Earthshine Ltd v Revenue & Customs [2010] UKFTT 314 (TC)

FTT-Tax
Earthshine Ltd v Revenue & Customs
[2010] UKFTT 314 (TC) · 2010-07-07
[1]The hearing in the case took place 18 January – 2 February 2010, at the end of which it was adjourned as the evidence was not finished and neither party had made their final submissions. It had always been intended to adjourn for final submissions as the Court of Appeal was about to hear Mobilx Ltd & others, their decision in which was expected to be of significant relevance to this case. In the event, the last day of the hearing, 2 nd February, was spent on an application made by HMRC to admit late evidence rather than concluding the evidence as originally planned.[2]We reconvened on 7 th -9 th June to conclude the hearing of the evidence. At the end of hearing the evidence, we heard the Appellant’s application for costs of and consequential upon the application made by HMRC to admit late evidence. This is an interim decision solely on that application.[3]The Appellant’s application was for costs to be summarily assessed by us on an indemnity basis in the sum of £71,720. By the time of hearing the costs application, however, the parties had agreed that they did not want a summary assessment: they wished us to decide the general headings in respect of which the Appellant was (or was not) entitled to costs and for those costs then to be assessed by a costs judge. We agree that this is the most appropriate course of action: the claim is for a large sum of money and in respect of a complex matter. Counsel for the Appellant therefore asked this Tribunal to make an interim award of costs and he asked for one in the order of £40,000. Tribunal’s powers to award costs[4]As noted in paragraph 76 of our previous interim decision in this case ( Earthshine Limited [2010] UK FTT 67 (TC) ), on 18 th January we directed that for all purposes in this appeal the costs rule in Regulation 10 of the Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009 was disapplied and instead Rule 29 of the Value Added Tax Rules 1986 would apply. We therefore have discretion to make an award of costs in this case as Rule 29 provides:
“29(1) A tribunal may direct that a party or applicant shall pay to the other party to the appeal or application – (a) within such period as it may specify such sum as it may determine on account of the costs of such other party of and incidental to and consequent upon the appeal or application; or (b) the costs of such other party of and incidental to and consequent upon the appeal or application to be assessed by a Taxing Master of the Supreme Court…….”
HMRC’s position[5]HMRC conceded some costs were payable by them as a result of their application to admit late evidence. They had said this at the hearing on 2 February and repeated it before us in June. They conceded that they should pay the costs which were “thrown away” as a result of their application to admit late evidence. This was not an unfettered undertaking to pay all the costs claimed by the Appellant and indeed at the hearing Counsel for HMRC opposed the costs application in part: he opposed some heads of claim, and where he accepted the head of claim he opposed the quantum. The latter is, of course, a matter for the costs judge. Appellant’s position[6]The Appellant’s view was that all the costs claimed listed under the 6 heads of claim (below) were in principle payable because HMRC was at fault in failing to disclose the late evidence in the normal course of pre-hearing disclosure. Mr Green asked for the costs of and consequential to HMRC’s application to admit late evidence. Although he cited no authority for this proposition, he said that where a party is at fault the minimum position is that it has to bear the costs of any consequential application it has to make even if it wins that application.[7]The Appellant’s six heads of claim were:(1) Considering and dealing with the disclosed documents during the course of the hearing;(2) Preparing for and appearing at the Respondent’s application;(3) Considering the Tribunal’s Decision Notice;(4) Preparing rebuttal evidence by way of the further statements of Messrs Sharp and Knatchbull;(5) Preparing for and attending the hearing of this application notice;(6) Preparing for and appearing at the hearing of Messrs Sharp’s and Knatchbull’s further oral evidence. Should costs be awarded?[8]Although not bound by the Civil Procedure Rules (CPR) which governs the High Court, this Tribunal tends to follow its principles when exercising its own costs discretion. It provides in so far as relevant at Rule 44.3:
“(2) If the court decides to make an order about costs – (a) The general rule is that the unsuccessful party will be ordered to pay the costs of the successful party; but (b) The court may make a different order. (3) ….. (4) In deciding what order (if any) to make about costs, the court must have regard to all the circumstances, including – (a) the conduct of the parties; (b) whether a party has succeeded on part of his case, even if he has not been wholly successful; and (c) ….. (5) The conduct of the parties includes (a) conduct before, as well as during, the proceedings, …..”
[9]The normal rule is that costs follow the event. HMRC succeeded in their application and would therefore not normally expect to have a costs order made against them. However, they were at fault and they do not dispute this.[10]This Tribunal recognised this in its first Decision in Earthshine Limited . At paragraph 15 we said:
“[Mr Stone] agreed that he had been careless when misplacing the file. The Tribunal also finds that he did not make a great effort to locate the lost file: he admitted that once lost, he kept an eye out for it, but we find he did not undertake a systematic search.”
[11]At paragraph 72 we said:
“HMRC have had [the evidence] since 2006 and with the exercise of more diligence could have found it once it was lost (or even asked the police for more copies) and disclosed it before the hearing commenced. They are clearly at fault for both losing and not properly searching for the evidence. There is a lot of force in the view that HMRC should abide by its actions in not seeking to adduce this evidence at an earlier stage.”
[12]Although we found HMRC to be at fault, we did not find this on the particular facts of the case to be a sufficiently compelling reason to exclude the evidence. But HMRC’s conduct in this case we find is relevant to the question of costs. It seems right to the Tribunal that a party should get the additional costs incurred because the other party disclosed something late when they had it in their power to make a more timely disclosure.[13]HMRC did have the power to make a more timely disclosure: the late evidence comprised documents in HMRC’s possession but which were lost by being enclosed within an entirely unrelated file. A systematic and thorough search would have discovered them, and of course they should not have been misplaced in any event. Although Mr Stone’s misplacing of the documents is no different from the kind of mistake most human beings make at many times in their life and cannot be regarded as of a particularly serious order, nevertheless it is HMRC’s mistake and they and not the Appellant should be responsible for the costs incurred because of it.[14]We did consider that HMRC cannot be criticised for disclosing to the Appellant the documents late once it had been found: HMRC were clearly right to do this. They cannot be criticised, either, for applying to admit the evidence late: they have the right to do this: but they must live with the consequences of doing so.[15]We conclude that HMRC is right to concede that they should pay the costs incurred by the Appellant which were inevitably caused by the admission of the evidence late. The Appellant should have the costs “consequential” upon HMRC’s successful application. This comes down to a question of causation and we set out below which costs we find to be consequential.[16]The Appellant’s claim is not only for the “consequential” costs of the application but also for the costs “of” the application itself. They consider that HMRC’s fault in making late disclosure entitled them to the costs of the application itself.[17]HMRC considered their liability should be limited because, firstly, their application succeeded, and secondly, most of the day spent hearing the application was spent by the Appellant opposing it (and in particular the first few hours was spent on an unsuccessful application by the Appellant that the Tribunal should not read the evidence sought to be adduced).[18]Our view is that the costs of the application itself were not an inevitable consequence of HMRC making the application: the Appellant could have consented to the application and saved the Tribunal the hearing of the application on 2 February. We agree that it was proper for the Appellant to have opposed the application: but consider that having unsuccessfully opposed it, an Appellant should normally expect to pay the other side’s costs. They certainly cannot expect to have costs of the application awarded in their favour.[19]We see no reason why the normal rule that costs follow the event should not apply. We record that HMRC made it clear that they were not making an application for payment of their costs, but simply resisting an application for costs against them. But any party would have an uphill battle to persuade this Tribunal to award them the costs of an application which they lost. And we do not do so.[20]We also mention in passing that Mr Green considered it relevant that (to paraphrase) he almost defeated HMRC’s application. Paragraphs 72 and 74 of our first Decision Notice indicate that we found the arguments “very finely balanced”. However, we do not consider this relevant. The Appellant lost the application and that is what is relevant when making an order that costs should follow the event.[21]We therefore consider the Appellant to be entitled to the costs consequential upon the HMRC’s application to admit late evidence but not the costs of that late application. We set out below under the Appellant’s six heads of claim which costs we consider to be consequential and therefore, subject to an assessment of quantum by the costs judge, to be awarded to the Appellant. (1) Considering the disclosed documents during the hearing[22]HMRC conceded that they ought to pay these costs in principle. We agree. They are consequential: although had the emails been disclosed in a timely fashion they would have had to be considered in any event, it must have involved extra work having to consider them during the hearing.[23]We note that Mr Collins reserves his position on the quantum of the claim under this head (as on all the heads) and in particular the reasonableness of the costs claimed by the Appellant, but as recognised by HMRC, quantum is an issue for them to agree with the Appellant or dispute in front of the costs judge. (2) Preparing for and appearing at the Respondent’s application to admit late evidence[24]We agree with Mr Green, as we have said, that he should have the costs which were inevitably occasioned by the evidence being late. As we have said above, we do not consider that this includes the costs of preparing for and appearing at the application on 2 February as the Appellant could have consented to it. Nevertheless at the hearing HMRC conceded that they should pay the Appellant’s costs for time spent listening to HMRC put their application. This can be determined from the transcripts.[25]Even if we agreed with Mr Green in principle that he should have the costs of the application (which we don’t), we would not award him the costs of the time spent in his unsuccessful application that the Tribunal should not read the evidence before deciding whether to admit it. That was not part of HMRC’s application to admit the evidence and Mr Green was unsuccessful in it. (3) Considering the Tribunal’s Decision Notice[26]HMRC do not oppose the Appellant’s application for costs under this head, which they see as minor and distinct from the work which resulted from our Decision that the evidence should be admitted and which is claimed for under the 3 headings below.[27]We are not sure that this concession ought to have been made: it seems us that the work of considering this Tribunal’s first Decision Notice was not an inevitable consequence of HMRC making the application to admit late evidence: it was only an inevitable consequence of the Appellant opposing the application. Nevertheless, HMRC conceded this point so we are not called upon to decide it. (4) Preparing rebuttal evidence by way of the further statements of Messrs Sharp and Knatchbull[28]HMRC objected to this part of the costs application. Firstly, they considered that this work would have had to be done in the event that the email exchanges the subject of our first Decision Notice had been disclosed in a timely manner. Secondly, they considered that some of Mr Sharp’s further statement and evidence and all of Mr Knatchbull’s further statement was not rebuttal evidence in relation to the email exchanges at all.[29]We disagree with HMRC on their first objection. We think that this work was consequential upon the admission of the late evidence. Although we accept had the emails been disclosed in a timely fashion they would have had to be dealt with by the Appellant in the ordinary course of preparing for the hearing, nevertheless their separate disclosure during the course of the trial would have involved the Appellant in extra work.[30]On HMRC’s second objection, which is that some of the evidence adduced in rebuttal by the Appellant was not relevant to rebuttal, we make no decision at this point. Mr Collins thinks the evidence irrelevant: Mr Green does not. They are yet to make their final submissions in this case which will (we have been promised) include their submissions on the relevance of the evidence. We will not pre-judge what they say nor our final decision in this appeal.[31]We will therefore leave this head of claim to one side, for the parties to agree after the issue of the final decision in this appeal. If they cannot agree it after the issue of our final decision on the appeal, either party is at liberty to apply to this Tribunal for a determination on this aspect of the costs application. (5)Preparing for and attending the hearing of this application notice[32]The Appellant made five applications before the commencement of this adjourned hearing. They were: · To permit Mr Sharp and Mr Knatchbull to adduce one further witness statement each to deal with the email exchanges admitted by our first Decision Notice ; · To permit Mr Knatchbull to be recalled as a witness; · To direct that the cross-examination of Messrs Sharp and Knatchbull be restricted to matters arising from the email exchanges and in particular not be directed to matters in respect of which questions could have been asked at the hearing in January; · This costs application; · To strike out part of HMRC’s re-amended Statement of Case.[33]HMRC consented to the first two of these applications and so this claim is for time in preparing the application. Should the claim be allowed in principle? That depends on our answer to the claim for costs on Head 4 which we have “parked” until our main decision notice. This claim is likewise parked as per paragraph 31.[34]The third application was dealt with in discussion by Counsel before the hearing on 7 June. This is also therefore a claim for preparing the application: is it allowed in principle? Yes, we find it follows from the admission of the late evidence.[35]The fourth application was for the costs of this costs application: the application occupied the afternoon of 9 June. We find that it has been successful in part, and costs normally follow the event. Applying CPR 44.3 the Appellant is entitled to some but not all of the costs of the costs application, because it has only been successful in part. We award the Appellant a proportion of their reasonable costs of the costs application assessed on a standard basis: that proportion is to be the same proportion as the total costs actually awarded by the costs judge bears to their claim for costs of £71,720. (We note that when assessing this, the costs judge will need a figure for the costs of the costs application which we have awarded in order to carry out the calculation of the appropriate ratio: we rule that just for the purpose of this calculation of the correct ratio, the figure used should be the total of the reasonable costs assessed on the standard basis rather than the smaller amount actually awarded, as this cannot be known until after the calculation has been carried out.)[36]The fifth application divides into two parts. Mr Green applied for part of HMRC’s re-amended statement of case to be struck out. He also applied to us to make a determination on this strike-out application before hearing the evidence at the adjourned hearing on 7 th -9 th June. We ruled that on June 7 th that we did not need to decide this application before we heard the evidence. We have therefore reached no decision on the strike-out application itself and our decision on that will form part of our main Decision Notice.[37]On the normal basis that costs follow the event the Appellant should not be awarded the costs of the time spent on 7 th June making the unsuccessful application for us to decide his strike out application before hearing the evidence.[38]Whether the costs of preparing the strike out application itself are those which followed inevitably from the admission of late evidence (Mr Green says that they do) or whether it was an application which could have been made before the commencement of the original hearing (as Mr Collins says) would, in our view, require us to take a view on submissions which Mr Green and Mr Collins are yet to make on the evidence we have heard and on the strike out application itself. This is not appropriate. Therefore, as with the costs of the fourth head of claim, we will leave this to one side, for the parties to agree if they can after the issue of our final decision in this appeal whether these costs were ones which followed from the admission of late evidence. If they cannot agree it after the issue of our final decision on the appeal, either party is at liberty to apply to this Tribunal for a determination on this aspect of the costs application. (6) Preparing for and appearing at the hearing of Messrs Sharp’s and Knatchbull’s further oral evidence.[39]Mr Green’s view is that HMRC’s application to admit late evidence inevitably involved the Tribunal adjourning to finish hearing the evidence at a later date. This inevitably meant that the Appellant’s legal advisers had to spend quite some time reading themselves back into the case in preparation for the hearing of 7-9 June, which they would not otherwise have had to do.[40]Mr Collins for HMRC view is that he does not agree that we would have finished the evidence in the allotted time even had the application to admit late evidence not been made.[41]We have already said that we think the test is whether the admission of the evidence late, rather than on time, meant that the Appellant inevitably incurred costs that they would not otherwise have incurred. It is a question of causation.[42]So the first question is whether this adjournment to finish hearing the evidence would have happened even if HMRC had disclosed the evidence in the normal course of pre-hearing disclosure. That would have meant that the last day of the hearing, 2 February, would have been spent as planned hearing the evidence of Mr Stone, the last witness to be called. Back on 2 February Mr Green estimated his cross examination would take ½ a day (see paragraph 36 of our first Decision Notice). Mr Collins points out that in the event in June Mr Green cross examined Mr Stone for over 1½ days. We think, had we been able to go ahead with Mr Stone on 2 February knowing that he had only one day in which to cross-examine Mr Stone, Mr Green would have finished in that time. In the event his cross-examination expanded to fill one-and-a-half days because the time was there to fill. So had the evidence been disclosed in time, no adjournment to hear further evidence would have been necessary.[43]The second question is whether the late admission of the evidence made it inevitable that the hearing would be adjourned. We find that it did. We do consider that the time spent on 2 February on Mr Green’s unsuccessful opposition to the admission of the evidence should not be taken into account: Nevertheless we think Mr Green would have been entitled to have 2 February to cross examine Mr Stone and that he would have used all that time in so doing. As the admission of the late evidence meant inevitably this Tribunal would allow the Appellant to call evidence in rebuttal and in particular allow them to recall Mr Sharp, it follows that the hearing would inevitably have to have been adjourned to hear the late evidence.[44]Therefore, the Appellant should have the costs of its legal team reading itself back into the case and preparing for Mr Sharp to be recalled.[45]HMRC objects to the costs of preparing for Mr Knatchbull to be recalled as although (by consent) the Appellant was given leave to do this, on the same basis as they object to the costs of the preparation of his witness statement: they do not consider it relevant evidence in rebuttal. Therefore, this is another item of the costs claim which we are “parking” until after the final Decision in this appeal, for the same reasons as given for head 4 of the claim in paragraph 31. If the parties are unable to agree it after the final Decision Notice, either party is at liberty to apply to this Tribunal to make a determination.[46]The second part of the sixth head of costs applied for is appearing at the adjourned hearing. We have found that the admission of late evidence made it inevitable the Tribunal would have adjourned to sit again to hear Mr Sharp. This took approximately 2 hours. Mr Knatchbull gave no oral evidence at the adjourned hearing. The reason we heard Mr Stone’s evidence at the adjourned hearing was that the day on which we should have heard him, 2 February, was spent on the Appellant’s unsuccessful opposition to HMRC’s application. We therefore do not allow the costs of the main part of Mr Stone’s cross-examination. However the late admitted evidence did mean that Mr Green had extra questions for Mr Stone. Taking this into account we think that the admission of the late evidence made it inevitable that the Tribunal would adjourn to sit an extra day. The Appellant should have the costs of its appearance for one day. Indemnity costs[47]The Appellant also claimed that the costs should be paid on an indemnity basis. Mr Green put forward a number of reasons for this which we summarise as: · The conduct of HMRC; · The inference Mr Green draws from Blue Sphere that indemnity costs should be used to recompense an Appellant where evidence is admitted late. Conduct of HMRC[48]Mr Green cited the Court of Appeal Excelsior Commercial & Industrial Holdings Limited v Salisbury Hammer Aspden & Johnson (a firm) & others [2002] EWCA Civ 879 that an award of costs on an indemnity basis was appropriate where the facts of the case or the conduct of the parties was such as to take the situation out of the norm.[49]HMRC opposed the application for indemnity costs. Mr Collins referred me to the Court of Appeal decision in the case of Kiam v MGN Limited [2002] 1 WLR 2810 . Simon Brown LJ said at paragraph 12:
“I for my part understand the court there to have been deciding no more than that conduct, albeit falling short of misconduct deserving of moral condemnation, can be so unreasonable as to justify an order for indemnity costs. With that I respectfully agree. To my mind, however, such conduct would need to be unreasonable to a high degree; unreasonable in this context certainly does not mean merely wrong or misguided in hindsight.”
HMRC did not consider that this case fell into that category.[50]Mr Green said that HMRC should pay indemnity costs because they were at fault. We have already discussed the issue of fault at paragraphs 9-15. HMRC lost and failed to search for the documents. Mr Green also made the point that HMRC have a high duty of disclosure. By this we take him to mean that not only should HMRC disclose under the Tribunal rules all documents on which they intend to rely but all documents which are relevant to the case. HMRC did not dispute this. HMRC are at fault for failing to disclose these emails before the hearing.[51]We do not agree that it is misconduct such as to justify an order for indemnity costs. Accidentally misplacing does not seem to us to be deserving of moral condemnation or unreasonable to a high degree. Failing to disclose the existence of documents might in some cases justify an award of indemnity costs (or a worse sanction) but on the facts of this case, it is not sufficiently serious to justify indemnity costs. Firstly, a passing reference to the existence of the evidence was made in Mr Stone’s second Witness Statement. The Appellant could have asked for full disclosure having read this Witness Statement but they chose not to do so. Such an application would have forced HMRC to make a more thorough search for the lost documents. Secondly, the evidence was not seen by the Appellant as assisting their case: they opposed its admission at length in the hearing of 2 February. Judging by this opposition, this was not a case of HMRC failing to disclose information seen by the Appellant as helpful to its case. Thirdly and most importantly, the emails which were the subject of the late admission application were well known to the Appellant as its principle shareholder and director either wrote them or received them. It is a little odd for the Appellant in these circumstances to criticise HMRC for not disclosing them. Indemnity costs as compensation[52]Mr Green also referred me to Judge Wallace’s decision in Blue Sphere Global Ltd [2008] UKVAT V20694 (29 May 2008) in which the Tribunal refused to allow HMRC to make a late amendment to their Statement of Case to allege fraud. In that case Judge Wallace ruled that (paragraph 39) “I do not consider that any prejudice to the appellant can be compensated for in costs” Mr Green submitted that this was the appropriate “backdrop” to this case and a reason why we should award costs on an indemnity basis.[53]We cannot agree. Firstly, the Blue Sphere case was quite different: because costs would not be an adequate recompense to allowing a late amendment to a Statement of Case which would inevitably lead to the trial date being put back and the Appellant possibly losing legal representation, Judge Wallace ruled that the amendment could not be made. On the contrary in this case, we ruled in favour of HMRC’s application to admit the late evidence (for the reasons as explained in our first Earthshine Limited Decision Notice). Secondly, we did not rule in HMRC’s favour because we thought costs would be an adequate recompense for the trial date being set back: on the contrary we found that the trial date had already been disrupted and was therefore not a consideration in deciding whether or not to admit the evidence (see paragraph 36 of our first Decision Notice). Thirdly, Blue Sphere did not in any event consider indemnity costs and we do not agree that the Judge’s reasoning in that case is a reason to award indemnity costs in this case.[54]The Appellant’s point seems to be that Blue Sphere is authority that costs should be used to compensate the Appellant where evidence is admitted late. We agree in that we have already held that in this case (see paragraph 15) that because HMRC was at fault the Appellant should have its consequential costs on the admission of the late evidence. It therefore follows that those costs should only be indemnity costs where the fault was either deserving of moral condemnation or of a high degree of unreasonableness, as set out in Kiam (above). We have already decided that that is not the case here.[55]We do not award indemnity costs. Interim costs[56]HMRC did not oppose in principle the application for an interim award of costs but they did oppose the figure of £40,000 put forward by Mr Green. This, he pointed, out was more than half of his best case scenario. They thought an appropriate award would be of “a few thousand pounds”.[57]We agree in principle that as the Appellant must wait for the determination of the costs judge, an interim award of costs should be made. The problem for us is not pre-empting the costs judge’s determination. We have refused the claim for indemnity costs and refused some of the heads of claim. The Appellant will not recover the claimed amount. We award £5,000 as an interim payment. Directions[58]We direct as agreed at the hearing and in substitution for Directions (5) and (6) of the Directions given in the first Earthshine Limited decision notice as follows:(1) A two day hearing to conclude this case shall be listed provisionally on 8 th and 9 th November 2010. At that hearing, HMRC shall make their submissions, to be followed by the Appellant making their closing submissions. HMRC shall have a right of reply on a point of law and the Appellant a right to respond to that;(2) The Appellant’s application dated 28 May 2010 for strikeout of part of the Respondent’s Statement of Case will be heard as part of this hearing;(3) Counsel for the Appellant to notify the Tribunal and the Respondent no later than 17 th September whether he is available on the provisional dates for the hearing. If not, he is to provide new dates to avoid, and Counsel for HMRC must do likewise.(4) The Respondents shall serve on the Appellant and the Tribunal written submissions in closing no later than 7 weeks before the date of the adjourned hearing;(5) The Appellant shall serve on the Respondents and the Tribunal written submissions in closing no later than 3 weeks before the date of the adjourned hearing;(6) Liberty to apply.(7) Liberty to apply after our final Decision Notice has been issued for this Tribunal to determine those costs payable under those parts of heads (4),(5), and (6) as mentioned above which are being put to one side pending our final Decision.[59]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: 7 July 2010