Victory against HMRC - but at what cost?
From a review of recent costs decisions handed down by the First-tier Tribunal (FTT), it is difficult to escape the conclusion that the FTT can be guilty of inconsistency and results-led reasoning when exercising its jurisdiction in relation to costs orders.
This blog is based on an article by Adam Craggs and Harry Smith that appeared in Tax Journal issue 1603 (20 January 2023).
Costs recovery in general
The starting point in civil litigation outside the tribunal system is relatively straightforward. Broadly speaking, a successful party is entitled to recover their reasonable costs of bringing or defending a claim (as the case may be). The aim is to ensure that those who are put to the inconvenience and expense of having recourse to the courts to resolve a dispute recover the costs they incurred: the so-called ‘indemnity principle’. Of course, this objective is not always achieved, and a successful claimant or defendant tends, in practice, to recover around 60%–70% of their costs.
However, in the world of tax litigation before the FTT, the circumstances in which an order for costs can be made are more limited. Rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules, SI 2009/273 (the FTT rules), provides that the FTT may only make an order for costs in a tax dispute:
(i) in relation to wasted costs;
(ii) where the FTT considers that a party, or their representative, has acted unreasonably in bringing, defending or conducting proceedings; or
(iii) if the proceedings have been allocated as a Complex case under rule 23 of the FTT rules and the taxpayer has not provided a written request to the FTT that the proceedings be excluded from the costs regime within 28 days of receiving the allocation notice from the FTT.
A party seeking its costs must ‘send or deliver a written application to the FTT and to the person against whom it is proposed that the order be made’ (rule 10(3)(a)) and ‘send or deliver with the application a schedule of the costs or expenses claimed in sufficient detail to allow the Tribunal to undertake a summary assessment of such costs or expenses if it decides to do so’ (rule 10(3)(b)).
Wincanton
In Wincanton Holdings Ltd v HMRC [2022] UKFTT 446 (TC) (in which RPC was instructed on behalf of the taxpayer), the FTT dismissed the taxpayer’s application for costs made under rule 10(1)(b) of the FTT rules. HMRC had withdrawn its assessments after the appeals had been notified to the FTT but before they had been heard, and before the hardship application that accompanied them had been determined (the taxpayer had also commenced judicial review proceedings against HMRC). The taxpayer sought its costs on the basis that HMRC had acted unreasonably by failing to withdraw the assessments at the earliest possible opportunity.
A costs schedule was provided with the application. This identified the fee earners involved and the hours spent by each under headings setting out different types of work done. In response to a request from HMRC, a further schedule of costs was provided which provided considerable detail about the work carried out. However, fee notes for counsel and a breakdown of the £388,235 claimed in respect of the taxpayer’s accountants’ fees were not provided, since such information is not required by form N260, the standard form used in costs applications.
The FTT considered it ‘fair to recognise that the standard form claim documentation was used by the Appellant breaking down the time into the various categories specified within the form itself in respect of the time spent by the solicitors’, but nonetheless considered that the schedule, which had been prepared using form N260, would not allow for summary assessment for a claim exceeding £700,000 and therefore refused the application for costs.
The FTT further considered that despite the fact that the appeals had been notified to the FTT, it was not seized of the proceedings as section 84(3), Value Added Tax Act 1994 (VATA 1994) and section 16(3), Finance Act 2004, provide that no appeal is to be entertained unless either the amounts in dispute have been paid to HMRC or a hardship application has been granted, either by HMRC or by the FTT.
This gives rise to an unfortunate result. Appellants in VAT cases who are not in a position to ‘pay to play’ in order to appeal a decision and whose hardship applications have not yet been determined are, so it would seem, unable to recover their costs occasioned by HMRC’s unreasonable conduct; in direct tax litigation there is of course no such anomaly.
Harris
In Harris v HMRC [2022] UKFTT 447 (TC), the taxpayer sought its costs from HMRC under rule 10(1)(b), again in circumstances where HMRC had conceded the appeal before a substantive hearing (although a number of interim applications had been made by HMRC which the FTT had refused, and disclosure had been provided). The taxpayer sought costs of £354,063.48, to be assessed on the indemnity basis. HMRC applied for the costs claim to be struck out under rule 8 of the FTT rules, claiming that the schedule of costs did not provide sufficient detail to enable a summary assessment to be carried out and that the statement of costs did not state that the costs claimed did not exceed the sum payable by the taxpayer.
HMRC’s strike-out application was unsuccessful. Since no 'unless' order had been made, rules 8(1) and 8(3) of the FTT rules did not apply, and as the costs proceedings were within the FTT’s jurisdiction there was no basis for it to strike the application out under rule 8(2).
Unlike in Wincanton, the schedule of costs in Harris did not follow the standard form N260. It included four non-chronological groupings. The FTT held that it was deficient, as it ‘would have rendered the task of summary assessment too time consuming and difficult to undertake for any judge attempting to do so particularly in the context that there had been no judicial determination’ (para 69). However, the FTT was able to infer, from the context, that the costs were those that the taxpayer was liable to pay and that, being an individual acting for private purposes, he would not be able to recover the VAT payable in respect of such costs (despite the lack of explicit statements to this effect). The FTT therefore held that the costs schedule was not deficient on these two grounds.
The FTT noted that on the facts it would have been 'quite plain' to HMRC that the appellant would have been incurring substantial costs, and asked itself whether the defect in the schedule of costs had so prejudiced HMRC that the taxpayer should be prevented from recovering his costs. The FTT remarked that ‘[g]iven the size of the claim it was entirely unrealistic of [the taxpayer’s representatives] to even suggest that the costs be determined summarily even had the schedule been more fully particularised’, and that, while this did not excuse the preparation of a deficient costs schedule ‘given the inevitability of the nature of the order as to detailed assessment HMRC have suffered no prejudice whatsoever as a consequence of the defects in the Schedule of Costs’. The FTT therefore exercised its powers, of its own motion, under rule 7(2)(a) of the FTT rules and waived the requirement for a fully- compliant schedule of costs to be provided. It awarded the taxpayer his costs, subject to detailed assessment in default of agreement between the parties.
The FTT recognised that this outcome differed from that reached in Wincanton. It noted that the FTT had a discretion to waive the breached requirement, or to require it to be remedied and/or to make an appropriate order as to costs. The FTT cited the greater quantum of the claim in Wincanton (in excess of £700,000, as opposed to £354,063.48 in Harris) and the earlier stage of the appeal as differentiating it from Harris (although given the finding in Wincanton that the FTT was not seized of any proceedings and did not therefore have jurisdiction to make a costs order, this point is in practice academic).
The above two cases reveal something of an inconsistent approach. Given that the FTT was willing to waive the non-compliant aspects of the costs schedule in Harris on grounds including that the size of the claim (£354,063.48) meant that it was not suitable for summary assessment, it is surprising that it rejected the costs schedule in Wincanton which related to costs of almost double those claimed in Harris. Indeed, in Wincanton, the FTT expressly noted (at paras 49–50) that it would, in all probability, have wanted to hear evidence to determine whether HMRC’s conduct had been unreasonable, thereby precluding summary assessment, making the inconsistency of this aspect of the decision with that in Harris all the more perplexing.
It is also interesting to note the comment in para 107 of the decision in Harris to the effect that the costs awarded included those that related to the initial application for a closure notice. Pre-litigation costs are normally disallowed (see, for instance, Distinctive Care Ltd v HMRC [2016] UKFTT 764 (TC) at paras 85–86), though in Harris the FTT clearly considered that seeking a closure notice was of integral importance to the litigation before the FTT and so costs regarding it were recoverable.
Field
GC Field & Son Ltd and others v HMRC [2022] UKFTT 314 (TC) also concerned an application to the FTT for costs based on HMRC's unreasonable conduct. The FTT agreed that HMRC’s conduct had been unreasonable - HMRC had prosecuted a matter where it bore the burden of proof without evidence meeting that burden so that ‘there could never have been any reasonable prospect of success’. However, the FTT considered that the taxpayers had had a ‘lucky strike’ in securing reliefs ‘to which they [knew] they were not entitled’ and so awarded the taxpayers costs of only £1. The FTT stated that it was taking account of the fact that ‘the tax planning engaged in by the Appellants [had], through procedural failure, resulted in a tax benefit of £1,275,113 in the case of the Field Appellants and £58,750 in the case of the Shaw Appellants to which they acknowledge they were not entitled’.
This decision seems to run counter to the indemnity principle that underlies the costs recovery regime, referred to above. If the FTT considered that the taxpayers did not ‘deserve’ to recover their costs, it might have been more appropriate for it simply to have declined to make a costs order (rule 10(2) provides that the FTT ‘may’ make a costs order, not that it must do so). Rule 44 of the Civil Procedure Rules (SI 1998/3132) provides that, in non-tribunal litigation, a court may have regard to a party’s conduct before or during litigation in determining the quantum of a costs order, but where the conduct in question is the subject-matter of the litigation (in this case, the tax planning undertaken by the appellants), it is hard to avoid the conclusion that the FTT was passing moral judgment on appellants who had succeeded in the substantive hearing due to HMRC’s unreasonable conduct – which was the basis of the costs application in the first place. In reaching its decision, the FTT appears to have been influenced by its disapproval of the tax planning undertaken by the appellants.
We understand that the appellants have appealed one or more aspects of this decision to the Upper Tribunal.
Comment
Three themes emerge from these decisions.
• First, it is not clear what constitutes an ‘acceptable’ costs schedule. While FTT decisions do not constitute binding precedent, a cautious litigant (or advisor) must be tempted to provide more than what is required in form N260, and consider including timecards and detailed narratives along with the customary summaries, in order to minimise the risk of the FTT considering that it has insufficient information to carry out a summary assessment (even where, in view of the amounts involved, such summary assessment is unlikely to be undertaken).
• Second, the consequences of providing a non-compliant costs schedule are also unclear. In Harris, the FTT excused non-compliance because the size of the claim meant that it would not be summarily assessed in any event, whereas in Wincanton it declined to do so, notwithstanding the fact that the claim was for a greater sum. So should a costs application, even if made in the standard form, now include a pre-emptive application for any non-compliance with rule 10(3)(b) of the FTT rules to be excused?
• Third, even where the form of a costs application is satisfactory, there remains the possibility that, as in Field, the FTT will make a costs award bearing no relation to the successful appellant’s actual costs on the basis that it considers itself compelled to make a costs order but has no sympathy with the taxpayer.
The overarching theme is one of uncertainty. While, as Jeremy Bentham famously said, 'the power of the lawyer is in the uncertainty of the law', this uncertainty cannot be a good thing in the context of a legal system that relies so heavily on clarity and certainty of treatment.