United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2009] UKVAT V20966

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Seymour Limousines Ltd v Revenue & Customs [2009] UKVAT V20966 (25 February 2009)

20966

COSTS - Application for indemnity costs – Appeal conceded at late stage – Whether Customs' resistance to appeal hopeless from outset – Held that Customs not so unreasonable as to justify indemnity costs on appeal – Opposition to hardship application for 9 months after clear evidence of hardship provided – Order for indemnity costs for that period – Trib Rules 1986, r.29(1) – Wrong test for hardship applied by Customs – VATA 1994 s.84(3)(b)

LONDON TRIBUNAL CENTRE

SEYMOUR LIMOUSINES LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: THEODORE WALLACE (Chairman)

Sitting in public in London on 27 November 2008

John Walters QC, instructed by K D Popat & Co, Chartered Accountant, for the Appellant

Michael Bacon FACLD, of A&M Bacon Ltd, Legal Costs Specialists, for the Respondents

© CROWN COPYRIGHT 2008


 


DECISION ON APPLICATION

1. This decision concerns an application by the Appellant for indemnity costs following the withdrawal by Customs on 12 December 2006 of a reduced assessment of £323,290. Although the withdrawal letter made no mention of the associated misdeclaration penalty that must logically have been covered by the withdrawal.
2. The assessment concerned the provision of security personnel to His Royal Highness Abdul Aziz of Saudi Arabia in Europe and the Middle East. The assessment was on the basis that the supplies were supplies of services of security personnel and were not supplies of staff within VAT Act 1994, Schedule 5, paragraph 6 and Article 9.2(e) of the Sixth Directive. The appeal was lodged on 10 August 2004.
3. The primary ground for the indemnity costs application was that Customs acted wholly unreasonably in contesting the appeal. A further ground was that Customs acted unreasonably in continuing to contest hardship after receiving a letter from Deloittes with enclosures dated 29 April 2005, only conceding hardship at a hearing on 23 January 2006. In relation to hardship, the Appellant also relied on the continued resistance to the appeal being entertained in the absence of hardship notwithstanding the consolidation on 14 April 2005 of the misdeclaration appeal.

The assessment and the appeal

4. I start by considering the facts as to the assessment.
5. Following a visit to the Appellant's office on 20 March 2003, Richard Jones, of Wembley VAT Office, raised an assessment on 23 April for periods 06/01 to 12/02 in the sum of £379,870 on the basis that supplies to the Saudi Arabian military attaché ("SAMA") with regards to security personnel were standard rated. Since the attaché was a government official, the supplies were clearly made either to HRH Abdul Aziz or to the Saudi government, it matters not which since either way the customer was established outside the EU.
6. Mr Jones had collected invoices on his visit. A typical invoice provided by the Appellant to Deloittes was dated 22 April 2001 for the account of SAMA, the client being stated as Princess Madawi Bint Faisal for "supply of static and mobile security personnel in Paris", the charge being £29,375, no VAT being shown; it did not state the period covered.
7. A misdeclaration penalty for £56,977 was notified on 21 May 2003.
8. On 5 June 2003, Deloittes wrote to Customs stating that the Appellant provided security personnel to SAMA for Saudi Arabian clients during trips to Europe. The letter stated,

"The Individuals are highly trained to provide security as required and are under the control of the clients at all times. At no time during any given assignment are they under any form of control by [the Appellant]. The assignment is driven and directed purely by the itinerary of the Client."

The letter cited paragraph 12.7.1 of Notice 741,

"A supply of staff is the placing of personnel under the general control and guidance of another party as if they become employees of that other party."

Deloittes referred to Schedule 5, paragraph 6 of the 1994 Act and Article 16(a) of the VAT (Place of Supply of Services) Order 1992.

9. Mr Jones replied on 6 June accepting the legal points made but repeated an earlier request for contracts or documentation to support the contention that the supplies were of staff.
10. On 8 October 2003 Deloittes wrote enclosing a letter from Mr Fakouri, managing director, dated 15 June 2000 addressed to Mr Atani, in Riyadh, containing "the agreement we reached for the supply of security personnel" and signed by Mr Fakouri for the Appellant and by Mr Atani. Paragraph 3 read as follows,

"Whilst the head office of Seymour is located in London, England, Seymour is well suited to provide complete security service to His Royal Highness and his family members wherever they are in Europe and Middle East. When travelling from one country to another, security guards and personnel will, as required and directed by His Royal Highness and his family members, travel with them or ensure that they are securely escorted to the airport, their private aircraft, train or to other modes of transport. These security personnel will subsequently communicate with security personnel at the other end or country to ensure that His Royal Highness and his family members are fully protected at all times and that they are at no time left vulnerable in a foreign country. All security officers and personnel will at all times remain and act entirely at the direction of His Royal Highness and his family members and/or their staff until their assignment is completed. You will agree that Seymour will not provide any instructions or control on day to day security arrangements as it will be driven entirely on the day to day itinerary of His Royal Highness and his family members, it is therefore vital that clear instructions on a daily basis are given by the staff of His Royal Highness."

The next paragraph stated, "they will work as if they are your employees." The letter stated that the Appellant would invoice HRH or SAMA as directed, monthly payment being made at agreed rates per hour depending on the country, the level of security required and the skill of the personnel. It concluded, "Please sign a copy of this letter to indicate your agreement, and return it to me as soon as possible."

11. Mr Jones replied on 22 October 2003 stating that the letter of engagement "does suggest that the control of the individuals does pass to the Saudi officials" but pointing to the words "provide complete security service." He wrote that he still believed that there was a supply of services rather than staff and stated that the case had been passed for local review.
12. On 24 March 2004 Deloittes wrote to Mr Jones with a letter from Mr Fakouri dated 19 March 2004 with further information and an example contract headed, "Terms of Engagement of Security Personnel." It was unsigned and undated. The paragraph headed "Duties" contained the following,

"You agree that once your assignment commences, you take all instructions regarding your work from the customer … You remain under the full control of the customer throughout your assignment."

Personnel were required to keep a full record of all time spent on each day and of expenses and to advise the customer. It stated that as a self-employed person the customer or company was not liable for medical bills. The customer would determine the hours of work each day which might include Saturdays or Sundays. Under "Tax" the agreement provided,

"You confirm that you are providing security services as a self-employed person."

13. The letter from Mr Fakouri enclosed by Deloittes included the following,

"Customs & Excise have requested examples of invoices, orders or correspondence or terms of engagement for the security personnel and evidence of day to day activities.

I believe that Wembley VAT office conducted a full examination of my company records in March 03 when it scrutinised invoices issued to the customers. With regard to orders, the customer almost always telephone us requesting the company to make available certain number and types of security personnel he requires at a particular time. You will probably know that when doing business with Middle East customers, there is generally little formal correspondence, particularly when a customer has been doing business with you for several years. Business is conducted more on trust and, in matters relating to security, this is particularly so because (a) overseas visits by His Royal Highness and his family members is never planned/announced weeks or months in advance but is generally at short notices, and (b) for security reasons, locations of visits, types or number of security personnel is rarely advised in advance or recorded in writing (particularly since the terrorist threats to the Royal family increased enormously since September 01) in the event that it falls into wrong hands. It is very important for Customs to understand this and that even verbal communication is kept discreet and at a minimum at all times. Also, because of the nature of this business and very important people requiring complete security at the highest level whilst keeping a very low profile, requires the pattern of operation being changed regularly and without notice. Orders also change (number of personnel required, destination, timing, etc) – often many times – before a job starts and therefore written orders are in any case not practical. This is unlike protecting a fixed property for days or weeks. Also, whether in UK, Europe or in Middle East, length of visits by His Royal Highness and his family members are unpredictable – it is extended or curtailed without much advance notice."

The letter stated that personnel "work entirely at the instructions of the customer."

14. An internal Customs memo dated 30 June 2004 to the Review Officer noted the lack of records including records as to payments due and agreed that there was insufficient information to allow the trader's case.
15. On 21 July 2004 the Review Officer, Dave White, wrote upholding the assessment, whereupon the appeal was lodged on 10 August on behalf of the Appellant with a hardship application. At that stage Deloittes were unaware of the associated misdeclaration penalty.
16. An internal Customs memo of 28 September 2004 by Miss Cosier cited Customs and Excise Commissioners v Reed Personnel Services Ltd [1995] STC 588 and said,

"I appreciate that we do not hold a copy of the contract between Seymour and their clients, but does not the scenario look more like an employment bureau with staff engaged by the bureau, the workers providing services to the bureau, which in turn makes a supply to the client?"

17. On 13 October 2004 Colin Wilson replied discounting the significance of the "Terms of Engagement of Security Personnel" document, because it had no date, name or signature. As to Reed Personnel he commented, "You may well be correct in your assumptions but it is not for us to argue the Appellant's case for them."
18. Also on 13 October 2004 the assessment was recalculated at 7/47ths of the amount treated by the Appellant as outside the scope resulting in the amended assessment of £323,290. The misdeclaration penalty was accordingly reduced to £48,882.
19. The next communication of significance was a letter from Deloittes dated 29 April 2005 which in addition to hardship addressed liability.
20. A statement by Mr Fakouri dated 21 April 2005 included the following,

"… Most of SLL's security clients are Arab, based in Middle East … [C]lient's secretaries contact SLL (and sometimes the security personnel directly …) and request a number of security personnel. SLL contacts various people who have provided such services before … [O]nce the security personnel fly from UK airports, they are entirely at the disposal and instructions of the clients and do everything the clients request. All expenses … are paid by the client directly. On completion of an assignment …, SLL bills the client … at an agreed chargeout hourly rate. SLL, in the meantime, pays the personnel every week, based on hours worked at a rate agreed …"

21. A statement by Kevin Crawford, a security guard, was also enclosed. He described an assignment with HRH Princess Sara Bint Faisel in January 2005 in Geneva. Mr Crawford was accommodated at a hotel and was telephoned when required by the Princess. He checked her residence and cars before she arrived in Geneva. He kept guard while she was at restaurants and shopping. He guarded the maid carrying money and carried shopping to the cars. He sat in front of the Princess at a cinema, keeping watch and not looking at the film. He waited in a car when she was visiting a friend. He accompanied the Princess and children Ten Pin Bowling. On the sixth day they flew by private plane to Paris where they drove to the Royal family's residence in Avenue Foch. He helped to load and unload.
22. On 8 June 2005 Graham Ward wrote to Miss Cosier expressing the view that the question whether the supplies were outside the scope was

"a straightforward issue and turns on whether the staff are controlled by the parent company or the overseas employer. The documentation which determines the contractual relationship is paramount."

He considered that there was no reasonable excuse for the penalty and no mitigation because of "the trader's lack of cooperation in providing basic information."

23. The next few months were taken up with the hardship application which Customs conceded at the hearing on 23 January 2006. Deloittes had withdrawn shortly before the application hearing.
24. Customs' Statement of Case was served on 22 March 2006. At paragraph 9 it was pleaded that Mr Jones noted at his visit the value of sales to SAMA and that the invoices said "supplies of static and mobile security in …" but that no contractual or other documentation was available. At paragraph 13 it was pleaded that there is a supply of staff

"if the use of an individual, who is contractually employed by the supplier, is provided to another for consideration. The determining factor is that staff are not contractually employed by the recipient but come under its direction. Where staff are supplied to another person but continue to operate under the direction of the supplier, this is not a supply of staff, but is a supply of those services."

In paragraph 15 it was pleaded that a supplier who treats services within paragraphs 1 to 8 of Schedule 5 as supplied where the recipient belongs "must hold commercial evidence that the services are received and used outside the UK." The premise of the following paragraphs was that in order for the Appellant to make a supply of staff the staff must be its employees; at paragraph 22 it was pleaded that,

"Whilst the bodyguard remain in the employment of the Appellant and SAMA may control the details of the bodyguards' duties, the guards appear to operate under the direction of the Appellant who remains responsible for their placement, conduct and payment."

At paragraph 23 it was pleaded alternatively that if the bodyguards were self-employed as per the terms of engagement "the Appellant cannot be making a supply of staff since the bodyguards are not employed by the Appellant" which must be making an onward supply of services.

25. Customs asked for further disclosure at a pre-trial review on 8 June 2006 but served no written application. The Appellant had served no List of Documents for the appeal. The directions hearing was adjourned for 28 days and then for two months following Mr Walters being instructed.
26. On 6 November 2006 Customs made a formal disclosure application. This covered the terms of engagement with personnel, contractual documentation with SAMA and records. They requested a signed and dated copy of the Terms of Engagement during the relevant period from 06/01 to 12/02, any documents as to variations during that period and any material setting out the rates of payment. In respect of SAMA they requested a signed and dated copy of the contract and any material evidencing negotiation of the terms. As to records they sought records of assignments taken by all security personnel during the period, time sheets, ledgers showing payments and not less than 15 sample invoices. The pre-trial review had been relisted for 5 December. That hearing was postponed at the Appellant's request. Customs objected to this on 29 November 2006.
27. On 12 December 2006 Miss Cosier wrote that after careful consideration by the policy unit the assessment was being withdrawn and that it was accepted that the arrangements could be regarded as a supply of staff.

Facts as to hardship application

28. I return now to the facts as to the hardship application. On receipt of the notice of appeal and hardship application on 10 August 2004, Customs sent a standard form questionnaire.
29. Deloittes replied on 16 September 2004 providing the latest accounts being to 31 March 2003 showing net worth of £255,153, a bank statement from 3 to 10 September 2004 and a schedule of answers to the questionnaire stating that the Appellant had no building society or other accounts, no stocks, shares or relevant insurance policy and that the premises were rented.
30. On 4 October Customs replied asking for the bank statements for the three months prior to 3 September 2004, the 2004 annual accounts when completed, the latest management accounts and trial balance; they asked whether the directors could obtain a loan from their other businesses, for an explanation of a transfer of £80,000 shown on the bank account and for details of an approach to the bank for a loan with the response; the letter asked whether the Appellant's holding company could be asked to pay £309,588 shown as due to the Appellant and for details of debtors over £30,000 and of other details of £161,147 in the accounts to March 2003. The letter stated that the assessment under appeal had been reduced to £323,292.
31. Deloittes replied on 22 November 2004 providing the bank statements requested and management accounts for the year to 31 March 2004 with trial balances at 31 March and an analysis of debtors at March 2003.
32. On 12 January 2005 Customs replied stating "our accountants are of opinion that your client has the capacity to pay prior to a tribunal hearing."
33. Deloittes wrote on 29 April 2005 providing a statement from Mr Fakouri, bank statements from 31 December 2004 to 23 March 2005, correspondence regarding two winding-up petitions in 2003 and 2004 and a letter of 20 July 2004 freezing the bank account until the outcome of the winding-up petition. The bank statements showed an overdraft varying from £55,297 to £167,459 at 23 March 2005. The correspondence showed winding-up petitions by the Inland Revenue on 19 November 2003 and 8 April 2004, the second being for £46,175; on 25 May 2004 the Revenue had agreed to an adjournment of 8 weeks on payment of £20,000; in December 2004 the Revenue agreed to the outstanding balance of £15,395 being paid in fortnightly instalments of £1,300. Mr Fakouri's statement said that the Appellant had an overdraft limit of £40,000 but this had been exceeded by using the higher group overdraft facility granted to the Appellant's parent company, Denis Carter Ltd. The parent was unable to allow additional use of those facilities.
34. Customs replied on 27 May 2005 asking for a copy of the group overdraft arrangement and a list of all bank accounts in the Appellant's name for which copy statements had not been provided. They inquired into a receipt of £3,880 from account 26503344. They asked what sums were received from SAMA between 3 September and 24 December 2004 and where receipts from UK sales had been credited.
35. Deloittes replied on 30 August 2005. They wrote that receipts from SAMA were on an irregular basis and £120,000 had been received between 3 September and 30 December 2004. The UK sales were to SAMA having been incorrectly treated as UK sales because the staff had been in the UK. Account 26503344 was a loan account closed on 29 December 2004. The deposit account was not active. The group overdraft facility letter dated 25 November 2004 was enclosed showing £450,000; this was reduced to £400,000 in another letter dated 31 May 2005. Prior to that the Appellant's limit had been £40,000. I observe that the group facility was arranged some months after the letter of 20 July 2004 freezing the Appellant's account.
36. On 4 October 2005 Customs wrote reiterating the opinion expressed earlier at paragraph 32 above.
37. This letter followed a witness statement dated 26 September 2005 by Shakli Marwaha, an accountant employed by Customs, in which he said, "The Appellant has the capacity to deposit of full assessed tax before hearing of their case."
38. As already mentioned at the hearing on 23 January 2006 Customs withdrew their opposition to the hardship application.

Submissions

39. Mr Walters submitted that there was a "significant level of unreasonableness" in Customs' conduct, see per Colman J in National Westminster Bank plc v Rabobank Nederland [202] EWHC 1742 (Comm) at [28]. The conduct of the action took the case out of the norm see Lord Woolf, CJ in Excelsoir Commercial & Industrial Holdings Ltd v Salisbury Hammer Aspen & Johnson (a firm) [2002] EWCA Civ 879 at [39]. It was objectively hopeless to resist the appeal. The Appellant's advisers had been consistent throughout, see Deloittes' letter of 5 June 2003 (paragraph 8 above). The letter of 15 June 2000 signed by Mr Atani on behalf of the Saudi royal family made it entirely clear that staff would be under their control. The Appellant's position was quite clear from material in Customs' hands before the appeal was brought. The only material evidence produced after the appeal was lodged in August 2004 was Mr Crawford's statement (see paragraph 21 above); however that did not add much. He said that the letter of 15 June 2000 signed by Mr Atani could not have been seen by Miss Cosier, Mr White or Mr Wilson.
40. He submitted that the opposition to the hardship application had been wholly unrealistic, quite apart from maintaining such opposition when the appeal also covered a misdeclaration penalty. In April 2005 Deloitte had provided evidence that the Inland Revenue had petitioned to wind-up the Appellant in May 2004 and that the Appellant's bank account had been frozen in July 2004; there was a time to pay agreement with the Inland Revenue in December 2004. The Appellant's account was £167,459 overdrawn at 23 March 2005. Customs had only withdrawn the opposition to hardship at the hearing on 26 January 2006 although they had most of the information 9 months earlier.
41. Mr Bacon said that Customs accepted liability for costs on the standard basis but not on an indemnity basis. In order to succeed the Appellant must show that the conduct of Customs was unreasonable to a high degree, not merely wrong or misguided in hindsight, see Simon Brown LJ in Kiam v MGN Ltd (No.2) [2002] 1 WLR 2810 at [12]; he referred also to Fitzpatrick Contractors Ltd v Tyco Fire and Integrated Solutions (UK) Ltd [2008] EWHC 1391 (TCC) at [3].
42. He submitted that the conduct of Customs had been entirely rational and reasonable. The officers did not accept that the letter of 15 June 2000 gave rise to a contract: it contained no details of the amount charged, merely what the security personnel would do. The Appellant must have had some basis for billing. The letter merely set out the terms on which staff would be provided if later agreements were made for specific staff. It would have been different if the contract had been all embracing. The Appellant should have produced the material sought in the disclosure application of November 2006 (see paragraph 26 above). He accepted that the disclosure request should have been earlier but that fact was not so unreasonable as to give rise to indemnity costs. The position of Customs had been consistent but they had been unable to get the information out of the Appellant. The terms of engagement of the security personnel were that they were self-employed.
43. As to opposing hardship, Mr Bacon asked for time to take instructions as to the compatibility with EU law of opposing hardship where a misdeclaration penalty is involved in the light of Coleman and Others v Customs and Excise Commissioners [1999] V&DR 133.
44. He said that he had not seen Mr Fakouri's letter of 17 January 2006 regarding hardship before the present hearing and Customs' advocate had not seen it before the hardship hearing. He said that not all of the information in that letter had been previously disclosed. Hardship was opposed because on the evidence Customs had considered that the Appellant had the capacity to pay. He referred to the witness statement dated 26 September 2005 by Mr Marwaha. Once Mr Fakouri's letter was read out on 23 January, Customs had withdrawn their opposition.
45. In reply, Mr Walters said that the assessment was based on the staff supplied and the sums received for the staff. The letter of 15 June 2000 had been signed by both parties who clearly intended to enter into legal relations. The letter dealt with the control issue in terms. It was unreasonable for Customs not to have made their concerns explicit in the correspondence Apart from the letter of June 2000 all other arrangements were clearly done orally. There was no rational support for the suggestion that the letter should not be taken at face value. In the event Customs decided to withdraw the assessment without the further disclosure sought. The staff were self-employed. The issue was whether they were under Saudi control: it was irrational to suppose that they were not.
46. The Tribunal gave Mr Bacon leave to make written submissions as to Coleman; this he did on 14 January 2009. In those submissions he said that the strike out applications by Customs with respect to Mr Coleman's appeal against default surcharges and that of the Miahs against civil evasion penalties were dismissed on the basis that section 84(2) of the VAT Act was "susceptible of undermining the fundamental principle of correct taxation and correct application of the compliance rules." He said that the tribunal decided that section 84(3) was not disproportionate and allowed the strike out application in respect of Mr Coleman's assessment appeal. He submitted that Coleman had no direct relevance to the present case. He said that the misdeclaration proceedings were not linked in any way to the hardship application other than an agreement that the two should be heard as a combined appeal.
47. Mr Popat responded in a letter of 28 January 2009. He said that following Coleman there was no basis for Customs to require that the Appellant pay the VAT assessed as a condition for appealing against the misdeclaration penalty and in those circumstances it was disproportionate to oppose the hardship application in the assessment appeal. It would have been an absurd result if the appeal against the misdeclaration penalty succeeded because no tax was due but the assessments stood because the appeal against them was not entertained.

Conclusions

48. The basic issue in this application is whether the conduct of Customs in resisting the appeal until 12 December 2006 was "unreasonable to a high degree" see Kiam. It is not enough that it was wrong or misguided in hindsight. It is a high hurdle, which is the more difficult for the Appellant to establish when a case is conceded before the hearing since the Tribunal does not have the benefit of having heard the witnesses. The only witness on the application was Mr Popat whose written statement was accepted without being cross-examined. The fact that the appeal was eventually conceded without an appeal hearing is not a matter to be held against Customs.
49. Mr Walters submitted that the case for Customs was hopeless from the outset of the appeal in August 2004. He did not suggest that it became hopeless at some later stage.
50. The issue in the appeal was whether the Appellant supplied staff to SAMA or whether it supplied the services of staff. The Appellant's case was that they supplied staff. It appears to have been accepted by Customs that this depended on whether the personnel came under the direction of the client rather than remaining under the control of the Appellant. However Customs appear to have taken the view that the staff could only be supplied if employed by the Appellant. Thus they pleaded in paragraph 23 of the Statement of Case that if the staff were self-employed there could not be a supply of staff by the Appellant. Customs must ultimately have accepted that this was wrong in law since otherwise the appeal would not have been conceded.
51. The stance of Customs on the control issue was in my judgment clearly wrong and it is surprising to put it at its lowest that it was maintained for so long. It is clear that the importance of the June 2000 letter which Customs were given some months before the assessment was not appreciated. It was clearly a contractual document, forming the basis of successive contracts which were part oral when the specific provision of staff was agreed. The possibility that the Saudis would agree to the provision of security personnel who were not under the direct control of the member of the royal family being guarded defies common sense. It can be a matter of no surprise that the Saudis did not enter into a series of specific written contracts for the supply of staff at specified times and places; among other matters such contracts could well jeopardise security and thus be self-defeating.
52. However while I consider that Customs were unrealistic in defending the appeal for over two years, I do not consider that it was unreasonable to such a high degree as to justify an order for indemnity costs. Although their stance on the control issue was unreasonable in that it was lacking in common sense, the question whether the staff could be supplied by the Appellant if not employed by them which was a pure question of law was less clear cut. While I am satisfied that self-employed staff could be supplied as a matter of law, I do not consider that the contrary position was unarguable. The complexity of the case was indicated by the fact that the Appellant instructed experienced counsel. In my judgment this was not unjustified.
53. The Appellant does not therefore succeed on the main issue.
54. The alternative submission by Mr Walters was that Customs' opposition to the hardship application was wholly unrealistic. This is only relevant up to 23 January 2006 when hardship was conceded. Mr Bacon did not submit that indemnity costs could not be directed in relation to the hardship issue alone.
55. The tax in issue, which was reduced to £322,292 in October 2004 being 7/47ths of the sum received, was substantial on any view. The hardship questionnaire sent on 19 August 2004 was a standard form requiring extensive material much of which was irrelevant to a company. In their letters of 16 September and 22 November 2004 and 29 April 2005 Deloittes had provided considerable material, in particular evidence as to the winding-up proceedings.
56. I have no hesitation in finding that Customs should have conceded the hardship application on receipt of the letter of 29 April 2005 at the latest. The Appellant had a substantial overdraft. The letter from RBS showed the bank's concern at the Appellant's position in July 2004. It is inconceivable that the Inland Revenue would have agreed to the time to pay agreement and ceased the winding-up proceedings if the Appellant had been in a position to pay the much larger sum assessed by Customs; the statement by Mr Marwaha made no mention of this whatsoever.
57. Under section 84(3) of the VAT Act 1994 an appeal shall be entertained without prior payment of tax if Customs or the Tribunal are "satisfied that the Appellant would otherwise suffer hardship." The test which Customs applied in this case was not whether payment would involve hardship, which in the context is financial hardship, but whether the Appellant had the capacity to pay. The correct test is whether the Appellant had the capacity to pay without financial hardship, which is very different. In order to be compatible with Community Law the legislation must be applied in a way which complies with the principle of proportionality.
58. The purpose of section 84 is to protect the revenue and to prevent appeals from being used as a means to delay payment of tax and not to provide a barrier to the exercise of the right of appeal. A hardship enquiry should be directed to the ability of an appellant to pay the tax from resources immediately or readily available and not to a lengthy investigation of an appellant's assets and liabilities and its ability to pay at some date in the future. It is relevant that if an appellant incurs costs in factoring debts so that an appeal may be entertained, those costs are not reimbursed if the appeal succeeds. Arguably that of itself may involve hardship.
59. There was no suggestion by or on behalf of the Appellant that Customs were deliberately using the hardship legislation to obstruct the progress of the appeal. The fact however was that the lengthy opposition to hardship had the result that the Statement of Case was not served until 19 months after the notice of appeal.
60. In my judgment once the material in relation to the winding-up petition, the time to pay agreement with the Inland Revenue and the overdraft at March 2005 were provided to Customs in Deloitte's letter of 29 April 2005, it was unreasonable to a high degree for Customs to continue to resist the hardship application. I direct that indemnity costs be paid for the period from 30 April 2005 to 23 January 2006 in relation to the hardship issue. This is not on the basis that Customs were applying the wrong legal test; even on the test actually applied the continued opposition after 29 April 2005 was highly unreasonable.
61. This leaves the impact of the misdeclaration penalty. Mr Bacon correctly pointed out that the dismissal of the strike out applications in Coleman in relation to Coleman and the Miahs was on the basis that section 84(2) was incompatible with EU law rather than section 84(3). However, if section 84(3) had been applicable in relation to the penalties, then the application by Customs in Coleman in respect of default surcharges should have been allowed under section 84(3) because he had not paid the tax assessed and in the case of Miah and Miah the strike out application would have succeeded under section 84(3). In fact Customs who were represented by leading counsel did not rely on section 84(3) in those appeals. The strike out application in relation to the penalties were dismissed. Since the decision in Coleman Customs have not pursued strike out applications in penalty cases and have not resisted hardship applications in such cases. As the Appellant pointed out it would be absurd if the appeal against the penalty had succeeded on the basis that no tax was due but the assessment stood because the appeal against the assessment was not entertained. However in Coleman an unless order was made in relation to the assessment appeal, although the application to the strike out appeal by the Khans was dismissed despite there being an unpaid assessment. I have concluded that the application of Coleman as regards the application of section 84(3) to proceedings such as the present which concern both an assessment and a penalty was not sufficiently clear to warrant an indemnity costs order for the period before 30 April 2005, notwithstanding that it would have been wholly anomalous if the assessment appeal had not been entertained but the misdeclaration appeal had succeeded.
62. I would add that I consider the imposition of the misdeclaration penalty to have been wholly inappropriate in this case. Mr Walters did not however submit that this warrants an indemnity costs order.
63. Finally, Mr Walters pressed the Tribunal to assess the amount of the costs without directing a detailed assessment under Rule 29(1)(b). As I understood his application, this was on the basis of an indemnity costs order. Since the indemnity costs order only covers part of the costs for part of the time, the rationale is much reduced. The amount of costs claimed is substantially greater than the costs which the Tribunal normally assesses. I accordingly direct taxation under Rule 29(1)(b) in accordance with the normal practice.

THEODORE WALLACE

CHAIRMAN

RELEASED: 25 February 2009

LON 2004/1217