20046

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 – Indemnity costs to the Appellants

LONDON TRIBUNAL CENTRE

VAUXHALL MOTORS LIMITED
	SAAB GREAT BRITAIN LIMITED	           Appellants

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	DR KAMEEL KHAN (Chairman)

Sitting in public in London on 5 February 2007

Mr Jonathan Peacock QC, instructed by Reynolds, Porter, Chamberlain, for the Appellant 

Mr Andrew O’Connor, instructed by HMRC, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Introduction

	The hearing relates to appeals by Vauxhall Motor Limited (“VMC”) and Saab Great Britain Limited (“SGB”) against decisions of the Respondents (“HMRC”) to refuse to pay VMC and SGB’s claims made under s.80 VATA 1994 to recover overpayments of output tax.

	The decisions were contained in a letter dated 8 October 2004.  Notices of Appeal were lodged on 14 and 22 October 2004 respectively and Custom’s Statement of Case served on 3 May 2005.

Relevant Facts

1.	The Appellants claimed by way of voluntary disclosure overpaid output tax on the margin of sale on demonstrator cars. The parties exchanged further correspondence relating to the claim on 25 July 2003, 8 September 2003 and on 12 March 2004. On 16 April 2004, the Commissioners rejected the voluntary disclosure on the basis that they were not satisfied that a claim would have been made during the transitional period in 1996/97.

2.	By a letter dated 5 May 2004, the Appellants requested a reconsideration of the Commissioners’ decision.  By letter dated 8 October 2004, the Commissioners upheld their decision to refuse the Appellants’ claim on the basis that, on the available evidence, the Appellants would probably not have made a claim during the transitional period.  The Appellants lodged an appeal to this Tribunal on 22 October 2004.  

3.	On 23 Dec ember 2004, the Appellant wrote to the Commissioners enclosing an undated note prepared by Peter Milbourne, General Motors VAT Manager said to have been prepared in 1997. The note contained calculations relating to a possible reclaim of overpaid output tax based on a five month period. The Appellants invited further reconsideration of the matter by the Commissioners.

4.	On 28 January 2005, a meeting took place between the Appellants and the Commissioners where the Appellants presented a revised figure putting the quantum of their claim at £35 million.  On 16 February 2005, HMRC rejected the claim stating that it was their view that a claim would not have been submitted during the transitional period. This followed an internal meeting of the relevant Customs officers, including policy advisers, held on 27 January 2005.

5.	The Appellants invited a reconsideration by letter dated 24 June 2005 and provided detailed calculations in support of their case. These were rejected by the Commissioners on 4 October 2005. On 31 January 2006, the Appellants sought further reconsideration, which was rejected on 21 February 2006.

6.	Various witness statements were then served.  First, on 3 June 2006, the Commissioners served the witness statement of Ms F Fraser, the HMRC officer mainly responsible for the Appellant’s VAT affairs. The Appellants served witness evidence dated 19 June 2006 including a statement of Mr G Mason showing relevant tax calculations. A second statement by Ms F Fraser dated 5 July 2006 showed that the calculations were further considered by the Commissioners on 16 March 2006 and again on a later unspecified date. There were six reconsiderations of the claim by the Commissioners.

7.	On 31 January 2007, the Appellants lodged skeleton arguments with the Tribunal. They were informed around 5.00pm by telephone that the Commissioners were conceding the Appeal. A letter was received by the Appellants at 2.29pm on Thursday 1 February 2007 to confirm the Commissioners position. The letter stated that “having given further consideration to the facts,” the Commissioners were prepared to accept the claims as valid.

The Appellants’ Submissions

8.	Mr Peacock said that there were no “new” facts as indicated on HMRC’s letter and none arose after 19 June 2006, when the matter should have been settled.  The decision to concede the claims should have been made earlier and the actions of the Commissioners in conceding at such a late stage meant that the Appellant had incurred considerable costs needlessly. While the Commissioners have conceded that they must pay the Appellant’s “reasonable” costs of and incidental to the appeals, Counsel argues that costs should be awarded on an indemnity basis pursuant to section 29(1)(b) VAT Tribunal Rules 1986 and gave by way of recent example of such costs the decision in Harrods (UK) Limited v Commissioners for Her Majesty’s Revenue and Customs, Decision 19318, November 2005 and The Funding Corporation Limited v Commissioner for Her Majesty’s Revenue and Customs, Decision 19525, April 2006.

The Respondent’s Submission

9.	Mr O’Connor for the Respondents says that the normal rules should follow and that there should be an order for the Appellants’ reasonable costs to be assessed on a standard basis not on an indemnity basis.  He says that for indemnity costs to be awarded there must be “conduct or some circumstances which takes the case out of the norm” and such conduct must be unreasonable and that neither of these conditions are satisfied in this case.  Further, the witness statements of Mr Milbourne (June 2006) and Ms Fraser (July 2006) were needed to complete HMRC’s determination and after these dates further consideration and inquiries were being made by HMRC.  There was therefore no unreasonableness in HMRC’s approach.  There was also evolving case law looking at the three year rule and claims in the transitional period which had to be considered. This would explain the delay and take the case outside of the category of extreme unreasonableness.  Let us now address the costs issue

10.	The Tribunal has jurisdiction to make a direction as to costs, as provided in rule 29 VAT Tribunal Rules 1986 (“the Tribunal 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 by a Taxing Master of the Supreme Court or a district judge of the High Court …” (rule 29(1)(b)). Where a direction is made under s.29(1)(b) of the Tribunal Rules, the provisions of Part 47 of the Civil Procedure Rules 1998 (“the CPR”) are to apply.

11.	The Tribunal will apply, by analogy, the general rules about costs contained in Part 44, the 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.

12.	Rule 44.4(2) and 44.4(3) explains the difference between a standard order for costs and an indemnity order for costs. There are two main differences.  The first concerns the onus of proof in establishing whether the costs were reasonably incurred or were reasonable in amount with a standard order for costs, the onus is on the party in whose favour the order has been made. Where an indemnity order for costs is made the onus of showing the costs are not reasonable is on the party against whom the order has been made.  The second difference between a standard and an indemnity order for costs is that in allowing standard costs the court will only allow costs which are proportionate to the matters in issue.  Where the assessment is on an indemnity basis, proportionality is not a relevant consideration and is omitted in the rule.  This means that where indemnity costs is awarded to a party, they are more likely to receive the actual costs relating to the proceedings.  Proportionality allows a judge to limit  costs to a proportionate amount of the costs incurred.

13.	There is a wide direction given in awarding costs.  An award of indemnity costs under the Rule 44 (which is analogous to such an award made by this Tribunal) requires the court to look, inter alia, at the conduct of the parties in the litigation in deciding on the appropriate order for costs.

14.	If the conduct of a party is unreasonable, not merely wrong or misguided in hindsight, and the court wishes to show its disapproval of such conduct then an indemnity order may be made (see Reid Minty v Gordon Taylor [2002] 2 All ER 150 (CA).  An indemnity order carries a stigma and is penal rather than exhortatory (see Kiam v MGN (No.2) [2002] 2 All ER 242).  The conduct as well as all the circumstances of the case must be examined in making a final decision.

15.	The Tribunal should therefore look at the conduct of the parties as well as all the facts and circumstances of the case, in the light of the guidelines laid down by previous cases.  The rules are clear.

16.	In this case, the Tribunal believes that costs should be awarded on an indemnity basis for the reasons outlined below.

17.	First, there is no apparent justification for the delay by the Commissioners settling this matter. On 19 June 2006 (the date on the witness statement of Mr Geoffrey Mason, European VAT Manager, General Motors) to 31 January 2007, when the Appellant was informed by the Commissioners that they were conceding the appeal and willing to pay reasonable costs.  The Commissioners argued that there was evolving case law which had to be considered.  Two cases were there cited to support this position; Marshall Motor Group Ltd v Revenue and Customs [2006] UK VAT  Decision 19828 (10 October 2006) and the Court of Appeal in Condé Nast Publications Ltd v HMRC  [2006] STC 1729 (July 2006).  Even if these cases were considered, the matter should have been settled in October 2006, the date of the later case.  However, it is questionable whether this case would have contributed any new views on the relevant points.  The relevant point in the Marshall case, that the burden of proof is on the Commissioners to show that the Appellant would not have made a claim within the transitional period, was taken as “common ground” and not in dispute (see paragraph 7 of the decision).

18.	Secondly, the Commissioners did not provide to the Tribunal clear evidence of the nature of any further enquiries or review which was being undertaken in the period from 19 June 2006 to 31 January 2007.  The Commissioners stated broadly that they were in the process of obtaining further information, witness statements, queries on witness statements and establishing the size of the claim.  This may well be true but let us look at the evidence available to the Tribunal.

19.	The size of the claim, though variable, was known in 2003, when the original claims were made by the Appellants.  The basis of the claims have remained the same.  They were in response to Business Briefs 22/02 and 27/02 issued following the European Court of Justice (ECJ) decision in Marks and Spencer.  There was correspondence between the Appellants and the Commissioners on whether the claims had been properly made within the guidelines for making claims and whether the partial exemption rules prevented recovery of all input tax.  The nature of the discussions and chronology can be found in the witness statement of Fiona Fraser, Higher Officer, HMRC dated 5 July 2006.  Even if the partial exemption rules applied, there was still a claim to be made by the Appellants for overpaid output tax.  The witness statement needed to assist the Commissioners was submitted by the Appellants in June and July 2006.  If the witness statements threw up further issues for the Commissioners to consider, no evidence was provided to the Tribunal that such further considerations were taking place.  The period from June 2006 to 31 January 2007 appears as a void, when no active consideration of the relevant considerations were taking place.  The Appellant would have expected some indication of the ongoing process and in the absence of such they incurred additional costs.

20.	On 1 February 2007, the Commissioners wrote to the Appellants a letter stating paragraph,

“Having given further consideration to the facts of these cases, we have decided that the voluntary disclosures in respect of overpaid output tax submitted by your clients – dated 24 June 2003 (Vauxhall) and 30 June 2003 (Saab) – will be allowed in principle.”

We know from the evidence that there were no new facts, statements or materials which were not available in June 2006.  If the Commissioners had undertaken a further review of existing facts, there was a responsibility on the Commissioners to act expeditiously to settle the matter.  Six months to undertake a further review (there were already six reviews) was not reasonable in the circumstances.

21.	Thirdly, the Commissioners conduct was unreasonable.  It is not fair for the Appellants to bear legal costs incurred as a result of a delay by the Commissioners.  The Appellants should have been informed of the status of the review, the time frame for expecting a decision and whether any further material was needed.  Conceding the case at the “99th hour” meant that the Appellants would have incurred substantial legal costs, incurred as a result of an unreasonable delay.  There were six reconsiderations by the Commissioners between June 2003 and January 2007, with the last taking the longest period to decide.  Given that the claim was three years old in June 2006 and no outstanding matters were identified to the Tribunal, a further delay of six months with attendant legal costs means that an order for indemnity costs would be appropriate for such a level of unreasonable conduct by the Commissioners

22.	The costs of Counsel for the day of the hearing should be awarded on a reasonable basis.  If there are any issues relating to interest on the costs, these should be raised within 30 days of the date of the release of this decision.  The Tribunal therefore concludes that it would be correct to direct the Commissioners to pay the Appellants’ costs of and incidental to and consequent upon the appeals on an indemnity basis, to be assessed in accordance with rule 29(1)(b) of the Tribunal Rules.

DR KAMEEL KHAN
CHAIRMAN

RELEASED:  14 March  2007

LON/04/1618
LON/04/1619