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Costs against HMRC – the importance of getting your arguments right
There have been a number of cases addressing the powers of the First-tier Tribunal (‘FTT’) in respect of the awarding of costs since the FTT was established in 2009. The latest is Zanaco Investments Limited v HMRC [2012] UKFTT 518 (TC), which concerned an application by Zanaco Investments Limited (‘Zanaco’) to recover its costs from HMRC in proceedings before the FTT relating to a disputed VAT assessment. HMRC had agreed, before the substantive hearing, to withdraw the assessments, but on different grounds to those which Zanaco had relied on in its grounds of appeal.
Zanaco argued that it was entitled to its costs in the proceedings on the ground that HMRC had acted unreasonably in defending the proceedings. The costs in question amounted to around £5,000 plus the VAT it paid on those costs.
Background
Zanaco was assessed to VAT of £46,576 in April 2008. Zanaco is a property developer, and the substantive legal question concerned whether and to what extent Zanaco could recover input tax in relation to two properties. This depended on whether its supplies were exempt or taxable supplies.
In May 2009, Zanaco submitted a late appeal against the assessments, with the following grounds of appeal:
“Input tax disallowed – due to exempt supplies. HMRC mislead trader in past in relation to what can be claimed – see also visits to assoc. companies eg Fat Sams Holdings & Fullcompany Ltd.”
Zanaco’s appeal had been categorised by the FTT as a ‘standard’ case, and therefore the FTT had only a limited jurisdiction to make a costs order, namely, under Rule 10(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (‘Tribunal Rules’), which provides:
“10(1) The Tribunal may only make an order in respect of costs… (b) if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings;”
In August 2010, HMRC applied to the FTT, pursuant to Rule 8 of the Tribunal Rules, to strike out Zanaco’s appeal on the grounds that either the FTT had no jurisdiction to hear an appeal based on misdirection or there was no reasonable prospect of the case succeeding.
However, in December 2010, and before the strike-out application could be heard by the FTT, HMRC withdrew the assessments under appeal.
HMRC wrote to Zanaco to explain why they had withdrawn the assessments, namely, because they had reviewed the case and had concluded that although they remained of the view that they were correct to assess for input tax wrongly claimed, they could not be satisfied that their calculation of the wrongly-claimed input tax was correct, nor could they be satisfied that the assessments were allocated to the correct VAT periods in circumstances where the matter turned on the date (and hence the VAT quarterly period) when firm intentions were established as to the sale or lettings of the properties. HMRC had also concluded that they were out of time to make certain corrective assessments.
Zanaco then applied to the FTT for an order awarding them their costs.
Zanaco’s arguments
Zanaco submitted that HMRC had made a grave technical error at the outset in making an incorrect VAT assessment in April 2008, and it had taken them until December 2010 to realise that this was the case, at which point they withdrew the assessment (it had then taken HMRC a further two months – following pressure from Zanaco – to provide an explanation for their action). During this period HMRC had fought hard in defending the appeal, in particular, HMRC had made a strike-out application.
HMRC failed to produce a Statement of Case. Had they done so, they would have realised that the assessment was wrong, although in any event, the errors should have been apparent to the original assessing officer.
Zanaco sought to distinguish the FTT decision in Bulkliner Intermodal Ltd v HMRC [2010] UKFTT 395 (TC). In that case, which also concerned Rule 10(1)(b), the taxpayer was not awarded costs since it was held that HMRC had not acted unreasonably, as they had shown no undue delay in carrying out a review which led to their decision to withdraw the assessment. In Bulkliner the taxpayer had made its appeal in November 2009 and the assessment was withdrawn by HMRC five months later. This was in contrast to Zanaco’s case, where there was over eighteen months between the date of the appeal notice and HMRC’s decision to withdraw the assessment.
HMRC’s arguments
HMRC focussed on the fact that the grounds of appeal were not related to the technical basis of the assessments, and instead comprised a contention that there was misdirection by HMRC. HMRC had conducted its defence of the appeal proceedings by reference to that stated ground of appeal, which led them to apply for a strike-out direction. This was not a case where HMRC had persisted in disputing an appeal in the face of a taxpayer consistently putting forward his arguments which HMRC subsequently conceded were correct.
Furthermore, HMRC remained of the view that VAT was due, but it was only because of insufficient information as to apportionment of costs, and because they were out of time to make further assessments, that they had decided not to proceed, and as a result Zanaco had, in HMRC’s view, received a windfall.
The decision
The FTT held that the actions of a party before proceedings are commenced cannot be taken into account for the purposes of determining an application for costs under Rule 10(1)(b), except to the extent that they result in, or influence, the actions of that party in the course of the proceedings. In particular, even if HMRC had acted unreasonably in making an assessment which gives rise to an appeal, that in itself does not entitle the taxpayer appellant to an unreasonable behaviour costs award. The FTT added that, in any event, it was not persuaded that HMRC was unreasonable in making the assessments in question, and the fact that they were subsequently withdrawn did not, of itself, establish that they were unreasonable. The FTT was satisfied that the facts and issues underlying the assessments were complex and uncertain.
In relation to Zanaco’s argument that HMRC had acted unreasonably in defending the assessments for such a long period of time during the proceedings, the FTT said that if it was not unreasonable for HMRC to make the assessments, their defence of the appeal was unlikely to be unreasonable unless it had become apparent that for some reason the assessments should be withdrawn, and that despite that HMRC had persisted in maintaining their position. That was not the case here.
Perhaps not surprisingly, the FTT appears to have been heavily influenced by the fact that Zanaco’s notice of appeal did not set out any ground which contested the technical correctness of the assessments – the only ground stated was that their conduct resulted from their being misled by HMRC. In the view of the FTT, if Zanaco, who would have had the best knowledge of the circumstances of the case, was unable, or not prepared, to assert that the assessments were wrong, it cannot then be said that it was unreasonable on the part of HMRC, with their more limited knowledge, to make those assessments.
The FTT also commented that the grounds of appeal should mark out the initial battleground over which the dispute will be fought. This is particularly so where (as in this case) the appellant taxpayer is professionally advised. The battleground may then subsequently be redefined once HMRC submit their Statement of Case, but this stage was never reached because of the strike-out application which HMRC made.
Comment
When HMRC abandon their defence of an appeal 18 months after proceedings have commenced, the taxpayer would ordinarily have strong grounds for seeking a costs award against HMRC on the basis of their unreasonable behaviour. However, this case is a salutary reminder that a party’s conduct will be examined by reference to the case which it had to meet. Where taxpayers, or HMRC, rely upon incorrect grounds in their notice of appeal or Statement of Case, it would appear from this decision that the FTT will be reluctant to penalise the other party for responding to those grounds.
This case illustrates how important it is for taxpayers to carefully and comprehensively set out their grounds of appeal when they submit their notice of appeal to the FTT. This will not only enhance the taxpayers likelihood of obtaining a costs award against HMRC in the event that they act unreasonably, but it will also increase the chances of a settlement being reached between the parties, as it is only once each party fully understands what the other party’s case is that they can identify whether there is genuine scope for agreement.
There have been a number of cases addressing the powers of the First-tier Tribunal (‘FTT’) in respect of the awarding of costs since the FTT was established in 2009. The latest is Zanaco Investments Limited v HMRC [2012] UKFTT 518 (TC), which concerned an application by Zanaco Investments Limited (‘Zanaco’) to recover its costs from HMRC in proceedings before the FTT relating to a disputed VAT assessment. HMRC had agreed, before the substantive hearing, to withdraw the assessments, but on different grounds to those which Zanaco had relied on in its grounds of appeal.
Zanaco argued that it was entitled to its costs in the proceedings on the ground that HMRC had acted unreasonably in defending the proceedings. The costs in question amounted to around £5,000 plus the VAT it paid on those costs.
Background
Zanaco was assessed to VAT of £46,576 in April 2008. Zanaco is a property developer, and the substantive legal question concerned whether and to what extent Zanaco could recover input tax in relation to two properties. This depended on whether its supplies were exempt or taxable supplies.
In May 2009, Zanaco submitted a late appeal against the assessments, with the following grounds of appeal:
“Input tax disallowed – due to exempt supplies. HMRC mislead trader in past in relation to what can be claimed – see also visits to assoc. companies eg Fat Sams Holdings & Fullcompany Ltd.”
Zanaco’s appeal had been categorised by the FTT as a ‘standard’ case, and therefore the FTT had only a limited jurisdiction to make a costs order, namely, under Rule 10(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (‘Tribunal Rules’), which provides:
“10(1) The Tribunal may only make an order in respect of costs… (b) if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings;”
In August 2010, HMRC applied to the FTT, pursuant to Rule 8 of the Tribunal Rules, to strike out Zanaco’s appeal on the grounds that either the FTT had no jurisdiction to hear an appeal based on misdirection or there was no reasonable prospect of the case succeeding.
However, in December 2010, and before the strike-out application could be heard by the FTT, HMRC withdrew the assessments under appeal.
HMRC wrote to Zanaco to explain why they had withdrawn the assessments, namely, because they had reviewed the case and had concluded that although they remained of the view that they were correct to assess for input tax wrongly claimed, they could not be satisfied that their calculation of the wrongly-claimed input tax was correct, nor could they be satisfied that the assessments were allocated to the correct VAT periods in circumstances where the matter turned on the date (and hence the VAT quarterly period) when firm intentions were established as to the sale or lettings of the properties. HMRC had also concluded that they were out of time to make certain corrective assessments.
Zanaco then applied to the FTT for an order awarding them their costs.
Zanaco’s arguments
Zanaco submitted that HMRC had made a grave technical error at the outset in making an incorrect VAT assessment in April 2008, and it had taken them until December 2010 to realise that this was the case, at which point they withdrew the assessment (it had then taken HMRC a further two months – following pressure from Zanaco – to provide an explanation for their action). During this period HMRC had fought hard in defending the appeal, in particular, HMRC had made a strike-out application.
HMRC failed to produce a Statement of Case. Had they done so, they would have realised that the assessment was wrong, although in any event, the errors should have been apparent to the original assessing officer.
Zanaco sought to distinguish the FTT decision in Bulkliner Intermodal Ltd v HMRC [2010] UKFTT 395 (TC). In that case, which also concerned Rule 10(1)(b), the taxpayer was not awarded costs since it was held that HMRC had not acted unreasonably, as they had shown no undue delay in carrying out a review which led to their decision to withdraw the assessment. In Bulkliner the taxpayer had made its appeal in November 2009 and the assessment was withdrawn by HMRC five months later. This was in contrast to Zanaco’s case, where there was over eighteen months between the date of the appeal notice and HMRC’s decision to withdraw the assessment.
HMRC’s arguments
HMRC focussed on the fact that the grounds of appeal were not related to the technical basis of the assessments, and instead comprised a contention that there was misdirection by HMRC. HMRC had conducted its defence of the appeal proceedings by reference to that stated ground of appeal, which led them to apply for a strike-out direction. This was not a case where HMRC had persisted in disputing an appeal in the face of a taxpayer consistently putting forward his arguments which HMRC subsequently conceded were correct.
Furthermore, HMRC remained of the view that VAT was due, but it was only because of insufficient information as to apportionment of costs, and because they were out of time to make further assessments, that they had decided not to proceed, and as a result Zanaco had, in HMRC’s view, received a windfall.
The decision
The FTT held that the actions of a party before proceedings are commenced cannot be taken into account for the purposes of determining an application for costs under Rule 10(1)(b), except to the extent that they result in, or influence, the actions of that party in the course of the proceedings. In particular, even if HMRC had acted unreasonably in making an assessment which gives rise to an appeal, that in itself does not entitle the taxpayer appellant to an unreasonable behaviour costs award. The FTT added that, in any event, it was not persuaded that HMRC was unreasonable in making the assessments in question, and the fact that they were subsequently withdrawn did not, of itself, establish that they were unreasonable. The FTT was satisfied that the facts and issues underlying the assessments were complex and uncertain.
In relation to Zanaco’s argument that HMRC had acted unreasonably in defending the assessments for such a long period of time during the proceedings, the FTT said that if it was not unreasonable for HMRC to make the assessments, their defence of the appeal was unlikely to be unreasonable unless it had become apparent that for some reason the assessments should be withdrawn, and that despite that HMRC had persisted in maintaining their position. That was not the case here.
Perhaps not surprisingly, the FTT appears to have been heavily influenced by the fact that Zanaco’s notice of appeal did not set out any ground which contested the technical correctness of the assessments – the only ground stated was that their conduct resulted from their being misled by HMRC. In the view of the FTT, if Zanaco, who would have had the best knowledge of the circumstances of the case, was unable, or not prepared, to assert that the assessments were wrong, it cannot then be said that it was unreasonable on the part of HMRC, with their more limited knowledge, to make those assessments.
The FTT also commented that the grounds of appeal should mark out the initial battleground over which the dispute will be fought. This is particularly so where (as in this case) the appellant taxpayer is professionally advised. The battleground may then subsequently be redefined once HMRC submit their Statement of Case, but this stage was never reached because of the strike-out application which HMRC made.
Comment
When HMRC abandon their defence of an appeal 18 months after proceedings have commenced, the taxpayer would ordinarily have strong grounds for seeking a costs award against HMRC on the basis of their unreasonable behaviour. However, this case is a salutary reminder that a party’s conduct will be examined by reference to the case which it had to meet. Where taxpayers, or HMRC, rely upon incorrect grounds in their notice of appeal or Statement of Case, it would appear from this decision that the FTT will be reluctant to penalise the other party for responding to those grounds.
This case illustrates how important it is for taxpayers to carefully and comprehensively set out their grounds of appeal when they submit their notice of appeal to the FTT. This will not only enhance the taxpayers likelihood of obtaining a costs award against HMRC in the event that they act unreasonably, but it will also increase the chances of a settlement being reached between the parties, as it is only once each party fully understands what the other party’s case is that they can identify whether there is genuine scope for agreement.
Comment