HMRC's application for security for costs refused

19 November 2014


The Upper Tribunal (Judge Berner) has dismissed an application for security for costs made by HMRC in a case which involved an appeal against a refusal of repayment of VAT.


Both GSM Export (UK) Ltd ("GSM") and Sprint Cellular Division Ltd ("Sprint") are in administration (collectively "the Appellants").

On 5 December 2012, the First-tier Tribunal ("FTT") released its decision in the Appellants' appeals upholding the decision of HMRC to deny the repayment of input tax of £5,291,780 claimed in respect of transactions in the VAT periods 04/06, 05/06 and 07/06.

The Appellants appealed the FTT's decision to the Upper Tribunal and the substantive appeal hearing was due to take place from 21 to 23 October 2014. On 29 August 2014 (less than two months prior to the date set for the hearing), HMRC applied to the Upper Tribunal for a direction for security for costs in the sum of £67,679.90. HMRC's application was heard on 19 September 2014.

The Appellants provided HMRC with a copy of an after-the-event insurance policy ("the ATE policy") which they had taken out to cover HMRC's costs if their appeals were unsuccessful. The ATE policy provided, amongst other things, that the insurer would determine whether the claim had been successful or unsuccessful following final disposal of the claim. The terms "successful" and "unsuccessful" were defined according to whether a judgment was obtained entitling the Appellants to receive monies which were sufficient to cover any defendant's costs.

The law

It was confirmed in Blada Ltd (in liquidation) v HMRC[2] that the Upper Tribunal has jurisdiction to make an order for security for costs. This is on the basis that in relation to matters incidental to its functions the Upper Tribunal has, pursuant to section 25, Tribunal, Courts and Enforcement Act 2007, the same powers as the High Court. Accordingly, the procedure is governed by the rules contained in Part 25 of the Civil Procedure Rules 1998 ("CPR").

Under rule 25.13, CPR, the Upper Tribunal may make an order for security for costs if it is satisfied, having regard to all the circumstances of the case, that it is just to make such an order and a relevant condition has been met. In the context of the present case, the relevant condition is contained in rule 25.13(2)(c), namely, that the Appellants are companies and "there is reason to believe that [they] will be unable to pay [HMRC's] costs if ordered to do so". Subject to the relevant condition being satisfied, the Upper Tribunal has a discretion as to whether to make an order for security for costs. The Upper Tribunal has to carry out a balancing exercise, taking all the relevant circumstances into account and having regard to the relevant principles summarised by Peter Gibson LJ in the Court of Appeal in Keary Developments Ltd v Tarmac Construction Limited and another[3].

The Upper Tribunal's decision

In the view of the Upper Tribunal, as both Appellants would, if they are unsuccessful in their appeals, be insolvent, the above test turns on the terms of the ATE policy which was relied upon by the Appellants.

HMRC argued that the ATE policy (1) gave the insurer an unfettered discretion to determine whether or not the appeal was successful and therefore did not sufficiently mitigate against the risk that their costs would not be paid and (2) was voidable for a range of reasons over which they had no control.

The Upper Tribunal did not consider that the ATE policy provided the insurer with an unfettered discretion. In dismissing HMRC's argument (see paragraph 23) the judge said:

"In my judgment, the role of the insurer in this regard is one of certification and not discretion. The insurer is required to certify the result of the appeals for the purposes of the Policy in order to provide certainty … any concern that the respondents may harbour that, despite the appellants' appeal being dismissed …. a bona fide insurer might nevertheless exercise its power of determination to the effect that the Claim has not been Unsuccessful in those circumstances is misconceived. There is in my judgment not even a theoretical risk of such an insurer acting in that manner. It is fanciful." (See paragraphs 23-24).

With regard to HMRC's argument that the ATE policy provided a broad range of grounds on which the policy could be argued to be voidable and over which HMRC would have no control in the circumstances in which it was necessary to make a claim, the judge noted that the relevant section of the ATE policy did contain a number of conditions which the Appellants had to comply with in order to make a claim and failure to comply with these conditions would entitle the insurer to terminate the ATE policy. In that event, the insurer would cease to be liable for HMRC's costs.

Following a consideration of the principles established from cases in which ATE policies have been considered[4], in the judge's view the key question was whether there was reason to believe that the Appellants would be unable to pay HMRC's costs despite the existence of the ATE policy. Following consideration of the relevant terms of the ATE policy, he concluded that there was nothing more than a theoretical risk that the insurer would argue that it was entitled to avoid or cancel the policy so as to provide no cover. However, he noted that the ATE policy was written in such terms that the beneficiaries of the ATE policy were the Appellants themselves. He thought that this gave rise to a point of concern, namely, that if the insurer were required to indemnify the Appellants, those funds on being paid to the administrator of the Appellants might fall into the general funds of the administration and HMRC would have no preferential or prior entitlement to them, in those circumstances. The judge did not consider that in relation to a payment under an insurance policy of this nature the provisions contained in the Insolvency Act 1986, Schedule B1, paragraph 67, had the effect that the administrator might conclusively determine the extent of the Appellants' property. However, an indemnity payment made under the policy might be impressed with a 'Quistclose trust'[5] as the payment would have been made to the Appellants for the specific purpose of being used to discharge HMRC's costs. The Quistclose principle was not confined to loans and extended to cases where the person making the payment was a debtor of the company concerned. It was reasonable to conclude that there was no real risk that sums paid by way of indemnity for HMRC's costs would fall into the assets available to creditors. It therefore followed that he threshold test (i.e. that there was reason to believe that the Appellants would be unable to pay HMRC's costs) had not been met.

Unreasonable delay by HMRC

Finally, the judge considered whether contrary to his decision on the first issue, on the assumption the threshold test was met, he should exercise his discretion in favour of an order for security for costs.

In the judge's view, HMRC "were guilty of an unreasonable delay" in raising at a late stage in the appeal proceedings the question of security for costs. The application had been made only a matter of weeks before the substantive hearing of the appeal and in circumstances when at all times HMRC had been aware of the financial position of the Appellants. The Appellants would have had an unreasonably short time to arrange security if an order was to be made. Accordingly, the judge concluded that, even if the threshold test had been satisfied, it would not have been in the interests of justice to make such an order.


This case is a reminder that ATE insurance is available to taxpayers who are pursuing an appeal to either the FTT or beyond and is an option which some taxpayers may find attractive as such insurance can provide a degree of certainty in relation to the costs which are likely to be incurred in such litigation.

The Upper Tribunal has also confirmed that any application for security for costs by HMRC must be made in good time and an application made shortly before commencement of the substantive hearing is unlikely to be successful. Given that the procedure is governed by the CPR, taxpayers may wish to obtain legal advice should they wish to resist an application for security of costs made by HMRC.    

[1] [2014] UKUT 0457.

[2] [2013] UKUT B7.

[3] [1995] 3 All ER 534.

[4] See Geophysical Service Centre Co v Dowell Schlumberger (Me) Inc [2013] EWHC 147 (TCC) and Michael Phillips Architects Limited v Riklin [2010] EWHC 834 (TCC).

[5] According to the principles stemming from the decision in Barclays Bank Ltd v Quistclose Investments Limited [1970] AC 567.

Stay connected and subscribe to our latest insights and views 

Subscribe Here