Waller v Revenue & Customs [2010] UKFTT 141 (TC)

FTT-Tax
Waller v Revenue & Customs
[2010] UKFTT 141 (TC) · 2010-09-27
[1]By an application dated 28 May 2010 the Appellant (“Mr Waller”) applied for an award of costs to be ordered in his favour against the Respondents (“HMRC”) in connection with his appeal proceedings. Background[2]Mr Waller is a self-employed London taxi driver. On 20 June 2007 HMRC opened an enquiry into his self-assessment income tax return for the tax year 2005-06, pursuant to s 9A Taxes Management Act 1970 (“TMA”). The enquiry continued until 18 November 2008 when HMRC issued a closure notice pursuant to s 28A TMA, and also issued discovery assessments pursuant to s 29 TMA relating to income tax and NIC. The tax years covered were 1997-98 to 2006-07. On 9 and 16 December 2008 Mr Waller’s accountant appealed to HMRC against the assessments, and also elected for the appeals to be brought before the Special Commissioners (s 46 TMA refers). On 3 February 2009 HMRC also issued a penalty determination; this was appealed on 10 February 2009, again with an election for the appeal to be brought before the Special Commissioners.[3]On 22 January 2009 Mr Waller’s accountant notified Mr Waller’s appeals to the Special Commissioners. On 2 April 2009 HMRC wrote to the Special Commissioners (who in fact had ceased to exist on 31 March 2009 – see below) stating, “… please be advised that [HMRC] now regard the issue for determination is agreed.” The parties agreed that all the assessments and penalty determinations were withdrawn. As already recited, on 28 May 2010 Mr Waller applied for an order of costs. Jurisdiction[4]The jurisdiction of the Special Commissioners to award costs was a limited one, contained in Rule 21 of the Special Commissioners (Jurisdiction and Procedure) Regulations 1994 (SI 1994/1811), which so far as relates to England & Wales states:
“21 (1) Subject to paragraph (2) below, [the Special Commissioners] may make an order awarding the costs of, or incidental to, the hearing of any proceedings by it against any party to those proceedings (including a party who has withdrawn his appeal or application) if it is of the opinion that the party has acted wholly unreasonably in connection with the hearing in question. (2) No order shall be made under paragraph (1) above against a party without first giving that party an opportunity of making representations against the making of the order. (3) An order under paragraph (1) above may require the party against whom it is made to pay to the other party or parties the whole or part of the costs incurred by the other party or parties of, or incidental to, the hearing of the proceedings, such costs to be taxed if not otherwise agreed. (4) Any costs required to be taxed pursuant to an order under this regulation shall be taxed in the county court according to such of the scales prescribed by rules of court for proceedings in the county court as may be directed by the order or, in the absence of any such direction, by the county court.”
[5]On 1 April 2009 The Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009 (SI 2009/56 ) abolished the Special Commissioners (article 4) and transferred their functions to the First-tier Tribunal (article 3 and schedules 1 & 2). Schedule 3 of that Order contains transitional provisions, under which Mr Waller’s appeals to the Special Commissioners constitute “current proceedings” for the purposes of schedule 3. Paragraph 6 of schedule 3 states, “Any current proceedings are to continue on and after [1 April 2009] as proceedings before the [First-tier Tribunal].” Paragraph 7(7) of schedule 3 states, “An order for costs may only be made if, and to the extent that, an order could have been made before [1 April 2009] (on the assumption, in the case of costs actually incurred after that date, that they had been incurred before that date).”[6]Proceedings before the Tax Chamber of the First-tier Tribunal are governed by The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (SI 2009/273). Rule 10 of those Rules gives the power to make an award of costs in certain circumstances. Those circumstances are wider than those relevant to an order for costs under Special Commissioners’ Rule 21. Therefore, because of the paragraph 7(7) limitation in relation to current proceedings, this Tribunal cannot order any costs in satisfaction of Mr Waller’s application that could not have been made by the Special Commissioners under their Rule 21. The requirements of Rule 21[7]Rule 21(1) imposes two conditions for an award of costs to be possible. First, the costs must be “costs of, or incidental to, the hearing of any proceedings”. Secondly, the Tribunal must be “of the opinion that the party has acted wholly unreasonably in connection with the hearing in question”.[8]Park J in Gamble v Rowe [1998] STC 1247 stated (at 1257):
“There are two particular restrictive aspects of the wording to which I should draw attention. The first is that the party concerned must act 'wholly unreasonably'. It will be a very rare case where a tribunal can say that a party has acted wholly unreasonably. It is not enough to be able to say that from time to time there has been unreasonableness. The party must act wholly unreasonably—a very exacting standard. The second restrictive point is that the party must act wholly unreasonably 'in connection with the hearing in question'. The commissioners may or may not take the view that the party concerned acted unreasonably or wholly unreasonably at some earlier stage in the history of the tax affairs of the person in question. But if that earlier stage was before the matter was either before the commissioners and being heard or was being prepared for a hearing before the commissioners, they have no power to award costs.”
[9]These issues were also considered by the Special Commissioners in Carvill v Frost [2005] STC (SCD) 208. Although that decision is not binding on the current Tribunal, I am in complete agreement with the views expressed there and so quote without paraphrasing. At 214:
“11. … the draftsman [of Rule 21] has, by using the expression 'the costs of and incidental to the hearing of the proceedings', been careful to confine costs to those incurred while the Special Commissioners have jurisdiction over the appeal. Costs incurred in the earlier stages of the appeal proceedings, ie while the appeal is being dealt with by the officer of the Board cannot qualify for an award. The expression 'costs of, or and incidental to, the hearing of any proceedings' imposes a further qualification. It will not, as Park J observed in Gamble v Rowe , cover any costs that in some way arise during the period when the Special Commissioners have jurisdiction. They have to be costs incurred while the matter is before the Special Commissioners and the matter is being heard or prepared for a hearing. It follows that if, as here, the appeal hearing has not taken place, the costs will nonetheless qualify for an award (always so long as they satisfy both the Gamble v Rowe test and the 'wholly unreasonable' test). That construction makes sense of the words in brackets in [Rule] 21(1). 12. … We come therefore to the question whether the Revenue have acted 'wholly unreasonably'. In Gamble v Rowe , Park J observed that it 'will be a very rare case where a tribunal can say that a party had acted wholly unreasonably' he went on to say that the 'party must act wholly unreasonably—a very exacting standard'. 13. Cases where the Special Commissioners have awarded costs are extremely rare. The Revenue almost never ask for costs. … 14. We take the phrase 'wholly unreasonably' as we find it, observing only than that the word 'wholly' has been used in an emphatic sense.”
The HMRC Enquiry[10]Mr Gordon for Mr Waller submitted:(1) The HMRC enquiry was deeply flawed from the outset. Because Mr Waller ran a cash business with few records, the Inspector leapt to the incorrect conclusions that the records were unreliable, that takings had been understated, and that profits needed to be revised for the past eleven years.(2) Calculations based on diesel usage were made on an incorrect basis looking at day-by-day purchases rather than a longer representative period. The Inspector had used statistics available to HMRC in a “tactical information package” which Mr Waller had obtained, in a redacted form, under a Freedom of Information Act request. Although the Inspector had stated the fuel-to-takings ratio was not tenable, in fact it was entirely in line with the figures in the tactical information package. Also, figures quoted by the Inspector for average traffic speeds in London were not in accordance with those stated in the tactical information package.(3) The Inspector used a business economics exercise to produce alternative figures for takings and profit but these took no account of data provided by Mr Waller’s accountant. The result was a significantly higher profit figure. The corrections provided by Mr Waller’s accountant showed that necessary corrections produced figures within only a small margin of error from those originally submitted.(4) Mr Waller did not work weekends but had on a single occasion made a mistake on his mileage log which showed trips on a Sunday instead of on a Monday. The Inspector had decided there was a pattern of undeclared weekend takings, without listening to Mr Waller’s explanation.(5) The only other records error was an underdeclaration of fuel purchase, which the Inspector had interpreted as evidence of undeclared mileage and therefore takings.(6) Mileage evidence was corroborated by an odometer reading taken when new tyres were purchased but the Inspector ignored this.(7) The approach of the Inspector and his superior was to refuse to accept any alternative proposals that did not amount to an admission of underdeclared profits. When calculating a penalty, the Inspector regarded Mr Waller as being unco-operative merely because he exercised his right to lodge an appeal against the assessments.(8) Mr Waller’s decision to call for a closure to the enquiry was justified, as was his decision to pursue appeals before the Special Commissioners, and to take expert advice on those proceedings.[11]Mrs Parslow for HMRC explained that after the appeals were notified to the Special Commissioners by Mr Waller’s accountant on 22 January 2009, the Special Commissioners’ office on 28 January telephoned HMRC to ascertain who would be dealing with the appeals and, as was standard practice at that time, the file was referred to the specialist appeals unit. The Special Commissioners issued standard case management directions on 11 February 2009; the deadline for HMRC to comply with those directions was 5 April 2009. At the specialist appeals unit Mrs Parslow herself reviewed the file. On 13 March 2009 she wrote to her colleagues advising that the appeals should not be litigated. That letter was another document obtained in a (mildly) redacted form by Mr Waller under his freedom of information request; Mrs Parslow very properly included a full version in her bundle for this hearing. In the letter Mrs Parslow made a number of actual or implied criticisms of the enquiry, from the point of view of an HMRC officer experienced in litigation of tax appeals. She stated, “If the [fuel costs] correction were made so that the figures on the vouchers were used it would have the effect of reducing the profit but it would still leave the fuel to takings ratio within an acceptable parameter.” “The inference you have sought to make is that this understatement relates to a culpable omission of takings and you have supported that inference by reference to the absence of the primary takings record. Unfortunately, there is no corroborative evidence to support your inference.” “… it seems that no attempt has been made, indeed it is not possible from the information held, to prepare a means test or capital statement.” “I realise you will not find it comfortable for me to say so, but I am afraid that the computations you have prepared are inference based on an inference.” “I am concerned that if the case proceeds to hearing and the decision of the Special Commissioners is that the additions are for the enquiry year only in an amount already tendered by the accountant that we will have acted wholly unreasonably and will be liable to a costs action.” Mrs Parslow even questioned whether the work undertaken in the enquiry had resulted in any discovery within s 29 TMA – a fundamental issue in any properly conducted enquiry. She concluded, “… for all of the above reasons, I do not consider this case to be fit for litigation.” Submissions on whether costs are available[12]Mr Gordon for Mr Waller submitted:(1) The conduct of the enquiry was so fundamentally flawed that HMRC’s behaviour during the enquiry colours their conduct thereafter. HMRC’s conduct during the investigation was a relevant consideration in relation to Rule 21.(2) Mr Waller was entitled to bring matters to a head by calling for a closure notice, appealing against it (and the discovery assessments and the penalty determination), and instructing his advisers to prepare for the expected Special Commissioners’ hearing. HMRC were at that stage warned that Mr Waller would be incurring costs in preparing for the litigation. To allow a situation where HMRC could withdraw without disadvantage at directions stage could encourage brinkmanship.(3) Mr Waller had also pursued HMRC’s formal complaints procedure and had been offered an award of compensation, but this covered only the period up to late October 2008 when Mr Waller effectively invoked the formal appeals mechanism by calling for a closure notice.(4) Mr Gordon accepted that any award of costs could be in relation only to the period 22 January 2009 to 2 April 2009, that being the period when the appeals were before the Special Commissioners (and, for the last few days, the successor Tribunal).(5) In Scott and another (trading as Farthings Steak House) v McDonald [1996] STC (SCD) 381 the Special Commissioner was especially critical of the Inland Revenue (as then was) pursuing an unreasonable business economics exercise; also of ignoring credible alternative explanations provided by the taxpayer. Costs of preparing for the hearing were awarded. Although in that case there had also been a finding of bad faith by the Inland Revenue, that was not a necessary condition for the award of damages in a case, such as Mr Waller’s, which was otherwise on similar grounds. Further, the correspondence from HMRC during the enquiry made reference to lack of credibility of information provided; that undermined the honesty of Mr Waller and his accountant.(6) In Carvill v Frost (cited above) HMRC advanced and then withdrew a weak case, and were ordered to pay costs on account of their unreasonable behaviour.(7) Hannigan (cited below by Mrs Parslow) was different from the current case in that it concerned the exercise of an NIC concession by HMRC. Those circumstances were not comparable to assessments raised following an enquiry.[13]Mrs Parslow for HMRC submitted:(1) Mrs Parslow agreed that the only period in issue for the purposes of Rule 21 was 22 January 2009 to 2 April 2009.(2) Mrs Parslow accepted that no further information had been made available to HMRC between the appeal being notified to the Special Commissioners (22 January 2009) and her review of the file in the specialist appeals unit. In other words, her decision to recommend on 13 March that litigation be abandoned was based entirely on the information on the file at 22 January.(3) In her letter dated 13 March Mrs Parslow invited her colleagues to discuss the matter with her and they did have a discussion. Both Mr Waller and the Tribunal were informed on 2 April of the decision to withdraw the assessments.(4) As was clear from Mrs Parslow’s letter to her colleagues, HMRC accepted that the enquiry might have been misguided; however, redress for that was available through the formal complaints process, which had indeed been pursued in this case. That process was confined to pre-proceedings matters and so events after October 2008 were excluded.(5) HMRC had not acted unreasonably in relation to the Special Commissioners’ proceedings. On the contrary, HMRC had acted promptly in performing an internal review of the file; also in informing the taxpayer and the Tribunal of their decision; and had done so in accordance with the time limits set down by the case management directions issued by the Special Commissioners. Mrs Parslow submitted that if HMRC had progressed the case to hearing then that would have been unreasonable, and she had raised that caution in her letter to her colleagues. But that had not happened; HMRC had acted reasonably by deciding in a timely manner not to pursue the litigation.(6) Farthings Steak House was an exceptional case in that it involved a finding of actual bad faith by Inland Revenue in pursuing the enquiry. The current case was entirely different and the Tribunal could not be guided by the outcome in relation to costs in Farthings .(7) In the recent Tribunal decision of Joseph Hannigan v HMRC [2010] UKFTT 141 (TC) there was a refusal to grant an award of costs where HMRC withdrew from proceedings soon after having reviewed the case upon notification of the appeal. That was in accord with the facts of the current case. Consideration and Decision[14]Rule 21 requires me to consider HMRC’s actions in the period in which the appeals were before the Special Commissioners, which is agreed to be 22 January 2009 to 2 April 2009, so as to determine whether those actions were wholly unreasonable. I deal first with the following case law (none of which is binding on this Tribunal) that was cited to the Tribunal.[15]In Farthings Steak House (cited above) there was an award of costs against the Inland Revenue; that was a case where the appeal did proceed to a hearing. The Special Commissioner was highly critical of Inland Revenue:
“Turning to the question of honest and bona fide belief, I have come to the conclusion that such belief was not held by the inspector of taxes.”
Those criticisms extended to the evidence presented at the appeal hearing. On costs the Special Commissioner concluded:
“I find that the Revenue has acted wholly unreasonably in connection with this hearing, having shown bad faith. However, I do not accept [the taxpayers’ representative’s] view that such costs should cover the period from the date of the appeals. The regulation speaks of costs of, or incidental to, the hearing, not in relation to the appeals. Therefore, for example, the costs of preparation for the hearing are allowable but not the long drawn out pretrial negotiations.”
I conclude that Farthings is of very limited assistance to me in this case, as it concerned an appeal where the unreasonable behaviour continued into the hearing of the appeal, and involved actual bad faith by the Inland Revenue.[16]I have already cited some passages from Carvill v Frost . The facts of that case were quite involved; the enquiry related to overseas employment arrangements. The appeals were notified to the Special Commissioners in March 2000; there were several interlocutory hearings and issues of sets of directions; the Inland Revenue changed their position at least once; the taxpayer asked the Inland Revenue to conduct an internal enquiry into the conduct of the case; the Inland Revenue withdrew in December 2003, before any substantive hearing. The Special Commissioners stated (at 228):
“There is also the Middleton Enquiry. Slaughter & May took the serious step of writing to the Chairman of the Board of Revenue after [one of the interlocutory decisions] and after the Sch E appeals were transferred to the Special Commissioners. They set out at length detailed concerns about the conduct of the various proceedings against Mr Carvill and specifically questioned the validity of the Sch E assessments. At the highest level, therefore, the Revenue were put on notice that there were serious grounds for challenging their case. Had the Revenue, in response to that and the subsequent letters from Slaughter & May, carried out a thorough and objective analysis of the basis of the Sch E assessments (and that, in our view, is what Mr Carvill could reasonably have expected in all the circumstances and history of his case), the conclusion would have been reached then, rather than in December 2003, not to defend Mr Carvill's appeal against the Sch E assessments. [Counsel for Inland Revenue] told us that it was no part of our role in a costs application to look into the internal workings of the Revenue and examine the nature and extent of an internal review; if the taxpayer has a claim for administrative or other failing then that must be pursued elsewhere. It seems to us, however, at least in the circumstances of this case, that where we are required to determine the reasonableness or otherwise of the Revenue's conduct in pursuing a case from which it eventually decided to withdraw, internal action, such as the adequacy or otherwise of a review of the issues on which the Revenue's case is founded and which is carried out whilst the appeal is within the jurisdiction of this Tribunal, is directly relevant to the findings we are required to make as to the Revenue's conduct.”
I agree that the “internal action” of HMRC is relevant but the facts in Carvill are very different from the current case. Here the time from notification of the appeals to the Special Commissioners (22 January) to withdrawal (2 April) was ten weeks, compared to 197 weeks in Carvill .[17]The current facts are more akin to Hannigan (cited above). There the delay between notification and withdrawal was nine weeks.

The Judge stated (at paragraph 10):

“Has Mr Hannigan satisfied me that HMRC have acted wholly unreasonably in relation to the hearing on that appeal or in the preparation for that hearing? The answer is no. In my judgment the review that was undertaken by HMRC following Mr Hannigan’s appeal on 30 March 2009 was carried out without delay, and HMRC acted wholly reasonably at that stage in agreeing by concession to withdraw their claim in respect of the NICs. This is a case very far removed from the facts of Carvill v Frost , to which I have referred earlier, and on which Mr Hannigan sought to rely. In that case the Special Commissioners held that there should have been a review of the appeal assessments at the time the appeal was referred to the Special Commissioners. Instead the Revenue had allowed matters to drift on and had fought a number of preliminary hearings. Here, by contrast, HMRC did carry out an immediate review and withdrew the NICs claim in timely manner. That was wholly reasonable.”
I note Mr Gordon’s point that Hannigan concerned the exercise of a concession by HMRC, rather than assessments raised following an enquiry, but the Judge’s comments regarding HMRC’s immediate review without delay reflect my own views on the reasonableness of HMRC’s behaviour.[18]I do not accept Mr Gordon’s submission that HMRC’s behaviour prior to proceedings must be taken into consideration as colouring their actions after that point. I am required to look solely at HMRC’s actions in the period in which the appeals were before the Special Commissioners (which is agreed to be 22 January 2009 to 2 April 2009) – that is clear from the comments of Park J in Gamble v Rowe (see paragraph 8 above). Mrs Parslow had completed her review of the file by 13 March, when she wrote to her colleagues. That was less than two months after notification, which I consider to be reasonable. The withdrawal (on 2 April) was three weeks later, which I again consider is reasonable. Accordingly, I do not find that HMRC’s actions in the relevant period were “wholly unreasonable” as required by Rule 21.[19]While I do sympathise with Mr Waller that he is left bearing professional fees in relation to proceedings that he would surely have won had they continued to hearing, Rule 21 does not adopt the “loser pays” costs shifting rule applicable in most civil litigation. Instead Rule 21 imposes a special rule that is restrictive in its ambit.[20]For the reasons stated above, the application is refused .[21]Having refused the application, I do not need to address the further point raised by the parties, as to whether an award of costs should be on the standard basis or the indemnity basis. Right of appeal[22]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. TRIBUNAL JUDGE RELEASE DATE: 27 September 2010