Hills and Another v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 17 June 2016 |
| Neutral Citation | [2016] UKUT 266 (TCC) |
| Date | 17 June 2016 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
Judge Roger Berner
Rebecca Murray, instructed by The VAT Consultancy, appeared for the appellants
Hui Ling McCarthy, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Costs payable to HMRC – Whether First-tier Tribunal (FTT) had power to make an order in respect of costs under Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), r. 10(1)(c) (Complex category) – Application by the taxpayers for recategorisation to complex on first day of FTT hearing, including intention not to opt-out of costs regime – Whether subsequent request to opt out under r. 10(1)(c)(ii) effective – Jurisdiction of Upper Tribunal (UT) to re-make costs order of the FTT – Exercise of discretion – Whether the taxpayers had acted unreasonably in bringing, defending or conducting the proceedings – Costs ordered to be paid to HMRC on the standard basis.
The Upper Tribunal (UT) held that the taxpayers, Mr and Mrs Hills, had not been unreasonable in conducting their appeal, but they must pay HMRC's costs of and incidental to the proceedings in (1) the UT on the standard basis and (2) the First-tier Tribunal (FTT), to the extent that such costs were incurred from and including 19 May 2014, on the standard basis.
The UT had dismissed the appeal by the taxpayers from the FTT, which related to the option to tax ([2016] BVC 513). This second hearing at the UT concerned the application for costs payable to HMRC. That application was not opposed in principle, but the parties were far apart on quantum. HMRC claimed £25,070.
In the FTT, the appeal was initially categorised as a Standard case, which meant that:
1) the appeal would be incapable of transfer to the UT under Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), r. 28 (“the FTT Rules”); and
2) the FTT would have no general costs-shifting power. Instead, under r. 10, the FTT's powers to award costs were restricted to wasted costs (which was not relevant here) and the power to order costs where a party or their representative had acted unreasonably in bringing, defending or conducting the proceedings.
However, at the start of the substantive hearing before the FTT on 19 May 2014, the FTT re-categorised the appeal as Complex. Later, the FTT dismissed the appeal with costs on the standard basis. However, when doing so, the FTT was unaware that on 16 June 2014, after the end of the hearing but before the release of the FTT's decision, the taxpayers had emailed the FTT stating “Please be advised that the Appellant in this case wishes to opt out of the costs regime with regard to this action.” Thus, the taxpayers asserted that the FTT had no jurisdiction to award costs.
The UT considered whether the FTT had the power to make the costs order on the basis that it had a full costs-shifting jurisdiction by virtue of the categorisation of the case as Complex.
The taxpayers argued that the FTT had no power to make such a costs order, because:
1) the FTT had failed to take account of the opt-out request made by them within the 28-day time limit under r. 10(1)(c)(ii); the effect of that opt-out is that the power that the FTT would otherwise have to make a costs order in a Complex case is not available; and
2) in any event, the FTT made its order without having given them an opportunity to make representations which breached r. 10(5); that failure meant that the order made should not have been made.
The UT held that the question of the FTT's costs order can be brought within the jurisdiction of the UT (para. 23 of the decision).
The UT permitted the question as to the validity of the FTT costs order to be added as a ground in the appeal to the UT (para. 28 of the decision).
The UT was satisfied that the FTT had made an error of law, because it did not give the taxpayers an opportunity to make representations. Thus, under r. 10(5) of the FTT Rules, the FTT had no power to make the order that it did. Thus, the UT had no alternative but to set aside the FTT's decision (para. 29 of the decision).
The UT decided to re-make the decision in relation to costs in the FTT (para. 31 of the decision).
The UT considered whether, having regard to the request for an opt-out of the Complex case costs regime, which was made by the taxpayers on 16 June 2014, there is power to make a costs order under r. 10(1)(c) of the FTT Rules (para. 32 of the decision).
Although normally justice is served by the making of a timely opt-out request, as that reflects the purpose of providing the taxpayer with the choice of costs regime in the FTT, that consideration may be overridden by the circumstances. Generally, a request is effective to displace the Complex costs regime, as it serves the interests of fairness and justice, which is inherent in r. 10. However, there are circumstances when the interests of justice may not be so served (para. 40 of the decision).
The UT held that the application for re-categorisation, which was made by the taxpayers, was made at a late stage in the proceedings, and at a time when immediate expense was to be incurred. It was not be within the purpose of r. 10 to enable a request to be made that fundamentally undermines the basis on which the application was made and the re-categorisation was directed. Such a request does not serve the interests of justice (para. 41 of the decision).
The UT held that the request to opt-out of the Complex costs regime would give rise to an injustice. Thus, it was not a request within r. 10(1)(c)(ii). In exercising the power to re-make the costs decision of the FTT, the UT had the same full costs-shifting power as the FTT has in a Complex case where there has been no opt-out (para. 46 of the decision).
The UT held that, in the circumstances of a re-categorisation of a case to Complex at an advanced stage of the proceedings, consideration should be given to the making of a costs order that reflects the time spent by the parties in the expectation that the regime of a Standard case (limited costs shifting) would apply. That was a proper consideration whether costs were to be awarded in favour of the party applying to re-categorise, or the other party (para. 47 of the decision).
Among the special factors to be taken into account is the conduct of the parties in bringing, defending or conducting the proceedings. The Standard costs regime is a no costs regime, unless the FTT considers such conduct to have been unreasonable (para. 50 of the decision).
HMRC claimed costs based on unreasonable conduct. HMRC argued that the taxpayers' conduct, in applying at the late stage for re-categorisation of the case to Complex, stating their intention not to opt-out and then making a request to opt-out on the last available date, was unreasonable (para. 56 of the decision).
As the UT decided that the request was not within r. 10(1)(c)(ii), it was unnecessary to decide this issue. However, in case this matter goes further, the UT held that, if it had come to a different conclusion on r. 10(1)(c)(ii), it would have found that combination of conduct to be unreasonable, so that it would have made the same award of costs as might be ordered if the request had not been made. Thus, that would have resulted in the same outcome as the UT decided should be the appropriate order in the Complex regime (para. 57 of the decision).
The UT held that the taxpayers had acted reasonably in maintaining their case with regard to the Grantor issue and the option to tax (para. 69 of the decision).
Also, the UT rejected the argument that the case could have been resolved without a hearing. There was no submission that HMRC had incurred expense that would not have been incurred but for the failure by the taxpayers better to particularise their case, and no application had been made to the FTT for a direction for further particulars (para. 73 of the decision).
Thus, the UT made the following orders in respect of costs:
1) the taxpayers must pay HMRC's costs of and incidental to the proceedings in the UT on the standard basis; and
2) the taxpayers must pay HMRC's costs of and incidental to the proceedings in the FTT, to the extent that such costs were incurred from and including 19 May 2014, on the standard basis (para. 77 of the decision).
This case is fact-specific, as cases are rarely re-categorised as Complex as a late stage in proceedings. The UT dealt with the dispute by bearing in mind the overriding objective of dealing with cases fairly and justly.
[1] By its decision released on 25 April 2016, this Tribunal (Judges Sinfield and Brannan) dismissed the appeal of the Appellants, Mr and Mrs Hills, against the decision of the First-tier Tribunal (“the FTT”) (Judge Cornwell-Kelly and Mr Coles) released on 2 July 2014 to the effect that an option to tax was valid in respect of a certain property and that the sale of that property to Mr and Mrs Hills was chargeable to VAT at the standard rate.
[2] Issues in relation to costs fall to be determined both in this Tribunal and in the FTT. In this Tribunal there is a straightforward application for costs by HMRC as the successful party. That application is not opposed in principle, but the parties are far apart on quantum. The amount claimed by HMRC is £25,070. As I indicated to the parties, in view of the amount and the dispute between the parties, which gives rise to questions of reasonableness and proportionality, I did not consider it appropriate for me to make a summary assessment. The order will therefore be for detailed assessment, unless the parties agree.
[3] This decision therefore focuses on the issues in relation to the question of costs in the FTT, which raises some important questions of...
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