Andy Keates explores the circumstances in which a taxpayer can claim the costs of an appeal against HMRC, illustrated by three recent cases where the taxpayers won.
Normally cost neutral
Appeals to the first tier tribunal (FTT) are normally “cost neutral”, with each party bearing its own costs. An exception, given by Rule 10(1)(b) of the Tribunal Rules, is where one or other party “has acted unreasonably in bringing, defending or conducting the proceedings”.
In Catana 2012 UKUT 172, the upper tribunal (UT) found this captures cases where:
- A taxpayer unreasonably brings an appeal which they should know could not succeed;
- HMRC has unreasonably resisted an obviously meritorious appeal; or
- Either party has acted unreasonably in the course of the proceedings.
A common scenario is when one party withdraws from an appeal at a very late stage when the other side has incurred significant amounts of time and money preparing a case.
The UT has set out (Tarafdar 2014 UKUT 0362) a set of three questions which the FTT should consider in such circumstances:
- What was the reason for withdrawing from the appeal?
- Having regard to that reason, could the party have withdrawn at an earlier stage in the proceedings?
- Was it unreasonable for that party not to have withdrawn at an earlier stage?
Sussex Cars Association
This case was an example of a late appeal and a failed ADR.
Sussex Cars (TC06110) was disputing VAT assessments of just under £1.4m. It appealed the assessment in July 2015 and also applied for Alternative Dispute Resolution (ADR).
The ADR process was unsuccessful in reaching an agreement, mainly because the HMRC officers attending lacked the technical knowledge to debate the issues at hand, and had been given no authority to go beyond the position already stated in HMRC’s review. In the view of the judge, this was “effectively failing to engage in the ADR process at all, while at the same time putting Sussex Cars to the cost and effort of engaging in it”. The appeal was reactivated and was ready to go before the Tribunal at the end of 2016.
However, in November 2016 Sussex Cars applied for judicial review, and for the first time, the matter reached a legally qualified officer. He spotted a potentially fatal flaw in HMRC’s position and called for the appeal to be conceded. He wrote, “it is… HMRC’s role to administer the tax system fairly and to collect tax in accordance with the law, not to take advantage of all possible technical points in order to secure a win in its litigation”.
HMRC withdrew from the appeal on 14 December 2016.
With regard to the questions set out in Tarafdar, the judge came to these conclusions:
- It was plain that the reason for withdrawing was a belated recognition that there was a strong defence against the assessments.
- HMRC could, at any time following receipt of the appeals, have come to this conclusion.
- It was not reasonable for HMRC not to obtain appropriate legal advice to enable the issues to be identified earlier.
Costs were awarded to Sussex Cars, including the costs of the failed ADR.
This was an “unreasonable behaviour” case.
Mr Cannon (TC06413) is a leading tax barrister well known for his expertise in Stamp Duty Land Tax planning. He was appealing against penalties for three errors on his personal tax return for 2010/11:
- Duplication of repair/refurbishment costs;
- A fee which arose on the last day of the accounting period which was wrongly included in the subsequent year’s accounts; and
- An incorrect furnished holiday letting (FHL) loss claim applied to obtain sideways loss relief.
Initially, HMRC categorised all three as “deliberate” errors, but following statutory review, the first two errors were re-categorised as “careless”. Penalties were calculated based on “prompted disclosure”.
Before the appeals came to be heard by the FTT, counsel for Mr Cannon telephoned HMRC. He proposed that the allegation that the FHL loss was deliberate should be withdrawn, since it had no realistic prospect of success, and a global settlement should be discussed with a view to rendering a hearing unnecessary. HMRC rebuffed this proposal and persisted in an allegation of dishonesty.
In the appeal hearing, the FTT found:
- Duplicating repair costs was careless, but Cannon’s disclosure was “unprompted” (reducing the penalty from 15% to 10%);
- The delayed fee income (a tax difference of £72!) was an innocent error with no indication of carelessness – the penalty was quashed.
- The FHL loss was similarly an innocent error without any taint of carelessness – again the penalty was quashed.
The judge was very critical of HMRC’s initial categorisation of all three errors as “deliberate”, and of its refusal to withdraw that allegation for the FHL loss. He considered that “an entrenched position was being adopted which was deaf to any kind of explanations”. The refusal to engage in pre-hearing settlement discussions was unreasonable and had led to extra litigation costs.
The judge proposed that, since there was arguably at least a 50:50 chance that such a settlement discussion would have succeeded, 50% of Cannon’s costs should be awarded.
This was another case of late withdrawal by HMRC.
Green (TC06817) was assessed to VAT of £2,987 and appealed. Two days before the hearing date, HMRC requested a postponement due to the illness of its litigator. Green objected, and HMRC’s application was due to be heard at the start of the scheduled hearing.
On the evening before the hearing, HMRC’s policy division raised doubts about the strength of their evidence, and the replacement litigator withdrew from the appeal. The judge himself only found this out while travelling to the venue.
HMRC accepted that the late withdrawal was unreasonable, and the judge agreed that a review of the evidence should have been undertaken far earlier. Of itself, the application to postpone based on illness was not unreasonable: “it is very difficult for another advocate to pick up the threads of a relatively complex appeal at very short notice”.
The real dispute was quantifying the costs due to Green.
The time he spent preparing for the hearing (for the sake of which he turned down work) was clearly eligible. The judge rejected HMRC’s suggestion that the £19 per hour provided by the Civil Procedure Rules (CPR) for litigants in person should be used – “CPR do not, strictly speaking, apply to this Tribunal” – and used Green’s own (higher) charge-out rate.
The cost of photocopying 335 pages for hearing bundles was eligible, but at what price? Green charged 15p a sheet to his clients, and claimed the same; HMRC suggested 5p. The judge settled on 10p a sheet, in line with local suppliers.
The fees paid to a consultancy firm for assistance with the appeal were allowed, but not those paid to another firm for work which preceded the appeal.
Costs are available if HMRC behaves unreasonably in the conduct of an appeal, or withdraws at a late stage. If your client has been similarly led up the FTT garden path by HMRC, it’s worth claiming costs.