The First-tier Tribunal (Tax Chamber) recently issued two decisions that serve as helpful reminders of the rules and guidance that the tribunal will apply when exercising its jurisdiction to award costs.
Section 29 of the Tribunals Courts and Enforcement Act 2007 enables the tribunal to determine by whom and to what extent costs of and incidental to tribunal proceedings shall be paid. This power is subject to rule 10 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 which provides that the tribunal may make an award in respect of costs (other than wasted costs) only if:
- it considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings; or
- the tribunal allocates the proceedings to the "complex" category and the taxpayer has not sent or delivered a written request to the tribunal, within 28 days of receiving notice of allocation, that the proceedings be excluded from potential liability for costs.
Proceedings are allocated to the complex category if they require lengthy or complex evidence or a lengthy hearing, involve a complex or important principle or issue or involve a large financial sum.
If the power to make a costs award is exercisable then it will be for the tribunal to determine in its discretion whether or not to make an award and the extent of any award.
In Hegarty [2019] UKFTT 226 (TC) the applicants were taxpayers who had successfully appealed against the issue of information notices by HMRC. The appeal had not been allocated to the complex category. The only basis on which the tribunal could make a costs award was, therefore, that HMRC had acted unreasonably in defending the appeal or in conducting their defence.
The FTT reviewed the guidance from the Upper Tribunal in Tarafdar, Willow Court and Distinctive Care as to what constitutes "unreasonable" behaviour in this context, noting in particular that:
- reasonableness should be assessed by reference to the circumstances at the time of the acts (or omissions) in question and not with the benefit of hindsight; and
- the fact that an argument fails in an appeal does not necessarily mean that the party advancing the argument was acting unreasonably in doing so. To reach that threshold, the party must generally persist with an argument that is obviously unmeritorious or against an argument that is bound to succeed.
Although HMRC recognised with hindsight that their case could have been better conducted (they failed to produce a witness statement from the officer who issued the notices) the tribunal found that at the time of the conduct in question, HMRC had not adopted an obviously unmeritorious position or otherwise acted unreasonably. The taxpayer's application was therefore refused.
In BAV-TMW-Globaler-Immobilien Spezialfonds [2019] UKFTT 233 (TC) unusually both the taxpayer and HMRC applied for costs. The appeal had been allocated to the complex category and the taxpayer had not opted out of liability, so the tribunal had a general discretion as to costs. The taxpayer had been successful in the appeal on a secondary argument that it had first raised shortly before the hearing.
The taxpayer argued that the tribunal should follow the general rule in CPR 44.2 that the unsuccessful party must pay the costs of the successful party, and that for this purpose it alone was the successful party because it had succeeded in the appeal. HMRC argued that they were entitled to almost all of their costs prior to the introduction of the secondary argument because those costs had been incurred in successfully defending the taxpayer's primary argument.
The tribunal granted the taxpayer's application and refused that of HMRC. The tribunal adopted CPR 44.2 as a guide to the exercise of its discretion and found that only the taxpayer could be regarded as a successful party in the appeal. The fact that the taxpayer put forward two separate and distinct arguments in support of its appeal and that HMRC successfully opposed one of them did not mean that both parties were partially successful.
Moreover, the introduction of the secondary argument required no new evidence and related solely to the interpretation of the relevant legislation. In these circumstances, there was no good reason to depart from the general rule that the unsuccessful party should pay the successful party's costs.
