United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2009] UKVAT V20960

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Queen Mary University of London v Revenue & Customs [2009] UKVAT V20960 (20 February 2009)

20960

COSTS – Application for Indemnity costs – Appeal conceded at late stage - Whether Customs' resistance to appeal until very late stage wholly unreasonable – Held not so unreasonable – Direction for costs on standard basis – Trib Rules 1986, r.29(1)

LONDON TRIBUNAL CENTRE

QUEEN MARY UNIVERSITY OF LONDON Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: THEODORE WALLACE (Chairman)

Sitting in public in London on 21 November 2008

Charles Rumbles, of the RCB partnership, for the Appellant

Judith Ayling, counsel, instructed by the Solicitors for Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

This decision concerns an application by the Appellant for a direction for indemnity costs following the withdrawal by Customs of a decision refusing a repayment claim of £2,350,974 less than week before the appeal hearing which was listed for 19 and 20 May 2008. Customs accept liability for costs on the standard basis but resist indemnity costs.

Mr Rumbles contended that Customs had acted wholly unreasonably in resisting the appeal until 13 May 2008 when the refusal decision was factually incorrect and unsustainable in law.

The repayment claim concerned the construction costs incurred in periods 07/03 and 01/04 to 04/06 on the Blizard Building which was part of the medical and dental school. The Blizard Building which houses a large open plan laboratory is used primarily for non-business research.

The Appellant had initially sought to obtain zero-rating under Schedule 8, Group 5, Note (10) of the VAT Act 1994, as being used in part for a relevant charitable purpose however this was refused in a letter dated 11 June 2003 on the basis that the business activity planned for the building was more than incidental. Following that decision the VAT incurred was treated as a general expense of the university and included in the partial exemption calculation.

At that time Customs took the view that the mechanism resulting from the decision of the Court of Justice in Lennartz v Finanzamt München III (Case C-97/90) [1995] STC 514 was confined to goods and did not apply to construction services.

In Seeling v Finanzamt Starnberg (Case C-269/00) [2003] STC 805 the Court of Justice decided that Lennartz does apply to the construction of a building. Following Seeling, sub-paragraph (4A) was inserted into Schedule 4, paragraph 5 to the VAT Act 1994 with effect from 9 April 2003 denying the right to deduct under Lennartz for construction services as being necessary to counter tax avoidance.

Following a further decision of the Court of Justice in July 2005 in Charles & Charles-Tijmens v Staatssecretaris van Financien (Case C-434/03) [2006] STC 1429 that Member States could not derogate from Articles 6.2 and 17.2 and 17.6, Business Brief 15/05 was issued providing by concession for businesses to apply Lennartz to certain construction services subject to conditions. The 2003 amendment was repealed by the Finance Act 2007 with effect from 1 September 2007.

Meanwhile on 31 August 2006 the Appellant submitted the repayment claim relying on Business Brief 15/05.

The claim was refused by a letter dated 21 March 2006 on the grounds that at the time of incurring the input tax the Appellant had not made a decision to use the building wholly for the purpose of its business and could not change its mind so as to come within Business Brief 15/05. The appeal was then lodged.

The Statement of Case dated 10 September 2007 stated at paragraph 18 that under Business Brief 15/05, the Respondents by concession allowed taxpayers dissuaded by Business Brief 22/03 from allocating an asset wholly to their business at the time of acquisition to bring such asset wholly into their business and claim input tax within 6 months. In paragraph 20 it was pleaded that the 3 year time limit under Regulation 29 of the VAT Regulations 1995 was not applicable to the Appellant's claim which was instead subject to a 6 month time limit under Business Brief 15/05 which expired on 18 February 2005. In paragraph 22 it was pleaded that the Appellant had changed its mind retrospectively as to business use and in paragraph 23 it was pleaded that for Lennartz to apply the allocation had to be at the outset. In paragraph 24 it was pleaded that the Business Brief 15/05 had enabled taxpayers otherwise precluded from making a Lennartz claim to make a back claim by 8 February 2006.

On 16 November 2007 the Tribunal gave an agreed direction for the service of witness statements by 25 January 2008. The statement of Jeffrey Ashby the officer who issued the refusal decision was eventually served on 29 April 2008. That statement confirmed that the repayment claim had been refused because the decision to apply Lennartz had not been made when the tax was incurred and the claim was not made in line with the Business Brief 15/05 which allowed six months for back claims.

The skeleton argument submitted by Mr Rumbles for the Appellant on 10 May 2008 stated that the first invoice for the construction services was on 31 July 2003 which was after the introduction of subparagraph (4A) into Schedule 4, paragraph 5 and S.I.2003, No 1055. Between 2003 and 2007 the UK legislation barred any claim under Lennartz. That legislation had since been accepted by Customs as ultra vires EC law following Tijmens. He contended that there was no lawful authority for the six month time limit imposed in the Business Brief 15/05. He contended that the Appellant's claim was valid under Lennartz, the construction services having been intended to be used both for a business and a non-business purpose and having been so used.

Submissions

Mr Rumbles said that the Appellant did not rely in this application on the failure by the UK to amend the legislation introduced in 2003 in proper time following Tijmens in July 2005.

He said that the 2003 legislation was only repealed after the repayment claim had been made, the building having been completed in 2005. He said that there was no legitimate place for the invented six months time limit.

He said that the acceptance of the claim in May 2008 after the Appellant's skeleton had been served and only days before the appeal was wholly unreasonable behaviour. No explanation had been given as to the reasons for accepting the claim at that stage.

Paragraph 14 of the skeleton for Customs had referred to acting on legal advice and to a debate as to the impact of Fleming v Revenue and Customs Commissioners [2008] STC 324 in the House of Lords, however paragraph 20 of the Statement of Case said that Customs were not relying on Fleming.

He said that the case for Customs had been hopeless because of Lennartz, Seeling and Tijmens. He said that there was no reason advanced for refusing the repayment except reliance on Business Brief 15/05 which had no basis in law.

He said that there was no foundation for the assertion in paragraph 22 of the Statement of Case that the Appellant had changed its mind as to use for a business purpose, see the refusal of zero-rating in June 2003. This was an invention to counter the Appellant's arguments.

He said that given the lack of any cohesive argument and of any explanation, the conduct of Customs had been wholly unreasonable.

Miss Ayling for Customs said that there had been an agreement that Customs would pay the Appellant's reasonable costs in respect of the late service of the witness statement; that could only be on the standard basis since there was no reference to any other basis. The late witness statement, being covered by that agreement, was not relevant to the application for indemnity costs.

She relied on the principles as to indemnity costs in the recent High Court decisions in Fitzpatrick Contractors Ltd v Tyco, Fire and Integrated Solutions Ltd [2008] EWHC 1391 (TCC) and National Westminster Bank plc v Rabobank Nederland [2007] EWHC 1742 (Comm). In the latter case Colman J said that there must be "a significant level of unreasonableness or otherwise inappropriate conduct in its widest sense." In that case the trial judge who had decided that Rabobank's behaviour "crossed the frontier." She said that the Appellant must pass a high hurdle.

She said that where an appeal is conceded before trial it is not appropriate to conduct a full mini-trial as to the merits. It was not clear before the day of the application hearing that the Appellant was going into the merits of the appeal. Paragraph 16 of the Appellant's Notice of Application in July which said that the decision and Statement of Case were "factually incorrect and unsustainable in law" did not make it clear that it was said that Customs' position was untenable.

In her written submissions she said that Customs,

"acted throughout on legal advice without in any way waiving privilege, constant communication and debate continued between counsel and the Respondents."

This included the impact of the decision of the House of Lords in Fleming v Revenue and Customs Commissioners on 23 January 2008. She continued,

"The Respondents conceded the appeal at the first point when the advice to do so was clear."

When it was pointed out that there was difficulty in relying on counsel's advice without waiving privilege, Miss Ayling after taking instructions produced an advice. However Mr Rumbles did not ask for this to be introduced in evidence

Miss Ayling said that the observations in Fleming on the Business Brief in relation to that case had caused Customs to reconsider Business Brief 15/05. She said that the Tribunal should not apply hindsight. The legal position was nowhere near as simple as the Appellant contended. Thee was no evidence of irresponsible behaviour by Customs. It was not customary to give reasons for conceding a case at a late stage.

Conclusions

It is well established that for an order for indemnity costs there must be conduct or circumstances which take the case out of the norm, see Tyco Fire at [3]. In order to justify an order for indemnity costs, conduct must be unreasonable "to a high degree", see Kiam v MGN Ltd No.2 [2002] 1 WLR 2810 per Simon Brown LJ. In National Westminster v Rabobank Sir Anthony Colman referred to intrinsic weakness in the case advanced and lack of consistency. Pre-litigation conduct can be relevant, see CPR 44.4.3 notes.

While I accept Miss Ayling's submission that it is inappropriate to engage in a mini-trial on the merits, it is relevant to consider whether Customs' defence of the appeal was hopeless from the outset. It can have come as no surprise in view of paragraph 16 of the Application that the Appellant was invoking the merits.

The real problem in this case arose from the derogation in 2003 by the United Kingdom from the Sixth Directive following the decision of the Court of Justice in Seeling, which was clearly incompatible with EC law following the decision in Charles-Tijmens, but which was not repealed until 2007. The Appellant's claim thus depended on direct effect overriding the UK legislation. Mr Rumbles did not however rely on this as a ground for indemnity costs. The failure to amend the law timeously was the responsibility of Parliament rather than Customs.

Mr Rumbles had a valid criticism in that Customs pleaded that the Appellant had changed its mind as to business use having earlier denied zero-rating on the basis of business use. That involved a lack of consistency.

He was also justified in asserting that the six month period under Business Brief 15/05 had no statutory basis. However it is to be noted that in Fleming the Court of Appeal did not say that the Business Briefs were to be wholly disregarded.

While I have no doubt that Customs were correct in conceding the appeal I do not regard the explanation by Miss Ayling that it followed consideration of the decision of the House of Lords in Fleming as in any way spurious.

Although I do not consider the conduct of Customs in this case to be above criticism, I do not consider that it was so unreasonable as to warrant a direction for indemnity costs.

Accordingly I direct that Customs pay the Appellant's costs of the appeal on the standard basis to be taxed under Rule 29(1)(b) unless agreed. There is no order for the costs of this application.

THEODORE WALLACE

CHAIRMAN

RELEASED: 20 February 2009

LON 2007/794