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Tribunal orders HMRC to pay taxpayers’ costs where HMRC ought to have known that their case did not have a reasonable prospect of success

30 October 2013

Following hot on the heels of the Simple Solutions decision, the First-tier Tribunal (Tax Chamber) ('FTT') (Judge Mosedale) has again ordered HMRC to pay the taxpayer's costs in Roden & Anor v HMRC.[1].

In our blog of 2 October 2013, HMRC ordered to pay taxpayer's costs following improper allegation of fraud, we discussed the recent case of Simple Solutions GB Limited[2], in which the FTT made a costs order against HMRC following an improper allegation of fraud made against the taxpayer.

The substantive appeal

In the substantive appeal[3], which was also heard by Judge Mosedale, HMRC had unsuccessfully argued that a supply of accommodation in a hotel by the appellant hoteliers was exempt because the supply was not within Item 1(d) of Group 1 of Schedule 9 to VATA 1994, ie “the provision in a hotel of sleeping accommodation”, on the basis that the supply was (deemed) not to be made to a person who would actually use the accommodation and sleep in the room, but to an intermediary for that person. The FTT rejected this argument and allowed the taxpayers' appeal.

The costs application

Following their successful appeal, the taxpayers applied to the FTT for a costs order against HMRC pursuant to Rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, on the grounds that HMRC had "acted unreasonably in bringing, defending or conducting the proceedings". The appellants argued that HMRC should not have defended the appeal because their position was unsustainable. The FTT considered what constituted unreasonable behaviour, and in particular the case of Leslie Wallis[4] to which HMRC drew its attention.

The FTT observed that it is not the case that any wrong assertion by a party to an appeal is automatically unreasonable, and being wrong is not, alone, a justification for ordering one party to pay the other’s costs. The FTT noted that it “should not be too quick to characterise pursuing what is found to be an unsuccessful case as unreasonable behaviour.” On this basis, if “HMRC’s view had no reasonable prospect of success, HMRC would have been acting unreasonably if they ought to have known this but not otherwise.”

The FTT found that in the circumstances, HMRC’s case did not have a reasonable prospect of success. In considering whether HMRC ought to have known this, the FTT considered HMRC as a whole, rather than the individual officer presenting the case and concluded that they ought to have known that their case did not have a reasonable prospect of success.

Comment

It is of some concern that HMRC pursued litigation in this case and continued to defend their action in circumstances where their arguments not only had no reasonable prospect of success but in the view of the FTT they ought to have known that this was the case. This decision is also a timely reminder to taxpayers that they should give serious consideration as to whether they should make an application to the FTT for a costs order against HMRC when it is considered that HMRC or their representative has acted unreasonably in bringing, defending or conducting the proceedings.

This blog was written by Nigel Brook.


[1] [2013] UKFTT 523 (TC).

[2] [2013] UKFTT 415 (TC).

[3] [2012] UKFTT 586 (TC).

[4] TC2499.