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Cite as: [2005] UKVAT V19189

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K A J and Mrs B M Fosberry v Her Majesty's Revenue and Customs [2005] UKVAT V19189 (28 July 2005)

19189

COSTS – Indemnity basis – Commissioners accepted that taxpayers' appeal succeeded – Commissioners offered to pay taxpayers' costs – Taxpayers applied for indemnity costs on grounds that Commissioners had changed their reasons for original decision after appeal had been lodged – Whether conduct of Commissioners so unreasonable as to warrant award of costs on indemnity basis – No – Application dismissed

COSTS – Parliamentary Answer – Successful Appellants applied unsuccessfully for indemnity costs – Commissioners sought award of their costs incurred in resisting the Appellants' costs application – Appellants relied on Parliamentary Answer – Whether Tribunal precluded from awarding costs to the Commissioners – No – Commissioners' application allowed

LONDON TRIBUNAL CENTRE

K A J AND MRS B M FOSBERRY Appellants

and –

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: STEPHEN OLIVER QC (Chairman)

Sitting in London on 4 July 2005

B J Rice of B J Rice & Associates, for the Appellants

A Bacon of A&M Bacon Ltd, legal costs consultants, for the Respondents

© CROWN COPYRIGHT 2005

DECISION ON COSTS

On 4 July 2005 I heard a costs application. The Appellants ("the Fosberrys") applied for the costs to be awarded on an indemnity basis. I directed that the assessment of costs should be made on the "standard" basis, the amount to be assessed by a Costs Judge of the Supreme Court. The Commissioners have asked for their costs of the costs application.

Background

It may be convenient to summarize the events leading up to the costs application.

The notice of appeal was lodged on 23 June 2002. The decision appealed against was to refuse registration of the Fosberrys, who provided foster care services. The reason for the decision was that the Commissioners had been advised, following the Kingscrest judgment, that the Government had laid the Value Added Tax (Health & Welfare) Order before Parliament.

On 29 July 2002 the Commissioners wrote to the Fosberrys asking for details about their fostering activities. On 2 September the Commissioners applied for and were granted an extension for service of their Statement of Case until 2 September 2002. On 29 August the Commissioners again applied for and obtained an extension of time for 30 days. The Commissioners, having received details of the Fosberrys' activities, wrote to B J Rice & Associates, acting for them, on 16 September providing as a new ground for refusing registration that fostering is not considered to be a business activity.

B J Rice & Associates provided a reasoned response to the Commissioners on 18 September. On 1 October 2002 the Commissioners asked for and obtained a further extension of time until 4 November 2002. On 6 November the Tribunal, noting that the Commissioners had abandoned the original reason for refusing registration and were relying instead on the need for an economic activity directed that the Commissioners' Statement of Case be lodged by 29 November. The statement of case was lodged.

The appeal being apparently ready for hearing by 29 November 2002, the Tribunal sent out a Trib 19 (dates to avoid) letter to both parties. The Commissioners and B J Rice & Associates duly responded in early December. A preliminary hearing was fixed for 12 February 2003 at which the Tribunal directed that the matter be stood over until the outcome of the appeal to the Tribunal in Kingscrest (LON/2002/691). Further correspondence ensued. Commenting on the Tribunal's decision in a letter to the Tribunal of 22 July 2003, B J Rice & Associates observed that it was a "very sensible direction".

The Fosberrys asked for a "directions" hearing at which they were understood to be seeking the joinder of their appeal with that of Families for Children and for the reference of both matters to the European Court of Justice. At the hearing on 22 September 2003 the Tribunal directed that the Fosberrys should lodge a revised Notice of Appeal stating all their contentions for opposing the ruling that their services were exempt and the Tribunal further dismissed the joinder application.

Further letters from the Fosberrys to the Tribunal, 29 December 2003 and 16 March 2004, claimed that the previous directions be changed with a view to the Fosberrys' appeal being listed for hearing.

On 2 April 2004 the Tribunal gave directions preparatory to a hearing in July. On 25 June 2004 the Fosberrys' appeal was directed to be heard on 29 November. Further directions were given on 29 July 2004 requiring the Fosberrys to serve, among other things, statements of facts and skeleton arguments.

On 1 November 2004 the Commissioners wrote to B J Rice & Associates as follows:

"The Commissioners have reconsidered their contentions, set out in their statement of case of 28 November 2002, and have decided that they will no longer defend the appeal brought by Mr & Mrs K Fosberry under reference number LON/02/0530.

The Commissioners will undertake to pay your clients' reasonable costs."

On 15 March 2005 the Fosberrys, through B J Rice & Associates, applied to the Tribunal for a costs hearing. On 13 June 2005 they notified the Tribunal of the possibility that the award might be sought on the indemnity basis.

Conclusion on application for indemnity costs

I heard arguments from both sides.

It appears to me that there is nothing in our rules preventing the Tribunal from awarding costs on an indemnity basis. I was referred to the new approach, following the publication of the Civil Procedure Rules set out in the judgment of the Court of Appeal in Reid Minty (a firm) v Taylor [2001] EWCA Civ 1723 at [28], [2002] 1 WLR 2800 at [28]. In that case May LJ addressed the question of the right approach to indemnity costs in circumstances where unreasonable conduct of one of the parties was alleged. In paragraph 28 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."

As I read those words, conduct which may fall short of misconduct deserving moral condemnation may in all the circumstances be so unreasonable as to justify an order for indemnity costs. Nonetheless an indemnity costs order does appear to carry some stigma. The key consideration is the unreasonableness or otherwise of the alleged conduct of the party against whom the order is sought. That party's conduct must be unreasonable, but with the further characteristic that it is unreasonable to an extent or in a manner that earns some implicit expression of disapproval or some stigma. I refer to the decision of Simon Brown LJ (as he then was) in Kiam v MGN Ltd (No.2) [2002] EWCA Civ 66, [2002] 1 WLR 2810. In paragraph 12, Simon Brown 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. …"

With those principles in mind I come back to the circumstances of the present case. When the original decision was taken in June 2002, the law and the possibility of future legislation were in the melting pot. It was anticipated by the Commissioners that the proposed Order to be laid before Parliament would make it clear that the Fosberrys' activities were VAT exempt. That was the basis of their decision letter and the basis on which the appeal was originally lodged (on 25 June 2002). Within three months the Commissioners had changed their legal position and were contending that the Fosberrys' activities did not amount to economic activities.

I cannot see that the Fosberrys were in any significant respect compromised or prejudiced by the change in approach taken by the Commissioners. The question whether an activity such as fostering is or is not an economic activity requires the most careful deliberation before it is advanced. Consequently I do not think that there was anything unreasonable in the change in the position taken by the Commissioners or in the fact that it took them three months to communicate the change.

Nor in my view was there anything unreasonable in the steps taken in the course of the appeal thereafter. The Commissioners did not act unreasonably in seeking (and obtaining) extensions of time leading up to their lodging their statement of case on 28 November 2002. Thereafter the matter was, to some extent, conditioned by the direction of the Tribunal that the Fosberrys' appeal be stood over until the outcome of the Kingscrest appeal. I have set out the main circumstances in chronological order earlier in this decision.

Taking all those circumstances into consideration, I cannot draw the conclusion that the conduct of the Commissioners has been unreasonable, still less can I say that it has earned some implicit expression of disapproval or stigma. For those reasons I dismissed the Fosberrys' application for costs on the indemnity basis.

The costs of the present application

Mr Bacon for the Commissioners, and on their instructions, has asked for their costs of the costs application. He has subsequently put in a Schedule of Costs in connection with the application and the Commissioners' costs amount to £1,050. Mr B J Rice argued that this was not a proper case for the Tribunal to award costs against his clients. He accepts that his clients were unsuccessful in their application. He relies, however, on the written answer given by the Minister of State, Treasury, (Peter Brooke MP) of 24 July 1986 to a Parliamentary Question. The statement reads:

"As a general rule, Customs and Excise do not seek costs against unsuccessful appellants. They do, however, ask for costs in narrowly defined cases so as to provide protection for public funds and the general body of taxpayers. They will, therefore, seek to continue to ask for costs at those exceptional tribunal hearings of substantial and complex cases where large sums are involved and which are comparable with High Court cases, unless the appeal involves an important general point of law, requiring clarification. They will also continue to consider seeking costs where the appellant has misused the tribunal procedures – for example in frivolous or vexatious cases, or where the appellant has failed to appear or to be represented at a mutually arranged hearing without sufficient explanation, or where the appellant has first produced at a hearing relevant evidence which ought properly to have been disclosed at an earlier stage and which could have saved public funds had it been produced timeously.

The new penalty provisions and right of appeal to the value added tax tribunals have made no change to this policy."

The general rule in civil litigation is that the unsuccessful party should pay the successful party's costs. The outcome of the present application for indemnity costs is that the Fosberrys were wholly unsuccessful. The entire hearing was taken up with the question of whether indemnity costs should be awarded against the Commissioners, who had already undertaken to pay the costs of the Fosberrys. Thus applying the general civil litigation rule, the Fosberrys should pay the Commissioners' costs of the application.

Does the Parliamentary Answer require a different order? As a statutory tribunal I am bound by the Tribunals Rules (SI 1986/560) Rule 29 provides:

"(1) A tribunal may direct that a party or applicant shall pay to the other party to the appeal or application –

(a) … 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."

Those words indicate that the tribunal has a power, exercisable at its discretion, both to award costs and as to the amount of the costs. The Tribunal has no power to review a decision of the Commissioners to ask for costs. Nonetheless the words of the Minister of State and the expectations that they are intended to convey to taxpayers are, I think, matters that should be taken into account by tribunals in considering how to exercise their discretion when dealing with costs applications by the Commissioners.

In considering the words of the Secretary of State I note that the Fosberrys are not "unsuccessful appellants": (see the words in the first sentence of the Parliamentary Answer). They are successful appellants who have sought indemnity costs from the Commissioners. The purpose of the Parliamentary Answer, as I read it, is to prevent the risk of a costs order from deterring a bona fide appellant from challenging a decision of the Commissioners before a tribunal. The Fosberrys have gone beyond making such a challenge. They have alleged against the Commissioners that the conduct of the Commissioners has been unreasonable, and unreasonable to an extent or in a manner that has earned the Commissioners some implicit expression of disapproval or some stigma. See the words in paragraph 13 above In making that allegation the Fosberrys have, in my view, stepped outside the protection given by the Minister of State in the Parliamentary Answer and I leave it out of account as a factor to be taken into the reckoning in exercising my discretion under rule 29(1). The Fosberrys are therefore thrown back on the general rule of civil litigation. As unsuccessful applicants for indemnity costs they must pay the costs of the successful party, namely the Commissioners.

For those reasons I dismissed the Fosberrys' application for costs on the indemnity basis and have awarded the Commissioners the sum of £1,050 on account of their costs of the costs application.

STEPHEN OLIVER QC

CHAIRMAN

RELEASED: 28 July 2005

LON/02/530