Bundles of fun!

07 November 2013

A decision earlier this year sheds light on the provisions for costs orders which apply in relation to appeals held before the First-Tier Tribunal (Tax Chamber) ('FTT').

The decision of Judge Roger Berner in HMRC v Eclipse Film Partners No 35 LLP [2013] UKUT 0141 (TCC) (FTC/63/2012) arose from 'satellite litigation' in the Eclipse 35 film scheme case.


The dispute on costs arose from a direction made in the course of a case management hearing in the FTT that the cost of preparing the hearing bundles for the substantive appeal should be shared equally by the parties to the appeal, namely Eclipse 35 and HMRC.

That interlocutory direction was not appealed by HMRC, but the decision records that subsequently no less than 736 lever arch files were prepared by Eclipse 35's solicitor with the assistance of Eclipse 35's litigation consultant, for the main appeal hearing. Following the hearing of the substantive appeal in the FTT in 2011, an invoice was provided to HMRC for half the solicitor's costs of bundle preparation which was disputed. The combined amount of the share of costs claimed on the preparation of the bundle was £108,395.48 (including VAT).

On 7 February 2012, HMRC applied to the FTT to set aside the direction which stipulated that the cost of preparing the hearing bundles be shared by the Parties equally and Eclipse also made an application pursuant to Rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 ('the Rules') for a wasted costs order, or for an order for costs against HMRC on the grounds that HMRC had acted unreasonably.[1]

FTT's decision

The FTT's decision was issued on 31 May 2012. The FTT held, contrary to HMRC's submissions, that it had jurisdiction to make the original direction and that the costs to be shared by the parties extended to the professional and other costs of compiling and organising the bundles as well as the copying costs.

UT's decision

With the permission of the FTT, HMRC appealed against this decision to the Upper Tribunal (Tax and Chancery Chamber) ('UT').

Judge Berner set out the question to be determined as:

"… whether the FTT was right, as a matter of law, to draw the distinction as it did between the express power to award costs in Rule 10 and the case management powers in Rule 5 and to confine Rule 10 to costs orders in respect of the proceedings generally, so that it does not restrict directions as to costs of compliance with specific case management directions or, as HMRC submit, the FTT made an error of law because Rule 10 exclusively governs the power of the FTT to make costs orders".

After very thorough and careful consideration of the wording of the relevant Rules and submissions from the parties, the UT concluded (see paragraphs 45 to 47) that the FTT had wrongly construed Rules 5 and 10 and that it was wrong to find there was a distinction between, on the one hand, "costs of the appeal proceedings" which were subject to Rule 10, and on the other "compliance with detailed case management matters", in respect of which a costs-sharing order could be made under Rule 5. The UT said at paragraphs 45 and 46 that:

"Rule 10, properly construed, is exhaustive of the FTT's power to make orders in respect of costs. There is no power in Rule 5 to make such orders, including orders that the parties share the costs of complying with a direction. That construction is in line with the overriding objective, and gives effect to it as required by Rule 2. The plain meaning of Rules 5 and 10 cannot be ignored, nor construed to mean something they do not, by reference to the requirement to interpret the Rules to give effect to the overriding objective. The FTT was wrong therefore to hold, by reference to the overriding objective, that it had the power to direct that the costs of complying with a direction should be borne by one party rather than the other, or by both."


The effect of this decision, as the Judge recognises at paragraph 47, is that the costs position in the FTT is tightly constrained and the FTT does not have the power to direct that the parties share the costs of bundle preparation. It would appear that such costs are only recoverable if the party who has incurred them obtains a costs order against the other party at the conclusion of the appeal, pursuant to Rule 10 of the Rules. Interestingly, the Judge observed, at paragraph 44(4), that there was nothing wrong in principle with the FTT recording in directions an agreement between the parties to share the costs of complying with any direction issued by the FTT. Taxpayers may therefore wish to consider seeking written confirmation from HMRC that they will share the costs of bundle preparation and ask that any such agreement be recorded in issued directions.

[1] Unfortunately, the published decision does not record the outcome of Eclipse 35's application for an order for costs against HMRC on the basis that they, or their representative, had acted unreasonably in defending or conducting the proceedings.

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