[2010] UKFTT 203

TC00505
Appeal Number: LON/2007/1321 

FIRST TIER TRIBUNAL TAX

VAT – COSTS – Claim by Unsuccessful Appellant – Last Minute change to the HMRC’ statement of case – Tribunal decided that the change was material –  Tribunal refused Application to hold HMRC to its statement of case but minded to make an award of costs to Appellant – Appeal continued – Appeal dismissed on merits – Appellant submitted a claim for costs in the sum  of ₤312,500 – Tribunal orders costs of ₤20,000

DECISION NOTICE (WITH FULL REASONS)
Rule 35(2) The Tribunal Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 

	SUMITOMO MITSUI BANKING CORPORATION EUROPE	Appellant
LIMITED
	- and -
THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)

Sitting in public at London on 12 February 2010

James Rivett counsel instructed by PricewaterhouseCoopers LLP  for the Appellant

Sam Grodzinski counsel instructed by the Solicitor’s office of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION
The Application
1.	The Appellant applies for its costs arising from its unsuccessful Appeal which was heard by the Tribunal on 10 and 11 March 2009. The amount of costs claimed was ₤312,350 which related to professional fees incurred from 1 August 2007 to 26 May 2009.
2.	The substantive Appeal was concerned with the place of supply of certain services supplied by the Appellant to its parent company, Sumitomo Mitsui Banking Corporation, (hereinafter known as SMBC), in Japan. The issue was whether the supplies should be treated as being supplied in the United Kingdom where the Appellant was established, or in Japan where SMBC was established. The Appellant contended that the services were consultancy services with the consequence that they were supplied in Japan and as such outside the scope of VAT. HMRC, on the other hand, submitted that the services were of an essentially managerial nature concerned with the day to day and longer term management of the SMBC organisation. Thus the services were not within the definition of consultancy services with the result they were supplied in the United Kingdom and subject to VAT. The Tribunal decided that the place of supply was the United Kingdom and dismissed the Appeal.
3.	The origin of the costs Application stemmed from a preliminary direction by the Tribunal at the beginning of the hearing on 10 March 2009. The Appellant argued that HMRC’s case as advanced in its skeleton argument was materially different from that in its statement of case. The Appellant had minimal notice of the change as the skeleton was served on the Friday afternoon before the hearing on the Monday. In those circumstances the Appellant applied for an order directing HMRC confine its case to that in its statement. After hearing full argument from the parties and consideration of the various documents the Tribunal decided that the Appellant had made out the grounds of its Application. The Appellant, however, conceded during the course of argument that it had not been substantially prejudiced by the change in HMRC case and ready to deal with the “new” case if so directed. The Tribunal, therefore, refused the Application but indicated that it was minded to make an award of costs.
4.	The Tribunal recorded its preliminary ruling in the published decision of the substantive Appeal released on 3 June 2009. 
“For the avoidance of doubt the Tribunal directs that the costs regime operating prior to 1 April 2009 applied to this Appeal.
At the beginning of the hearing the Tribunal dealt with and announced its decision on a preliminary application by the Appellant that HMRC be directed to adhere to its Statement of Case. In summary the Tribunal found that
The Appellant had made out the grounds of its application in that there was a material and substantive difference between HMRC’s skeleton argument and its statement of case.
The Tribunal had the authority to make the order as requested by the Appellant.
The Appellant conceded that it had not been substantially prejudiced by the change in HMRC case and was in a position to deal with it.
In view of the Appellant’s concession the Tribunal considered that the appropriate remedy was an award of costs.
The Tribunal directs that the Appellant submits its Application for costs within 28 days of release of the decision. HMRC will have 28 days to respond after receiving the Application. The Appellant 14 days to reply after receiving the response. The Tribunal will determine the Application on written submissions unless either party requests an oral hearing”.

5.	The Appellant made its Application for costs within time which was served on HMRC on 6 July 2009. HMRC delivered its response on the Tribunal on 30 July 2009. Unfortunately HMRC’s response was not sent to the Appellant which  occasioned delay in dealing with the Application for costs. On 18 September 2009 the Tribunal received the Appellant’s reply to HMRC’s response. After considering the submissions the Tribunal decided that it was necessary to hold a hearing to determine the issue of costs, which was communicated to the parties on 5 October 2009. The hearing was fixed for the 12 February 2010 being the earliest convenient date for the parties.  
The Application for Costs
6.	The Appellant split its costs application  into two different categories:
(1)	Costs incurred by the Appellant in relation to its Appeal against that part of the disputed HMRC decision which dealt with the recharge of the Appellant’s salary costs  which was conceded by HMRC in mid 2008 (the settled amount).
(2)	Costs occasioned as the result of the material and substantial difference between HMRC’s pleaded case and the case the Appellant was forced to meet during the substantive hearing of its Appeal (litigation and residual costs).
The Appellant’s Submissions
7.	The Appellant contended that the Tribunal had a wide discretion under rule 29 of the Tribunal Rules 1986 to make an order for costs. The Tribunal’s discretion extended to making orders in respect of those costs that were incurred by the Appellant in challenging that part of HMRC’s decision which related to the recharge of salary costs and conceded by HMRC on 1 May 2008.  The concession affected some 31 per cent of the tax in dispute. The Appellant pointed out that the issue of salary recharge costs formed part of the Notice of Appeal to the Tribunal. Further the general rule that costs follow the event equally applied to the situation where an Appellant was partly successful with his Appeal.
8.	The Appellant submitted that the Tribunal’s discretion under rule 29 extended to compensate an unsuccessful party with an order for costs where the other party has behaved unreasonably or unfairly at the hands of its opponent.  The Appellant argued that it had been treated unfairly as a consequence of  HMRC’s  failure to set out the matters and facts on which it relied to support the disputed decision in its statement of case Contrary to HMRC’s submission, the Appellant suffered prejudice from HMRC’s failure, albeit not to the extent that it was unable to continue with the hearing timetable. The prejudice suffered was real and substantial in that the Appellant incurred considerable costs in meeting a case that it was not required to meet, and forced ad hoc to counter a case put at the hearing which was materially different from that articulated in the statement of case. Finally HMRC’s change of case was all the more unfair given the context in which it was served. According to the Appellant, HMRC’s statement of case was extremely late and only served in response to an application that the Appeal be allowed unless HMRC served its statement of case by a prescribed date. 
HMRC’s Submissions
9.	HMRC’s understanding of the Tribunal’s direction was that no firm decision had been taken about an order for costs. In its view the Tribunal had indicated after dismissing the Appellant’s application to limit HMRC to its statement of case that the change of the case may lead to an award of costs against HMRC.
10.	HMRC opposed the Appellant’s application for costs in both categories. HMRC starting point was that the general rule in litigation was that the losing party should pay the winning party’s costs. In this Appeal the Appellant had lost and should pay HMRC’s costs.
11.	HMRC contended that the costs application in respect of the settled amount had nothing to do with any change in HMRC’s  statement of case. Thus in HMRC’s view this application fell wholly outside the ambit of the Tribunal’s directions made in its decision released 3 June 2009. In any event there was no good reason why the Appellant should be awarded these costs. HMRC only withdrew part of its decision under Appeal, relating to the recharge of certain salary costs, once additional information had been provided by the Appellant.
12.	HMRC submitted that it would be wholly unjust and disproportionate to penalise HMRC by making it pay the Appellant’s costs in respect of the purported change to its case. HMRC considered that such an award of costs would be tantamount to a finding that HMRC’s conduct warranted an award of costs on an indemnity basis.  Despite the Tribunal’s finding of a material and substantial change in its case, the Appellant conceded that it was not seriously prejudiced by the change to the extent of preventing it from continuing with the hearing. Further although the emphasis of HMRC’s case may have changed following the service of the Appellant’s evidence the fundamental basis of its case remained the same. Finally the Appellant’s own case shifted throughout the proceedings including at the hearing where the Tribunal held that the evidence of the Appellant’s principal witness was fraught with confusion.
Consideration
13.	The Tribunal made a specific a direction that the Old Costs regime applied to this Appeal. In this respect the relevant law to this dispute is found at Rule 29(1) of the Tribunal Rules 1986 which provides that
“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”.
b)	the costs of such other party of and incidental to and consequent upon the appeal or application to be assessed by a Taxing Master of the Supreme Court …..
14.	Sir Stephen Oliver QC, the President of the Tribunal, observed in MG Rover Group Ltd v The Commissioners for HMRC [2008] VAT Decision 20871 at paragraph 21 that
“The general rule in civil litigation is that the unsuccessful party should pay the successful party’s costs. The outcome, following MG Rover’s withdrawal of its appeal on the morning of the hearing is that MG Rover has been wholly unsuccessful. Nonetheless the Tribunal’s power to award costs and to determine the amount of costs is a discretionary power and is to be exercised in the light of all the relevant circumstances. Our task is to determine whether the conduct of HMRC has been such as to require us to depart from the general rule”.
15.	The Tribunal draws from the observation of Sir Stephen Oliver QC that when considering an order for costs the Tribunal should normally apply the general rule for civil litigation but can depart from it when the circumstances of the case merit it. 
16.	The Tribunal agrees with HMRC’s understanding of the status of the costs directions. The Tribunal did not decide that it would make an order for costs at the time it dismissed the Appellant’s application to restrict HMRC to its statement of case. The Tribunal indicated that it was minded to make such an order but would invite representations from the parties after it had reached its decision on the substantive Appeal.  This was done to enable the parties and the Tribunal to have regard to the outcome of the substantive Appeal which in the Appellant’s case may have meant  a claim for costs on indemnity basis if it had been successful in the substantive Appeal.
17.	 The Tribunal equally stands by its preliminary decision that there was a material and substantive difference between HMRC’s skeleton argument and its statement of case, and that the Appellant had made out the grounds of its application. HMRC sought to dilute the effect of that finding by suggesting that this case was no different from the norm for litigation characterised by the ebb and flow of parties constantly adjusting their respective positions in response to that taken by the other. According to HMRC the state of flux was evident in this Appeal with the Appellant’s case assuming various transformations along the route. HMRC’s depiction of the character of litigation may be correct but the critical feature of this case was that the change to HMRC’s case took place virtually on the eve of the hearing.
18.	The Tribunal addresses first the claim for costs in connection with that part of Appeal which had been conceded by HMRC (the settled amount). The Tribunal considers this claim to go beyond the scope of the costs directions which were linked to the material and substantive change in HMRC’s case. At first blush the settled amount application appeared opportunistic. The Tribunal, however, accepts that it had jurisdiction to deal with the claim because it arose from the Notice of Appeal. Despite the Appellant’s attempt to treat the settled amount as a separate claim insulated from the disputed element of the Appeal, the Tribunal considers that as both elements originated from the same Appeal notice the claim should be examined in the context of the Appeal as a whole. That being so HMRC was successful with the principal aspect of the Appeal in which case application of the general  rule of the loser paying the winner’s costs would suggest that HMRC had the greater claim for a costs order than the Appellant. In respect of the settled amount the Appellant put forward no substantive grounds for departing from the general costs rule. In fact the Appellant based its application on the general rule.  In those circumstances the Tribunal refuses the Appellant’s claim for costs in respect of the settled amount. 
19.	HMRC relied upon the Tribunal decision in MG Rover Group Limited for its submission of no substance to the Appellant’s second claim for costs. M G Rover Group Limited as with this Application concerned a claim for costs arising from HMRC’s late change to its case. In  M G Rover Group Limited the Tribunal decided that no award of costs was appropriate:
“It is not satisfactory to see a case like this where HMRC have, through ignorance or oversight, failed to give a proper explanation for their decision.  Nonetheless MG Rover’s liquidator and advisers are professionals of equal experience and expertise.  Regulation 25(3), which destroyed the claim, was there for all to see. One cannot resist concluding that they too should have recognised the weakness of their case at a much earlier time. We do not therefore see that HMRC’s failure to make an application to amend their statement of case justifies a different decision on costs.  
For those reasons we reject MG Rover’s application for costs, let alone indemnity costs.  We make no order for costs as regards MG Rover’s application” (paras 29 & 30).
20.	HMRC considered that the facts of this case were far weaker than that of M G Rover Group Limited.  In the latter HMRC’s skeleton abandoned both arguments in its statement of case and advanced an entirely new argument. The skeleton was served on the Appellant on the Friday before the hearing on the Monday. The Appellant withdrew its Appeal over the intervening weekend and applied for its aborted costs at the hearing. According to HMRC it did not abandon its argument in this Appeal. The fundamental basis of its case remained the same throughout. The Appellant, on the other hand, did not adduce different evidence or advance different legal argument as a result of HMRC’s shift of position. Thus the Appellant cannot claim to have incurred any additional costs, whereas HMRC had to incur significant costs in defending an unsuccessful appeal. The Appellant in this case persisted with its Appeal in contrast to  the sensible approach adopted by the appellants in M G Rover Group Limited who withdrew their appeal as soon as they saw HMRC’s skeleton argument.
21.	The Tribunal takes a different view from HMRC on the significance of M G Rover Group Limited to this Application. First the Tribunal  in M G Rover acknowledged that a late change in HMRC’s case constituted circumstances which the Tribunal can have regard to in exercising its discretion to order costs. The Tribunal in M G Rover Group Limited said at paragraph 24
“The main point in favour of making some costs award is that HMRC did not refine their argument properly until the last moment. Rule 8 of the Tribunals Rules exists to ensure that HMRC’s case is clear to the other party and to the Tribunal and to protect the taxpayer affected by HMRC’s decision and generally to produce a fair and orderly hearing of the issues”.  
22.	Second the facts of M G Rover Group Limited were different. The Tribunal in that case ruled in effect that the appellants knew their case was hopeless and should have recognised the weakness of their position at a much earlier time. The Appellant in this Appeal was not seeking to take advantage of an obvious error on the part of HMRC. The Appellant had prepared its case to counter a settled characterisation by HMRC of its services as administrative which suddenly changed on the eve of the hearing to managerial. Despite this shift in HMRC’s characterisation of the Appellant’s supplies, the Appellant still had an arguable case but the bar had been raised. The Tribunal considers the change in HMRC’s case inevitably generated wasted costs on the part of the Appellant. HMRC argued that it did not because the Appellant was able to continue with its case at the hearing. The Tribunal disagrees with HMRC’s view. 
23.	The natural consequence of the Tribunal’s ruling that the Appellant had made out its grounds of Application but the sanction of holding HMRC to its statement of case was too severe was that the Tribunal would consider lesser remedies. If the Appellant had requested an adjournment of the hearing the Tribunal would have granted it. The reason why an adjournment was avoided was down to the skill, knowledge and experience of Appellant’s counsel. In the Tribunal’s view it compounds the sense of unfairness of denying the Appellant a lesser remedy on the ground that it engaged competent counsel to conduct its case.  In this respect the Tribunal considers that an award of costs to the Appellant is merited.
24.	The Tribunal did not make a specific award of costs at the conclusion of the preliminary matter because the outcome of the substantive Appeal would have a significant bearing on any such award. Following release of the decision the Tribunal had every expectation that the claim for costs from the Appellant would be modest and that the matter would be settled between the parties. The Tribunal’s expectation was shattered by the Appellant’s claim which in the circumstances was unreasonable leading to a continuation of the dispute and an escalation of costs on both sides. The Tribunal has been asked by the parties that any such order for costs should be assessed. The Tribunal fears that if this course was adopted it would perpetuate the dispute and incur further costs.
25.	 The Tribunal decides that the appropriate remedy for HMRC’s failure  to set out the matters and facts on which it relied to support the disputed decision in its statement of case is a costs order. The award, however, should be modest having regard to all the circumstances, in particular the eventual outcome of the Appeal and the general rule that costs should follow the event. The amount of costs incurred by the Appellant since 30 August 2008 when the preparation for the hearing began in earnest was ₤187,500. The Tribunal considers that an amount in the region of 10 per cent is appropriate. The Tribunal orders HMRC to pay costs of ₤20,000 plus VAT to the Appellant. The Tribunal makes no order for costs in respect of these proceedings.

                                

                                 MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 6 May 2010

LON/

Notes
1.	A party wishing to Appeal this decision to the Upper Tribunal must seek permission by making   an application in writing to the Tribunal within 56 days of being provided with full written reasons for the decision. An application for permission must identify the alleged error(s) in the decision and state the result the party making the application is seeking.