In Sussex Cars Association v HMRC  UKFTT 0691 (TC), the First-tier Tribunal (FTT) has exercised its discretion, under Rule 10(1)(b) of the Tribunal Rules, to make an order for costs against HMRC on the basis that it had "acted unreasonably in bringing, defending or conducting the proceedings".
HMRC raised assessments to VAT of c.£1.4 million on Sussex Cars Association (the taxpayer) as it should have, in HMRC's view, accounted for VAT on its supplies of taxi services. The taxpayer appealed the assessments.
In addition to its appeal to the FTT, the taxpayer made an application to the High Court for judicial review of HMRC's decision to make assessments, based on assurances it claimed HMRC had provided to it in relation to its method of accounting for VAT.
HMRC withdrew its defence to the appeal to the FTT shortly thereafter.
Rule 10(1)(b) of the Tribunal Rules provides that the FTT can make a costs order if:
"the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings ...".
The taxpayer subsequently made an application to the FTT, under Rule 10(1)(b), for an order that HMRC pay its costs due to HMRC's unreasonable behaviour in belatedly withdrawing its defence to the appeal.
The FTT awarded the taxpayer its costs.
HMRC claimed that the reason for withdrawing from the appeal before the FTT was the perceived cost of defending the appeal and the judicial review proceedings. However, the FTT found as a fact that HMRC had withdrawn from the appeal because it had realised that if it successfully defended the appeal the taxpayer would charge VAT to its client (a local authority), who would claim the VAT back under section 22, VAT Act 1994. The matter was therefore revenue-neutral and defending the appeal was not a proper use of public funds. Moreover, HMRC considered that it might be unjustly enriched if it pursued the appeal in such circumstances.
In determining the application, the FTT applied the three stage test laid down by the Upper Tribunal in Shahjahan Tarafdar v HMRC  UKUT 0362 (TCC), namely:
(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(2) Having regard to that reason, could that party have withdrawn at an earlier stage in the proceedings?
(3) Was it unreasonable for that party not to have withdrawn at an earlier stage?
The FTT concluded that HMRC's conduct had been unreasonable. In the view of the FTT, HMRC could have reached its decision at an earlier point had it taken appropriate legal advice.
The FTT acknowledged that HMRC's reasons for withdrawing from the litigation were unusual, as they were not based on the merits of the appeal but on the funds in defending the appeal. However, in the view of the FTT, the fact that HMRC's reasons were pragmatic, rather than technical, did not make them reasonable. Given that the quantum of VAT alleged to be outstanding was in the region of £1.4m, HMRC's failure to take legal advice at an earlier point was unreasonable. The FTT held that HMRC was not in a special position merely because it was a public body (as confirmed recently by the Supreme Court in BPP Holdings v HMRC  UKSC 55).
The FTT also considered that HMRC's conduct in relation to an unsuccessful attempt at alternative dispute resolution (ADR) had been unreasonable and allowed the costs of the ADR process as part of the costs of the proceedings as a whole, since if HMRC had taken appropriate advice at an early stage, ADR would not have been necessary.
As regular readers of our blog will be aware, in Gekko, the FTT also took a dim view of HMRC's conduct and awarded the taxpayer its costs on the basis that HMRC had acted unreasonably. It is to be hoped that pressure to increase the tax yield is not influencing the decision making process within HMRC. As in Gekko, the FTT in the instant case was highly critical of the way in which HMRC had conducted itself.
A copy of the decision can be found here.