[2009] UKFTT 352 (TC)

								TC00290

Appeal numbers: LON/2006/0951
							       LON/2007/0858
							       LON/2007/861
							       LON/2008/2061

Costs – Transition appeal – Appeal withdrawn – Costs application made by HMRC within 28 days after withdrawal – Whether tribunal authorised to make costs award – Yes – TTF Order 2009 Sch 3 para 7

FIRST-TIER TRIBUNAL
TAX CHAMBER

	SURESTONE LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Costs)	Respondents

				TRIBUNAL: 	SIR STEPHEN OLIVER QC 
						Chamber President

Sitting in public in London on 30 November 2009

No representation for the Appellant

David Bedenham, counsel, instructed by the General Counsel to HMRC, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	This application relates to four appeals.  Three of the appeals (LON/2007/858, 861 and 2061) were withdrawn by letter of 17 July 2009.  I will deal with the fourth (LON/2006/951) separately at the end of this Decision. All four appeals were transitional appeals (i.e. they started before 1 April 2009 and were made to the VAT and Duties Tribunals).  The question is whether the Tribunal has authority to award costs against the withdrawing party applying the costs provisions of the VAT Tribunal Rules when the costs application is made after 31 March 2009 and after the notice of withdrawal has been served.

Background

2.	The three appeals were against decisions by HMRC dated 8 May 2007, 9 May 2007 and 12 September 2008 denying Surestone Ltd (“the Appellant”) its right to deduct input tax in the sum of £1,991,836.88.  The basis for the decision was that the relevant transactions (conducted in VAT periods 01/06, 02/06, 03/06, 04/06 and 05/06) were connected with the fraudulent evasion of VAT and, further, the Appellant knew or should have known of that connection with fraud.  The Appellant’s transactions in relation to which input tax was denied are said by HMRC to be connected with the fraudulent evasion of VAT by way of a variant of Missing Trading Intra-Community fraud known as “contra-trading”.  

3.	By way of notices of appeal filed on 14 May 2007 and 2 October 2008, the Appellant appealed against HMRC’s decisions.  By letter dated 17 July 2007, the Appellant withdrew the three appeals.  

The present proceedings

4.	At an application hearing on 20 July 2009 (fixed sometime before the Appellant’s withdrawal of the three appeals) an oral application for costs was made.  The Tribunal is informed that between 14 May 2007 and 17 July 2009 HMRC had incurred significant expenditure in relation to the appeals including attending several case-management hearings and preparing and serving witness statements.  In the light of that, HMRC made the oral application for costs on 20 July.  The application was stoodover for argument today (30 November 2009).

No appearance for the Appellant

5.	Shortly after withdrawing the three appeals the Appellant ceased to use the services of their then representative (Vantis plc).  The Tribunal was informed and in due course listed the application in relation to the three appeals and sent the hearing notice to the Appellant’s address as found on its original notice of appeal.  It has turned out that the Appellant now uses a different address.  This was not notified to the Tribunal.  However the Appellant was informed of the present hearing on Friday 27 November and received a letter of confirmation on Saturday 28 November. No one came to represent the Appellant.  The Tribunal decided to address the question of principle, namely whether and to what extent it has power to make a costs order against the Appellant.  The Tribunal has, as will become apparent, decided that it does have such power.  The Tribunal has however left over for a further hearing the question of whether the circumstances of these proceedings were such as to warrant the making of a costs award in favour of HMRC and what amount should be awarded.

The relevant statutory provisions

6.	Under the VAT Tribunal Rules 1986 (“the 1986 rules”), costs were governed by rule 29.  That rule provided:

“(1)	A tribunal may direct that a party or applicant shall pay to the other party to the appeal or application – 

(a)	within such period as it may specify such sum as it may determine on account of the costs of such other party of and incidental to and consequent upon the appeal or application; or
(b)	the costs of such other part of and incidental to and consequent upon the appeal or application to be taxed by a … judge …”.

Rule 16(2) of the 1986 Rules made clear that “the withdrawal of an appeal or application under [rule 16] shall not prevent a party to such appeal or application from applying under rule 29 for an award or direction as to his or her costs.”

7.	Under the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the 2009 Rules”) which came into force on 1 April 2009, costs are governed by rule 10.  That rule provides: 

“(1)	The Tribunal may only make an award in respect of costs (or, in Scotland, expenses –

(a)	under section 29(4) of the 2007 Act (wasted costs);
(b)	if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting of proceedings; or
(c)	if – 

(i)	the proceedings have been allocated as a Complex case under rule 23 …; and
(ii)	the taxpayer … has not sent or delivered a written request to the Tribunal … that the proceedings be excluded from potential liability for costs or expenses under this sub-paragraph.”

Rule 10(4) of the 2009 Rules provides – 

“(4)	An application for an order under paragraph (1) may be made at any time during the proceedings but may not be made later than 28 days after the date on which the Tribunal sends –

(a)	a decision notice recording that the decision which finally disposes of all issues in the proceedings; or
(b)	notice of a withdrawal under rule 17 (withdrawal) which ends the proceedings.”

8.	Paragraph 7 of Schedule 3 of the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009 (“the TTF Order”) deals with the application of the 2009 Rules to transitional proceedings that commenced prior to 1 April 2009 (but were not concluded before that date).  Transitional proceedings are “current proceedings” within paragraph 1(2) of the TTF Order.  

9.	Paragraph 6 of Schedule 3 provides that – 

“Any current proceedings are to continue on and after the commencement date as proceedings before the Tribunal.”

Paragraph 7 makes specific provision for current proceedings.  It directs in sub-paragraph (3) that – 

“The tribunal may give any direction to ensure that proceedings are dealt with fairly and justly and, in particular, may –

(a)	apply any provision in procedural rules which applied to the proceedings before the commencement date; or
(b)	disapply any provision of Tribunal Procedure Rules.” [i.e. the 2009 Rules].

“Procedural rules” are defined in subparagraph (4) to mean – 

“… any provision (whether called rules or not) regulating practice or procedure before the commencement date.”

The entirety of the 1986 Rules (including the costs provisions) were “Rules of Procedure” : see VAT Act 1983 Schedule 8 paragraph 9.

10.	In relation to costs, paragraph 7(7) of the TTF Order provides:

“An order for costs may only be made if, and to the extent that, an order could have been made before the commencement date.”

Application of the provisions to the present appeals

11.	If these appeals had been filed and concluded before 1 April 2009, the 1986 Rules would have applied both in relation to procedure and costs.  Typically costs would, subject to the Tribunal’s discretion, have been recoverable by the successful party (this case falling, as it does, outside the “Sheldon Statement”).  

12.	If this appeal had not been filed with the Tribunal until after 1 April 2009, then the 2009 Rules would apply in relation to both procedure and costs.  This appeal would then have been “allocated” under rule 23.  Had the appeal been allocated as “complex” the Appellant would have been given 28 days from allocation to “opt out” of the costs regime, subject only to being exposed for a costs award if unreasonable behaviour had been shown.  If the Appellant had not “opted out” of costs within 28 days of the appeal being allocated as “complex”, then costs would, subject to the Tribunal’s discretion, have been recoverable by the successful party.

13.	The present case does not, however, fit into the situation set out in either of those two scenarios.  Instead, the appeals were filed before 1 April 2009 but were not concluded prior to that date.  In those circumstances, it is clear that in relation to procedure the starting point is that the 2009 Rules apply unless and to the extent that the Tribunal exercises its power in paragraph 7(3) of Schedule 3 to the TTF Order and applies the 1986 Rules..  

14.	The effect of paragraph 7(7) of Schedule 3 to the TTF Order is that the making of a direction under rule 10(1) of the 2009 Rules relating to costs is not (in the circumstances to which this application relates) open to this Tribunal.  None of the situations in rule 10(1)(a)-(c) applies.  The 1986 Rules under which a costs award could have been made ceased to have effect at the end of March 2009.  Likewise the 1994 Special Commissioners Rules, which contained no power to make costs awards (save where one party had behaved wholly unreasonably), ceased to have effect.

15.	These, however, are “current proceedings” within the meaning of that expression in paragraph 1(2) of Schedule 3 to the TTF Order.  Because they are current proceedings, paragraph 7 of Schedule 3 to the TTF Order applies.  Thus, if the Tribunal is satisfied that in the circumstances a costs award is a direction that ensures that the proceedings are dealt with fairly and justly, the Tribunal has the power (on the strength of paragraph 7(3)(a) and (7) of Schedule 3 to the TTF Order) to apply the 1986 Rules (and specifically rule 16(2), so far as it is material, and rule 29).
	
16.	In principle, and without at this stage examining the particular circumstances of the present proceedings, a costs award is a direction that may come within paragraph 7(3) as ensuring that proceedings are dealt with fairly and justly; it ensures, for example, that the successful party does not lose out financially by being involved in the litigation.  Paragraph 7(7) of Schedule 3 to the TTF Order limits the Tribunal’s powers, wherever granted, in relation to costs orders.  Any order for costs made in pursuance of the power in paragraph 7 of Schedule 3 of TTF Order may, therefore, only be made if and to the extent that an order could have been made before 1 April 2009.  On that basis the Tribunal cannot make a costs award that goes beyond what could have been awarded under the 1986 Rules.  And where, as in the Special Commissioners Rules, no costs award could have been made at all (save in circumstances of unreasonable behaviour), the Tribunal has no power under paragraph 7 of Schedule 3 to the TTF Order to make a costs order.  There is, however, no question in the present case of the costs award exceeding the amount permitted by the 1986 Rules.

17.	Was the costs application of 20 July 2009 made in time?  The application is for costs which do not fall within any of the categories in rule 10(1) of the 2009 Rules.  Rule 10(4) which refers only to applications for orders under rule 10(1) does not therefore apply.  But, as already observed, the Tribunal has the discretion, given by paragraph 7(3) of Schedule 3 to the TTF Order, to “apply any provision in [the 1986 Rules] which applied to the proceedings before 1 April 2009”.  In the present circumstances rule 16(2) of the 1986 Rules (if applied) operates to enable HMRC to make the costs application.  The application was made three days after the Appellant’s notice of withdrawal.  It was clearly in time for the purposes of the 1986 Rules.  The effect of the Tribunal’s exercise of its discretion (in paragraph 7(3)(a) of Schedule 3 to the TTF Order) to apply rules 16(2) and 29 of the 1986 Rules will be to make HMRC’s application of 20 July 2009 an effective application.

18.	For completeness, it was put to me (in response to a possible argument for the Appellant) that a costs award could only be made after 1 April 2009 where the Tribunal had already allocated the appeal to the complex category under rule 23(1) of the 2009 Rules and the Appellant had not “opted out” under rule 10(1)(c) of those Rules. I do not think this is correct. Rule 23 and the allocation of appeals and “application notices” has no application to “current proceedings”; it applies only to appeals or appeal notices (e.g. to extend time for appealing) that have been made from 1 April 2009 onwards.  There is no power in paragraph 7(3) of Schedule 3 to the TTF Order to make rule 23 apply in order to enable an allocation of an appeal to the complex category. In any event, the Tribunal’s power to make any costs award after 1 April 2009 is constrained by paragraph 7(7) of Schedule 3.

19.	For those reasons I am satisfied that the Tribunal has the authority to make a costs order in relation to the three appeals.

The Fourth Appeal

20.	The fourth appeal (LON/2008/0951) was stood behind the three appeals.  Confirmation of withdrawal was received by the Tribunal on 24 September 2009.  On 29 September HMRC made an application for costs in relation to the Fourth Appeal and applied for all four to be heard together.  I shall make a direction to this effect.

DIRECTIONS
1.	The Tribunal has the authority to make an award of costs in relation to each of the four appeals.

2.	A one hour hearing for directions as to the processing of the costs award in relation to the four appeals shall be listed for a date in early 2010.

SIR STEPHEN OLIVER QC
CHAMBER PRESIDENT
RELEASE DATE: 8 December 2009