R & C Commissioners v Cheshire Centre for Independent Living (now known as Disability Positive)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 September 2020 |
| Neutral Citation | [2020] UKUT 275 (TCC) |
| Date | 15 September 2020 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2020] UKUT 275 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Judge Swami Raghavan
Procedure – Costs application based on unreasonable conduct / defence of FTT proceedings – Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273), r. 10(1)(b) – Jurisdiction to make order in relation to FTT proceedings under Tribunals, Courts and Enforcement Act 2007 (TCEA 2007) , s. 12(4) when FTT Decision remade by UT – Application allowed.
The Upper Tribunal (UT) allowed a taxpayer company's costs application, deciding that even though HMRC were ultimately successful in the case, because HMRC had only raised their winning argument when they appealed against the First-tier Tribunal's (FTT) decision they had acted unreasonably.
In Cheshire Centre for Independent Living [2019] TC 07182, the FTT found that a payroll service provided to people with disabilities who employed personal assistant carers using the Direct Payments they received as benefits, supplied by Cheshire Centre for Independent Living (CCIL), was exempt from VAT on the grounds that it was ancillary to the exempt care provided by the personal assistant; it was a service “closely linked” to the supply of welfare.
HMRC appealed the FTT's decision to the UT on two grounds. Ground 2 was an entirely new ground, that the payroll services could not be ancillary to a principal supply of exempt care provided by the personal assistant because the principal supply was not itself exempt. This was because the personal assistant was an employee of the disabled person and as such, pursuant to article 10 of the Principle VAT Directive, was not a taxable person capable of making a supply within the scope of VAT to their employer. The personal assistant was neither a body governed by public law nor another body recognised by the UK as being devoted to social welfare within article 132(1)(g) of the Principle VAT Directive.
CCIL accepted that Ground 2 disposed of the appeal in HMRC's favour. A consent order was made settling the UT proceedings, allowing HMRC's appeal, setting aside the FTT's decision and remaking it under TCEA 2007, s. 12(2)(a) and 12(2)(b)(ii).
CCIL applied for its costs of almost £45,000, summarily assessed, on an indemnity basis, arguing it was wholly unreasonable of HMRC to not identify their “trump argument”, which had been available to them since the beginning of the dispute until after the FTT proceedings had ended. Had this ground been raised during the FTT proceedings, CCIL submitted that it would have withdrawn, and would have avoided the costs that it incurred.
Given that the UT had remade the FTT's decision, TCEA 2007, s. 12(4) enabled the UT to make any costs order that the FTT could have made and therefore the relevant costs rule was SI 2009/273, r. 10.
The UT noted that although there was ample case law where the alleged unreasonable conduct concerned an unsuccessful party running with what turned out to be a bad argument, the same was not true where the alleged unreasonable conduct concerned the successful party not revealing a good argument sooner. It found no reason in principle why failing to raise a ground sooner might not constitute unreasonable conduct.
As it was plain that CCIL had conceded the case because HMRC raised Ground 2, the UT adopted this three stage approach to deciding whether HMRC had acted unreasonably:
- What was the reason for HMRC raising Ground 2 as a new ground before the UT?
- Having regard to that reason, could HMRC have raised Ground 2 at an earlier stage in the proceedings?
- Was it unreasonable for HMRC not to have raised Ground 2 at an earlier stage?
As to the first question, the UT accepted HMRC's submission that it was not until CCIL made its oral submissions arguing that the payroll services were ancillary to a principal exempt supply that the non-exempt nature of that principal supply came to the fore.
Looking at the second question, the UT considered that HMRC could have raised Ground 2 earlier, as the issue was in the scope of the appeal before the FTT and therefore could have been raised when HMRC filed their statement of case.
As to the third question, the UT found that Ground 2 should have been addressed in HMRC's statement of case because the law, the key facts relevant to the law, and the centrality of the point raised by Ground 2 to the case, were all in plain sight. Instead of HMRC's statement of case setting out their “position in relation to the case” as required by SI 2009/273, r. 25(2)(b) and therefore looking at the wider context of the appeal it only considered CCIL's specific grounds of appeal. In the UT's view a reasonable party would not have restricted its case simply to the nuanced argument on the qualitative nature of the supply without also flagging its position on the nature of the principal supply. It therefore considered HMRC's conduct to amount to unreasonable conduct. That conclusion was sufficient to trigger the UT's discretion to make a costs order under r. 10(1)(b).
The UT refused the application for costs to be ascertained on an indemnity basis, because it did not find HMRC's conduct unreasonable to a high degree or outside of the norm.
The UT allowed CCIL's application, that HMRC was liable for its costs of and incidental to CCIL's appeal before the FTT.
Given that the UT did not have all the information before it to make a summary assessment of costs it directed the parties to agree costs, taking into account that:
- HMRC should not be liable for the costs CCIL incurred in relation to CCIL's evaluation of HMRC's Ground 2 as those costs would likely have been incurred even if HMRC had raised that ground earlier;
- the resulting amount should be discounted, in its judgment by 30%, to reflect that CCIL bore some responsibility for not evaluating the strength of its case when viewed in the round and for not taking steps to resolve the ambiguity around whether HMRC had conceded that the payroll services were exempt; and
- any amount in respect of VAT should take account of the extent, if at all, to which CCIL was able to recover all or a proportion of its VAT.
Although this costs decision was made by the UT it was made using the FTT's procedural rules because it related to an FTT decision remade by the UT.
It is unusual for costs to be awarded in the FTT and even more unusual where it is the successful party being required to pay costs to the unsuccessful party. But the UT found that because HMRC had not looked at the wider issues of the appeal at an earlier stage in the proceedings their conduct had been unreasonable.
[1] This is an application by the Cheshire Centre for Independent Living (“CCIL”) for an order that HMRC pay CCIL's costs of and incidental to its appeal before the First-tier Tribunal (FTT) in Cheshire Centre for Independent Living [2019] TC 07182 on the basis that HMRC acted unreasonably in conducting or defending those proceedings. CCIL's case, in essence, is that HMRC unreasonably failed to run what turned out to be a winning argument for HMRC sooner. That failure resulted in CCIL incurring significant costs unnecessarily.
[2] CCIL is a charity which promotes the independent living of disabled persons. Its appeal before the FTT concerned the VAT treatment of its supply of payroll services which arose when disabled persons, who had used funding they received for their care needs (Direct Payments), became the employer of their personal assistant carer. CCIL was successful before the FTT. The FTT held the supply of payroll services was exempt because it was ancillary to the exempt care provided by the personal assistant; it was a “supply of services closely linked to welfare work” for the purposes of article 132(1)(g) of the Principal VAT Directive (PVD)1.
[3] HMRC appealed to the Upper Tribunal (“UT”) on two grounds one of which was an entirely new ground (“Ground 2”) that the payroll services could not be ancillary to a principal supply of exempt care provided by the personal assistant because the principal supply was not itself exempt. This was because the personal assistant was an employee of the disabled person and as such, pursuant to article 10 of the PVD, was not a taxable person capable of making a supply within the scope of VAT to their employer. The personal assistant was neither a body governed by public law nor another body recognised by the UK as being devoted to social welfare within article 132(1)(g) PVD.
[4] As reflected by the fact of the subsequent consent order settling the UT proceedings, CCIL ultimately accepted Ground 2 disposed of the appeal in HMRC's favour. However it now seeks its costs, summarily assessed, on an indemnity basis, arguing it was wholly unreasonable of HMRC to not identify their “trump argument”, which was available to them since the beginning of the dispute until after the FTT proceedings had ended. Had Ground 2 been raised during the FTT proceedings, CCIL would have withdrawn, and would have avoided the costs that it incurred in successfully pursuing an appeal in response to what it regarded as a differently framed dispute. Those costs total £44,706.21 including VAT.
[5] Under the consent order determining the UT proceedings which was made, HMRC's appeal was allowed and the FTT's decision was set aside and remade under sections 12(2)(a) and 12(2)(b)(ii) of the Tribunals, Courts and Enforcement Act 2007 (“TCEA 2007”).
[6] There is no dispute between the parties that in remaking the FTT's decision, s12(4) TCEA enables the UT to make any costs order that the FTT could have made. That subsection provides that in remaking the FTT decision “… the Upper Tribunal – (a) may make any decision which the First-tier Tribunal could make if the First-tier Tribunal were re-making the decision”. The power to award such costs under...
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...what was ultimately a winning argument sooner in R & C Commrs v Cheshire Centre for Independent Living (now known as Disability Positive) [2020] BTC 560; the applications having been made at a time when the substantive appeal remained undetermined; and the overriding objective in SI 2009/27......