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Cite as: [2006] UKSPC SPC00558, [2006] UKSPC SPC558

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Kidney & Ors v Revenue & Customs [2006] UKSPC SPC00558 (18 July 2006)

SPC00558

COSTS – Appellants successful with their Appeal – subsequent application for costs in connection with the Appeal hearing –the Respondents did not act wholly unreasonably in connection with the Appeal – Application for costs dismissed – Regulation 21(1) of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994

SPECIAL COMMISSIONERS

EDWARD KIDNEY, ALONSO VELA CASTRO

AND NATALIE LUCIBELLO Appellants

- and -

HER MAJESTY'S REVENUE and CUSTOMS Respondents

Special Commissioner: MICHAEL TILDESLEY OBE

Application dealt with on written representations

Carol Fraser, Counsel employed by CLB LittleJohn Frazer, Chartered Accountants for the Appellants

Dr Margaret Carey on behalf of the Acting Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The Application

The Appellant applied for an order of costs (in whole or in part) in connection with their Appeal against the Respondents' refusal to allow roll-over relief under section 152 of the Taxation of Chargeable Gains Act 1992 in respect of chargeable gains arising from the Appellant's sale of their franchised restaurants to Pizza Express Restaurants.

The Appeal was heard on 5, 6, 7 and 9 December 2005. The Appeal was allowed and the decision (SPC 00524) was released on 3 March 2006.

The decision recorded the following direction:

"If any of the parties wishes to make application for costs, he made do so provided he makes a written application setting out clearly the amount claimed and the reasons why Regulation 21(1) applies supported by authorities where necessary and served on the other party within one month from release of the decision. The other party will have a right of response within one month of receipt of the application. The Applicant will a have a right of reply restricted to the points made in the response by the other party. The Applicant will serve a consolidated bundle of the Application and responses together with any authorities cited on the Office of the Special Commissioners within three months from release of the decision. If no application is received within the stipulated period I will formally determine that there has been no application for costs. If an Application is received supported by the consolidated bundle I will determine the Application for costs without a hearing unless I direct otherwise or one of the parties applies for a hearing".

I also stated in the decision that my power to award costs in Special Commissioner hearings was restricted to those circumstances set out in Regulation 21(1) of the Special Commissioners Regulations 1994. Further, Regulation 21(1) did not incorporate the general rule that costs follow the event.

On 2 June 2006 Appellant's counsel submitted the consolidated bundle in connection with the costs' application to the Office of the Special Commissioners.

Neither party requested an oral hearing to determine the Application.

After receipt of the consolidated bundle the Office of Special Commissioners informed the parties that I would determine the Application on the written representations.

The Law

Regulation 21(1) of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 provides the power for ordering costs arising from hearings before the Special Commissioner. The regulation states that

"Subject to paragraph 2 below, 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 (including a party who has withdrawn his appeal or application) if it is of the opinion that the party has acted wholly unreasonably in connection with the hearing in question".

Regulation 21(2) prohibits an order from being made against a party without first giving that party an opportunity of making representations against the making of the order.

The discretion to award costs under Regulation 21(1) of the 1994 Regulations is very restrictive, as Park J observed in Gamble v Rowe(Inspector of Taxes) [1998] STC at page 1256:

"The relevant provision in the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 is very restrictive as to the circumstances in which a costs order can be made by the Commissioners against the Revenue. A costs order can be made only if the Commissioners are of the opinion that the party has acted wholly unreasonably in connection with the hearing in question.

There are two particular restrictive aspects of the wording to which I should draw attention. The first is that the party concerned must act "wholly" unreasonably. It is not enough to be able to say that from time to time there has been unreasonableness. The party must act wholly unreasonably – a very exacting standard. The second point is that the party must act wholly unreasonably in connection with the hearing in question. 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".

A decision of the Special Commissioners in Carvill v Frost [2005] STC (SCD) 209 emphasised that the Special Commissioner's jurisdiction covered only such costs as were incurred while the matter was before the Special Commissioner and the matter was being heard or prepared for a hearing. The Commissioner's jurisdiction did not extend to those costs expended prior to the Appeal or incurred in the earlier stages of the Appeal process when an Officer of the Customs and Revenue Board was dealing with it.

The Application

The Appellants submitted four grounds in support of their contention that the Respondents acted wholly unreasonably in relation to the Appeal.

First Ground: Delay

The Appellants contended that the Respondents engaged in persistent delaying tactics over eight years with the purpose of persuading the Appellants to withdraw their claim for roll-over relief. Further the Respondents only closed their enquiries into the Appellants' 1996/97 tax return following the Appellants' intimation of judicial review proceedings.

The Respondents pointed out that the Appellants did not submit their 1996/97 tax returns until April and July 1999. The period in question was five years not eight. The Appellants did not apply to the Commissioners to direct the Revenue Inspector to close his enquiries into the returns. Appellants' counsel in response indicated that the Appellants' adviser at the time of the enquiries had not told the Appellants of their rights to apply for a direction. Also the adviser had been subsequently suspended from his professional body and had not been re-admitted into membership.

On 12 January 2005 the Appellants notified the Respondents that they were appealing against the refusal to grant roll-over relief with a request that the matter be heard before the Special Commissioners. The Respondents responded on 22 March 2005 seeking clarification on a number of issues and informing the Appellants that the papers had been passed to the Respondents' solicitor. On 1 June 2005 the Respondents outlined their opposition to the Appeal and provided details of their apportionment of the consideration received by the Appellants on the sale of their franchised businesses.

On 1 July 2005 I held a preliminary hearing for the purpose of issuing directions to facilitate the hearing of the Appeal. Appellant's counsel requested that the Appeal be heard without undue delay. The timetable and the final hearing date of 5 to 9 December 2005 were robust and paid full regard to counsel's concerns about unnecessary delay. The Respondents complied with the timetable. The Respondents took active steps to ensure that the deadlines were met. They agreed to take responsibility for the preparation, pagination and production of the bundles of evidence. The Respondents' representative offered to discuss with the Appellants' representatives their disclosure requirements with a view to meeting them. The Appeal was heard on the dates set at the preliminary hearing.

I am satisfied that during the period the Special Commissioners were seised of jurisdiction to hear the Appeal the Respondents acted responsibly and facilitated the Appeal process with the result that the timetable for the Appeal was met. I have no jurisdiction with the costs incurred in the period prior to the transfer of the Appeal to the Special Commissioners. I note, however, that the Appellants did not exercise their right to apply for a direction to close the Respondents' enquiries into their tax returns. Further their Notice of Appeal was dated the 12 January 2005.

I, therefore, find on the Appellants' first ground of delay that the Respondents did not engage in persistent delaying tactics. The Respondents acted responsibly and facilitated the hearing of the Appeal.

Second Ground: Joinder

The Appellants contended that the Respondents unreasonably applied for the Appellants' Appeal to be heard at the same time as the Appeal of another Appellant. According to the Appellants the joinder of Appellants resulted in voluminous, additional amounts of correspondence between the Appellants which significantly increased the Appeal costs. Further the Appellants considered that the joinder was forced upon them because the Respondents refused to disclose information about the other Appeal on grounds of confidentiality.

The Respondents responded that I decided that their Application to hear the Appeals at the same time was meritorious and issued a direction to that effect. I re-affirmed my decision when the other Appellant applied to reverse the earlier direction. The Respondents were of the view that they did not behave unreasonably in seeking a direction that was granted by the Special Commissioner. The Appellants denied that they were complaining about my direction. The Appellants' dispute was that they would not have incurred the additional costs, if the application had not been made in the first place.

The Respondents could not disclose the identity of the other Appellant to the Appellant prior to the hearing of their application for joinder because of the need to protect the confidentiality of the tax affairs of taxpayers. The Appellants, however, should have been aware of the identity of the other Appellant and that they shared effectively the same dispute with the Respondents. The two Appellants had been members of the PizzaExpress Franchisee Association, a consortium which had instructed solicitors and corporate finance advisers to effect the sale of their businesses to PizzaExpress. Once the direction was made to hear the Appeals at the same time, the Respondents then disclosed details of both Appeals to the Appellants.

The Respondents' application to join the Appeals was meritorious as demonstrated by my decision to grant it. Both appeals shared the same common issue. The direction was necessary to ensure consistent decision making and avoid severe prejudice to the Appellants. When the Appellants' representatives subsequently fell out with each other prior to the Appeal hearing, the Respondents did not object to the Appellants' renewed application to sever the Appeals, which I refused.

I am satisfied that the Respondents' application was a proper and reasonable one to make in the circumstances of the Appeal. The Respondents' reasonableness was apparent from their conduct in not seeking to exploit the subsequent disagreement between the Appellants' representatives.

Third Ground: Inadequate Statement of Case

The Appellants considered that the Respondents' statement of case lacked clarity, in particular it did not identify the Respondents' contentions regarding the different types of goodwill. This meant that the Appellant spent significantly more time on preparation of witness statements and proving factual matters at the hearing. The Respondents stated that the Appellants should have raised their concerns about the statement of case when they received it. They also considered that their counsel, Philip Jones, amplified the Respondents' arguments in his excellent and comprehensive skeleton argument.

The Respondents have no statutory obligation to provide the Commissioners and Appellants with a statement of case. Arguably the Appellants have the responsibility to state the case as it is their Appeal. The Respondents, however, at the preliminary hearing on 1 July willingly agreed to prepare a statement a case in order to progress the Appeal.

The purpose of a statement of case is to summarise clearly the party's principal arguments and relevant facts. The Respondents' statement of case explained with clarity their chief argument that the consideration received by the Appellants for goodwill should be attributable to the sale of the franchise agreements and/or to compensation for the early termination of the agreements. The Respondents did not take issue with the consideration apportioned to plant and equipment and the property (including goodwill inherent in the property). The statement of case identified relevant facts which were referred to in the attached schedule of "Relevant Provisions in the Franchise Agreements" and the accompanying "Agreed Statement of Facts".

Appellant's counsel has taken issue with the statement of case in that it did not deal with the various types of goodwill. I would not have expected the statement of case to provide a detailed exposition of the Respondents' contentions. The place for that detailed exposition was the Respondents' skeleton argument, which in my view set out the Respondents' contentions in a thorough and understandable way.

I am satisfied that the Respondents' statement of case summarised clearly their principal argument and the facts in support of it. The Respondents did not depart from their principal argument at the hearing. They were under no statutory requirement to supply a statement of case but willingly provided one to progress the Appeal. I consider that the Respondents' approach with the statement of case was reasonable and helpful to the tribunal and the Appellants.

Fourth Ground: Expert Witness

The Appellants submitted that the Respondents acted wholly unreasonably with their appointment of a chartered surveyor as their expert. According to the Appellants the expert had no accounting nor legal knowledge and no understanding of the concept of free goodwill. At the hearing the expert contradicted himself and admitted that he disregarded his professional body's guidelines on the valuation process of goodwill. His evidence was confusing and lacked credibility which prolonged the Appeal hearing unnecessarily.

The Respondents acknowledged that I preferred the evidence of the chartered accountant who was instructed by the other Appellant as an expert witness. The Respondents referred to a comment that I made at the hearing where I stated that I saw nothing unreasonable or inappropriate with the Respondents' appointment of a chartered surveyor as an expert witness.

In my decision I held that Appellants' counsels' challenges about the relevance of the expert's evidence were well founded. I also decided that the expert's propositions about ownership of goodwill and the apportionment of consideration were flawed. The facts that the credibility of his opinion was undermined by cross examination and that I found his evidence unconvincing, however, are not determinative of the issue that the Respondents acted wholly unreasonably in connection with the hearing of the Appeal.

The Respondents' case did not principally rely upon the evidence of their expert. The Respondents' skeleton argument which consisted of 112 paragraphs devoted only two of those to their expert's opinion. Essentially their case was based on a mixed proposition of law and fact, namely, that ownership of goodwill in a franchised business belonged to the franchisor. The expert witness was not called to give an opinion on the law, which was the function of the parties' legal representatives.

The Respondents' main reason for requiring expert evidence was to supply a valuation of the assets sold by the franchisees. Chartered surveyors are recognised valuation experts. The Respondents engaged an expert who had specific expertise in the valuation of catering, licensed and restaurant properties which involved valuations of trade related potential and goodwill.

I consider that the Respondents acted reasonably in instructing a chartered surveyor with specific expertise in the restaurant trade for the purpose of providing a valuation of a restaurant business. Their case did not principally rely upon the expert's evidence.

Decision

The circumstances under which costs may be ordered under Regulation 21(1) of the 1994 Regulations are very restrictive. The threshold of "wholly unreasonably" for triggering an award of costs is high. I find that the specific grounds relied upon the Appellants for an order of costs against the Respondents did not demonstrate that the Respondents acted wholly unreasonably in connection with the Appeal hearing.

Regulation 21(1) of the 1994 Regulations, however, requires me to form an overall view of the reasonableness of the Respondents' actions in connection with the Appeal. Although I found against the Respondents in the substantive Appeal which I allowed in principle in favour of the Appellants, I consider that the Respondents were entitled to contest the Appellants' claim for roll-over relief. From the Respondents' point of view they were dealing with an established area of Revenue practice drawn from case law which decided that goodwill in a franchised business belonged to the franchisor. I understood that this Appeal was the first time that the Revenue's proposition had been tested in a tribunal or a court of law.

As stated in my decision I was grateful for the considerable assistance given to me during the Appeal by the respective counsel and those instructing them. At the hearing the standard of advocacy from all the representatives was high. The conduct of the Respondents' case by their representatives was exemplary. Dr Carey ensured that the trial bundles were professionally prepared and offered assistance to the parties during the preliminary stages. Mr Jones concentrated his efforts on presenting the Respondent's contentions. He did not dwell on procedural matters that arose during the hearing which could have prolonged the hearing.

I am satisfied after examining the specific grounds put forward by the Appellants and the overall position that the Respondents did not act wholly unreasonably in connection with the Appeal from the date it was within the jurisdiction of the Special Commissioners. I find that the Respondents acted reasonably throughout the Appeal proceedings. I, therefore, dismiss the Appellants' application for costs.

I recognise that the Appellants may be perplexed and aggrieved by my decision not to award them costs. They will be liable to bear their costs of a successful Appeal. Unfortunately for them, the legal power to award costs in Special Commissioner proceedings is very restrictive. This restrictive power stems probably from the perception that tribunal proceedings are relatively straightforward which can normally be conducted without legal representation with the result that many tribunals have limited jurisdictions to award costs. This perception, however, does not fit with the reality of proceedings before Special Commissioners which can involve complex issues of law requiring expert legal representation. In this respect I support the per curiam observation (iv) in Carvill v Frost (Inspector of Taxes) [2005] STC (SCD) at page 210 that:

"There should be a proper costs jurisdiction in Special Commissioner proceedings modelled on the cost powers of the Value Added Tax and Duties Tribunal and applied in the manner hitherto adopted by the Commissioners of Customs and Excise".

MICHAEL TILDESLEY

SPECIAL COMMISSIONER

RELEASE DATE:18 July 2006

SC 3037/2005