First-tier Tribunal (Tax)

 

[2011] UKFTT 276 (TC)

TC01138

 

Appeal number: LON/2007/956

 

 

COSTS – Transitional appeal – Opposed Application by HMRC under Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009, Sch 3, para 7 for 1986 costs rules to apply – 18 months delay after 2009 Rules took effect – Fact that MTIC appeal not relevant – Hawkeye [2009] UK FTT 636 (TC) approved – Application dismissed

 

FIRST-TIER TRIBUNAL

TAX

 

 

ATLANTIC ELECTRONICS LTD Appellant

 

 

- and -

 

 

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS Respondents

 

 

 

TRIBUNAL: JUDGE THEODORE WALLACE

Sitting in public in London on 21 January 2011

 

Abbas Lakha QC and Edmund Vickers, instructed by Jeffrey Green Russell, for the Appellant

 

Karen Robinson, instructed by Howes Percival LLP, for the Respondents

 

 

© CROWN COPYRIGHT 2011

 

 

DECISION

 

1. This decision concerns the costs regime for an appeal which was consolidated in 2008 with two further appeals all of which are transitional appeals, being current proceedings when the First-tier Tribunal replaced the VAT and Duties Tribunal on 1 April 2009.  On that date the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 took effect and the Value Added Tax Tribunals Rules 1986 ceased to have effect.  I refer to these as the 2009 Rules and the 1986 Rules.

2. The question to be decided is whether the Tribunal should give a direction applying Rule 29 of the 1986 Rules and disapplying Rule 10 of the 2009 Rules covering orders for costs, no direction having yet been given.  HMRC applied on 28 October 2009 for a direction applying the old costs rules pursuant to Schedule 3, paragraph 7 of the Transfer of Tribunal Functions and Revenue and Customs Appeals Order (“the Transfer Order”) 2009.  In practice costs under the 1986 Rules normally follow the event.

3. The Appellant opposes the application.  In fact the hearing was initiated by an application by the Appellant on 21 October 2010 for a direction that Rule 10 of the 2009 Rules should not be disapplied.

4. The appeals are against the disallowance of input tax totalling £1,128,137.50 on the purchase of mobile phones in periods 03/06, 04/06 and 05/06 on the grounds that the Appellant knew or should have known that its transactions were connected with the fraudulent evasion of VAT, see Kittel v Belgium (Case C-439/04) [2008] STC 1537.  HMRC contend that six acquisitions were in chains leading directly to fraudulent defaulters and that a further two acquisitions were in contra chains.

5. If the appeals had been lodged under the 2009 Rules they would have been categorised as Complex cases and it would have been open to the Appellant to have opted out of the costs regime otherwise applicable to Complex cases.  Rule 23 providing for categorisation of appeals applies only to appeals made from 1 April 2009 onwards, see Surestone Ltd v Revenue and Customs Commissioners [2009] UK FTT 352(TC).  This means that under the 2009 Rules costs could only be ordered in this case either on the grounds of wasted costs or for unreasonable conduct.

The legislation

6. Paragraphs 6 and 7 of Schedule 3 to the Transfer Order provide, so far as relevant, as follows:

“6. Any current proceedings are to continue on and after the commencement date as proceedings before the tribunal.

7(1) This paragraph applies to current proceedings that are continued before the tribunal by virtue of paragraph 6.

(2) …

(3) The tribunal may give any direction to ensure that proceedings are dealt with fairly and justly and, in particular, may –

(a) apply any provision in procedural rules which applied to the proceedings before the commencement date; or

(b) disapply any provision of the Tribunal Procedure Rules.

 

(4) …

 

(5) Any direction or order made or given in proceedings which is in force immediately before [1 April 2009] remains in force on and after that date as if it were a direction or order of the tribunal relating to proceedings before that tribunal.

(6) …”

 

7. Rule 29 of the 1986 Rules provided,

 

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

 

(a) within such period as it may specify 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; or

(b) the costs of such other party of and incidental to and consequent upon the appeal or application to be assessed … by way of detailed assessment …”

 

The history of the proceedings

 

8. The appeals were against decisions on 22 May 2007, 28 June 2007 and 28 May 2008 disallowing input tax claimed on the returns for March, April and May 2006.  The three appeals were consolidated on 10 July 2008 and HMRC’s Statement of Case and List of Documents were served on 8 August 2008.  In the Statement of Case HMRC stated that they would ask for costs if the appeal was dismissed.

 

9. By the time when the 2009 Rules took effect HMRC had served seven witness statements and the Appellant had served one.  At that point some 16 level-arch files or ring-binders of documents had been served.  There had been one directions hearing on 30 May 2008 (before the third decision had been notified to the Appellant) at which a costs order of £1,000 was made against HMRC.  On 18 December 2008 the Tribunal gave a direction without a hearing under which further witness statements were to be served by 27 February 2009 with no further evidence without leave; the parties were to provide dates for a pre-trial review.

 

10. On 16 September 2009 (incorrectly dated 16 October) HMRC applied for a further extension of time to serve their witness statements.  The application included,

 

“5. In respect of costs the Respondents contend that the costs of this application should be costs in the case or alternatively that they be reserved until the conclusion of the case.”

 

A stamp was applied allowing the application unless notice of objection was served in 14 days; there was a written endorsement by a judge, “Costs in the case.”

 

11. On 6 and 10 November 2009 HMRC served a further eight  witness statements, all but two being further statements by existing witnesses with 11 files or ring binders.

 

12. On 8 February 2010 the Appellant notified the Tribunal that its previous representative was no longer acting and requested copies of any communications since the beginning of 2009 between the Tribunal and the representative and the Tribunal and Howes Percival.  On 31 March 2010 Jeffrey Green Russell notified the Tribunal of their appointment to act.  On 6 April 2010 the Tribunal consented to an application by the Appellant for a 10 week stay which included, “Costs to be in the cause.”

 

13. On 18 August and 2 September 2010 without hearings the Tribunal granted further extensions of time for HMRC to serve witness statements; these included the same provisions as to costs as in the earlier directions.  On 2 September and 14 October 2010 HMRC served nine further witness statements with 12 files or ring binders.

 

14. On 1 October 2010 the Appellant’s solicitors were told on the telephone and in an e-mail that the appeal had been categorised as standard.  This was in fact incorrect and was stated without judicial authority.  The solicitors did not rely on this and on 21 October applied for a direction that Rule 10 of the 2009 Rules should not be disapplied.  HMRC responded with the notice opposing the Appellant’s application and making the application to apply the 1986 Rules referred to at paragraph 2 above.

 

Submissions for HMRC

 

15. Although Mr Lakha addressed the Tribunal first, since the application for a direction applying the 1986 Rules for costs was by HMRC, I summarise Miss Robinson’s submissions first.

 

16. Miss Robinson submitted that in order to deal with the proceedings fairly and justly in accordance with paragraph 7(3) of the Transfer Order the 1986 costs rules should be applied.  She said that there was no limitation on the Tribunal’s power under paragraph 7 requiring there to be compelling reasons or that directions under the paragraph should be comparatively rare or that it was retrograde to apply the 1986 costs rules.

 

 

17. She said that the deterrent effect on an Appellant of the risk of costs under the 1986 costs regime was no argument in this case where the Appellant had started and continued the appeal when it was expected by both parties that costs would follow the event.  HMRC had referred to costs in the Statement of Case.

 

18. She said that it was not said that the Appellant was in such a financial position that it could not continue the appeal if it was at risk for costs.  She submitted that in any event the fact that an Appellant had limited funds was not relevant in deciding whether it was fair and just to apply the 1986 costs rules; otherwise an Appellant without funds would be better placed than one with funds.

 

19. Miss Robinson said that in Pars Technology Ltd v Revenue and Customs Commissioners (2009) (not reported) where the Appellant wished to avoid the uncertainty of costs the Tribunal had nevertheless directed that the 1986 Rules for costs should apply.

 

20. She said that the decision in Hawkeye Communication Ltd v Revenue and Customs Commissioners [2010] UK FTT 636 (TC) released on 10 December on which the Appellant relied is not binding on the Tribunal and that HMRC were still in time to apply for leave to appeal against that ruling.  She said that the delay in seeking a direction under the Transfer Order and the length of time since the 2009 Rules took effect was not relevant to the question whether it was fair and just to apply the 1986 Rules for costs.

 

21. Miss Robinson said that there were three reasons why the Appellant could not be entitled to assume that the 2009 costs rules would apply: (1) the transitional provisions empowered the Tribunal to apply the 1986 Rules; (2) there had been a pattern of the Tribunal applying the 1986 costs rules in a large number of cases of which Pars and Surestone were examples; (3) the Appellant had itself applied for a direction that Rule 10 of the 2009 Rules should apply.

 

22. She said that on 16 September 2009 HMRC had applied for the costs of an application to be costs in the case; this was on the basis that the 1986 costs rules applied.  The Appellant should have objected if it considered otherwise; given that there was no response the Appellant was not entitled to assume that the 1986 costs rules would not apply.

 

23. Miss Robinson said that it was not right simply to evaluate how much work had been done on the appeal before April 2009 and compare that with what had been and would be done after; such comparison was not determinative, although it was relevant.  It was not a case where there was minimal work beforehand; HMRC had invested considerable time, effort and expense and the Appellant’s witness statement had been served.

 

24. She said that if the Tribunal found that the Appellant was guilty of fraud or that it should have known of the fraud, HMRC should be able to recover its costs.  In deciding whether it was fair and just that the 1986 costs rules should apply, it was relevant that fraud was alleged.

 

25. She said that there are unavoidable anomalies with cases started before 1 April 2009; Parliament had left the exercise of a discretion with the Tribunal.

 

26. In a short written submission served after the hearing at the Tribunal’s invitation, Miss Robinson stated that HMRC did not rely upon the Community Law principle of legitimate expectations.  In support of the argument that it was fair and just to apply the 1986 Rules for costs she contended that the Appellant started the appeals in 2007 under the 1986 costs rules under which the normal principle was that costs followed the event.  If the appeals had been concluded before 1 April 2009 the successful party would have recovered costs, MTIC cases falling outside the Sheldon statement.

 

Submissions for the Appellant

 

27. Mr Lakha said that as a matter of fact and law the 2009 Rules applied from 1 April 2009 unless there was a direction by the Tribunal disapplying them.  There was no disapplication by default; from 1 April 2009 it was necessary for any party seeking to disapply the 2009 costs regime to apply for a direction.

 

28. He said that the three points made by Miss Robinson at paragraph 21 above did not stand up: (1) the 1986 Rules only applied if there was a direction; (2) if there had been a pattern of the Tribunal directing that the 1986 costs rules apply, the Appellant was not to know this; (3) the application by the Appellant was purely to obtain clarification confirmation.

 

29. Mr Lakha submitted that although Hawkeye was not binding it was persuasive and the principles set out were correct. Each of the points raised in this appeal had been raised and covered in Hawkeye.

 

30. He said that the delay by HMRC in making its application must be relevant as well as the amount of work done after 1 April 2009.  The more time passed, the more firmly embedded was the Appellant’s legitimate expectation that the 2009 costs rules applied.  No explanation had been given by HMRC for the delay.

 

31. He said that the submission that if it succeeded in establishing fraud HMRC should be entitled to recover its costs was directly contrary to the policy of the 2009 Rules.  Judge Berner had held in Hawkeye that the nature of the case could not create any expectation on the part of HMRC.

 

32. Mr Lakha said that HMRC’s lawyers must have known that absent a direction the 2009 Rules applied.  Any expectation could only arise on a legal basis.  It would have been different if although no application had been made the parties had agreed that the 1986 Rules for costs should apply.  There had been no application by HMRC until after the Appellant’s application.  The Appellant could not be taken to have implicitly accepted that the 1986 Rules should apply when the law was clear in the absence of a direction.

 

33. Mr Lakha submitted that the relative means of the parties were a relevant circumstance.  He did not suggest that the Appellant could not afford to pursue the appeal if costs were at risk, but said that HMRC was bound to have a deeper pocket and the Appellant wished to avoid the risk of costs.  It was an overriding objective under Rule 2(2)(a) and (c) that there should not be a costs barrier for Appellants.  Both parties and the Tribunal had the safeguard of the power to award costs for unreasonable conduct.  When making its appeal in 2007 the Appellant could not have anticipated that it would not have been heard before 2011.

 

34. He said that the Appellant’s solicitors who had only been instructed in April 2010 had only obtained the full paperwork on 26 October 2010.  They had been told by the Tribunal on 1 October that the appeal was in the standard category (as they had also been told in Hawkeye see at [6]); their application had followed to obtain confirmation of the position.

 

35. He said that as in Hawkeye, the majority of the work in this case was not completed before 1 April 2009.  The main costs would be those of the appeal hearing and there had been many more witness statements since April 2009 than before including a statement based on FCIB material.  HMRC were seeking to introduce further statements.

 

36. He said that the facts in Pars were very different to the present case; in particular in Pars the Appellant had obtained a costs order after 1 April 2009.

 

37. In response to Miss Robinson’s further submissions recorded to at paragraph 26, counsel for the Appellant relied on the government’s response to the consultation document prior to the making of the 2009 Rules, “Transforming Tribunals: Implementing Part I of the Tribunals Courts and Enforcement Act 2007 – The Government’s Response, published 19.05.08.”  This included the following,

 

“Costs will not be appropriate for the majority of tax appeals.  However … costs should be available for some large, substantial or complex cases, whilst at the same time ensuring that taxpayers are not deterred from taking their case to the tribunal because of a fear of incurring HMRC costs.”

 

The Response stated that the taxpayer could opt-out of costs in cases allocated as Complex and continued,

 

“This is consistent with the principle that no taxpayer be obliged to be in a costs regime against their will.”

 

Counsel submitted that there having been no application by HMRC until the eleventh hour there existed a legitimate expectation for the Appellant that the 2009 Rules apply from 1 April 2009.

 

Conclusions

 

38. The power to give a direction under paragraph 7(3) of the Transfer Order is exercisable “to ensure that proceedings are dealt with fairly and justly”.  Although such a direction is not made under the 2009 Rules which expressly require the Tribunal to give effect to the overriding objective in rule 2 when exercising a power under those Rules, nevertheless the principles in rule 2 are clearly relevant because they are directed at dealing with cases fairly and justly which is also the object of paragraph 7(3) of the Transfer Order.

 

39. Mr Lakha was clearly correct in his submission that from 1 April 2009 the 2009 Rules including the costs rules apply unless there is a direction disapplying them and that there can be no disapplication by default.  I would add that there can be no disapplication by implication.

 

40. Although paragraph 7(3) provides that the Tribunal may disapply any provision of the 2009 Rules, there are in my judgment no circumstances in which the Tribunal could properly disapply the 2009 Rules in their entirety.  In particular Rules 39 to 41 covering permission to appeal and reviews are necessary to comply with the statutory requirements.  In reality any directions have usually been limited to Rule 10.

 

41. The power to apply the 1986 Rules for costs is necessary to meet the legitimate expectations of an Appellant who started proceedings before 1 April 2009 in the expectation that if successful he could recover his costs.  Denial of such legitimate expectation would have been contrary to Community law.  However the state (or its emanations such as HMRC) cannot rely on legitimate expectations under Community law.

 

42. It is to be noted, however, that the Transfer Order did not contain a right for an Appellant to opt out of a direction applying the 1986 Rules for costs in transitional cases if there is a direction, although such a right to opt-out would have been consistent with the Response. There have been cases where the 1986 Rules for costs have been applied against the wishes of the Appellant, such as Pars.

 

43. Clearly the closer to 1 April 2009, the stronger was the case for applying the 1986 costs rules; this was particularly obvious in cases where the actual appeal hearing straddled the commencement date.

 

44. In a considerable number of cases the Tribunal has directed that the 1986 Rules for costs apply, both parties having agreed or neither having objected.

 

45. The problem arises when as here one party opposes the application of the 1986 costs rules and above all when that party is an Appellant which can invoke legitimate expectations because of the time that has passed.

 

46. It is an unfortunate fact that in many cases, particularly MTIC cases, neither party has given any consideration to whether a direction should be made applying the 1986 Rules until a very late stage.  This is particularly surprising in the case of the Respondents who must be well aware of the need to make an application if they wish the 1986 costs rules to apply.

 

47. In the present case the Appellant’s solicitors who were only instructed I April 2010 could not be sure which costs regime applied until they obtained all the papers, some of which they only obtained in October 2010.  They were told on 1 October 2010 that the case had been categorised as standard in which case costs shifting would not apply.  As stated at paragraph 14 this advice was incorrect.  Very sensibly the solicitors did not rely on this and sought a confirmatory direction which gave rise to this hearing.

 

48. In my judgment the fact that the Tribunal made a direction in September 2009 (see paragraph 10 above) that the costs of an application should be costs if the case is of marginal relevance.  The application which was by HMRC should have been accompanied by an application under paragraph 7(3).  The Tribunal file was at that stage already 5 centimetres thick and the judge must have assumed that in the absence of an application under paragraph 7(3) a direction had previously been given.  In the absence of a paragraph 7(3) direction, the direction given was ultra vires.

 

49. I do not accept that the delay in seeking a direction is not relevant.  In my judgment it is clearly not acceptable that parties should wait and see how a case develops before making an application for a direction.  I do not suggest that the delay here was for that reason, however it clearly had that effect. 

 

50. In any event the greater the amount of costs incurred after 1 April 2009 the stronger the position of the party resisting a direction for the 1986 Rules to apply.

 

51. Miss Robinson relied on Pars Technology, again an MTIC appeal, where HMRC applied on 19 October 2009 after the first week of an appeal listed for 4 weeks for the 1986 costs rules to apply.  Pars Technology was much further advanced before 1 April 2009, the delay was much shorter and the Appellant itself had recently sought and obtained a costs order.

 

52. I accept the submission of Mr Lakha that the means of the parties are relevant, however, I do not consider the relative means of the parties to be a major factor in this case.

 

53. I also accept his submission that the fact that the case involves an allegation of fraud is not relevant.  The main effect of the nature of this case is to increase the costs at risk and, together with that risk, the importance of a timely application by a party seeking to apply the old costs regime.  In neither the 2009 Rules nor the Transfer Order is there anything to suggest that the presence of an allegation of fraud raises a presumption in favour of costs shifting.  An Appellant is entitled to opt out under the 2009 Rules whether or not fraud is alleged.

 

54. In my judgment the lapse of time since April 2009 when the 2009 Rules came into effect is decisive in a case such as this when there is an objection by the Appellant to the application of the old costs rules and there has been nothing in the conduct of the Appellant or otherwise to make it necessary to apply those rules in order to ensure that the proceedings are dealt with fairly and justly.  I am in full agreement with the reasoning of Judge Berner in Hawkeye.

 

55. This decision may appear unnecessarily long, however the application hearing took a whole day and raises a point of importance since several hundred MTIC appeals which started under the 1986 Rules have still to be decided and in many of these there has been no application to apply the old costs rules.

 

56. The application is dismissed.  The result is that the only costs which can be ordered in this appeal are for wasted costs under Rule 10(1)(a) and costs for unreasonable conduct under Rule 10(1)(b).

 

57. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

 

 

 

THEODORE WALLACE

 

TRIBUNAL JUDGE

 

RELEASE DATE: 11 February 2011

 

 

Amended pursuant to Rule 37 of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 on 16 February 2011