Victory – but at what cost?
From a review of recent costs decisions handed down by the 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.
In Wincanton, a costs schedule that the FTT considered non-compliant was disallowed on the basis that it was insufficient to support a summary assessment, while in Harris, a non-compliant schedule was excused even though it was ‘entirely unrealistic’ to suggest that summary assessment be undertaken on the basis of the size of the claim (just over half that in Wincanton). This has created some uncertainty and as a result it may be prudent for taxpayers to provide significantly more detail than has hitherto been customary in their costs applications, and potentially even to make precautionary applications for any defects to be excused.
Several interesting costs decisions have emerged from the First-tier Tribunal (FTT) in recent months. From these decisions, it is possible to discern a number of practice points that are relevant for all those involved in tax litigation and who might wish to seek a costs order from the FTT.
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:
- in relation to wasted costs;
- where the FTT considers that a party or their representative has acted unreasonably in bringing, defending or conducting proceedings; or
- 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 FTT to undertake a summary assessment of such costs or expenses if it decides to do so’ (rule 10(3)(b)).
In Wincanton Holdings Ltd v HMRC  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), in circumstances where HMRC withdrew its assessments after the appeals had been notified to the FTT but before the appeals, and 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 that identified the fee earners involved and the hours spent by each under the headings ‘attendances on the Appellant (letters/emails out, telephone), attendances on the opponent (letters/emails out, telephone), attendances on others (letters/emails out, telephone), work done on documents, [and] attendance at hearings’ (para 22). In response to a request from HMRC, a further schedule of costs was provided which particularised in considerable detail the work carried out but fee notes for counsel and a breakdown of the £388,235 claimed in respect of the taxpayer’s accountants’ fees were not provided as such information is not required by form N260, which is the standard form used in costs applications.
While 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’, it 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 VATA 1994 s 84(3) and FA 2004 s 16(3) 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 the unfortunate position that 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.
In Harris v HMRC  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, on the grounds 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 given very short shrift by the FTT. The FTT stated that as an ‘unless order’ had not been made, rules 8(1) and 8(3) of the FTT rules were inapplicable and as the costs proceedings were within the FTT’s jurisdiction there was no basis for striking the application out under rule 8(2).
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 in that 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, although there was no explicit statement that the costs did not exceed those that the taxpayer was liable to pay, or any statement as to whether the taxpayer was able to recover VAT, 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. The FTT therefore held that the costs schedule was not deficient on these two grounds.
The FTT then went on to consider whether the defect in the schedule of costs had so prejudiced HMRC that it should deprive the taxpayer of an award of his costs in circumstances where, on the facts, it would have been ‘quite plain’ to HMRC that the taxpayer would have been incurring substantial 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 compliant schedule of costs incurred 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, noting that it was a matter for the FTT’s discretion whether to waive the breached requirement, require it to be remedied and/or 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 an apparent inconsistency in approach. If 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 the FTT 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 often disallowed (see, for instance, Distinctive Care Ltd v HMRC  UKFTT 764 (TC) at paras 85–86), though the FTT in the present case was clearly of the view that seeking a closure notice was of integral importance to the litigation before the FTT and so costs regarding it were recoverable.
GC Field & Son Ltd and others v HMRC  UKFTT 314 (TC) also concerned an application to the FTT for costs based on the unreasonable conduct of HMRC. Although the FTT agreed that HMRC’s conduct had been unreasonable – by prosecuting 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’ – it 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 in terms 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 the FTT simply to have declined to make a costs order (rule 10(2) provides that the FTT ‘may’ make a costs order). 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 difficult to avoid the conclusion that the FTT was passing moral judgment on appellants who had succeeded in the substantive hearing only 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 underlying arrangements entered into by the appellants.
What common themes can be drawn from these decisions? First, what constitutes an ‘acceptable’ costs schedule is not clear. Although decisions of the FTT do not constitute binding precedent, it must be tempting for the cautious practitioner 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 amount claimed, it is unlikely that the FTT would be willing to carry out a summary assessment (and what the monetary threshold is for such a decision remains unclear).
The consequences of providing a non-compliant costs schedule are also unclear. In Harris, the FTT waved through a costs schedule that would not have enabled it to carry out a summary assessment 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. Is it therefore necessary for a costs application, even if made in the standard form, to include a precautionary application for any non-compliance with rule 10(3)(b) of the FTT rules to be excused?
Finally, even where the form of a costs application is satisfactory, there remains the possibility that, as in Field, the FTT will carry out a summary assessment and award costs in an amount that bears 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.
Perhaps the overarching theme is one of uncertainty. That is not a good thing in a legal system that is heavily reliant on the principle of legal certainty, although as Jeremy Bentham famously said: ‘the power of the lawyer is in the uncertainty of the law’.