Archive for month: June, 2014

In a recent case, the Upper Tribunal (“UT”) considered and rejected HMRC’s application for costs against the taxpayer, Softhouse Consulting Ltd (“Softhouse”). The application related to the oral hearing of the company’s application for permission to appeal to the UT against the dismissal of its appeal by the First-tier Tribunal (“FTT”) – Softhouse Consulting Ltd v Revenue and Customs Commissioners [2014] UKUT 0197 (TCC). In the FTT The FTT had previously heard an appeal by Softhouse against HMRC’s refusal to allow input tax credit on the ground that it knew, or should have known, that its transactions were connected with missing trader intra-Community (MTIC) fraud. HMRC were successful, and the FTT dismissed the appeal. Softhouse applied to the FTT for permission to appeal the decision, under the powers granted to the FTT – see the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 2009/273 (“FTT Rules”) rule 21, but was unsuccessful in this application.  Softhouse then applied to the UT, but permission to appeal was refused – see Tribunal Procedure (Upper Tribunal) Rules 2008 2008/2698 (“UT Rules”) rule 21. The company then exercised its right to an oral hearing in pursuit of its application – see rule 22(2). Softhouse argued that a trader in a ‘clean’ chain of transactions cannot be adversely affected by a default in a ‘dirty’ chain, connected to the clean chain by a contra-trader, since there was an insufficient connection to the fraud. Judge Bishopp rejected that argument on the basis that it had no prospect of success and refused Softhouse’s permission to appeal. HMRC then applied to the UT for an award of costs. Costs The Tribunals Courts and Enforcement Act 2007 (“TCEA”) provides that, subject to any Tribunal procedural rules, the costs of and incidental to all proceedings in the FTT and UT shall be in the discretion of the Tribunal which has full power to determine by whom and to what extent the costs are to be paid. The FTT Rules and UT rules both provide the Tribunal with the powers, under defined circumstances, to make awards of costs – see FTT Rules, rule 10 and UT Rules, rule 10. In the UT HMRC contended that the UT had the power to make a payment of their costs of the oral hearing, including the cost of being represented by Counsel and that it should duly exercise that power in favour of HMRC. HMRC’s view that that the words “the costs of and incidental to all proceedings” were wide and could encompass proceedings preparatory to an appeal, namely attempting to secure permission to appeal. If this was correct, it would be reasonable for the UT to award costs. The UT accepted that it did indeed have a jurisdiction to award costs. Judge Bishopp said: “In a full costs-shifting regime the norm would be that the successful party should recover all of the costs reasonably incurred…In my view the securing of permission to appeal is without question incidental to the appeal itself, and in the case of an appellant a wider interpretation is necessary. Thus a successful appellant should normally be awarded his costs of the application as well as those of the resulting appeal….If a successful appellant is entitled, in principle, to all of his costs it seems to me that the same must be true of a successful respondent…” (page 5 para 12). However, the UT was not prepared, in the circumstances of this case, to make such an award in HMRC’s favour. The key point was whether it was reasonable for HMRC to have incurred costs in preparing for, and attending the hearing, rather than rely upon the experience and expertise of the Upper Tribunal judges. Judge Bishopp said: “HMRC’s position is that the application for permission to appeal, as originally presented, raised various arguments which, in essence, seek to challenge the decision of the Court of Appeal in Mobilx Ltd (in administration) v Revenue and Customs Commissioners [2010 STC 1436;…These are arguments which have been repeatedly rejected not only by the Court of Appeal but also by this tribunal….I do not doubt that HMRC had a legitimate interest in the outcome of the application but the fact of a legitimate interest does not of itself make it reasonable to incur costs in protecting it; an assessment of the risk is necessary. If, for example, it is plain that an application for permission to appeal is misconceived…that the grant of permission is unlikely and that, if permission were granted but the appeal failed, the appellant would be able to meet his opponent’s costs of defending it one might well conclude that costs incurred in resisting the application would have been unreasonable, because unnecessarily, incurred. There is also, I think, a further consideration. Taxpayers seeking to challenge decisions of the First-tier Tribunal before this Tribunal already riskl an adverse costs direction if they lose….the risk of an adverse costs award in the event of an unsuccessful application for permission to appeal may well operate as an additional disincentive to an appellant who, despite having been refused twice, does in fact have a meritorious appeal…” (page 6 paras 15,16 and 17). Levy and Levy comment In our view, the decision of the UT is a sensible one in clarifying the point that the Tribunal does indeed have the power to award costs of and incidental to an oral permission hearing. It also provides a measure of protection for a taxpayer who wants to take an appeal but is concerned of a costs award against him in the event of an unsuccessful application but does have a reasonable case.

Levy & Levy – the tax investigations and resolution specialists in London and Tunbridge Wells.