Case No:CH/2003/APP/0054
Neutral Citation Number: [2010] EWHC 2215 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 27/08/2010

Before :

MR JUSTICE WARREN

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Between :

	THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS	Appellant	
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	MARKS AND SPENCER PLC	Respondent	

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David Ewart QC and Sarah Ford  (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Appellant
 Nicola Shaw (instructed by Dorsey &Whitney (Europe) LLP) and Paul Farmer counsel of Dorsey & Whitney (Europe LLP) for the Respondent

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Judgment
Mr Justice Warren : 
1.	The purpose of this judgment is to deal with the outstanding costs issues in relation to proceedings in the High Court, the Court of Appeal and the European Court of Justice (as it was then called) (“the ECJ”) in certain tax appeals.  The most recent decision in relation to those appeals is the decision dated 21 June 2010 (“the UT Decision”) of Judge Sadler and myself in the Tax and Chancery Chamber.  We were hearing appeals from the decisions of the Tax Chamber (Judge Avery Jones and Judge Gammie QC) dated 2 and 30 April 2009 and 24 August 2009.  I do not propose to rehearse the factual background to the appeals which is already covered in detail in the decisions of the Tax Chamber.  The interested reader of this decision should refer to those earlier decisions if necessary.
The procedural history
2.	I do, however, need to deal with the procedural history in a little detail.
3.	Group relief claims were submitted for MSG, MSB and M&S France as follows (in respect of MSG and MSB, these are the first group relief claims referred to in the UT Decision):
MSG: 
i)	on 31 March 2000 for 1998
ii)	on 30 March 2001 for 1999
iii)	on 24 September 2001 for 2000 and 2001
MSB:
i)	on 24 September 2001 for 2000 and 2001
M&S France
i)	on 30 March 2001 for 1999
ii)	on 24 September 2001 for 2000.
4.	HMRC refused the claims for relief in each case.  Appeals were made by M&S in relation to the claims made on 31 March 2000 and 30 March 2001 in respect of 1998 and 1999.  These appeals were made by letter dated 20 August 2001 (and thus before the claims dated 24 September 2001 had been made).  The refusals of relief in respect to the claims dated 24 September 2001 were the subject of a joint referral (under paragraph 31A Schedule 18 Finance Act 1998).  
The 2002 Special Commissioners hearing and decision
5.	The appeals and the references which I have described above came before the Special Commissioners in November 2002.  They gave a decision on 17 December 2002.  They concluded that the respondent inspector of taxes had been correct to refuse the claims.  They did not consider that a reference to the ECJ was necessary.  
6.	M&S appealed.  Its appeal related, of course, only to the claims and references which I have already identified.  The case came before Park J who, on 2 May 2003, made an order referring preliminary questions to the ECJ.
7.	The ECJ gave its preliminary ruling on 13 December 2005 (following the Opinion of Advocate-General Poiares Maduro on 7 April 2005).  The matter then returned to Park J.  He had before him only the appeals and referrals considered above although, by this time, further group relief claims had been made in February and March for the year 2002.  He heard submissions over 2 days in March 2006 and gave a judgment on 10 April 2006.
8.	In relation to the losses of M&S France, Park J held that the effect of the decision of the ECJ was that M&S’s claim for group relief must fail.  He gave guidance about the interpretation of the decision of the ECJ but considered that he should not make a further reference to the ECJ.  He remitted the matter t the Special Commissioners to make further findings in order to be able to apply the no possibilities test in accordance with the guidance he had given.
9.	The Revenue and M&S appealed to the Court of Appeal.  As with Park J, the only matters before the Court were the appeals and referrals considered above.  Before the hearing M&S withdrew its appeal against that part of Park J’s decision which dismissed its appeal against refusal of group relief in respect of the losses of M&S France.  Accordingly, the preliminary ruling of the ECJ had resulted in partial success for the Revenue in relation to the only appeals and referrals which had been before the Special Commissioners and the Court.
10.	That partial success was very considerable.  In relation to the appeals and referrals before the Special Commissioners in 2002, it can be seen from the table set out in paragraph 10 of their decision that the losses of M&S France in respect of which relief was claimed were very large and on a par with those of MSG, with MSB accounting for a comparatively small percentage of the losses forming the basis of the group relief claims.
11.	The order of Park J remitting the appeals and the referrals to the Special Commissioners therefore took effect but at that stage the proceedings were still concerned only with the appeals and referrals which had been the subject of the claims dated 31 March 2000, 30 March 2001 and 24 September 2001 (the last by way of referrals rather than appeal).  
12.	When remitting the case to the Special Commissioners, Park J made the following costs order:
“Consideration of costs to be stood over pending the final determination of the appeal by the Special Commissioners or further order.”
13.	Miss Shaw submits that it was the plain intention of Park J in making that costs order that the costs attributable to the High Court proceedings (including,  one might suppose the costs of the reference to the ECJ) would follow the event as determined by the Special Commissioners (and now the Tax Chamber).  Mr Ewart agrees with that proposition.   I broadly agree with it too, although I am sure that the Judge recognised that “costs follow the event” is only the starting point and that other factors may result in modifications to that end result.  This apparent harmony is unfortunately illusory: Miss Shaw and Mr Ewart fundamentally disagree, about how “the event” is to be identified.
14.	Miss Shaw in effect identifies the event as success or failure in obtaining group relief.  In that respect, M&S has been partially – but only partially – successful.  It must be remembered that it was unsuccessful in relation to the losses of M&S France even before the matter actually found its way to the Tax Chamber and it was unsuccessful in relation to its claims for the pay and file years.
15.	Further, it has been wholly unsuccessful in relation to the appeals and referrals which were before the Special Commissioners in 2002 and which formed the subject matter of the appeals to Park J and were the context in which the reference was made to the ECJ.  Even when the matter came back to Park J in 2006, it was only those matters which were the subject of appeal and only those matters which came before the Court of Appeal at all.
16.	It is true that by then, the first group relief claims for 2002 had been made (on 17 February 2003, amended 26 March 2004) for both MSG and MSB.  But those claims failed before the Tax Chamber on the footing that the no possibilities test was not fulfilled in relation to the losses of either company at the dates of the claims and their amendments.  In the Tax and Chancery Chamber, Judge Sadler and I agreed with that conclusion.  So even if, procedurally, all of the claims extant in 2006 could in some way have been brought before Park J, all of those claims were or would have been unsuccessful.
17.	It was not until it made the claims which it did in 2007 that M&S can point to a group relief claim which was valid.   Park J cannot, I think, have had in mind when he made the costs order which he did in 2006 that M&S might be able to make a further claim for group relief after the date of his order.  He was surely, I consider, concerned only with the outcome of the claims, the appeals and the referrals with which he was dealing.  He had in mind and expressly referred to “the final determination of the appeal” – that is to say the appeals and referrals before him; he was not focusing on whether M&S might, by an entirely new and separate claim, eventually achieve group relief.
18.	At the time when he made his costs order, Park J did not, of course, know what findings of fact the Special Commissioners would make; he did not know whether, on his own approach, the no possibilities test was in fact fulfilled when the claims were made or at the time of his judgment in 2006.  He did not even know, assuming that the test was not fulfilled at that later time, whether subsequently it would ever be fulfilled.  Nor, of course, did the Revenue.   It would be odd, to my mind, if the Revenue should be deprived of the costs which it would otherwise be entitled to recover by virtue of the fact that a valid claim for group relief in respect of the years in question might subsequently be made given that the relevant appeals and referrals were those originally before the Special Commissioners.  
19.	Miss Shaw’s approach, however, is not to look at who has been successful in relation to the appeals before Park J but to look at who has been successful in the end in achieving or resisting their respective desired end results (ie M&S in its aim of obtaining the maximum relief and HMRC in their claim that the UK legislation was compliant with Community (now European Union) law).  On this approach, what the High Court proceedings and the reference to the ECJ were really about was vindicating M&S’s rights under European law.  Once that had been done and the matter remitted to the High Court, the further hearing before Park J was concerned with clarifying the practical application of the no possibilities test.  As she puts it, the product of the High Court proceedings was to establish the appropriate principles to be applied to a claim for cross-border group relief.  Those principles are derived from the ruling of the ECJ and the subsequent judgment of the High Court offering guidance as to the interpretation of that ruling.  M&S has, she says, “been substantially successful in its action and as a result are entitled to a substantial repayment of tax”.  
20.	And therein lies the rub.  For the “action” which she identifies is the consequence generally of the result of the appeals and referrals going beyond the subject matter of those appeals and referrals.  But the relevant costs rules, found in the CPR, are not directly concerned with those general consequences but are concerned with the result of the claim or appeal before the court.  
21.	Test the matter this way.  Suppose that when the matter was first before Park J in 2003 it had been possible to wave a magic wand (at the expense of the magician’s fees, recoverable on an assessment of costs on the standard basis) so as to produce an immediate answer to the questions which Park J referred; and suppose that it had been possible to obtain a speedy decision from the Special Commissioners by the end of 2003. The appeals and referrals to the Special Commissions would then (subject to any onward appeal to the High Court and beyond)  have resulted in a complete lack of success on the part of M&S since at that stage, in relation to all years, the no possibilities test was not fulfilled.  It would have known (or had a pretty good idea about) what it had to do to put itself in a position where it could make a valid claim in the future.  But that would not entitle it to resist a costs order by arguing that it had been successful because the result of the litigation had been to establish that it would be able to bring about a situation where it could make a valid claim within a short period of time.
22.	But that strict approach might need to be tempered.   M&S might say, in such a case, that it would not have proceeded with the appeal or the reference had the effect of European law been properly understood.  It would simply have made further claims, as it did in 2007, without needing to resolve the validity of the original claims.  This is perhaps a different way of putting Miss Shaw’s “substance-over-form” argument which I shall come to in a moment.  So, although the actual appeal may have been lost, the real dispute between the parties – whether group relief is available in principle and if so subject to what conditions - has been won.
23.	Further, the present case is different in that the valid group relief claims had in fact been made by the time of the resumed hearing before the Tax Chamber and were in fact dealt with by the Tax Chamber in the course of the same hearings as the original appeals and referrals.  I do not, however, consider that that can make any difference to the result.  There is no reason why the happenstance of the addition of the refusal of the later claims to the issues which the Tax Chamber was to decide would have one costs result whereas leaving those issues to be dealt with in a separate appeal or referral would have a different costs result.
24.	I have already mentioned Miss Shaw’s “substance-over-form” argument; this is how she describes the argument that the “event” by which the success or failure is to be measured is the result of the appeals originally before the Special Commissioners in 2002.  She says that such an approach fails to appreciate the nature of the High Court proceedings and would be inconsistent with the reality of the result and the plain intention of Park J’s order.  I have already dealt with the last of those; I have taken a rather different view of his intention and say no more about it.  I deal with her other points in the following paragraphs.
25.	As to the nature of the proceedings in the High Court, their “nature” was an appeal from the decision of the Special Commissioners.  It was in order to resolve the appeal that Park J made a reference to the ECJ because, to deal with that appeal, he needed to know the answer to certain questions.  The nature of the High Court hearing was not a roving commission for the benefit of taxpayers and the Revenue to establish the effect of the group relief legislation in the United Kingdom and the rest of the Community.  
26.	Miss Shaw says that the underlying basis for the claims has not changed.  But that depends on what she means by claims.  If she means that there has always been a claim for group relief (as it were in the air) and that that claim has succeeded, she is right.  But if the claim is properly to be identified with the formal claims made from time to time, it is wrong: in that case, the basis of the later claims is different from the basis of the first claims depending, as they do, on entirely different facts to establish fulfilment of the no possibilities test.
27.	She notes that it is commonplace in litigation for arguments to change and develop in a dynamic process.  That is no doubt true.  She is correct to make the point that a claimant who succeeds on a new basis does not necessarily fail in obtaining costs.  He almost certainly would not obtain costs if the defendant capitulates on the new point being made.  But where there is no capitulation, the court will have to make an assessment about how matters might have proceeded had the new point been raised right at the beginning.  That is all well and good where the new arguments relate to the claim in question.  But that is not the present case.  M&S has not produced new arguments to uphold the claims in respect of which the appeals and referrals were made in 2002; rather, it has brought new claims, in 2007, to take advantage of its better appreciation of the law.  
28.	Miss Shaw next points out that the claims are governed by the UK group relief regime which allows for the making of new or subsequent claims for the same accounting period.  I agree with Mr Ewart that this adds nothing to the point: it does not mean that a claimant is entitled to its costs of an earlier unsuccessful claim when it makes a new or subsequent claim which is successful especially, I would add, if a valid claim could not have been made even at the time of the first hearing of the appeals in 2002.  
29.	In my judgment, the correct approach in principle is to consider the appropriate costs order in the present case by reference to success on the appeals which were before the Special Commissioners in 2002, which formed the subject matter of the appeal to Park J in 2003, which formed the basis of the reference to the ECJ, and which were the subject matter of the resumed hearing before Park J in 2006 and the appeal to the Court of Appeal in late 2006 with a decision in early 2007.  
30.	In applying that approach, I must follow the provisions of CPR 44.3.  The general rule is that the successful party gets his costs (CPR 44.3(2)(a)) but this rule can be displaced (CPR 44.3(2)(b)).  And in deciding what order to make the court must have regard to all the circumstances including whether a party has succeeded on part of his case, even if he has not been wholly successful (CPR 44.3(4)(b)).  
31.	Accordingly, it does not necessarily follow from the fact that HMRC has succeeded on all the appeals and referrals originally before the Special Commissioners, Park J and the Court of Appeal, that they are entitled to an order for payment of all of their costs.  I must exercise my discretion taking into account the provisions of CPR 44.3.  It is very often the case in litigation that a successful party loses on a particular issue which has been raised, particularly if the litigation is complex.  That lack of success can often properly be reflected in a costs order.  
32.	In the context of that last rule, a person may win his claim or appeal and obtain judgment for everything which he has sought.  He is without doubt the successful party.  But equally, it is possible that, in winning his case, he has raised a discrete issue which he has fairly and squarely lost.  That does not make him the unsuccessful party, but it does mean that he has not been wholly successful on his “case”.  
33.	In the present case, HMRC has been wholly successful in relation to the appeals and referrals which were originally before the Special Commissioners and to which the costs in the High Court and the costs of the reference to the ECJ were attributable.  But it has not been wholly successful in relation to all of the issues which the appeals and referrals raised; nor for that matter, has M&S been wholly successful.  
34.	In particular, neither party was wholly successful on the questions which were raised by the reference.  HMRC succeeded in establishing the general principle that the group relief provisions in domestic law pursued a legitimate objective; but M&S succeeded in showing that the measures implemented in pursuing that objective went beyond that which was necessary.  It was not permissible to exclude relief when certain conditions were fulfilled as reflected in the no possibilities test.  
35.	In the light of the effective rejection by the ECJ of the main positions taken by HMRC and M&S respectively and the reasons given by the ECJ for taking the position which it did, I do not consider that either HMRC or M&S can be viewed as the substantial winner of the issues on which the ECJ ruled.  The reference to the ECJ has formed such an important part of this litigation – and the costs incurred in relation to it have, I imagine, been significant – that the costs order which I make ought to take account of the measures of success achieved by each side.  
36.	I do not suggest that the proceedings on the reference should be treated as a wholly distinct matter to which I should apply CPR 44.3 as though it were an entirely separate claim.  I would have power, I think, to do so since CPR 44.3(6)(f) envisages costs orders relating to a distinct part of the proceedings; but it would not be right to take that course since it would altogether isolate success and failure in the proceedings under the reference from success and failure on the appeals which cannot, in principle, be correct.  
37.	I must, however, take account of the level of success of each party on the proceedings under the reference pursuant to CPR 44.3(4)(b).  It might be said that I ought to make an order under which HMRC recovers less than its full costs since it has not been wholly successful on the reference.  HMRC’s case was held to be right in principle (the group relief regime pursued a legitimate objective) but went too far (precluding relief even where the no possibilities test was fulfilled).  It could be said that HMRC did not need to go as far as it sought to do in order to justify their refusal of the first group relief claims – the only matters before the Special Commissioners and Park J in 2002 and 2003.  They wanted to go as far as they did, quite clearly, because, had they succeeded, they would have had a powerful weapon to use not only against M&S should it make subsequent claims, but against other taxpayers.  There was a very large amount of money indeed at stake for HMRC in relation to cross-border group relief claims when the reference to the ECJ was made, when it was argued by many, including M&S on the reference, that the group relief claim was in its entirety non-compliant with Community law.   The Crown was exposed to the risk of a huge loss of revenue and repayment claims.  M&S should not, the argument would run, be liable for all of the costs in these circumstances.
38.	I decline to make a reduction in the recoverable costs on that basis.  The reality is that Park J had to refer the questions to the ECJ in order to be able to deal with the appeals before him.  Both parties took positions which were not fully vindicated but HMRC were successful in the context of the actual appeals and referrals under consideration.  In this context, I mention again that it was only as a result of the decision of the ECJ that (i) M&S’s claims in respect of losses of M&S France were finally rejected by Park J and (ii) that the earlier claims for the pay and file years failed.  
39.	So far as the other costs of the High Court proceedings are concerned, there is nothing, in my judgment, which justifies departure from the ordinary rule.  Accordingly, the result is that M&S should pay HMRC their costs of the High Court proceedings and of the reference to the ECJ to be assessed on the standard basis if not agreed.  
40.	So far as the costs in the Court of Appeal are concerned, I am told that the Court of Appeal dealt with the substantive costs of the appeal but left any costs specifically associated with the abortive appeal for the French losses to be dealt with by the same judge who was to consider the outstanding High Court costs.  It is not easy to see how any costs would have been incurred specifically in relation to the French losses, or at least costs which can be shown to be so attributable.  Perhaps HMRC have kept careful records which enable them to allocate specific time to consideration of issues which were unique to the French losses.  As a matter of principle, however, it seems to me that HMRC should be entitled to recover such of its costs of the appeal to the Court of Appeal as are attributable exclusively to the costs of the appeals in respect of the French losses.  I should make an order accordingly.
41.	However, I add this.  If, as I suspect, the costs which can be demonstrated as so attributable are, as Miss Shaw submits, de minimis or even nil, I would invite the costs judge, if the amount cannot be agreed, to bear in mind the question of proportionality when it comes to dealing with the costs of the assessment.  
42.	In reaching these conclusions, I have not overlooked Miss Shaw’s submissions concerning the Part 36 offers which were made by M&S.  In my judgment, those offers do not affect the result.  I should explain why I have reached that conclusion.
43.	Mr Ewart submits that it is not clear that Part 36 applied to statutory appeals to the High Court from the Special Commissioners.  However, CPR 36.3(2) provides that a Part 36 offer may be made in “appeal proceedings” and I see no reason to think that a statutory appeal is not within the meaning of “appeal proceedings”.  With that preliminary point out of the way, the substance of Miss Shaw’s case is that M&S made an offer to discontinue its appeal in relation to the French losses if HMRC would agree that group relief was available for German and Belgian losses.  This offer was made in February 2006 and repeated in open court at the 2006 hearing before Park J.  
44.	The Part 36 offer was contained in a letter, with schedules attached, dated 21 February 2006. In summary its terms were (a) M&S would drop the claims for the French losses altogether with all claims for costs and interest (b) to liquidate MSG and MSB and provide HMRC with documentary proof that the possibilities of use had been exhausted; and (c) to limit the claim to the losses of MSG and MSB unutilised following liquidation plus interest at the repayment supplement rate on a simple interest basis.
45.	The offer to settle was set out in specific amounts, the bottom line being repayment of tax of just under £13.96 million.  According to Miss Shaw, similar offers were made for other claims outside the litigation.  There was further correspondence about provision of documents.  The offer was never accepted and no counter-offer was made.
46.	Miss Shaw attaches importance, when comparing the Part 36 offer to the outcome finally reached, to the fact that by the time the appeals reached the Tax Chamber stage, the litigation included claims for further accounting periods among them the year ending 31 March 2002, which has also been successful.  Her arithmetic shows the following:
i)	On the basis of the UT Decision, M&S are entitled to payment of £18.5 million.  This includes £4.75 million for the year 2002.  
ii)	If that amount is deducted it produces an amount of £13.76 million for the years which were subject to the High Court proceedings and therefore for the Part 36 offer. [I have rounded her figures so the arithmetic here does not appear correct but the end figure, rounded, is correct.]
iii)	The Part 36 offer was for £13.96 million (again rounding the figure) with a difference of just over £187,000.
47.	Miss Shaw argued that the Part 36 offer was, in all the circumstances of the case, “at least as advantageous” within the meaning of CPR 36.14(1)(b).  I very much doubt that that can ever be said when the claim is for money and the offer is of a lesser sum of money.  But I do not need to decide the point because Miss Shaw’s approach is, in my judgment, fundamentally flawed.  
48.	The relevant litigation for the purposes of the Part 36 offer was the appeal against the decision of the Special Commissioners and related to the appeals and reference originally before them.  It did not include the later addition of the claims relating to the year 2002; it did not even include the claims which were eventually successful.  In relation to the claims subject to the appeal, M&S has been wholly unsuccessful.  M&S’s offer said nothing about the claims in relation to MSG and MSB actually under appeal.  Its position was, at best in the context of the Part 36 offer, that it would give up its appeals provided that HMRC agreed the £13.96 million repayment.  M&S has in fact recovered nothing in respect of overpaid tax by reason of the claims subject to the appeals.  It is impossible to see how the outcome of the appeal process is “at least as advantageous to” HMRC (that is to say, nil recovery by M&S) as the Part 36 offer (obliging HMRC to part with £13.96 million).
49.	Quite apart from that, the offer included proposals for the settlement of other claims outside the litigation which were to “be settled on the same basis”.  This was part of the offer and by accepting it HMRC would have been obliged to settle other claims.  The reference to “the same basis” must be to the basis which M&S put forward as the basis for making the offers which it did in relation to MSG and MSB.  That included an assertion (found in the third paragraph of the second page of the letter) the effect of which is that the no-possibilities test did not need to be satisfied, a proposition which has been found to be wrong.  
50.	Moreover, the offer required HMRC to pay M&S its costs of the High Court proceedings.  My determination of the costs issue is that, absent the Part 36 offer, the result should be the other way round.  The Part 36 offer is clearly inadequate in that respect.
Conclusion 
51.	M&S is ordered to pay HMRC’s costs of the proceedings in the High Court (including the costs of the reference to the ECJ) and HMRC’s costs in the Court of Appeal attributable solely to the issue of the French losses, such costs to be assessed on the standard basis if not agreed.