“28. Where one is dealing with the losing party's conduct, the minimum nature of that conduct required to engage the court's discretion would seem, except in very rare cases, to be a significant level of unreasonableness or otherwise inappropriate conduct in its widest sense in relation to that party's pre-litigation dealings with the winning party or in relation to the commencement or conduct of the litigation itself. … in each case in which the costs of the whole litigation are under consideration, the conduct adversely criticised must be looked at in the context of the entire litigation and a view taken as to whether the level of unreasonableness or inappropriateness is in all the circumstances high enough to engage such an order.” 18. The reference to “pre-litigation dealings” would doubtless encompass compliance in civil procedure with any pre-action protocols which have no equivalent in tax tribunal procedure. However, I accept that the respondents conduct prior to an appeal to the tribunal is relevant in the context of the present application (see Judge Berner in Curran v HM Revenue & Customs[2012] UKFTT 655 (TC) at [16]. I must consider all the circumstances. 19. The appellant’s case is that the respondents’ conduct of the appeal is outside the norm and has been unreasonable to a high degree. In particular Ms Brown submitted as follows: (1) In the normal course specialist officers of the respondents should have considered the merits of the Assessments at the time they were issued, when the statutory review took place and when the appeal was lodged with the tribunal. At the time the appeal was lodged specialist legal advice should have been taken. Reliance was placed on Carvill v Frost [2005] SCD 208 . (2) PwC had provided a detailed explanation of the circumstances in which the supplies were made. This included a description of how the factual and commercial realities differed from the written terms and conditions on which property guardians occupied the properties, together with supporting documentary material. (3) The respondents should have used their wide powers of investigation to elicit facts and evidence at the time of raising the Assessments rather than waiting until witness statements were provided in the appeal process. An analogy was drawn with the position in relation to closure notices described in Steven Price v HM Revenue & Customs[2011] UKFTT 624 (TC) . 20. In essence, Ms Brown’s submission was that the respondents’ failure to address the evidence until a very late stage in the proceedings amounted to unreasonableness to a high degree taking the case outside the norm. It was not the case that the respondents did not have the relevant evidence until the witness statements were served. The material provided in the appellant’s witness statements by way of documentation and explanation had previously been provided by PwC in 2016 or was simply further examples of the same type of material. 21. Before considering Ms Brown’s submissions, I should set out the circumstances in which the respondents came to withdraw the Assessments, as described by Mr Singh. The respondents obtained advice in conference with Mr Singh on11 April 2018 . His advice was as follows: (1) In finding whether the appellant’s supplies constituted the letting of immovable property the tribunal would treat the contractual documentation as the starting point and then consider whether the position established by the contracts represented the economic reality. In doing so, the tribunal would place weight on the appellant’s witness evidence as to what happened in practice. (2) It was clear from Mr de Neve’s evidence that property owners authorised the appellant to grant the right to occupy their properties to property guardians. Whilst the licences granted indicated that property guardians did not have exclusive use or enjoyment of any part of the premises, the evidence of Mr de Neve was that in reality the property guardians did have exclusive use of part of the premises. That evidence was corroborated by the evidence of Mr Westley. (3) The tribunal was likely to accept that the arrangements were a letting of immovable property and the appeal was therefore likely to succeed. 22. Following the conference, based on Mr Singh’s advice and in accordance with the respondents’ litigation settlement strategy, the respondents decided to withdraw the Assessments. They notified the appellant on24 April 2018 . 23. Ms Brown suggested that by referring to Mr Singh’s advice the respondents must be taken to have waived privilege in that advice. In her written submissions she reserved the right to seek disclosure of the advice. In the event no application for disclosure was made. Whilst recognising that I do not have the full context in which the advice was given, I accept Mr Singh’s description of his advice at face value. 24. The initial correspondence from PwC was dated12 April 2016 and gave a detailed description of the Appellant’s business and the supplies in question, including the way in which properties were occupied by property guardians in practice. Relevant documents supporting what was said were annexed to the letter. HMRC already had copies of written licence agreements. PwC also set out in detail by reference to case law their legal arguments in favour of the exempt treatment adopted by the Appellant. There was no response to that letter before the first assessment was made, apparently on10 May 2016 . A response to the letter was sent on26 September 2016 following a review of the position by HMRC’s policy section. The response appears to have been limited to the contractual documentation and confirmed the assessments. It did not address PwC’s description of what happened in practice and I accept it ought to have done so. 25. PwC replied on22 November 2016 seeking a review of the decision to confirm the assessment. Again, this was a detailed letter referring to the commercial reality of the arrangements with further supporting documents. In particular it was asserted that HMRC’s decision ignored the facts and commercial realities of the transactions and was based only on the contracts. 26. The review decision is dated5 January 2017 . It set out the basis of the assessment, the arguments raised by PwC and expressly states that the reviewer has taken into account both the written contracts and the reality of the arrangements. The reviewer concluded that the supplies were standard rated and subject to a slight amendment the assessment was confirmed. Shortly afterwards the second assessment was made. 27. Notice of appeal to the tribunal was lodged on3 February 2017 . The grounds of appeal were (1) that the appellant did not have sufficient interest in the properties to grant any interest to the property guardians, and (2) any interest granted to the property guardians did not satisfy the requirements for exemption. The appellant subsequently amended its grounds of appeal to add a ground asserting that the decision to refuse exemption breached the principle of fiscal neutrality. 28. HMRC’s statement of case was served on2 November 2017 and an amended statement of case to address fiscal neutrality was served on24 January 2018 . The amended statement of case set out the issues in relation to the three grounds of appeal. In relation to the second ground of appeal the statement of case focussed on the terms of the licence agreements and made no mention of commercial reality. I accept it ought to have done so. 29. The witness statement of Mr de Neve dated22 February 2018 set out background to the appellant’s business and gave detailed evidence as to how the arrangements worked in practical terms. It included a video which was on the appellant’s list of documents but which had not previously been provided to HMRC. Mr Westley’s witness statement dated12 February 2018 set out the circumstances in which he occupied various properties at various times as a property guardian. 30. Mr Singh referred me to the written licence agreements. It was not disputed that if the written licence agreements were looked at in isolation then the supplies made to property guardians would not meet the conditions for an exempt supply. He submitted that the two issues which formed the appellant’s original grounds of appeal were not straightforward. If they had been, then he submitted that the appellant would have applied to bar the respondents from taking further part in the proceedings under Tribunal Rule 8(3)(c) on the basis that there was no reasonable prospect of defending the appeal. Mr Singh pointed out that there had been no such application by the appellant. In theory Mr Singh is right, but I do not accept that the absence of such an application weakens the appellant’s submissions. I must consider those submissions on their merits. 31. Mr Singh emphasised the nature of the advice the respondents had received following service of the appellant’s witness statements. That advice was not that the respondents would lose the appeal, but that it was likely they would lose. In particular it was likely that the appellant would persuade a tribunal that the appellant had a right to grant licences to the property guardians and despite the written licence agreements that the property guardians had exclusive possession for the purposes of exemption. 32. Mr Singh accepted that in substance there was nothing in the witness statements which had not been described previously in the PwC correspondence and the documents annexed thereto. 33. The question I must decide is whether the respondents ought to have realised much earlier that the tribunal was likely to allow the appeal and withdrawn the assessments, and whether that amounts to unreasonable conduct to a high degree so as to justify an order for indemnity costs. In doing so, I must be cautious to avoid reliance on the benefit of hindsight. Ms Brown accepted that the mere fact the respondents had capitulated was not sufficient to justify indemnity costs. However, she submitted that the reason for the capitulation in this case was evidence which had been available to the respondents since 2016. 34. Mr Singh relied on Arcadia Group Brands Ltd for a submission that even persisting to trial with a hopeless case would not necessarily give rise to an indemnity costs order. The other party would have their remedy of costs on the standard basis. In my view much will depend on the circumstances in which a party persists to trial and there is no general rule. Suffice to say that in this case there is no suggestion of any ulterior motive on the part of the respondents. I do accept that advancing a case which is difficult or ultimately unlikely to succeed is not a sufficient reason for an award of indemnity costs. 35. At the heart of the appeal was the view that should be taken of the commercial reality of the arrangements with property guardians. That is very much a value judgment and from the evidence I have seen different people could reach different conclusions. In the review letter an officer addressed his mind to the commercial reality of the arrangements. I do not consider that HMRC should be criticised for maintaining the Assessments at that stage, or indeed when the appeals were lodged. The decision in a case such as this is rarely cut and dry. Mr Singh’s advice was not that the respondents would lose the appeal, but that it was likely that they would lose the appeal. It could not be suggested that the respondents’ case was hopeless. 36. Mr Singh did not accept that HMRC should have withdrawn the decisions even before the appeal was lodged. In particular, he submitted that when it came to the crunch the appellant may not have been able to make good the factual assertions in the PwC correspondence. In this respect the witness statements were crucial and HMRC were entitled to defend the appeal until they had sight of the witness statements. I accept that submission. In this case the witness evidence would have been crucial. In my view HMRC were reasonably entitled to maintain their defence of the appeal at least until they had sight of the appellant’s witness statements. It might even be argued that they would be entitled to defend the appeal to a final hearing to satisfy themselves that the witnesses came up to proof. I do not consider that the respondents were unreasonable, and certainly not to the necessary high degree, to maintain the Assessments until sight of the appellant’s witness statements. 37. Ms Brown relied on Carvill v Frost but in my view it is of limited assistance. The case did concern a situation where the Inland Revenue withdrew from proceedings and there are similarities with the present circumstances. However, it was applying a different test. It was not concerned with indemnity costs, but with costs before the Special Commissioners which generally were not payable unless a party had acted “wholly unreasonably” in connection with the proceedings. I do not consider that the phrase “wholly unreasonably” in that context equates to unreasonableness to a high degree in the context of indemnity costs. Indeed, the Special Commissioners observed at [14] that the word “wholly” was used “in an emphatic sense”
“7A. Upon making an order for the assessment of costs, the Tribunal may order an amount to be paid on account before the costs or expenses are assessed.” 40. In the ordinary course there would be no objection to a direction for a payment on account of costs pursuant to Rule 10(7A). The rationale for payments on account was described by Jacob J as he then was in Mars UK Ltd v Teknowledge Ltd[1999] EWHC 226 (Pat) as follows: “8. …Where a party has won and has got an order for costs the only reason that he does not get the money straightaway is because of the need for a detailed assessment. Nobody knows how much it should be. If the detailed assessment were carried out instantly he would get the order instantly. So the successful party is entitled to the money. In principle he ought to get it as soon as possible. It does not seem to me to be a good reason for keeping him out of some of his costs that you need time to work out the total amount. A payment of some lesser amount which he will almost certainly collect is a closer approximation to justice. So I hold that where a party is successful the court should on a rough and ready basis also normally order an amount to be paid on account, the amount being a lesser sum than the likely full amount. ”