20871

COSTS – Indemnity costs – Claim by unsuccessful Appellant – Appellant had appealed against refusal to allow input tax relief – Last  minute change of argument by Respondents – Appellant withdrew appeal – Whether Appellants entitled to costs – No  – VAT Trib rules r.29(1) 

LONDON TRIBUNAL CENTRE

	M G ROVER GROUP LTD (in liquidation)	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

			Tribunal:	SIR STEPHEN OLIVER QC (Chairman)
					RUTH WATTS DAVIES MHCIMA, FCIPD	

Sitting in public in London on 3 November 2008

Valentina Sloane, counsel, instructed by PricewaterhouseCoopers LLP for the Appellant

Rebecca Haynes, counsel, instructed by general counsel or solicitor to HMRC, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	This decision concerned an application for costs by M G Rover Group Ltd (in liquidation) (“MG Rover”) following its withdrawal of an appeal against the decision of HMRC refusing it a VAT credit in the amount of £952,206.

2.	HMRC had refused MG Rover’s claim for crediting that amount by a decision letter of 18 September 2006.  The decision letter contained two reasons for the refusal.  MG Rover appealed contending that HMRC’s grounds were wrong.  HMRC’s Statement of Case of March 2007 advanced two arguments (“the original arguments”).  MG Rover’s skeleton arguments, lodged on 28 October 2008, addressed those two original arguments contending that they were unsound.  

3.	The case was listed for a two day hearing starting the following Monday.  

4.	At 4.30pm on the Friday HMRC lodged their skeleton argument advancing neither of the original arguments.  Instead HMRC put forward a new argument.  MG Rover considered their position over the weekend and decided to withdraw their appeal.

5.	On the Monday morning MG Rover came to the Tribunal and informed us of its decision not to continue with the appeal.  MG Rover asked for indemnity costs against HMRC.

The decision appealed against

6.	MG Rover imported goods from non-Member States for the purposes of its business and was liable to pay import VAT on those importations.  In the ordinary course of events MG Rover could recover that import VAT as input tax resulting in a VAT-neutral position. But for the event of administration, MG Rover’s relevant prescribed accounting period would have ended on 29 April 2005. 

7.	MG Rover had been on a duty and import VAT deferral scheme.  This allowed payment of tax and duty to be deferred for up to two months.  The deferral scheme was backed up by bank guarantees.  

8.	On 8 April 2005 MG Rover went into administration.

9.	C79s (monthly VAT certificates evidencing payments and deferrals of import VAT) were issued for the importations of March and April 2005, even though MG Rover had not in fact paid the import VAT.  Then on 9 June 2005 “negative C79s” were issued by HMRC for the March and April importations because the import VAT had not been paid.

10.	In due course, by decision letter of September 2006, HMRC wrote to MG Rover informing it of adjustments to the VAT return for the period ending 29 April 2005.  The adjustments to which the present appeal relates had been made on the basis that import VAT which had not been paid to HMRC had been claimed input tax and that this claim, if allowed, would amount to unjust enrichment.  

11.	It is not in dispute that the VAT position now is that MG Rover still owes £3.3m arising from its return for the period ending 28 January 2005: the unpaid import VAT (for which the input tax credit has been claimed) is £952,206.  

The dispute between MG Rover and HMRC

12.	On 8 July 2005 MG Rover had submitted a VAT return for the period ending on 29 April 2005 showing a repayment due; of this, the £952,206 related to goods that had been imported in March and April 2005 and in respect of which import VAT was payable. 

13.	A decision letter from HMRC of 18 September 2006 stated that the amounts set out in the VAT return for the period ended 29 April 2005 should be amended, on the basis that “import VAT, which was not paid to HMRC, was claimed as input tax, in VAT return for period ended 29 April 2005”.  The effect of the amendment was to reduce the amount of VAT claimed, and thus the net VAT reclaimed, by £952,206.  The justification given for the amendment was that “HMRC can refuse to make a repayment where the claimant would be unjustly enriched [VAT Act 1994 s.80(3)].  It has been accepted by CJEC that money need not be refunded if the claimant would be unjustly enriched.  HMRC take the view that the term “unjust enrichment” to apply where, by meeting a claimant’s VAT claim, the claimant would be put in a better economic position if it received a windfall profit of claiming as input tax, import VAT it had not paid”.

14.	On 25 September 2006 MG Rover appealed against the decision pointing out that the defence of unjust enrichment is available to HMRC only in respect of claims falling within section 80.  MG Rover also argued that withholding the repayment by means of an adjustment to a VAT return was procedurally incorrect.

15.	By their statement of case of 8 March 2007 HMRC dropped their argument based on unjust enrichment.  Instead they put forward a new argument.  This was that import VAT “could not count as input tax” on the ground that the import VAT had not been paid and was no longer payable.  It was no longer payable, so the argument was presented, because HMRC had issued negative C79s and thereby “waived” payment of the import VAT.  It was no longer payable because MG Rover was by then in liquidation; consequently the VAT debt was no longer payable “in practice”.

16.	MG Rover’s skeleton argument of 28 October 2008 put its case as follows:

“The input tax claimed falls within section 24(1)(c) VAT as it relates to “VAT paid or payable by it on the importation of any goods from a place outside the Member States”.  The import VAT to which the input tax relates has not been paid, as MG Rover went into administration after the supply was made but before the deferred duty payment date.  The import VAT nevertheless remains payable notwithstanding the “negative C79” and notwithstanding the liquidation of MG Rover.  Thus, in accordance with section 25(2) of VAT Act 1994, MG Rover is entitled to credit for that input tax at the end of the relevant prescribed accounting period, i.e. 29 April 2005 and it was duly claimed in the return for that period.”

17.	The skeleton argument of HMRC, lodged at around 4.30pm on the Friday before the hearing, placed no reliance on the original argument that the import VAT was no longer payable.  Instead the skeleton argument reads:

“The Commissioners have carefully reviewed their position and contend their decision for refusing the Appellant a VAT credit in the amount of £952,206 was correct for two reasons … .”

18.	The first new argument for HMRC recites that HMRC had required the liquidator of MG Rover (PricewaterhouseCoopers) to comply with a VAT requirements imposed by regulation 30 (and regulation 9) of the VAT General Regulations. These had resulted in regulation 25(3) applying to the making of returns by the liquidators on behalf of MG Rover. On this basis MG Rover’s VAT period starting on 29 January 2005 was brought to an end by the administration and was therefore curtailed to 7 April 2005. The return submitted by MG Rover’s representative, in which they claimed the input tax credit, was therefore a split return and covered two accounting periods (from 29 January to 7 April 2005 and from 8 April to 29 April), as well as providing for other members of the group registration.  MG Rover’s representative had indeed submitted MG Rover’s output and input tax figures up to 8 April 2005, the date of administration.  They had not made an entry in that return in respect of post-administration VAT so far as concerned MG Rover.  The skeleton argument went on to point out that the result of section 25 of VAT Act 1994 was that the entitlement to VAT credit arose at the end of the accounting period albeit that the entitlement was not exercised or claimed until the VAT return was submitted.  Thus, as at 7 April 2005, MG Rover had been entitled to a VAT credit in respect of input tax based on import VAT payable but it had also been liable for import VAT in the sum of £952,206 arising from imports taking place before that date. Since both the liability and the credit had arisen before the date of administration (and hence section 81(4A) had had no application), section 81(3) operated to set off the amount of input tax credit claimed in respect of import VAT against the liability to import VAT such that no credit was due.  

19.	The second argument advanced in HMRC’s skeleton argument can be shortly summarised as follows. The reality of the situation has been that input tax was not actually incurred since the import VAT had not been paid and would not now be paid albeit that there technically and academically remained a liability to pay. It therefore offended the principal of neutrality for input tax credit to be allowed in such circumstances.

Conclusion on the claim for costs

20.	Rule 29(1) of the Value Added Tax Tribunals Rules 1986 provides:

“A tribunal may direct that a party or applicant shall pay to the other party to the appeal or application –

(a)	within such period as it may specify such sum as it may determine on account of the costs of such other party of and incidental to and consequent upon the appeal or application; …”

21.	The general rule in civil litigation is that the unsuccessful party should pay the successful party’s costs. The outcome, following MG Rover’s withdrawal of its appeal on the morning of the hearing is that MG Rover has been wholly unsuccessful.  Nonetheless the Tribunal’s power to award costs and to determine the amount of costs is a discretionary power and is to be exercised in the light of all the relevant circumstances. Our task is to determine whether the conduct of HMRC has been such as to require us to depart from the general rule. We have already summarised the steps in the dispute between MG Rover and HMRC. We now identify the factors that seem to us to point towards and against the making of a cost award.

22.	The most significant factor pointing against any cost award is that MG Rover have withdrawn their claim.  The inference must be that they have accepted that their claim was bad and that the liquidator should indeed have applied regulation 25(3) in the manner required by HMRC.  We acknowledge that it is not as simple as that.  MG Rover was part of a VAT group and the application of the General Regulations, and in particular Regulation 25(3), to a group claim when one member becomes incapacitated is not entirely clear.

23.	HMRC have consistently opposed MG Rover’s claim, albeit on other grounds.  The claim appears to us to have been improbable and unlikely.  We note in this connection that MG Rover’s claim related to input tax that had not in reality been incurred since the import VAT has not been paid and will not be paid; it would, we agree with HMRC, violate the principle of neutrality for the input tax credit to be allowed. Had the appeal proceeded and had we found ourselves driven to allow the claim (a point on which we offer no comment) our decision would have had to have been based on defective legislation. But the legislation producing a sensible result was, as it turned out, in the statute book all along.

24.	The main point in favour of making some costs award is that HMRC did not refine their argument properly until the last moment. Rule 8 of the Tribunals Rules exists to ensure that HMRC’s case is clear to the other party and to the Tribunal and to protect the taxpayer affected by HMRC’s decision and generally to produce a fair and orderly hearing of the issues.  Rule 8 is as follows:

“Unless a tribunal otherwise directs … the Commissioners shall within a period of 30 days after the date of … the notification of the notice of appeal … serve at the appropriate tribunal centre a statement of case in the appeal setting out the matters and facts on which they rely to support the disputed decision and the statutory provisions under which the tax or penalty is assessed or, as the case may be, demanded or the decision is made.”

The statement of case did not effectively set out the matters on which HMRC relied in support of the disputed decision. Nor did they allude to the relevant statutory provision upon which the decision was based, i.e. regulations 30 (and regulation 9) and regulation 25(3) of the General Regulations.

25.	With those features in mind we now ask the question – should MG Rover be awarded an amount in respect of their costs?

26.	The matter in dispute is HMRC’s refusal of MG Rover’s claim for input tax, being a claim that MG Rover now accept to have been unsustainable. MG Rover chose to pursue the appeal because it had to appeal to displace HMRC’s decision in their letter of September 2006. It might have backed down earlier had HMRC presented a better argument at an earlier date.  Had MG Rover backed down earlier it would have spent less on the appeal; to use the words of section 29(1), MG Rover would from then on have had no more costs of and incidental to and consequent upon the appeal.

27.	MG Rover’s real criticism comes down to this. HMRC allowed them to spend fees in pursuit of a dud claim that they would have dropped earlier had the strength of HMRC’s case been revealed at that earlier date. The other side of the coin is that the liquidator chose to pursue the dud claim and to run up the fees because he had failed to spot that the claim was flawed. The skeleton argument from HMRC alerted the liquidator at the last minute to something he should have known all along.  But the skeleton did not cause additional costs.    

28.	We accept that had the appeal been properly handled by HMRC, HMRC could and should have applied to amend their statement of case in order to refine their “gut” (but correct) reaction and introduce the arguments based on the General Regulations (and in particular regulations 9, 25(3) and 30). Such an alteration would not have changed the decision to refuse the claim. It would have better identified the matters in dispute; but if MG Rover had chosen to continue with the appeal, it would still have incurred the costs and, one infers, have lost the appeal.

29.	It is not satisfactory to see a case like this where HMRC have, through ignorance or oversight, failed to give a proper explanation for their decision.  Nonetheless MG Rover’s liquidator and advisers are professionals of equal experience and expertise.  Regulation 25(3), which destroyed the claim, was there for all to see. One cannot resist concluding that they too should have recognised the weakness of their case at a much earlier time. We do not therefore see that HMRC’s failure to make an application to amend their statement of case justifies a different decision on costs.  

30.	For those reasons we reject MG Rover’s application for costs, let alone indemnity costs.  We make no order for costs as regards MG Rover’s application.

SIR STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 19 November 2008

LON 2006/0997