19318

	VALUE ADDED TAX – Direction to pay costs to the successful party (the 	Appellant) – rule 29(1) of the VAT Tribunals Rules 1986 – whether costs 	should be awarded on the standard basis or alternatively on the indemnity 	basis – CPR rule 44.4 applied by analogy – in the light of their conduct of 	the litigation, the Commissioners directed to pay costs on the indemnity 	basis

LONDON TRIBUNAL CENTRE

	HARRODS (UK) LIMITED	Appellant

	- and -

	THE COMMISSIONERS 
                        FOR HER MAJESTY’S REVENUE AND CUSTOMS 	Respondents

			Tribunal:	JOHN WALTERS, QC (Chairman)
					MRS RUTH WATTS DAVIES, FCIPD, MHCIMA

Sitting in public in London on 22 July 2005

Miss Lindsay Searle, Barrister, employed by KPMG, appeared on behalf of the Appellant 

Mr. C. Thomas, of Counsel, instructed by the Solicitor for HM Revenue & Customs, appeared on behalf of the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	At the start of the hearing on 22 July 2005, the Tribunal was told that the appeal dated 22 March 2005, lodged by Harrods (UK) Limited (“the Appellant”), together with an application for an extension of time to appeal, had been settled on the basis that the Respondent Commissioners were not opposing the application for an extension of time, and were not defending the appeal.  However the appeal had not been withdrawn because there remained issues between the parties as to the rate at which the repayment of VAT to be made consequent upon the appeal being allowed would carry interest, and costs, in particular the basis on which any award of costs should be made to the Appellant.
2.	The Tribunal heard argument on both these issues.  
3.	Following the hearing the Tribunal issued a Direction allowing the application for an extension of time to appeal, allowing the appeal and dealing with the question of interest as follows.  We ordered the Respondents to pay, within 14 days of the date of release of the Direction, simple interest on the amount repaid pursuant to section 84(8) VAT Act 1994 (“VATA”) at the rate of 4 per cent per annum, adding that the Appellant had liberty to apply for a further hearing to show cause why interest ought to be paid at a higher rate than 4 per cent per annum in order to effect proper restitution.
The costs issue
4.	The remaining issue of costs includes (besides the basic issue of whether or not the Tribunal will award costs), the evidential issue of the amount of costs incurred, whether the Tribunal will award costs on the indemnity basis or the standard basis, and, in relation to any costs claimed, any question of whether those costs were reasonable or unreasonable.
5.	Mr. Thomas, for the Commissioners accepted that the Respondents should pay the Appellant’s reasonable costs to be assessed on a standard basis, if not agreed.  There will be an award of costs in favour of the Appellant.
6.	The Tribunal is, however, as the parties recognised, not able to deal finally with the question of costs at this stage, and in particular is not in a position to find the amount of costs incurred (around £31,000 is claimed by the Appellant) nor to determine any question of reasonableness in relation to items of costs claimed.
7.	In this Decision we deal with the remaining issue, which is the basis on which the costs order should be made.
8.	The jurisdiction of this Tribunal to make a direction as to costs is contained in rule 29 of the VAT Tribunals Rules 1986 (“the Tribunals Rules”).  It may direct the payment of such sum as it may determine on account of costs “of and incidental to and consequent upon” the appeal or application (rule 29(1)(a)), or it may direct the costs of a party “of and incidental to and consequent upon” the appeal or application to be assessed (in proceedings in England and Wales) by a Taxing Master of the Supreme Court or a district judge of the High Court (rule 29(1)(b)).  Where it makes a direction under rule 29(1)(b) the provisions of Part 47 of the Civil Procedure Rules 1998 and any supplementary practice directions (“the CPR”) are to apply – the procedure for detailed assessment of costs in the Supreme Court.
9.	The Tribunal will apply by analogy the general rules about costs contained in Part 44, CPR and in particular rule 44.4, which deals with the basis of assessment.  Rule 44.4(1) states that the court will assess costs on the standard basis or on the indemnity basis, but will not in either case allow costs which have been unreasonably incurred or are unreasonable in amount.  
10.	Where costs are assessed on the standard basis, the court will only allow costs which are proportionate to the matters in issue and will resolve any doubt which it may have as to whether costs were reasonably incurred or reasonable and proportionate in favour of the paying party (rule 44.4(2)).
11.	Where costs are assessed on the indemnity basis, the court will resolve any doubt which it may have as to whether costs were reasonably incurred or were reasonable in amount in favour of the receiving party (rule 44.4(3)).
12.	It will be seen that the test of proportionality included in the assessment on the standard basis is absent from the assessment on the indemnity basis.
13.	In the light of these differences, the Tribunal can well see why the Court of Appeal said in Kiam v MGN Ltd (No. 2) [2002] 2 All ER 242 that an indemnity costs order made under rule 44 does carry at least some stigma and is of its nature penal rather than exhortatory.  In this it is different from an indemnity costs order made under rule 36.21 (where a claimant does better than he proposed in his Part 36 offer), which is part of a case management procedure and so not germane to the issue the Tribunal has to decide in this case.
14.	Indeed, the award of costs on the indemnity basis under rule 44 (which is analogous to such an award made by this Tribunal) is normally reserved to cases where the court wishes to indicate its disapproval of the conduct in the litigation of the party against whom the costs are awarded: Reid Minty v Gordon Taylor [2002] 2 All ER 150 (CA).
15.	The Tribunal therefore proceeds to examine the relevant history of the current dispute.
The relevant history of the dispute
16.	On 25 April 1996 the Court of Appeal handed down its decision in Primback Ltd. v Customs and Excise Commissioners [1996] STC 757, which was that the part of the price charged for goods by Primback Ltd., which related to free credit taken by customers, did not attract VAT.  Following this decision the Commissioners issued Business Briefs advising taxpayers that they could seek repayments of overpaid VAT on the basis of the Court of Appeal’s decision in Primback.
17.	The Appellant was in a position to take advantage of this situation and in February and March 1998 made a Voluntary Disclosure for repayment of overpaid VAT.  The claim for repayment was in the region of £200,000.
18.	The Appellant’s claim was met as to 95% in May 1998 and as to the remaining 5% in June 1999.
19.	The next relevant event was the handing down by the European Court of Justice of its judgment on a reference from the House of Lords in Primback.  This was on 15 May 2001 ([2001] STC 803).  The judgment was adverse to Primback.
20.	The provision then relevant for the recovery by the Commissioners of a repayment of VAT which exceeded their “repayment liability” (as defined) was section 80(4A) VATA as then in force.  This provided an assessment power to the Commissioners.
21.	However another taxpayer, DFS Furniture Co. plc (“DFS Furniture”), which was in a position exhibiting similarities to that of the Appellant, took the point that the assessment under section 80(4A) which had been made on it, following the Court of Justice’s judgment in Primback was out of time.  DFS Furniture’s appeal to the VAT and Duties Tribunal was successful, the decision being released on 26 September 2002.  
22.	In these circumstances, discussions took place between the Appellant and the Commissioners, the upshot of which was that the Commissioners’ National Business Manager (Don Davis) wrote to the Group Tax Manager of the Appellant (Chloris Flint) on 6 March 2003 informing her that he proposed “to issue – but not enforce – a s.80(4A) assessment for the overpaid amounts where they relate to payment returns” adding that “should the legal position eventually be clarified in Customs’ favour we would then enforce those assessments; should it go against Customs, the assessments would fall.”  This action was proposed because Don Davis apprehended that assessments issued on the Appellant after 14 May 2003 (two years after the Court of Justice’s judgment in Primback) would be out of time and therefore protective assessments were necessary.
23.	On 16 April 2003, the High Court (Sir Andrew Morritt V-C) allowed the Commissioners’ appeal in DFS Furniture Co. plc holding that the assessments in that case were not out of time.  The notice of assessment on the Appellant was issued on 29 April 2003 charging VAT of £113,407 and stating that late payment would attract default interest.
24.	On 14 July 2003, Customs Collection Team chased payment of the VAT assessed.  Chloris Flint (whose Witness Statement is in evidence before the Tribunal) told the officer from the Collection Team that it was her understanding that the assessment, having been raised on a protective basis was not due for payment.  The officer told her that so far as he was aware, the assessment was due for payment and that interest was accruing. He also told Chloris Flint that penalties might also apply if payment was not forthcoming.  She made strenuous efforts to check the situation with Don Davis but was unable to make contact with him.  She paid the VAT assessed, even though she had not heard back from Don Davis, on the assumption that the DFS Furniture Co. plc case had been resolved in the Commissioners’ favour.  However she emailed Don Davis informing him that she had arranged for payment of £113,407 and asking: “if the legal position eventually be clarified against Customs, will you please make arrangement for the £113,407 to be repaid?”.  Don Davis replied to this email stating that following the High Court’s decision in DFS Furniture Co. plc the VAT was payable, adding: “As to your last point, I think that if we eventually lost DFS at the ultimate stage then the assessment would have to fall, because it would not have been issued within the legal time limit.  If the assessment was struck out it would leave a credit on your account.  But I stress this is only my knee-jerk reaction, if you want greater certainty I can explore it further.”  Chloris Flint replied that she “would like of course to have some assurance that I could then get this money back if you lost on the DFS case on the final stage”.
25.	On 16 March 2004, the Court of Appeal handed down its judgment in DFS Furniture Co. plc [2004] STC 559, which was adverse to the Commissioners.  On 12 July 2004 Chloris Flint, for the Appellant, wrote again to Don Davis, expecting repayment of £113,407 and asking him “to update me on this issue”.  On 25 October 2004 Mirani Cooke, a Senior Officer in the Commissioners’ London Large Business Group wrote in reply, informing Chloris Flint that the assessment on the Appellant would not be withdrawn, and citing the Commissioners’ policy published on 14 September 2004 in Business Brief 25/04.
26.	The relevant statement of policy is as follows:
“It is Customs view that the proper course for a taxpayer to take if the taxpayer has been assessed and believes the assessment to be incorrect for any reason is to ask Customs to review the decision and, if still unsatisfied, to make a timely appeal to the VAT and Duties Tribunal.  Where an underdeclaration of tax has been correctly established but the related assessment, which has been paid but not appealed, is subsequently acknowledged to be technically flawed … Customs will not withdraw the assessment.  There will not be any reason to do so.  In addition, and subject always to the VAT appeal provisions, no repayment of money against a technically flawed but otherwise correct assessment will be made.” 
27.	Referring to Don Davis’s email in which he gave his “knee-jerk reaction”, Mirani Cooke’s point was that Don Davis had expressed reservations about his view that repayment would be made and that the Commissioners’ Policy Group, having considered the correspondence, had concluded that the assessment should not be withdrawn.
28.	The Commissioners took their stand on the basis that the sum in dispute was “properly due” in the sense that the Appellant’s case based on Primback was incorrect and that therefore no claim for repayment of overpaid VAT under section 80 VATA could be made, and that in these circumstances they would only have repaid VAT assessed by a technically flawed (because out of time) assessment if the Appellant had entered an appeal to this Tribunal against the assessment, which it had not done.
29.	Chloris Flint requested the Commissioners to reconsider the decision in Mirani Cooke’s letter.  Mrs. Melanie Bishop, Appeals & Reconsiderations Officer of the London Appeals & Reconsiderations Team, replied in a letter dated 17 January 2005 stating that “it is Customs’ view that this matter is not one that is appealable to the VAT & Duties Tribunal, but would be a matter for judicial review, if you wish to pursue that course”.
30.	Mrs. Bishop did not mention in her letter the possibility of an application to this Tribunal to extend time for appealing by the exercise of its powers under rule 19 of the Tribunals Rules, and the consequences if the Appellant appealed the assessment and applied successfully for an extension of time for appealing.
31.	At this stage Chloris Flint sought advice on the position from KPMG.  KPMG advised the Appellant of the possibility of making a late appeal against the assessment by an application for an extension of time to appeal and, on 22 March 2005, KPMG lodged on behalf of the Appellant the appeal and the application for an extension of time for appealing.
32.	On the same day KPMG wrote to Mrs. Bishop advising her of the appeal and application to the Tribunal, putting the case that the Appellant could make, and was making, a claim for repayment of VAT under section 80 VATA, and asking again for repayment on the grounds of unfair treatment (having regard to Chloris Flint’s original reliance on Don Davis’s assurances).
33.	Further correspondence ensued which was detailed in the Chronology put before the Tribunal by Miss Searle at the hearing.  The most pertinent aspects are as follows.  On 13 April 2005 Mrs. Bishop wrote to KPMG upholding her decision of 17 January 2005 and Mirani Cooke’s decision of 25 October 2004 and advising that the Commissioners would be opposing the Appellant’s application for an extension of time to appeal.  The Commissioners filed a formal objection to the Appellant’s application on 28 April 2005.
34.	A hearing date was fixed for 3 June 2005.  KPMG served Chloris Flint’s Witness Statement on the Commissioners in the morning of 2 June 2005.  Later on 2 June 2005, the Commissioners sought a postponement of the hearing listed for the following day.  The hearing went ahead at KPMG’s insistence and on 3 June the present Chairman gave Directions to adjourn the hearing for seven weeks to 22 July 2005, for the service of the Statement of Case, and Witness Statements and for the exchange of Skeletons and that the Tribunal would proceed to hear the appeal on 22 July 2005 if the application was successful. He ordered the Commissioners to pay the Appellant’s reasonable costs of the hearing to be assessed if not agreed.
35.	The Commissioners did not comply with the Direction to serve a Statement of Case.  A letter dated 8 July 2005 from Christina Parkinson of the Commissioners’ Solicitor’s Office gave a fairly clear indication that the Commissioners were conceding the application and the appeal, but this was not indicated expressly until 14 July 2005 when, in a telephone call this was confirmed and the Commissioners agreed to pay costs on the standard basis.
36.	On 15 July 2005 the Commissioners wrote to the Tribunal advising that the appeal was conceded, that they would be making a repayment to the Appellant, and asking that the hearing listed for 22 July 2005 be vacated.
37.	KPMG refused to agree to the vacation of the hearing, pending agreement on costs and interest.  This was the situation when the matter came on for hearing before the Tribunal on 22 July 2005.
The parties’ submissions on the costs issue
38.	Against this background, Miss Searle, for the Appellant, submitted that the Commissioners’ conduct in the litigation had taken the situation away from the norm.  They had sought to defend an unsustainable position to prevent the repayment of tax collected against a technically flawed assessment.  They had taken technical points to deny a proper repayment to the Appellant, in particular Mirani Cooke’s letter of 25 October 2004 and Mrs. Bishop’s letter of 17 January 2005 advising that the refusal to repay was not itself appealable to this Tribunal.  Miss Searle submitted that the costs incurred by the Appellant were directly referable to the tactics adopted by the Commissioners.  In particular the Appellant only approached KPMG when the Commissioners refused to honour Don Davis’s apparent assurance.
39.	Mr. Thomas for the Commissioners points out that the Tribunal’s power to direct the payment of costs of and incidental to and consequent upon the appeal or application rules out the payment of any costs incurred by the Appellant before 25 February 2005 (the appeal was lodged on 22 March 2005).  25 February 2005 was the date of the first advice given to the Appellant by KPMG.
40.	He conceded that the Commissioners, instead of adhering to their policy as published in Business Brief 25/04, could have recognised at the time of Mirani Cooke’s letter of 25 October 2004 that this was a special case by reason of the possibility that misdirection by Don Davis had led to the Appellant not entering a timely appeal against the assessment.  They had not decided to do so until they considered Chloris Flint’s Witness Statement.  At its worst, the Commissioners’ conduct of the litigation could be described as “misguided in hindsight” and this was not serious enough to attract the penal effect of a direction to pay costs on the indemnity basis.  He submitted that the Tribunal should not lose sight of the fact that the Appellant had been repaid VAT which was, following the Court of Justice’s judgment in Primback shown to be due, at least as a conceptual matter.
Decision on the costs issue
41.	When considering whether to award costs on the standard basis or alternatively on the indemnity basis, the Tribunal bears in mind that on whatever basis costs are awarded, costs unreasonably incurred, or which are unreasonable in amount, will not be allowed (see: above, paragraph 9).  Thus although an award of costs on the indemnity basis would carry some stigma, be penal and would indicate the Tribunal’s disapproval of the conduct of the Commissioners in the litigation, it would not oblige the Commissioners to fund or reimburse any unreasonable costs.  Further, to the extent that the Appellant has incurred costs, particularly reasonable costs which are not reimbursed by the Commissioners, the Tribunal bears in mind that this will cause loss to the Appellant, which has been entirely successful in the litigation.
42.	The Tribunal makes it clear that it cannot and does not criticise the policy adopted by the Commissioners and published in Business Brief 25/04.  On the other hand, the Tribunal considers it is not relevant to the costs issue to have regard to the fact that the Appellant has been repaid VAT which was, following the Court of Justice’s judgment in Primback shown to be due, at least as a conceptual matter.  The Tribunal is only concerned to examine the parties’ (particularly the Commissioners’) conduct of the litigation, following the filing of the notice of appeal and the application for an extension of time for appealing, on 22 March 2005.  Thus, we do not take account of the fact that Mrs. Bishop in her letter of 17 January 2005 to Chloris Flint did not indicate the possibility of applying for an extension of time for appealing to this Tribunal, and lodging a late appeal, although she did indicate that the Appellant might consider instituting judicial review proceedings.  We regard this letter as having been less helpful than it could (and should) have been, but as irrelevant to the costs issue before us.
43.	We see nothing to criticise in the Appellant’s conduct of the litigation (through Chloris Flint and KPMG).
44.	On the other hand we do criticise the Commissioners’ opposition to the Appellant’s application for an extension of time in which to appeal – Mrs. Bishop’s letter to KPMG of 13 April 2005 and the Notice of Application filed by the Commissioners at the Tribunal on 28 April 2005.  The decision eventually taken by the Commissioners to concede the application and the appeal was (Mr. Thomas submitted) taken on the basis of a consideration of Chloris Flint’s Witness statement, which was served on 2 June 2005.  However we notice that full details of the relevant exchanges between Chloris Flint and Don Davis in July 2003 (including copies of the emails) were included in or annexed to KPMG’s letter to the Commissioners dated 5 April 2005, and we consider that at least from that time onwards the Commissioners were in a position to reach the conclusion they eventually came to – that they would not resist the obligation to make repayment at a contested hearing.
45.	In addition, we can see no justification for the delay from 2 (or 3) June 2005 to 14 July 2005 in conceding the application and the appeal.  This was a period in which substantial costs were (justifiably) incurred by the Appellant.
46.	It seems to the Tribunal that the matter could (and should) have been settled, at the latest, soon after the Commissioners’ receipt of KPMG’s letter dated 5 April 2005, that is, about two weeks after the litigation commenced.  Instead the litigation was unjustifiably dragged out for a further 3½ months.
47.	In the result, the Tribunal has concluded that it would be right to direct the Commissioners to pay the Appellant’s costs of and incidental to and consequent upon the application and the appeal on the indemnity basis, to be assessed in accordance with rule 29(1)(b) of the Tribunals Rules, if not agreed.    
48.	At the hearing on 22 July 2005, Miss Searle asked the Tribunal to give its reasons for its decision on the costs issue in writing.  In this Decision we have done that.  This Decision will serve as the Direction to pay costs as per paragraph 47.  Both parties have liberty to apply to a Chairman of these Tribunals sitting alone.

JOHN WALTERS QC
CHAIRMAN

RELEASED: 1 November 2005

LON/05/355