PCO’s are hard to come by – Upper Tribunal dismisses taxpayer application
The background facts
On 9 January 2024 the Appellants, the Executors of the Estate of Peter John Linington and the Trustees of the Kent Trust, made an application for a protective costs order (“PCO”) to the Upper Tribunal (“UT”). Unsurprisingly, HMRC objected.
The Appellants had previously been granted permission to appeal on one ground only from the First-tier Tax Tribunal (“FTT”); the FTT refused permission on other grounds in their decision notice dated 16 May 2023. The Appellants renewed their application to the UT and was successful in obtaining leave for a second ground, but nothing more.
The Decision concerns arrangements entered into by Mr Peter Linington (“PL”) in 2010 designed to reduce the amount of inheritance tax that would be payable on his death. They involved the acquisition of various interests in an Isle of Man discretionary trust (“the Marshall Trust”) in February 2010. The trust assets were held on discretionary trust to accumulate and capitalise so much of the income as the trustees should think fit in their absolute discretion. Any income not accumulated and capitalised was payable to the income beneficiary. Subject thereto, the reversionary beneficiary would become entitled to the trust assets at the expiry of 150 years from the date of settlement.
By the arrangements:
(1) PL was nominated as the reversionary beneficiary of the Marshall Trust.
(2) PL was granted an option to purchase the income interest in the Marshall Trust. The consideration for the grant of the option was £1,083,750. The option was exercisable on payment of a sum of £100.
(3) PL assigned his reversionary interest to the Kent Trust, a UK resident family trust set up for the purpose. The Kent Trust is the Second Appellant in these proceedings.
(4) PL exercised the option and was designated as the income beneficiary of the Marshall Trust.
HMRC issued notices of determination on the basis that PL made a transfer of value when he assigned his reversionary interest to the Kent Trust. The notices of determination were made on the basis that IHT was due either by PL’s estate or by the Kent Trust
The Appellants’ case before the FTT was that when PL was nominated as the reversionary
beneficiary, no consideration was paid for that nomination. HMRC, on the other hand, HMRC
contended that immediately before PL’s transfer of the reversionary interest, he held that
interest together with the option to purchase the income interest. By exercising the option, he could
call for the trustees to transfer all the trust assets to himself. The FTT accepted HMRC’s arguments and held that:
(1) The reversionary interest was not excluded property, and
(2) The transfer of the reversionary interest was a transfer of value.
The grounds for granting permission to appeal to the UT
These were:
(1) Ground 1 – the points at issue had potentially wider implication;
(2) Ground 2 – the FTT had erred in law in finding that the reversionary interest was acquired for
consideration. This was not supported by the evidence or was a conclusion which no
reasonable tribunal could have reached.
The PCO application
Somewhat unexpectedly perhaps, the Appellants’ next move was to apply for a PCO whereby they would not be liable for HMRC’s costs of defending the appeals if their appeals were dismissed (costs being in point against them were they to lose in the UT).
The law on PCO’s
The jurisdiction of the Upper Tribunal to make a PCO has been considered in Drummond v HM Revenue & Customs [2016] UKUT 221 (TCC) and HM Revenue & Customs v TGH (Commercial) Limited [2016] UKUT 0519 (TCC). In ‘Drummond’ Lord Philips said:
‘(1) A protective costs order may be made at any stage of the proceedings, on such conditions
as the court thinks fit, provided that the court is satisfied that:
(i) the issues raised are of general public importance;
(ii) the public interest requires that those issues should be resolved;
(iii) the applicant has no private interest in the outcome of the case; 3
(iv) having regard to the financial resources of the applicant and the respondent(s)
and to the amount of costs that are likely to be involved, it is fair and just to make
the order; and
(v) if the order is not made the applicant will probably discontinue the proceedings
and will be acting reasonably in so doing.
(2) If those acting for the applicant are doing so pro bono this will be likely to enhance the
merits of the application for a PCO.
(3) It is for the court, in its discretion, to decide whether it is fair and just to make the order
in the light of the considerations set out above.’
The decision of the UT
The Tribunal then considered the above criteria, as developed in subsequent judicial authorities, notably R (Corner House Research) v Secretary of State for Trade and Industry [2005] EWCA Civ 192.
In applying the relevant criteria to the facts of the present case, the Tribunal concluded:
- The arrangements in issue were no longer, since FA 2012, effective. Although there were around thirty other appeals following behind the Appellant’s, there could be no wider point of general public importance engaged in this case;
- It therefore followed that there was no public interest engaged;
- Although the Appellants clearly had a substantial private interest in the appeal, that was not a bar to a PCO;
- Although the Appellants were of relatively modest means, this did not affect the Tribunal’s wider determination; and
- HMRC’s estimated costs, of £20,000, were reasonable.
The Tribunal concluded:
’50 I take all these factors into account, and the circumstances generally, in considering whether it is
fair and just to make a PCO. It seems to me that the most significant factors are the absence of any
issues of general public importance, the significant personal interest of Mrs Pearce and her brother,
and the context in which the issues arise. I have described these factors above.
51 I also bear in mind that this is not a case where HMRC are seeking to appeal a decision of the
FTT in order to establish a point of principle, thereby exposing the taxpayer to a liability for costs.
52 I agree with HMRC that the general body of taxpayers should not be exposed to irrecoverable
costs in defending the Appellants’ appeal if it were unsuccessful. There are many cases where
taxpayers decide not to pursue an appeal because of the potential liability for costs in an unsuccessful
appeal. In my view, the general body of taxpayers would baulk at the suggestion that the Appellants
should be immune from a costs order where they are seeking to challenge a decision that the tax
planning arrangements entered into by PL to avoid IHT were ineffective.
53 Even if I assume that Mrs Pearce could not herself fund the likely costs of £20,000 plus VAT and
the appeal would then have to be withdrawn, I consider that the balance falls against granting a PCO.’
Conclusion
One must applaud the Appellant’s energy for ‘having a go’ at obtaining a PCO; but the decision illustrates that obtaining a PCO for a private Appellant, even one of modest means, is a tall order.