There's unreasonable, and there's wholly unreasonable!

21 November 2011

When it comes to awarding legal costs, the Tribunal has often been viewed as an island of leniency, especially when compared to the strict regime which governs High Court litigation.

In the High Court, even successful parties can find themselves penalised in costs where their conduct is deemed to fall foul of procedural requirements, with litigants punished for shortcomings such as missing court deadlines, refusing to consider mediation, and running unmeritorious ancillary legal arguments.

In the recent case of Thomas Holdings Limited v HMRC the Tribunal showed a refreshing willingness to put down a marker when it comes down to unreasonable conduct in tax litigation.


The case concerned a request for repayment of overpaid VAT following the ECJ decision in Linneweber (C-453/02). HMRC accepted that there was an overpayment, but sought to defend the claim on the basis that the claim had been made by the wrong company, because the VAT in question had not been overpaid by the appellant itself, but by associated companies.

The correct position was communicated to HMRC from the outset by the taxpayer and HMRC were specifically referred to the case of Thorn PLC v Customs and Excise Commissioners (1997) (VAT Decision 15283) . HMRC however had simply not engaged with the argument based on the Thorn case. This was the first criticism levelled at HMRC – that they were unreasonable to have even defended the appeal.

The second, and perhaps more serious criticism, related to HMRC's conduct in the proceedings. HMRC neglected to serve it's Skeleton Argument as directed by the Tribunal (or at all), applied for the hearing to be re-listed just 10 days before it was due to commence, and in that application HMRC improperly mentioned a 'without prejudice' settlement offer that had been made by the taxpayer. The application was refused and on the Friday before the Monday when the hearing was due to commence, HMRC conceded the whole claim. The taxpayer then sought to submit a joint application to vacate the hearing, which HMRC did not respond to, thus leaving the taxpayer with little choice but to turn up on the Monday and incur yet further legal costs.

The statutory threshold for obtaining costs

The case had been allocated to the standard rather than complex category, which meant that costs were available to a party pursuant to Rule 10(1)(b) of the First-tier Tribunal (Tax Chamber) Regulations, which states that:


(1)  The Tribunal may only make an order in respect of costs . . .

(a)  …

(b)  if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings,"


The Tribunal accepted that the defence and conduct of the proceedings by HMRC was unreasonable. However, they did not consider that HMRC's conduct was wholly unreasonable. Accordingly, an award of costs on an indemnity basis was not appropriate. The Tribunal also noted that failures by HMRC to comply with the relevant case management directions amounted to serious deficiencies in HMRC's conduct of the proceedings.

It is somewhat disappointing that the Tribunal did not give a clearer indication of when indemnity costs would be appropriate, and when conduct crosses the line from unreasonable to wholly unreasonable.  Instead the Tribunal simply said that it was "not persuaded that HMRC's conduct had been such as to justify an order for indemnity costs; without setting out detailed comment on cases where such costs have been awarded, we consider that the test for such costs is stringent and requires elements of conduct which were not present in relation to THL's appeal".

This case is a salutary reminder to HMRC of the need to comply with case management directions and to conduct litigation in a reasonable manner which does not generate unnecessary costs for the taxpayer!

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