SPC00472
Costs - Special Commissioners power to award costs – whether Inland Revenue had acted wholly unreasonably in connection with the hearing.  No – Special Commissioners (Jurisdiction and Procedure) Regulations 1994, SF 1994/1811, Reg. 21 – Application disallowed.

THE SPECIAL COMMISSIONERS

	J M COLLINS AND XI SOFTWARE LIMITED	Appellant

	- and -

             ROSS LAING           
	(HM INSPECTOR OF TAXES)     	Respondents

				Special Commissioner:     DR KAMEEL KHAN

Given in London following written submissions

© CROWN COPYRIGHT 2005

DECISION

Introduction

This is a costs application by the Appellant, under the provisions of Regulation 21 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994.  Both parties have made written submissions.  At the hearing of the appeal on 3 September 2004, the Respondent stated that they were not pursuing the matter relating to Class 1 NIC contributions due from XI Software Limited.  The appeal with regard to this matter was allowed by the Special Commissioner.  The substantive appeal by the Appellant was dismissed in the Special Commissioners decision dated 3 December 2004.

The Law

This application for costs is made under Regulation 21 of the Special Commissioners (Jurisdiction and Procedure) Regulations (1994/1811) which makes provision for costs in limited circumstances.  The regulations provide:-

(1)	“Subject to paragraph (2) below, a Tribunal may make an order awarding the costs of, or incidental to, the hearing of any proceedings by it against any party to those proceedings (including a party who has withdrawn his appeal or application) if it is of the opinion that the party has acted wholly unreasonably in connection with the hearing in question.

(2)	No order shall be made under paragraph (1) above against a party without first giving that party an opportunity of making representations against the making of the order.

(3)	An order under paragraph (1) above may require the party against whom it is made to pay to the other party or parties the whole or part of the costs incurred by the other party or parties of, or incidental to, the hearing of the proceedings, such costs to be taxed if not otherwise agreed.

(4)	Any costs required to be taxed pursuant to an order under this regulation shall be taxed in the County Court according to such other scales prescribed by rules of court proceedings in the County Court as may be directed by the order or, in the absence of any such direction, by the County Court.”

The costs which are referred to are “the costs of and incidental to the proceedings” which means costs incurred whilst the Special Commissioner has jurisdiction over the appeal (see Carvill v Frost [2005] STC (SCD) p208.  This is costs incurred while the matter is before the Commissioners and the matter is being heard or prepared for hearing (see Park, J in Gamble v Rose, 1988, STC 1247 and 1257).  In deciding on the award of costs, Park, J (as above) commented that:-

“It is not enough to be able to say that from time to time there has been unreasonableness.  The party must act wholly unreasonable – a very exacting standard.”

He went on to say that:-

“The Commissioners may or may not take the view that the party concerned acted unreasonably or wholly unreasonably at some earlier stage in the listing of the tax affairs of the person in question.  But if that earlier stage was before the matter was before the Commissioners and being heard or was being prepared for a hearing before the Commissioners, they have no power to award costs.”

It is no surprise that there are very few cases where costs have been awarded against the Inland Revenue since the standard of unreasonableness required is very high.  The behaviour must be “wholly unreasonable” – a very exacting standard.

The Facts

1.	An Employer Compliance Review of the Appellant commenced on 26 March 2002.  Various correspondence passed between the Inland Revenue and the Appellant.  On 22 August 2002, the Inland Revenue wrote to the Appellant requesting various information and the Appellant replied on 27 August stating that they would “like to appeal the decision that a taxable benefit arises and only proceed to consider the actual figures if an appeal is not upheld”.  The Inland Revenue replied on 21 October 2002 to this and another letter from the Appellant of 11 September with a more comprehensive explanation of their views on the matter.  They explained that the payment in question, payments made by the Appellant to their lawyers for legal services, fell to be treated as benefits under Section 154(2) ICTA 1988.  Class 1 NIC does not arise on most benefits.

2.	The first Decision Notice was issued on 25 October 2002 with the reference “Further to my letter of 21 October 2002” - for the sum of £10,700 primary and secondary Class 1 NIC for the period 6 April 1996 – 5 April 2000 in “respect of earnings of Mr J Collins”.  The Appellant would not have been aware until this Decision Notice that there was an NIC issue.  The second Decision Notice of 9 December 2002 was for the sum of £6,025.  There was no real explanation of the NIC charge.  It is understandable that the Appellant would have felt there was no clarification of the NIC charge in the first and second Decision Notices issued by the Inland Revenue.

3.	It is clear now that the Inland Revenue sought to assess the taxpayer on alternate provisions of the Taxes Act.  These alternate grounds are:-

3.1.	A charge on the company based on the payment being emoluments within Section 19(1) ICTA 1988.

3.2.	A charge on the director based on the payments being benefits under Section 154 ICTA 1988.

The Inland Revenue made clear in their letter of 21 October 2002 that they issued their assessments based on estimates.  It may not, however, have been clear to the Appellant that in the Inland Revenue’s view, the payments may be chargeable either as emoluments from an office or employment (Section 19) or as a benefit in kind (Section 154).
4.	At a decision as a Direction Hearing on 3 April 2004, the Appellant requested that the Inland Revenue state clearly the basis on which Class 1 NIC became payable.  Skeleton arguments were provided on 12 August 2004 but there was no explanation of the NIC issue by the Inland Revenue.  There were arguments presented by the Appellant in their submissions on the NIC matter.  On 26 August 2004, 7 days before the hearing date of 3 September 2004, the Inland Revenue indicated to the Appellant that they were not pursuing the emoluments argument under Section 19(1) ICTA 1988 and consequently there was no Class 1 NIC charge on the company.  The Special Commissioner dealt with this issue at the hearing by allowing the Appellant appeal on this ground but dismissed their appeal on the other arguments presented by the Appellant.

Appellant Submission

The Appellant submits the following:-

1.	The Class 1 Decision Notice were without adequate explanation of the basis on which the Notices were issued.

2.	The Respondent’s skeleton arguments did not provide an explanation of the basis for the Class 1 NIC liability whilst giving an undertaking to do so.

3.	That the Respondent’s accepted the Appellant’s argument that the payments were not emoluments and consequently did not intend to raise the Class 1 NIC before the Commissioner.

4.	That for the reasons given, the Respondent acted “wholly unreasonably” in connection with the hearing in question.

Respondent Arguments

1.	That they raised alternate grounds of assessment in that a Schedule E Charge can arise either as an emolument, giving rise to Class 1 NIC or as a benefit in kind, where there was no Class 1 NIC and that adequate explanation of this position was given to the Appellant.

2.	That they withdrew one ground of assessment after arguments presented by the Appellant.

3.	That their actions were not unreasonable since the “borderline between emoluments and benefits in kind is blurred and it was reasonable for the Respondent to consider alternate basis of liability”.

4.	That they acted reasonably in withdrawing one basis for assessment and that the remaining appeal succeeded before the Special Commissioner.

Decision

The issue in this case is whether the Respondent “acted wholly unreasonably in connection with the hearing”.  The word “acted” indicates that they took a course of action which was not reasonable.  It is our view that while the Appellant may feel they were not fully informed of the details nor given an adequate explanation of the basis for the liability for Class 1 NIC and that the assessment was withdrawn 7 days before the hearing, such action was not “wholly unreasonable”.  It is possible for the Inland Revenue to raise grounds for assessing a taxpayer or to take a course of action with which the taxpayer does not agree but this cannot be considered to be wholly unreasonable.

It is possible to understand that the Appellant would feel that the actions of the Inland Revenue were unreasonable or late or not transparent but this does not meet the high standard of wholly unreasonable.  The Inland Revenue can raise arguments and can indeed raise different arguments in pursuing a taxpayer for unpaid tax.  This is within the power given to the Inland Revenue.  If after being presented with arguments by the Appellant, the Respondent become convinced that their arguments are without merit, they then may withdraw those arguments.  I do not think the Inland Revenue believed that their arguments were untenable nor did they feel they had little faith in the arguments.  They genuinely felt that the payment to Mr Collins could have been either emoluments or benefits in kind since the definition of emolument can cover certain payments in kind.  I do  not think this belief was unreasonable.

The Appellant may think that the Inland Revenue’s argument on the Class 1 NIC could have been communicated more clearly and in a timely manner.  It is accepted that more effort could have been made to present these to the taxpayer’s satisfaction.  However, it is our view that such actions are not “wholly unreasonable” for the purposes of Regulation 21 Special Commissioners (Jurisdiction and Procedures) Regulations 1994.  Accordingly we feel that this application would not succeed.

Decision

Application for costs disallowed.	

DR KAMEEL KHAN
SPECIAL COMMISSIONER
Release Date: 15 April 2005

SC 3082-83/2003