Costs were partially awarded against HMRC after Wilsons Solicitors successfully appealed a wide-ranging information notice relating to offshore advice provided by the firm.
The original first tier tribunal (FTT) decision held that Wilsons Solicitors LLP were not required to comply with an HMRC information notice that was used to fish for client information.
Wilsons then embarked upon an application for costs against HMRC. This application was decided on written representations and a decision was recently released that awarded partial costs to Wilsons (TC07169).
When can the FTT award costs?
At the FTT, there is a very limited route to awarding costs, resting on whether the tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings (Rule 10(1)(b) of the tribunal rules).
Further guidance on the concept of acting unreasonably can be found from the upper tribunal in the Catana case (UKUT 172). Their view was that the test was met when:
- an appellant unreasonably brought an appeal which they should know could not succeed;
- a respondent has unreasonably resisted an obviously meritorious appeal; or
- either party persistently failed to comply with the rules or directions of the tribunal.
The behaviour focused on examines the handling of the case being heard at tribunal, rather than the quality of the original decision by HMRC. In the recent Wilsons case, the judge stated that it was for Wilsons to demonstrate that HMRC had acted unreasonably, not for HMRC to demonstrate that they hadn’t.
Losing a case at the FTT does not in itself equate to a party acting unreasonably – the party must “generally persist in an argument in the face of an unbeatable argument to the contrary”.
Caution on costs award
There is also a wider theoretical question for the tribunal to consider when deciding on costs in individual cases.
Costs should not be too readily awarded, otherwise such claims become a method of cost shifting. Nor should the bar be set too high, as there are definitive examples where a party has clearly acted in an unreasonable manner and should be discouraged from doing so.
For example, when HMRC has resisted an appeal that it clearly should have allowed, or a taxpayer has appealed simply in order to delay the payment of tax for as long as possible.
What is considered?
In the Wilsons case, the judgment made it clear that a number of elements had been considered:
- Was it unreasonable for HMRC to argue Wilsons was a relevant data-holder in that they maintained a “register”?
- Was it unreasonable for HMRC to argue that Wilsons held relevant data?
- Was it unreasonable for HMRC not to apply to the tribunal to approve the notice rather than issuing the notice and forcing Wilsons to appeal?
- Was it unreasonable for HMRC to serve a witness statement that suggested Wilsons were seeking special treatment (in contrast to the other nine recipients of similar notices) and alleged that Wilsons had not complied with the Law Society’s anti-money laundering practice note?
Furthermore, in considering these elements, Judge Mosedale also had to determine the impact on the costs incurred by Wilsons as a result of any unreasonable behaviour.
The judge’s position on the first two issues highlighted whether HMRC has a civil duty not to put the burden of cost of testing principles in tax law onto a taxpayer. It was recognised by HMRC that their arguments were a novel point of law and therefore pushing the boundaries. So was it reasonable for HMRC to take an untested position and put Wilsons to the cost of appealing?
The judge decided that as she had to resort to general principles of statutory interpretation in order to determine the original case: it was not sufficiently obvious to HMRC that they would lose and therefore not unreasonable to defend the proceedings. This was despite her decision in the original case being unequivocally in favour of Wilsons.
The overall conclusion for the costs application on these points was that HMRC fell just short of unreasonable behaviour and no costs were awarded.
Witness statement costs
The fourth issue was a completely different matter. HMRC served a witness statement that was both late and ultimately not relevant to the matters being decided.
Whilst the lateness of the statements was not deemed to affect costs, the judge felt that the statement itself contained allegations that were not part of the case that HMRC were putting forward.
The judge concluded that they “should have taken a great deal more care to ensure that the witness statement was appropriate” and that to introduce it “forced the appellant to incur costs in responding”.
It was on this point that HMRC was found to have acted unreasonably and associated costs were awarded against them.
Whilst Wilsons were ultimately unsuccessful in the majority of their application for costs, the different areas of the judgment are a useful exercise in how the tribunal considers behaviour and financial impact when making decisions to award costs.
This judgment highlights some key points if you are considering making an application to the FTT for costs against HMRC:
- What specific HMRC behaviour, in terms of case proceedings, can be demonstrably shown to be unreasonable? Was the case against them so strong that they should have withdrawn?
- Was there enough technical uncertainty or was the matter a novel point of law whereby the tribunal could have potentially been persuaded to rule in HMRC’s favour?
- Were there any tribunal proceedings where HMRC did not comply with the tribunal rules or directions in a timely manner?
- Did HMRC waste time and cost by introducing irrelevant points of argument?
- If meeting the hurdle for demonstrably unreasonably behaviour by HMRC, how can one show the specific costs impact that this has had?
It is vital to have clarity on these points of principle before deciding whether to proceed with a costs application to the FTT.
About Jessica McLellan
Jessica McLellan is a tax risk and dispute resolution director at Blick Rothenberg Limited. She specialises in advising on proactive tax risk management for high net worth individuals, dealing with HMRC and resolving complex tax disputes. She is also a CEDR-trained mediator and has resolved a number of cases through Alternative Dispute Resolution, both as a HMRC mediator and an external mediator.