“Without expressing any views as to the ultimate outcome of the appeal, there is a good arguable case that the [Decision Letter] is inadequate and incomplete, in that the reference to ‘key points’ begs the question of what was taken into account by the decision-maker, and what was disregarded.” 10. HMRC appealed against the Upper Tribunal’s decision to the Court of Appeal. In HMRC v Smart Price Midlands Ltd and Hare Wines[2019] EWCA Civ 841 (‘ Hare Wines CA ’), the Court of Appeal allowed HMRC’s appeal on the ground that the original disclosure direction had been too broad. 11. Giving the only judgment, Rose LJ made the following comments in relation to Hare Wines’ appeal at [59] and [60]: “59. … The main problem is the opacity of the reasons given for the refusal of approval. If what happened in the Hare Wines appeal is at all typical of HMRC’s process in determining applications, it reveals a chaotic decision-making process which is almost bound to generate appeals and create case management problems in any tribunal proceedings. I agree with the comment of the Upper Tribunal in Hare Wines UT that the [Decision Letter] is inadequate and incomplete. … 60. This confused position has made it difficult for Hare Wines properly to formulate its grounds of appeal and has then been compounded by HMRC’s statement of case. That document appears in one section simply to replicate the brief reasons given in the Refusal letter but in a later section raises a host of other points without explaining in some cases whether and why HMRC have apparently rejected the arguments put forward in the Rainer Hughes letter.” 12. Following the release of the decision of the Court of Appeal in Hare Wines CA on16 May 2019 , HMRC reconsidered the decision that was the subject of the appeal and, by letter dated 19 June, withdrew the Decision Letter. Although the Decision Letter was cancelled, HMRC stated that the decision would be remade after reconsideration of the evidence by persons other than the original decision-maker. 13. On 2 July, the parties agreed an order by consent that: (1) Hare Wines’ appeal was allowed; (2) any application by Hare Wines for costs must be filed and served by no later than 4pm on 12 July; and (3) any response by HMRC to the application for costs must be filed and served by 26 July. Both Hare Wines’ application for costs and HMRC’s response were made within the time limits specified. Legislation 14. There is no general power to award costs in the FTT. Such power as the FTT has is found in section 29 of the TCEA and rule 10 of the FTT Rules. Section 29 of the TCEA provides that the FTT has power to determine by whom and to what extent costs of and incidental to proceedings shall be paid but this power is subject to the FTT Rules. 15. Rule 10 of the FTT Rules rule relevantly provides: “(1) The Tribunal may only make an award in respect of costs … – (a) …; (b) if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting of proceedings ; or (c) …” 16. Rule 10(1)(a) relates to wasted costs as defined by Section 29(5) of the TCEA Rule. Under that rule, the FTT may order a legal or other representative whose improper, unreasonable or negligent act or omission has caused a party to incur costs to meet those costs. Legal or other representative for this purpose is defined as any person exercising a right of audience or right to conduct the proceedings on behalf of a party. That is not the situation in this case and rule 10(1)(a) is not relevant to these proceedings. Rule 10(1)(c) relates to proceedings that have been allocated as a Complex case and is also not relevant to this appeal. Case law on costs 17. The proper approach to be taken in relation to applications for costs on the basis of unreasonable behaviour when an appeal before the Tribunal is withdrawn or not defended has been discussed in a number of cases. The case law was summarised by the Upper Tribunal in Marshall & Co v HMRC[2016] UKUT 116 (TCC) (‘ Marshall’ ) at [10] – [13] as follows: “10. The scope of Rule 10(1)(b) has been discussed in this Tribunal in Catanã v Revenue and Customs Commissioners[2012] UKUT 172 (TCC) , where Judge Bishopp, at [14], stated: ‘Mr Catanã has made a number of points about the phrase “bringing, defending or conducting the proceedings”
‘….. It is not possible under the 2009 Rules … for a party to rely upon the unreasonable behaviour of the other party prior to the commencement of the appeal, at some earlier stage in the history of the tax affairs of the taxpayer, nor, even if unreasonable behaviour were established for a period over which the Tribunal does have jurisdiction, can costs incurred before that period be ordered. In these respects the principles in Gamble v Rowe … remain good law. That is not to say that behaviour of a party prior to the commencement of proceedings can be entirely disregarded. Such behaviour, or actions, might well inform actions taken during proceedings, as it did in Scott and anor (trading as Farthings Steak House) v McDonald (Inspector of Taxes) [1996] STC (SCD) 381, where bad faith in the making of an assessment was relevant to consideration of behaviour in the continued defence of an appeal.’ 12. Where HMRC eventually withdraw from a case against a taxpayer, in relation to the pre-2009 costs regime the Special Commissioners held in Carvill v Frost [2005] STC (SCD) 2008 that failure by HMRC properly to have reviewed its decision to pursue a claim would be relevant. The Commissioners stated (at [73]): ‘Mr Brennan [counsel for the 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.’ 13. Again in the context of the withdrawal by HMRC of a case before the FTT, the decision of this Tribunal in Tarafdar (t/a Shah Indian Cuisine) v Revenue and Customs Comrs[2014] UKUT 362 (TCC) is relevant. In Market & Opinion Research International Ltd v Revenue & Customs Comrs[2015] UKUT 12 (TCC) , this Tribunal endorsed (at [18]) the test set out in Tarafdar at [34]: ‘In our view, a tribunal faced with an application for costs on the basis of unreasonable conduct where a party has withdrawn from the appeal should pose itself the following questions: (1) What was the reason for the withdrawal of that party from the appeal? (2) Having regard to that reason, could that party have withdrawn at an earlier stage in the proceedings? (3) Was it unreasonable for that party not to have withdrawn at an earlier stage?’” Submissions 18. Hare Wines submits that it should be awarded costs under rule 10(1)(b) because HMRC acted unreasonably in defending the proceedings. Hare Wines’ primary position is that HMRC should never have defended the appeal and, in doing so, acted unreasonably. Hare Wines submits that, because of obvious flaws in the decision making and reasoning process, the appeal was indefensible from the outset. Hare Wines contends that the flaws in the decision making should have been apparent to HMRC once they had considered the grounds of appeal filed by Hare Wines on23 March 2017 . 19. Hare Wines’ alternative position is that HMRC should have conceded the appeal after the Upper Tribunal released its decision in Hare Wines UT on6 December 2017 which included the comment, set out at [ 9] above, that there was a good arguable case that the Decision Letter was inadequate and incomplete. 20. HMRC’s overarching position is that they have not acted unreasonably in defending or conducting proceedings. They make three distinct submissions in support of that proposition. 21. The first is that any conduct which pre-dates the filing of the Notice of Appeal cannot be taken into account by the FTT when considering whether a party has acted unreasonably. HMRC rely on [36] – [43] of Distinctive Care Limited v HMRC[2018] UKUT 155 (TCC) (‘ Distinctive Care ’) as showing that conduct before the proceedings have commenced cannot be taken into account in assessing the reasonableness of a respondent’s conduct. HMRC say that Hare Wines asserts that the Response Letter and Decision Letter amounted to HMRC acting unreasonably. HMRC contend that the Decision Letter and the Response Letter cannot be the basis of an allegation of unreasonable conduct because they pre-dated the Notice of Appeal. 22. HMRC’s second submission is that, bearing in mind the information available to HMRC, it could not be said that Hare Wines’ appeal was obviously meritorious. HMRC accept that the Decision Letter could have contained more detail but contend that the deficiencies were remedied by the Statement of Case which showed that HMRC had sufficient grounds to justify the refusal of Hare Wines’
“In agreeing with this formulation [in [14] of Catanã ], we consider that in a costs application made against an appellant, the actions of that appellant (and its representative) in bringing the proceedings are to be considered; for an application made against a respondent, the actions of that respondent (and its representative) in defending the proceedings are to be considered; and in both cases their respective actions (and those of their representatives) in conducting the proceedings are to be considered. These are the relevant actions to be considered for the purposes of Rule 10. It may be that some earlier actions of one party or the other might inform the FTT’s assessment (for example by demonstrating bad faith), but the focus of the assessment remains on these relevant actions, not on any earlier actions.” 25. In my view, however, that interpretation of the phrase “bringing, defending or conducting the proceedings” does not assist HMRC in this case. It seems clear to me that, contrary to HMRC’s submission, Hare Wines is not contending that the Decision Letter and Response Letter are unreasonable conduct. As set out at [19] and [20] above, Hare Wines’ case is that HMRC should have conceded the appeal on considering Hare Wines’ grounds of appeal or, at the latest, after reviewing the Upper Tribunal’s decision in Hare Wines UT . Hare Wines contends that HMRC acted unreasonably in continuing to defend the proceedings after those dates, both of which post-date the commencement of proceedings. That does not dispose of the application however: the question is whether, in continuing to defend the proceedings, HMRC acted unreasonably. 26. Defending an appeal that is clearly indefensible is likely to be regarded as unreasonable conduct. That seems to me to be an example of what Judge Bishopp said in Catanã , see the passage from Marshall at [16] above, when he referred to a respondent who has unreasonably resisted an obviously meritorious appeal. The context of Judge Bishopp’s words makes it clear that by “obviously meritorious”, he did not mean merely “having some merit”