Spc00615

COSTS – whether the Revenue acted wholly unreasonably in not particularising its submissions on the Appellant’s failure to comply with compliance testing relation to a sub-contractors’ certificate – yes 

THE SPECIAL COMMISSIONERS

	ORIEL SUPPORT LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S 
	REVENUE AND CUSTOMS	Respondents

			Special Commissioner:	DR JOHN F AVERY JONES CBE

Heard on paper

© CROWN COPYRIGHT 2007

DECISION

1.	This is an application by the Appellant for costs.  I heard a preliminary issue on 3 March 2006 relating to whether, the Revenue having refused a sub-contractor’s certificate on the grounds of the business and turnover tests, which they later accepted were satisfied, it was open to them to raise the compliance test and particularise the compliance failures the day before the hearing of the appeal.  I received written submissions from both parties on costs and they agreed that I should decide it without a hearing.
2.	I am deciding this question on the basis of the following facts:
(1)	On 12 July 2005 the Appellant started business including the furnishing (or arranging for the furnishing) of labour in carrying out construction operations.
(2)	On 29 September 2005 it applied for a CIS 5 certificate on the basis of a predicted annual turnover of £4m. Further information was requested by the Revenue and supplied on 7 October.
(3)	On 8 November 2005 the Revenue directed that s 562(8) to (14) shall apply to the directors of the Appellant.  Completed forms were returned on 10 November 2005.
(4)	On 15 November the Revenue gave formal notice of refusal of the application for the certificate.  A covering letter gave as reasons (a) that the Appellant did not satisfy the business test because it did not carry out construction work in the UK and did not provide labour for such construction work; it was considered to have a factoring arrangement with its clients and any contractor would be paying it as a nominee for the client; and (b) that it did not satisfy the turnover test because the payments received represent the turnover not of the Appellant but of its clients.
(5)	On 6 December 2005 the Appellant appealed and elected for the appeal to be heard by the Special Commissioners.  On 10 January 2006 the Appellant discovered that the case had not been referred to the Special Commissioners.  It applied on 12 January 2006 for an expedited hearing which the Revenue opposed but the Special Commissioners granted on 19 January directing 3 March 2006 as the hearing date.
(6)	On 10 February 2006 the Revenue said in a letter “You will appreciate that no consideration has yet been given to whether [the Appellant] would pass the compliance test…I will now run the compliance tests for the company.”  The letter also stated: “The Commissioners will no doubt want to full [sic] appraised of all the facts so that they can fully determine the appeal at the hearing on 3 March 2006 and issue the company with a CIS5 certificate if appropriate.”  
(7)	The parties were unable to agree directions and applied for a directions hearing which I was able to deal with only on 1 March 2006 as I had been away during the previous week.
(8)	On 27 February 2006 the Revenue agreed that the Appellant satisfied the business test, and on 2 March 2006, as a result of further information submitted following the directions hearing, that it satisfied the turnover test.
(9)	At about 1.45 pm on 2 March 2006 the Revenue faxed a two-page list of compliance failures to the Appellant.
3.	My jurisdiction to award costs is contained in Regulation 21 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1992:
“21—(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 of the scales prescribed by rules of court for proceedings in the county court as may be directed by the order or, in the absence of any such direction, by the county court….”
4.	The Appellant contends:
(1)	The Revenue, having promised in a letter of 20 December 2005 a full response early in the New Year, nothing was received.
(2)	The Revenue failed to comply with their letter of 10 February 2006 to make sure that the Tribunal was fully appraised of the facts so as to enable it to make a decision at the hearing on 3 March 2006.
(3)	The Revenue failed to provide any documents in advance of the hearing fixed for 3 March 2006 forcing the Appellant to apply for a directions hearing on 1 March 2006.
(4)	By 1 March 2006 the Revenue had not decided whether the compliance test was satisfied or particularised any failures.  They were directed to do so by 9 am on 2 March.  These were provided at about 1.45 on 2 March, the further delay being caused by snow.
(5)	The Revenue’s actions were wholly unreasonable.
5.	The Revenue contends:
(1)	 The Tribunal’s jurisdiction to award costs is extremely limited.  “Wholly unreasonable” is a very exacting standard and it should be a rare case where this is concluded.
(2)	Both Warren J and I had approved the Revenue’s approach of dealing with the other tests before considering compliance.  The Revenue had a statutory duty to consider compliance.
(3)	The hearing date was only three weeks after the Revenue announced on 28 February 2006 that they were considering compliance.
(4)	There was no causal link between the conduct and the progress or outcome of the appeal.  Warren J held that the late introduction of their objection was not objectionable in the context of performing a statutory obligation, and that a short adjournment should have been given.
(5)	In relation to the Revenue’s actions “in connection with the hearing in question” their approach in considering compliance after the other tests in the run-up to the appeal and before the hearing was sensible.
(6)	There was no basis on which one could conclude that the Revenue had acted wholly unreasonably.
6.	There are two separate points: first, whether the Revenue could raise compliance as a new issue, having refused the subcontractors’ certificate on other grounds which they later withdrew, and in doing so could they particularise the defaults only the day before the hearing of the appeal; and secondly, whether they were acting wholly unreasonably in so doing.   The first point has been decided in the Revenue’s favour by Warren J, reversing my decision.  He said:
“[41] There is, however, some validity in the point which the Special Commissioner made when he said that for the appeal system to work, the taxpayer must know the basis on which the Board are not satisfied, the Revenue must know the taxpayer’s grounds of appeal, and the Commissioners must know what decision they are reviewing. One feels instinctively that the last minute production of evidence and the presentation of an entirely new objection based on the compliance test is objectionable. But that instinct, derived from experience of litigation, is not a reliable guide when it comes to giving effect to statutory provisions. The appeals procedure laid down in s 561(9) cannot, in my judgment, override the statutory requirements for the issue of a certificate; at least, short of an abuse of power or frustration of a legitimate expectation as those concepts have been developed in a public law context, that must be so. Absent those factors, even the last minute production of evidence concerning the compliance test is, I consider, to be taken into account. It may, in many cases, be possible to observe procedural fairness without undue prejudice to the taxpayer by the granting of a relatively short adjournment to allow the taxpayer to produce evidence in rebuttal. There is, perhaps, an analogy to be drawn with cases where the jurisdiction of the court is challenged. It is unlikely I think that, where the challenge is genuine, the court would refuse to deal with it simply because it was made at the last moment.”
He also concluded that there was no public law objection to the Revenue’s conduct:
“[47] In my judgment, there is no basis on which HMRC’s conduct in this case can be said to result in such unfairness as to constitute an abuse of power. Nor is there any frustration of legitimate expectations (whatever the actual expectation might have been in relation to the points which would be taken on the appeal).”
It is the second point that is relevant to costs.  In other words, while last-minute production of evidence by the Revenue that a statutory requirement has not been satisfied cannot be denied as a matter of case management, this says nothing about whether the Revenue acted reasonably in making such last-minute production.
7.	On 10 February 2006 the Revenue first told the Appellant that they were raising the compliance test.  Warren J accepted, as I had, that it was sensible for the Revenue to delay dealing with compliance until they had considered the other tests.  At the time the Revenue knew that the hearing of the appeal against the refusal of the certificate was fixed for 3 March 2006, then three weeks ahead.  By the time of the directions hearing on 1 March 2006 the Revenue had not supplied any information about the compliance test and they were directed to do so by 9 am on 2 March 2006, which they did by 1.45 on that day, the further delay being caused by snow and being outside their control.  By the time of the directions hearing on 1 March 2006 it was clear that the hearing on 3 March 2006 could not deal with compliance, and a preliminary issue was directed as to whether the Revenue could raise the question of compliance at all in the circumstances.  Had the Revenue supplied information about compliance in good time such preliminary issue would not have been necessary and the hearing on 3 March 2006 could have dealt with compliance.
8.	Accordingly it seems to me that the Revenue acted reasonably until 10 February 2006.  But not producing anything relating to compliance until 2 March 2006, the day before the hearing, and then only after a directions hearing, cannot be classed as reasonable.  There is no submission that they acted as quickly as was possible in the circumstances.  Given the date of the appeal hearing it was necessary to give priority to the compliance issue.  I am not satisfied that they did.  In my view they acted wholly unreasonably in connection with the hearing in not producing their evidence about compliance and making a decision on it until the day before the hearing.  While the hearing had by then been changed to the preliminary issue that was itself caused by the delay.  Accordingly I direct the Revenue to pay the Appellant’s costs of and incidental to the hearing on 3 March 2006 to be taxed if not agreed.
9.	I should like to add a postscript.  As I understand Warren J’s judgment it is limited to cases in which a statutory requirement has to be fulfilled before something happens, here the grant of a subcontractors’ certificate.  In other circumstances, the Special Commissioners’ powers of case management are fully available, as the Court of Appeal has recently confirmed in Foulser v McDougall 17 January 2007 (not yet reported) at [66].  Secondly, Warren J’s suggestion of applying for a relatively short adjournment will be much harder for the Special Commissioners, who arrange appeals on fixed dates for some time in the future, to achieve than if there were floating dates, but we shall endeavour to do so if circumstances like this reoccur.

JOHN F. AVERY JONES

SPECIAL COMMISSIONER
RELEASE DATE: 16 May 2007

SC 3012/06