TC02876
Appeal number:
TC/2010/07107
PROCEDURE – COSTS – appeal
in standard category – appellant’s application for costs on the basis that
HMRC acted unreasonably in defending or conducting proceedings under Rule
10(1)(b) of Tribunal Rules – appeal settled on second day of hearing – whether
HMRC acted unreasonably in failing to engage with case which meant case could
have been settled earlier in the proceedings – no – whether other acts
individually or together amounted to HMRC defending or conducting proceedings
unreasonably – no – application for costs dismissed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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MARKET &
OPINION RESEARCH INTERNATIONAL LTD
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE SWAMI RAGHAVAN
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UPON the appellant’s
applications for costs under Rule 10(1)(b) of the Tribunal Procedure
(First-tier Tribunal) Tax Chamber) Rules 2009
Sitting in public at 45 Bedford Square, London on 15 April 2013
Mr Tarlochan Lall, Counsel,
for the Appellant
Mr Shea, HMRC Officer for the
Respondents
© CROWN COPYRIGHT
2013
DECISION
Introduction
1.
This matter concerns the appellant’s application for an order that HMRC
pay the appellant’s costs on the grounds that HMRC acted unreasonably in
conducting and defending proceedings. The costs are in relation to an appeal in
the standard category lodged on 9 September 2010. The substantive issue in the
proceedings related to a Fleming claim for input tax of £126,454.22 for
periods ended between 1 January 1986 and 30 April 1997 on the fuel element of
mileage allowances reimbursed to researchers engaged by the appellant.
2.
The appeal was listed for a hearing on 18-20 June 2012. On the first day
the Tribunal dealt with two preliminary issues. First, whether HMRC could amend
its statement of case to include an argument that the Tribunal’s jurisdiction
in the matter was supervisory rather than appellate and second, if it could,
what the nature of the Tribunal’s jurisdiction in the matter was. The Tribunal
permitted HMRC to amend its statement of case but its conclusion, contrary to
HMRC’s view, was that its jurisdiction was appellate. The reasons for those
decisions are set out in HMRC v Market & Opinion Research International
Limited [2013] UKFTT 007 (TC). Mid-way through the second day of
hearing the Tribunal agreed the parties’ draft consent order disposing of the
proceedings and allowing the appellant’s claim in the amended amount of
£112,742.52. (The reduction in the amount claimed by the appellant arose from
an issue relating to the employment status of the researchers.)
3.
The appellant made two applications for costs, the first dealing with
the costs in relation to the substantive matter and the second (“the jurisdiction
issue”) in relation to the preliminary matters.
4.
The appellant’s complaint is that there was essentially no new
information or evidence provided to HMRC at the hearing that they did not have
before. They say HMRC did not engage with the submissions and evidence provided
by the appellant prior to the hearing, and that if they had done so the case
would have settled much earlier in the proceedings. The appellant also points
to various other matters, as amounting to HMRC unreasonably conducting and
defending proceedings including the fact that HMRC raised the jurisdiction
issue late in the proceedings on a misconceived basis.
5.
The fact that there were two costs applications in relation to one set
of proceedings arose from the different times at which the consent order was
made and the decision on the jurisdiction issue given. Both the parties were in
agreement that the Tribunal should deal with the two costs applications together.
HMRC had filed a written response to the appellant’s first application and a
further written response on 27 February 2013 which consolidated their response
to both the applications. HMRC conceded that if their conduct in relation to
the substantive proceedings was found to be unreasonable they would accept that
their conduct in relation to the jurisdiction issue would also be unreasonable.
They acknowledged that if their conduct in relation to the substantive issue
was not unreasonable it would still be open to the Tribunal to find their
conduct in relation to the jurisdiction issue was unreasonable (although they
disputed that this was the case).
Legislation
6.
Section 29 of the Tribunals Courts and Enforcement Act 2007 which
provides the basis for the First-tier Tribunal’s ability to make a direction in
respect of costs states:
“(1) The costs of and incidental to—
(a) all proceedings in the First-tier Tribunal…
shall be in the discretion of the Tribunal in which
the proceedings take place.
(2) The relevant Tribunal shall have full power to
determine by whom and to what extent the costs are to be paid.
(3) Subsections (1) and (2) have effect subject to
Tribunal Procedure Rules.”
7.
In so far as is relevant to this application, Rule 10 of the Tribunal
Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the Tribunal
Procedure Rules”) provides as follows;
“10. – (1) The Tribunal may only make an order in
respect of costs (or, in Scotland, expenses) –
(a) …
(b) if the Tribunal considers that a party or their
representative has acted unreasonably in bringing, defending or conducting the
proceedings;…”
Exercise of Tribunal’s discretion
8.
I was taken through a number of First-tier Tribunal decisions and a
decision of the Special Commissioners. There was some large measure of
agreement between the parties as to the propositions to be drawn from these. These
are described and discussed where necessary below.
(1)
It was to be noted that the test in the Tribunal Rules that a party or
representative had “acted unreasonably” required a lower threshold than the costs
awarding power of the former Special Commissioners in Regulation 21 of the
Special Commissioners (Jurisdiction and Procedure) Regulations 1994 which was
confined to cases where a party had acted “wholly unreasonably”. This was
discussed in Bulkliner Intermodal Ltd v HMRC [2010] UKFTT 395(TC) at [9].
(2)
It was suggested that acting unreasonably could take the form of a
single piece of conduct. I was referred to [9] to [11] of the decision in Bulkliner
by way of support for this proposition. In particular at [10] the decision
highlights the actions that the Tribunal can find to be unreasonable may be
related to any part of the proceedings
“…whether they
are part of any continuous or prolonged pattern or occur from time to time”.
(3)
The point is I think mentioned in the context of contrasting the Tribunal’s
rules in relation to acting unreasonably across the span of proceedings with
the former Special Commissioners’ costs power which was in relation to
behaviour which was “in connection with the hearing in question”. Having said
that there would not appear to be any reason why the proposition that a single
piece of conduct could amount to acting unreasonably. It will of course rather depend
on what the conduct is.
(4)
Actions for the purpose of “acting unreasonably” also include omissions
(Thomas Holdings Limited v HMRC [2011] UKFTT 656 (TC) at [39].)
(5)
A failure to undertake a rigorous review of assessments at the time of
making the appeal to the tribunal can amount to unreasonable conduct (Carvill
v Frost (Inspector of Taxes) [2005] STC (SCD) 208 and Southwest
Communications Group Ltd v HMRC [2012] UKFTT 701 (TC)) at [45]).
(6)
The test of whether a party has acted unreasonably does not preclude the
possibility of there being a range of reasonable ways of acting rather than
only one way of acting. (Southwest Communications Group Ltd at [39]).
(7)
The focus should be on the standard of handling of the case rather than
the quality of the original decision (Thomas Maryam v HMRC [2012] UKFTT 215(TC)).
(8)
The fact that a contention has failed before the Tribunal does not mean
it was unreasonable to raise it. In Leslie Wallis v HMRC [2013] UKFTT
081(TC) Judge Hellier stated at [27]:
“It seems to us that it cannot be that any wrong
assertion by a party to an appeal is automatically unreasonable…before making a
wrong assertion constitutes unreasonable conduct in an appeal that party must
generally persist in it in the face of an unbeatable argument that he is wrong…”
(9)
As cautioned by Judge Brannan in Eastenders Cash and Carry Plc v HMRC
[2012] UKFTT 219 (TC) at [91] Rule 10(1)(b) should not become a “backdoor”
method of costs shifting.
9.
Although there was no fundamental disagreement on these propositions as
to the interpretation of Rule 10(1)(b), what was in dispute was the application
of Rule 10(1)(b) to the facts of this case and how it was to be applied to
cover situations such as the current one where the complaint was that if HMRC
had engaged with the case sooner it would have settled sooner.
Issue and procedural history
10.
In order to understand the issues raised in the costs application it is
necessary to set out briefly what was in issue on the substantive matter and flag
some of the features raised in the parties’ pre-hearing exchanges.
11.
It was agreed between the parties that the substantive issue for
determination was whether on the balance of probabilities the appellant could
show input tax for the periods ended between 1 January 1986 and 30 April 1997
had not been claimed on the fuel element of mileage allowances reimbursed to
researchers engaged by the appellant. A claim for a later capped period had
been accepted by HMRC, but HMRC did not agree this gave rise to a presumption
of continuity. The appellant was relying on circumstantial evidence. This
included witness statements setting out recollections of the two directors who
had dealt with a VAT visit in 1990 and their recollections of making VAT claims
which were sent by the appellant to HMRC on 5 January 2011 (which both parties
accept by themselves were not persuasive), and copies of handbook guides
containing claim forms relating to mileage allowances. The 2005 and 2007
versions were provided initially, subsequently the 1995 version was produced.
There was also an issue over how various excerpts from HMRC officer reports following
visits by HMRC to the appellant were to be interpreted.
12.
The substantive issue was one of fact. There was no direct evidence as
to the issue of whether the appellant had claimed input tax during the claim
period.
13.
The Notice of appeal was lodged on 9 September 2010.
14.
On 27 January 2011 the appellant requested a further review of their
claim.
15.
On 3 May 2011 HMRC served its Statement of Case and List of Documents.
16.
The appellant served its list of documents on the Tribunal on 30
September 2011 and on HMRC on 11 October 2011. By 23 February 2012 HMRC had received
copies of the documents the appellant intended to rely on which would not have
otherwise been available to HMRC.
17.
Between 23 December 2011 and 2 March 2012 the parties had been
corresponding with each other over a draft statement of facts. In reality
because of the nature of the deletions made to the draft and the comments and
explanations given, the process for agreeing the draft statement became a
substitute for discussing the parties’ factual and legal contentions. A copy of
the handbook for researchers on expenses and allowances that was in force in
1995 was provided to HMRC on 23 February 2012.
18.
On 8 May 2012 HMRC wrote a letter to the appellant stating it had
considered the evidence supplied, including the additional evidence supplied above
but that their decision to disallow the claim still stood.
19.
On 6 June 2012 the appellant submitted a comprehensive skeleton argument
to HMRC and the Tribunal.
Interpretation of officer visit report
20.
At least part of the reason for HMRC’s refusal to allow the claim for
input tax was based on excerpts from officer visit reports, in particular one
on 18 October 1990:
“Discussed scale charges- satisfied only business
mileage claimed- amounts negligible”.
21.
HMRC’s view prior to settlement was that this indicated input tax had
been claimed. In their response to the appellant’s costs application they explained:
“Having heard how [the appellant’s] arguments
related to the visit reports and heard other explanations during the hearing
the Respondents accepted that the comments on the visit reports did not show
input tax had been claimed on mileage during the claim period”.
22.
HMRC go on to say this is not the same as accepting that the report
showed input tax on mileage was not claimed.
23.
The appellant’s case in relation to the interpretation of the note of
the visit was this it could not have been referring to input tax on mileage
allowances paid to researchers. Scale charges and mileage allowance related to
different things. Scale charges were provided for in statutory provisions and
gave rise to output tax whereas at the relevant time input tax on mileage
allowances was dealt with by an administrative practice. The expression “business
mileage” did not have any particular meaning in VAT and from its context must
be taken to have been a reference to private mileage funded by the appellant
giving rise to scale charges. On the basis that the costs of the researchers
were a principal input, the amount of input tax cannot have been “negligible”
and so it is argued the officer could not have been referring to input tax in
respect of mileage allowances paid to researchers.
24.
Mr Lall helpfully acknowledged in his submissions on this application
that his submissions at the hearing had covered a new point which was that
because the input tax on mileage allowances was “embedded” in costs incurred by
third party researchers it could be missed by the appellant and he submitted it
was missed by the appellant. In my view this point, to the extent it factored
in any way in HMRC’s assessment of the strength of their case, cannot have come
as a surprise to HMRC. So I discount the fact it was not mentioned previously
in assessing whether it is correct that by the time of settlement no new
information had come to light that was not apparent previously.
Researcher Handbooks
25.
The issue of the 2005 and 2007 Finance and Admin Guides (Handbook) which
had been raised by the appellant was mentioned in the draft Statement of Facts
dated 23 December 2011 prepared by the appellant. The guides contained sections
on car mileage allowances and indicated that mileage allowances were payable on
submission of a claim form.
26.
On 17 January 2012 HMRC responded saying there was no evidence that the
guides in 2005 and 2007 were similar to those in the Fleming claim period.
27.
On 10 February 2012 the appellant wrote to HMRC and in its amended draft
statement of facts referred to a Handbook issued in June 1995. This referred to
a section on the terms of employment and the interviewers’ pay and an appendix
form for interviewers’ claims for fees and expenses together with an example
completed form. It was stated in the appellant’s draft that “This shows that
the Appellant paid mileage allowances to interviewers who claimed them during
the claim period.”
28.
On 22 February 2012 HMRC responded. Its version of the draft statement
of facts deleted the references to the 1995 Handbook on the basis HMRC had not
seen it.
29.
On 23 February the appellant sent HMRC the 1995 Handbook and asked HMRC
to consider its draft statement of facts and comments in the light of this.
30.
On 2 March 2012 HMRC gave its response on the Handbook. It incorporated
descriptions and excerpts from the document and stated that the information
showed that mileage costs would have been incurred by the business at the time
but that the information did not show that the business did not recover input
tax on interviewer mileage claims rendered.
Parties’ arguments in relation to HMRC continuing to defend proceedings
31.
In essence the appellant argues the same material was put to HMRC
earlier and there was no reason the case could not have been settled sooner.
HMRC were wholly unreasonable in not carefully considering the case and they
had failed to engage with the matter properly. The appellant was, it says, put
to the trouble and expense of putting the same points to the Tribunal that it
had made much earlier. It cannot be the case that it should make a difference
that those points were made at the hearing by counsel rather than the
accountant representing the appellant in correspondence prior to the hearing.
32.
HMRC draw attention to the fact that in Fleming claims the
evidence is rarely clear cut and there are difficult questions as to the
tipping point on when it can be shown that something is more likely than not to
have been found to be the case. In their written response to the costs
application HMRC say they did consider the additional evidence put before them.
They say it was reasonable for them to say the additional evidence did not
advance the claim and it was correct for them to continue proceedings until
both evidence and explanations had been provided as to how the evidence
supported the appellant’s case.
33.
Both the review officer and the decision maker looked at the information
that was provided to them but did not change their decision until the second
day of the hearing. They say the explanation of the 1995 Handbook and the way
it operated (while by itself not conclusive) plus the detailed review of visit
reports changed HMRC’s mind about the meaning of the visit reports which was an
issue which was finely balanced. It was only following submissions made at
Tribunal by the appellant, some in response to requested clarifications from
the Tribunal that the appellant’s case became clear. In particular they refer
to an explanation prompted by the Tribunal’s question as to why the handbook
evidence was relevant to the issue of whether the appellant had made VAT claims
during the relevant period.
34.
In addition to the reasons for not pursuing the case set out in HMRC’s
written response, Mr Shea said that having listened to the submissions and
explanations given by the appellant at the hearing, and having come to the view
it would be willing to accept the claim it would have been wrong of HMRC to
continue to argue to the claim just to see what happened. HMRC’s main witness,
the officer who had made the decision under appeal was in attendance at the
hearing and instructed Mr Shea (who was HMRC’s representative at the hearing)
that if all that had been said at the hearing had been explained in the first
place he would have accepted the claim. Mr Shea said HMRC would have been
subject to criticism if in these circumstances it had continued with the
hearing.
HMRC’s reasons for settlement and Tribunal’s approach where issue is
whether case ought to have been settled earlier
35.
Before getting into the substance it is necessary to deal with an
argument the appellant made that the Tribunal is restricted to looking at HMRC’s
written response of 27 February 2013 to see what their reasons were for settling
and that it cannot look beyond that as to do so would be speculation.
36.
As to the reasons for settlement I was also referred by the appellant to
[109] in the FTT’s decision in Thomas Maryan where it was said for the
purposes of the cost application in that matter the Tribunal should not go
behind HMRC’s decision to abandon its opposition to the appeal and reach its
own conclusion on the merits of the decision. It was said there that the
Tribunal had to proceed on the basis that HMRC’s case against the appellant was
weak and the decisions issued by the officer were flawed.
37.
I am not persuaded that to the extent it is necessary to understand the
reasons why HMRC settled the case I should not be able to take into account Mr
Shea’s additional reasons beyond what is stated in HMRC’s written response. If
there is any reason to apply caution it is in relation to the fact that an
explanation of why the case settled given after the event is susceptible to
subsequent rationalisation and therefore might not accurately reflect the real
reasons why the case was settled. That would apply equally to written
explanations given after the event as it does to the ones given at this hearing.
I see no reason in principle why the Tribunal could not take such explanations into
account. If it did have concerns about after the event rationalisations being
given it could deal with this appropriately in making its findings.
38.
As to Mr Shea’s additional submissions these in any case amount to an
explanation for why it was not unreasonable for HMRC to have settled when they
did. This does not assist HMRC because the issue is not whether HMRC would have
been unreasonable if they did not settle when they did, but whether having
settled, this indicated that there had been an earlier omission in engaging
with the case such that the case could have been settled sooner. For this
reason the further argument that HMRC made which was to say that their action
of accepting the claim demonstrated that they acted reasonably does not assist
either.
39.
In relation to the underlying reason for settlement I agree with
appellant’s submission that HMRC must be taken to have accepted that on
balance, the appellant was more likely than not to be able to discharge the
burden of proof to persuade the tribunal to find that the input tax had not
been claimed before.
40.
In their submissions HMRC refer to various contentions they would not
have accepted had the hearing continued. But, the fact is the hearing did not
continue. HMRC decided to settle. As set out above having done that it must I
think be presumed that they came to the view that the appellant was more likely
than not to succeed. If the Tribunal did not make this presumption, and sought
to go on to examine whether HMRC were in fact correct to settle it would effectively
be giving a view on the merits of the matter without the benefit of the full
arguments and the relevant evidence and would be doing so without acknowledging
that the parties by settling had chosen not to have the substantive matter
resolved by the Tribunal.
41.
The upshot is HMRC cannot now suggest their case is not to taken as one which
on balance would not have been successful. But, subject to that, I think it is
relevant to consider the reasons they put forward as to why they settled when
they did and in doing so look at both their written submissions and what was
said at the hearing of the costs application.
42.
Where the issue is whether the case could have been settled sooner one
approach would be to assume that whatever information was available to HMRC at
the time of the settlement was enough to mean they had a weak case and then to
scroll back along the timeline of the case to consider what if any new material
or arguments HMRC could reasonably have been expected to be aware of at a given
point in time in order to see whether the case could have been settled sooner.
But, in my view to only consider the matter on this basis would be to fail to
acknowledge the way in which hindsight may colour an assessment of whether a
party acted unreasonably. A party may have acted reasonably in defending
proceedings at a given point in time even though with the benefit of hindsight
it might be said the appeal could have been settled then. Also as pointed out
by the Tribunal in Eastenders Cash and Carry there is a need to guard
against creating a “backdoor” costs shifting regime.
43.
HMRC raised an argument which went along the lines that if the Tribunal through
its decisions on costs applications determines that not allowing a case to be
tested shows unreasonable behaviour, there is a danger this might encourage
parties to continue putting points when otherwise they might have agreed the
point. This argument which is at the level of policy raises a wider issue which
is whether parties would be less willing to settle if they feared that the act
of settling would expose them to costs applications based on having “acted
unreasonably” in not settling sooner.
44.
The logical implication of this however would be that wherever matters
settle the conceding party would be immune from unreasonable costs applications
just because it was thought as a matter of policy that it was desirable for
cases to settle rather than to be litigated. That cannot be right in cases where
for instance Respondents to proceedings have been (to use the terms referred to
in Lesley Wallis) persisting in the face of an unbeatable argument and putting
the appellant and the Tribunal to expenditure of time and money resources that
could otherwise have been avoided. On the other hand there will, as indicated above,
be cases where the fact the matter has settled does not mean a party acted
unreasonably in not deciding to settle earlier. Along the continuum of
behaviour on which these possibilities lie the point at which a party can be
held to have acted unreasonably will of course depend on the particular facts
and circumstances of the case.
Proposed approach
45.
Taking account of the concerns outlined above as to the need to be aware
of the effect of hindsight, I will consider whether at the various stages of
the proceedings (which the appellant has highlighted as being points in time the
case could have settled) it was unreasonable on the part of HMRC to continue to
defend the proceedings considering what was reasonably available to them at the
time. In doing this I will also take into account what if any new information
or arguments which advanced the appellant’s case became available to HMRC. This
is on the basis that given HMRC’s view at settlement must be take to be that its
case was weak, if it then turns out they had the same information available to
them at the outset then this would tend to support a finding that HMRC ought to
have appreciated the weakness of their case sooner and settled earlier.
Appellant’s request for further review on 27 January 2011
46.
The evidence that was available at this time, in particular the references
to recollections of directors going back to the VAT visit in 1990, and excerpts
from the VAT officer’s report were in my view of limited relevance and weight. The
evidence was a long way off from amounting to evidence which would have led to the
conclusion that HMRC were unreasonable in not having drawn the conclusion that
the relevant input tax had not been claimed before and that they had therefore acted
unreasonably in continuing to defend the proceedings at this point.
47.
In terms of comparing the material available at this time as compared
with what was available at the time of the settlement I was referred by the
parties in particular to the following in a letter from Mr Newark of UHY Hacker
Young (the appellant’s representative) to HMRC dated 27 January 2011:
“1.The original claim was rejected by Mr Egerton [of
HMRC] on the basis that without any concrete supporting evidence either way the
Commissioners were of the view that on the balance of probabilities the company
probably had claimed the input tax in the past.
2. The only indications either way were:
i) A very badly worded Officers’ visit report from
1990 where one interpretation could be read as suggesting that the said input
tax had been claimed. However it was acknowledged that an equally valid
alternative interpretation of the Officer’s comment would have indicated that
the Officer was focused on scale charges and output tax not input tax and no
such inference could have been drawn…
…The two ex-directors recollected the following:
That any enquiry into business mileage would probably have concerned the
executive’s expenses and whether they had valid receipts for their claims”.
48.
This letter was reporting Mr Newark’s understanding of why the original
claim had been rejected. In Mr Newark’s earlier letter of 5 January 2011 he
states “it was noted by Counsel that the Officer’s comment [in the 1990 visit
report] could have alternative meanings, particularly since he refers to scale
charges (i.e. output tax) and not input tax specifically…”
49.
The appellant argues that taken together with the witness statements
(which it was accepted were not persuasive by themselves) the case should have
settled then.
50.
I have compared the contentions made at this stage with those which were
known at the time of the hearing in June 2012. I have considered the
appellant’s skeleton argument filed before the hearing and Mr Lall’s
submissions from my note of the hearing on the issue of respectively why the
reference to “scale charges”, “business mileage” and “negligible” meant it was
more likely than not that input tax in the claim period was not claimed.
51.
In my view the elaboration of the law underlying why scale charges and
mileage allowance were different would have been something HMRC knew or ought
to have known without having the matter spelled out to them. That was not a new
point. Indeed, in their response HMRC say they understood the differences
between claiming input tax on mileage and scale charges “but the difficulty
arises out of determining what was being referred to by isolated comments in a
visit report written years ago for another purpose”.
52.
However the business mileage point was not made in the same terms, and
the point about the significance about the reference to “negligible” was not
made at all. That raises the issue of whether the business mileage points and
points about “negligible” were things which HMRC ought to have been able to
take on board without having the matter spelled out to them.
53.
In my view these points were not obvious. It was not unreasonable for
HMRC to have taken the view it did that the visit report did not tend to
suggest the relevant input tax had not been claimed.
54.
The appellant complains that HMRC ought to have considered reviewing the
arguments and the evidence upon this request for a second review. However
HMRC’s response of 8 February 2011 explains why a second review was not
undertaken by reference to HMRC’s appeal and reviews guidance and advised the
appellant that the point raised in the 27 January 2011 letter would be
considered as part of the process for drafting the Statement of Case. Having
considered the Statement of Case which was prepared this does reflect in my
view that HMRC did consider the appellant’s points even if did not agree with
it as to their significance.
55.
As at the time of the Statement of Case on 3 May 2011 I find it was
still the case in my view that HMRC did not act unreasonably in continuing to
defend the proceedings.
HMRC ought to have engaged with case and settled when they sent their letter
of 8 May 2012?
56.
The appellant says that by this stage all the relevant material was
before HMRC. The officer who had made the decision who had apparently revised
his views must have been taken to have been involved all the way through the
process. He could have accepted the evidence at this time and should have done
so. HMRC in turn say the relevance and significance of various documents in
particular the 1995 Researcher Handbook was not adequately explained to them. In
particular it did not appear to provide evidence that the input tax on the
mileage had not been claimed. They say it was only after the explanation from
the Tribunal’s question as to how this assisted the appellant’s case that HMRC
appreciated the appellant’s contention. The appellant says an explanation was
given in the exchanges which took place over the draft statement of facts.
57.
Whether the level of explanation given is adequate will of course depend
on the context. There is a line is to be drawn between on the one hand
providing enough explanation in correspondence in order for the other side to adequately
assess the other side’s position and the merits of the case and on the other having
to “spoon-feed”, as the appellant put it, arguments or issues which ought to
have been apparent without detailed explanation.
58.
The details of the exchanges between the parties in relation to draft
statement of facts relating to the significance of the Handbook are set out
above at [25] to [30].
59.
On 2 March 2012 HMRC gave its response on the Handbook material saying
the information did not show that the appellant did not recover input tax.
60.
That was not in my view an unreasonable view to take. It was not
unreasonable of HMRC to continue to defend the proceedings.
61.
In terms of considering what new information came to light as compared
with what was available at the hearing I explain below at [63] onwards why I am
not persuaded HMRC were unreasonable in not settling upon receipt of the
appellant’s skeleton. It follows from those reasons that the information
apparent to HMRC at this stage (8 May 2012) was not the same as that at the
hearing. The relevance of the 1995 Handbook to the issue of whether input tax
had been recovered in the claim period was not addressed in the appellant’s
exchanges on the draft statement of facts.
62.
Further as mentioned above the argument about the significance of the
reference to “negligible” in the officer visit report was first raised in the
skeleton and not before.
Ought to have settled once skeleton argument received?
63.
Barring the point set out at [24] above relating to the “embedded”
nature of the costs which I have disregarded the appellant says that nothing
new was said at the hearing which would not have been apparent from the
skeleton argument or documents which had been produced by that stage. No
evidence had been called on behalf of the appellant at the hearing by the time
of the settlement.
64.
The appellant’s skeleton argument included the following:
“It is said [in HMRC’s Statement of Case] that “no
evidence has been provided about the different bases of payments before and
after this change and there is therefore no evidence upon which to base a claim
for this period before the change”. The handbook evidence shows that the
pattern of payments was the same in material respects…The Appellant submits
that its appeal should succeed without that evidence. That evidence strengthens
its case…”
65.
At the hearing the appellant made comparisons with the claim forms in
the 2005 and 2007 Handbook and the 1995 Handbook. Upon being asked for
clarification as to the relevance of the 1995 handbook the appellant submitted the
behaviour and pattern of activity was constant throughout and within the periods
covered by the capped claim and the claim period.
66.
A link was being made between it being accepted that if claims for input
tax were valid in respect of the capped period (i.e. no input tax claims had
already been made in the capped period) even though certain handbooks were in
operation, then it was more likely than not, if similar handbooks were in
operation in the disputed period, that claims for input tax were similarly not
being made in the disputed period. With the benefit of hindsight the link
between the capped period and the claim period might have been understood from
the appellant’s skeleton but it was not an obvious point in my view. (Given I
was the tribunal judge on the panel at the substantive hearing who asked for
clarification on the significance of the 1995 Handbook claim forms I am conscious
it might be said that it is not surprising that I would come to the view that
the point was not an obvious one. But even putting that to one side I would
still say it was not an obvious point). To say that HMRC ought to have settled
on the back of this argument I think the point would need to have been made
more explicitly. By the time of the hearing it was in any event a matter of
dispute between the parties whether payments of allowances (in relation to
which the input tax said to not have been claimed arose) had in fact been made
by the company to the researchers.
67.
It was not in my view unreasonable for HMRC to have raised the point
that the Handbook evidence was not evidence as to whether input was claimed in
the claim period. It was within the range of reasonable courses of action for
HMRC to take to leave it to the appellant to bring forward evidence and make
arguments as to why it should be found that allowances were paid but that input
tax in relation to the allowances had not been claimed.
68.
I conclude that having received the skeleton argument and without meaning
any disservice to Mr Lall’s written advocacy it was not so persuasive as to enable
me to find that HMRC ought to have settled the case prior to the hearing. That
is particularly so given the jurisdiction point, which would have strengthened
HMRC’s case, was at large. But, even putting that to one side it was not
unreasonable, in my view, for HMRC not to have settled on the basis of the
skeleton.
69.
It follows from the various point above that I do not agree with the
appellant that HMRC had reasonably at their disposal all the materials and
arguments before them which were apparent at the time of the hearing at earlier
stages of the proceedings. Accordingly I do not accept the appellant’s argument
that the only difference between what was before HMRC at various stages before
the hearing and what was available to them at the hearing was the fact that the
arguments were put forward by counsel rather than the appellant’s accountant.
70.
I also disagree having reviewed the correspondence between the parties that
it has been shown that HMRC failed to engage with the issue. They did consider the
information provided, and responded with their views. Although the appellant
may not have agreed with those views I cannot find that HMRC acted unreasonably
in their conduct of the case.
71.
The issue in the substantive appeal came down to a determination of
fact. As alluded to by HMRC particularly where there is lack of direct evidence
the assessment of the strength of such a case is not straightforward and
requires the evidence to be carefully assessed and balanced. In my view there
was no question of this being the sort of case where HMRC were seeking to
defend the indefensible because the evidence clearly pointed against them.
72.
Another way of approaching the issue is to start from the position that the
case was weak from HMRC’s point of view as at the second day of the hearing and
then ask what new matter gave rise to that conclusion? While it might well have
appeared to the appellant that there was no startling denouement and that no
significant new matters had been raised by the time of the hearing, there were in
my view shifts and developments in the points being raised such as the
interpretation of the visit report and the significance of the handbook
evidence to the extent that when viewed together it is possible to see that
HMRC were not unreasonable in altering their assessment of the likelihood of
success. Looking at any of the given points up to the point HMRC settled I
cannot say it was unreasonable of them to continue defending the proceedings.
73.
I move on now to consider the other points the appellant has made which
it says justify a finding that HMRC acted unreasonably in conducting and
defending the proceedings.
Raising the jurisdiction issue on a misconceived basis?
74.
The appellant accepts HMRC were not wrong in principle to raise the
issue of the nature of the Tribunal’s jurisdiction given it was an issue the Tribunal
could have raised of its own accord. But, the appellant says it was
unreasonable of HMRC to have raised the issue on the misconceived basis that it
did and that the misconception arose from a failure on HMRC’s part to engage with
the case and in not properly appreciating that their views were wrong on the
law given the nature of the decision under appeal. The appellant also
highlights that HMRC’s written submissions in relation to the costs application
have not addressed this point.
75.
On this latter point it was clear to me from the terms of concession HMRC
made at the hearing at [5] above that they did not accept they acted
unreasonably in raising the jurisdiction issue (except to the extent it was
found that they were unsuccessful in relation to defending the substantive
issue.)
76.
HMRC argue that because the Tribunal allowed their application to amend
their Statement of Case this shows the Tribunal must have thought their
application cannot have been without any merit, but I do not think this can be
assumed as there was no explicit consideration of merit in determining that application.
77.
The Tribunal came to the conclusion that HMRC were wrong on the jurisdiction
issue. However, in my view the legal argument HMRC raised is some distance away
from the category of argument mentioned by Judge Hellier in Leslie Wallis (see
[8(3)] above) which would lead to a party being seen to have been persisting
in the face of an unbeatable argument.
78.
Although there was ample case law from which principles
surrounding the Tribunal’s supervisory and appellate jurisdiction could be
extracted there was no authority the Tribunal had been made aware of on the particular
point of what the Tribunal’s jurisdiction was on the issue of whether a
taxpayer had previously recovered the input tax which was the subject of the
claim.
79.
While the Tribunal at [35] and [37] of its decision came to the view
that it appeared to it to be self-evident that input tax recoverable under an
entitlement could not be recovered again once recovered before, and that the
issue of whether claims had been made before and input tax recovered was a matter
of objective fact, it was accepted at [39] that issues of fact were not
necessarily determinative of the nature of the Tribunal’s jurisdiction.
80.
I disagree that in raising the jurisdiction issue on the basis that they
did HMRC’s conduct was unreasonable.
Allegation that jurisdiction issue was raised as a means of excluding Handbook
evidence
81.
The appellant argues that it was no co-incidence that HMRC chose to
raise an argument on jurisdiction shortly after it had received details of the
1995 Handbook evidence. If HMRC had been successful in persuading the Tribunal
that its jurisdiction was supervisory this would have had the effect of excluding
the Tribunal’s consideration of materials which were not before the Commissioners
when they had made their decision.
82.
However I note that HMRC were consistent in questioning the relevance of
handbook evidence from the outset. It was clear HMRC thought the handbook
evidence would only be relevant to show the researchers had claimed mileage
allowances. In their view it said nothing on whether it was more likely to be
the case that the appellant did not claim input tax in the Fleming
period. HMRC had already made this point shortly after receiving the 1995
Handbook evidence on 2 March 2012 which was made a month before their
application to amend the Statement of Case on 2 April 2012. As discussed above
that view was not an unreasonable one and there was no reason to think that
despite what HMRC had said in their correspondence they were concerned that the
1995 Handbook evidence was damaging to their case. There is nothing in the
evidence before me which supports the allegation that HMRC had an ulterior
motive to do with exclusion of evidence in raising the jurisdiction issue when it
did.
Way in which HMRC handled its application to amend its Statement of Case
unreasonable?
83.
The appellant argues that when HMRC made an application to amend its
Statement of Case to cover the jurisdiction issue without any discussion of the
issue with the appellant beforehand on 2 April 2012 this was unreasonable
conduct. HMRC also failed to provide a properly marked up version of the
statement of case so it could be seen what changes were proposed and which
meant the appellant had to prepare their own marked up version. The appellant
refers to the decision Thomas Holdings Limited case which is said to
have found that a unilateral application by HMRC to cancel the hearing was
unreasonable. The decision explains at [43] how on the last working day before the
hearing HMRC sought to withdraw their decision and cancel the hearing
unilaterally. The HMRC officer handling the matter was not then available to
discuss the case with the appellant later that afternoon.
84.
HMRC argue it is a matter for the Respondents as to what goes into their
Statement of Case as it is a matter for the appellant as to what goes into
their grounds of appeal.
85.
I note that the conduct of seeking to cancel the hearing unilaterally in
Thomas Holdings was not by itself found to be unreasonable. It was the
combination of a number of elements. In any event I do not consider the
appellant’s conduct in not discussing the application to amend its Statement of
Case before sending it to the Tribunal to be comparable to the conduct
complained of in Thomas Holdings.
86.
I do not however accept HMRC’s argument that it is a matter for them
what goes into their Statement of Case (with the implication that there was no
need to raise the matter with the appellant). Changes to a Statement of Case
may have consequences for the appellant in terms of the evidence it proposes to
adduce and the arguments it proposes to make. (In the same way changes to
grounds of appeal may have consequences for respondents). In fulfilling their
obligation under Rule 2(4) of the Tribunal’s Rules to help the Tribunal further
the overriding objective and to co-operate with the Tribunal generally, parties
should, co-operate and liaise with each other over procedural matters. (See
the Upper Tribunal’s decision in Dorset Healthcare NHS Foundation Trust v M H [2009] UKUT 4 (AAC), at [13] which was in the context of a
First-tier Tribunal with an identical overriding objective to this one). This
means parties should normally serve any application on the other party
and attempt to agree or narrow down issues before making their application to
the Tribunal.
87.
HMRC ought to have initiated discussions with the appellant before
filing its application and it ought to have made a properly marked up copy
available. The way in which HMRC handled its application to amend the Statement
of Case fell short of the expected standards. However I cannot say that in looking
at the context of the proceedings as a whole this instance of conduct amounted
to the Respondents acting unreasonably in their conduct of the proceedings so
as to justify a cost order being made.
88.
It remains however to be considered if there are any other instances
of conduct which fall short of the standards expected which when considered together
show a pattern of unreasonable conduct which would justify a costs order.
Other instances of HMRC acting unreasonably?
89.
The appellant makes various other complaints as to HMRC’s conduct. It
says HMRC’s conduct was contrary to its own litigation and settlement strategy
which (as set out in HMRC’s letter of 8 May 2012)
“requires [HMRC] to manage all disputes to a
professional standard, working in a collaborative and non-confrontational way;
and to continue throughout the lifetime of a dispute to seek ways to test the
strengths and weaknesses of a case and to resolve the dispute if that is
consistent with the law and [HMRC’s] policy.”
90.
The appellant also argues that the way in which HMRC handled the
agreement of the Statement of Facts was unreasonable. HMRC say it is up to each
side to prove its case; there is no particular responsibility on either party
to agree any particular fact. The draft was very long; it was only prudent to
withhold agreement until their relevance could be understood. They say that
where they deleted items on the draft an explanation was provided.
91.
I have considered the correspondence in relation to agreement of the
statement of facts. As discussed above this became something of a misnomer
because it became to some extent a vehicle to exchange submissions. Some
proposed facts were disputed on the evidence or HMRC took the view they had not
been substantiated. Their consideration and explanation for why facts were not
agreed was adequate. I am not persuaded HMRC’s acted unreasonably in dealing
with the statement of facts.
92.
In relation to the way HMRC handled the appeal more generally and
whether there was a pattern of acting unreasonably, beyond the way in which the
application to amend the statement of case was dealt with, it appears to me
that HMRC’s consideration and engagement with the materials and arguments put
to them was adequate. I cannot say that they acted unreasonably or agree that
their conduct was contrary to their litigation and settlement strategy (to the
extent the standard expressed there is relevant to the standard of conduct for
present purposes).
Conclusion
93.
For the reasons above I am not satisfied that when looking at the
proceedings as a whole HMRC acted unreasonably in conducting or defending the
proceedings. The appellant’s applications for costs are dismissed.
94.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. The parties are referred to “Guidance to accompany a Decision from
the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this
decision notice.
SWAMI RAGHAVAN
TRIBUNAL JUDGE
RELEASE DATE: 13 September 2013
