exercised by the inspector concerned before raising the Early Years Schedule E assessments. We refer to paragraph 64 of the Costs Decision. We confirm that the order at the conclusion of the Costs Decision covered the costs of that application. They were costs of, or incidental to, the hearing within regulation 21(1) of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994.

Indemnity costs

3. Regulation 21(1) empowers the Tribunal "to 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".
4. The Inland Revenue resist Mr Carvill's application for costs on the indemnity basis. They say that regulation 21(1) gives the Special Commissioners no power to specify any particular basis for the assessment of costs. And, even if the Special Commissioners had power to order costs on the indemnity basis, they should not do so in this particular case. Indemnity costs are, they say, penal in nature and there is no justification for penalizing the Inland Revenue in the present circumstances. Alternatively, if the Special Commissioners were to decide to award costs on the indemnity basis, they should qualify the order by imposing on Mr Carvill the burden of justifying and explaining the reasonableness of those costs, as was done by Lightman J in Westminster City Council v Porter [2003] EWHC 2373.
5. As we read regulation 21 there is nothing that excludes the Tribunal from determining the basis for the assessment of costs. Regulation 21(1) simply empowers the Tribunal to make an award of costs. Both bases for awarding costs (that is, the standard basis and the indemnity basis) have been recognized throughout the court system for as long as regulation 21 has been in force. It seems to us that the matter has been left to the discretion of the Tribunal (such discretion to be exercised in accordance with the relevant case law). That would be the normal and natural presumption where a costs jurisdiction is conferred without elaboration. If the converse were the case (that is, if there had been the intention to fetter that discretion by restricting the basis of the award the Tribunal could make) one would expect to find express provision to that effect in regulation 21.
6. In reaching this conclusion we have taken into account the points raised by the Inland Revenue for restricting our power to an award of costs on the standard basis. The Inland Revenue refer to rule 29(1)(b) of the VAT Tribunal Rules 1986 and to rule 21(3)(b) of the Financial Services and Markets Tribunal Rules 2001. These expressly provide for the Tribunal to award costs "on such basis as it shall specify". This, they say, indicates that regulation 21 should be read as if the word "costs" means "costs on the standard basis". They also point out that the word "costs" under the Civil Procedure Rules has that meaning whenever the qualification is expressed : see CPR 44.4(b) which in substance repeats provisions that were in force (under the Rules of the Supreme Court 1965) in 1994 when the present regulations were made (see RSC Order 62r 12(3)). We see no reliable comparison with rule 29 of the VAT Tribunal Rules which has a completely different structure and enables the Tribunal to award costs on a High Court basis; the draftsman of regulation 21 clearly did not follow any part of rule 29 when formulating the scope of the Special Commissioners' costs jurisdiction. Nor could the draftsman of regulation 21 have followed the equivalent provision of the Financial Services and Markets Tribunal Rules, which were not in force when regulation 21 was being drafted.
7. Here, regulation 21 gives the Special Commissioners power to make the order awarding costs without any other qualification than that the Tribunal shall be of the opinion that the party has acted wholly unreasonably in connection with the hearing in question. We can infer no further qualification from CPR 44.4(b). That provision has nothing to do with the exercise by the Court of its power to award costs; it is there to cover the case where the Court has already exercised that power but has failed to specify the basis on which the costs are to be assessed or has made an order on a basis other than the standard basis or the indemnity basis. In those cases costs are to be assessed on the standard basis. Here, however, we are concerned with the exercise of our power to award costs.
8. The Inland Revenue also argue that paragraphs (3) and (4) of regulation 21 (which provide that costs which cannot be agreed should be taxed in the county court) imply some restraint on the Tribunal's discretion as to the basis on which an award of costs is made, since one would otherwise expect that there would be express provision enabling the Tribunal to specify the basis of the award which is to be taxed. We do not agree: the question of the taxation of costs follows once the basis on which the costs are awarded has been directed and then only if the parties, seeking to apply that basis, cannot agree how it should be applied to the circumstances of the costs claimed. Therefore the issue of referring the taxation of costs to the county court does not, expressly or impliedly, limit the scope of the Tribunal's discretion.
9. There being nothing to disqualify us from ordering costs on an indemnity basis, we turn now to the question whether, in the circumstances of the present case we should, as Mr Carvill asks, order that costs be awarded on that basis.
10. We start with the approach predicated by May LJ to the question of indemnity costs for unreasonable conduct in Reid Minty v Taylor [2002] 1 WLR 2800 at 2807, paragraph 28, where he said:

"As the very word "standard" implies, this will be the normal basis of assessment where the circumstances do not justify an award on an indemnity basis. If costs are awarded on an indemnity basis, in many cases there will be some implicit expression of disapproval of the way in which the litigation has been conducted, but I do not think this will necessarily be so in every case. What is, however, relevant to the present appeal is that litigation can readily be conducted in a way which is unreasonable and which justifies an award of costs on an indemnity basis, where the conduct could not properly be regarded as lacking moral probity or deserving moral condemnation."

Brown LJ (as he then was) in Kiam v M G N Ltd (No.2) [2002] 1 WLR 2810 cited that passage from May LJ's decision in answering the question whether it was right that indemnity costs should only be awarded if there had been some sort of moral lack of probity or conduct deserving of moral condemnation on the part of the paying party. In paragraph 12 of his judgment he said of the Reid Minty decision that he understood the Court there to have been deciding –

"… no more than that conduct, albeit falling short of misconduct deserving of moral condemnation, can be so unreasonable as to justify an order for indemnity costs. With that I respectfully agree. To my mind, however, such conduct would need to be unreasonable to a high degree; unreasonable in this context certainly does not mean merely wrong or misguided in hindsight. An indemnity costs order … does, I think, carry at least some stigma. It is of its nature penal rather than exhortatory. …"

11. From those passages it is clear to us that the key consideration is the reasonableness or otherwise of the party's conduct. The party's conduct must be unreasonable, but with the further characteristic that it is unreasonable to an extent or in a manner that it earns some implicit expression of disapproval or some stigma.
12. In the Costs Decision we were concerned with the question whether the Inland Revenue had acted wholly unreasonably in connection with the hearing. Paragraph 48 of the Costs Decision contains a short summary of the points explained in greater detail in the later part of the decision. Essentially our reason for deciding that the Inland Revenue's conduct had been wholly unreasonable came down to the fact that the decision taken on 18 December 2003 not to resist the appeals could and should have been taken nearly four years earlier: see the concluding words of paragraph 48. The points made in the succeeding paragraphs were, in some cases expressly and in others by implication, so critical of the conduct of the Inland Revenue as to "stigmatise" it; and the factors identified in those paragraphs led us to the conclusion that the Inland Revenue had acted wholly unreasonably in relation to the hearing for the purposes of rule 21.
13. The Inland Revenue contend that it does not follow from the making of the costs order under regulation 21 that any costs so awarded should be assessed on an indemnity basis. Indeed, they say, were that to be the position, every costs order ever made by the Special Commissioners would necessarily result in an order for assessment on an indemnity basis. That may be so as a matter of fact. But as a matter of law our approach to the question of whether to award costs on an indemnity basis must be grounded on the case law of the courts and, as has been the case here, in the light of the guidelines given recently by the Court of Appeal. Having said that, we point out that the "wholly unreasonably" test in rule 21 is high. In Gamble v Rose [1998] STC 1247 at 1257g, Park J observed that it "will be a very rare case where a Tribunal can say that a party has acted wholly unreasonably"; and he went on to say that the "party must act wholly unreasonably – a very exacting standard". In the very rare cases where a party has acted wholly unreasonably, and so become liable to costs under regulation 21(1), it will be no cause for surprise if his conduct has been "unreasonable to a high degree" in the sense contemplated by Brown LJ in paragraph 12 of the Kiam decision supra.
14. We are, however, concerned with this particular case, and in all the circumstances of this case we are satisfied that the Inland Revenue's conduct was unreasonable to a sufficiently high degree to require us to make the costs award on the indemnity basis.
15. The Inland Revenue stressed that our order should not have the effect of penalizing them with disproportionate costs or costs of doubtful reasonableness. They based their concern on evidence obtained in the course of an interlocutory application for disclosure made to Jacob J in the High Court (in the course of an unsuccessful judicial review claim brought by Mr Carvill against the Inland Revenue). There Jacob J had, say the Revenue, been very critical of the level of costs incurred and the value for money achieved by that expenditure. The point arose in the course of a short exchange at the end of the hearing. Words of the exchange are set out in the transcript. Here we are not concerned with details of the costs assessment. The only issue for us is the basis on which such assessment should be made. If the Inland Revenue are concerned that Mr Carvill and his advisers are predisposed to incurring costs unreasonably or in an unreasonable amount, they will have the opportunity of proving this on a detailed assessment. We do not, however, consider that this is an occasion on which we should make a ruling similar to that given by Lightman J in the Westminster City Council v Porter case referred to earlier in this decision.
16. We direct therefore that Mr Carvill's application for costs on the indemnity basis, covering all expenses incurred since March 2000 (including the costs of making submissions since the release of the Costs Decision) be allowed. By agreement it is directed that (to use the parties' words) the scale be specified as "the Multi Track".

STEPHEN OLIVER QC

EDWARD SADLER

SPECIAL COMMISSIONERS

Release Date: 23 March 2005

SC 3131/2000