The decision of the First-tier Tribunal (Tax Chamber) ('FTT') in Ian Elder v Commissioners for HMRC offers a useful summary of the FTT's approach on the assignment of appeals to the Complex category, applications to bar a party from participating in proceeding and costs sanctions.
The procedural history to the Ian Elder case is lengthy and complex. For the purposes of this blog, however, it is not necessary to recount it in detail. Ian Elder (the 'Appellant') was a director of a company called Topcars (Taxis) Limited ('Topcars'), registered in the BVI. During an enquiry into the Appellant's tax affairs HMRC came to the view that sums of money deposited in an offshore bank account amounted to remuneration payments to him from Topcars.
Assessments were issued and HMRC indicated that it intended to make a direction under Regulation 72 of the Income Tax (Pay As You Earn) Regulations 2003, in respect of unpaid tax. Owing to an error in interpretation of HMRC's guidance by the officer dealing with the case, no Regulation 72 direction was issued until 6 months after the first hearing in the appeal against the Assessments.
A separate appeal was then lodged and the two appeals joined together. Thereafter, HMRC failed to lodge its statement of case in accordance with Rule 25(1)(c) of the Tribunal Rules  and failed to engaged with the Appellant in relation to proposed directions which would have avoided the necessity for a further directions hearing in the case.
The Appellant applied (amongst other things) for:
- the case to be assigned as a Complex category case;
- HMRC to be barred from taking further part in the case; and,
- for costs to be awarded against HMRC in respect of the unnecessary directions hearing.
With regard to the first issue, the relevant provisions relating to the allocation of an appeal to the Complex category are contained in Rule 23(3) of the Tribunal Rules. Following the decision in Capital Air Services and Dreams Plc, in order for the FTT to allocate an appeal to the Complex category it must be shown that the case: will require a lengthy hearing; involve a complex or important principle; or, involve a large sum.
The FTT was of the view that none of the above 'gateways' had been passed. The judge concluded that the sum in issue, £232,000, was not considerable, there were no complex or important issues of principle (either individually or taken together) and a hearing estimate of 7 ½ days in a case involving issues of dishonesty was not "at all out of the ordinary". Consequently, this aspect of the Appellant's application was not successful.
With regard to the second issue, the relevant power is contained in Rules 7 and 8 of the Tribunal Rules, which enable the FTT to bar the respondent from taking further part in the proceedings. Such a sanction will often lead to the failure of HMRC's case.
The judge was critical of HMRC's failure to lodge its Statement of Case on time; its failure to engage with the Appellant in relation to draft directions proposed by the Appellant well before a directions hearing; its failure to prepare its Statement of Case before the directions hearing, despite the clear indication from the judge that it would be desirable for it to do so; and, its failure to make an application, supported by reasons, to extend the time for service outside of the normal limits. As expressed by the Appellant during the hearing and endorsed by the judge in the decision: "HMRC seemed to be content just to sit back and let the appellant and the judge do all the work".
Failure to engage with the Appellant on the subject of draft directions, where there is sufficient time to do so, is particularly offensive since it will almost inevitably lead to wasted time for all parties and the FTT, the incurring of unnecessary cost and is contrary to the overriding objective (see Rule 2 of the Tribunal Rules) .
So, was such conduct enough for HMRC to be barred from participating further in the case? Alas, no. The FTT considered HMRC's actions measured against dicta of the Court of Appeal in the recent case of Denton v TH White Ltd & Others. Denton concerning the application of CPR 3.9, which relates to circumstances in which a court may provide relief from sanctions. The Court of Appeal applied the following three stage test:
- identify the seriousness and significance of the breach;
- consider why the default occurred;
- evaluate all the circumstances of the case so as to deal justly with the application.
On the facts of this case the judge concluded that HMRC's failure to serve its Statement of Case was not serious or significant, in particular, it did not imperil a future hearing date or disrupt the conduct of the litigation.
As to 'why' the default occurred, one of HMRC's excuses was that the officer with conduct of the case had only recently taken over and needed time to get up to speed. The FTT was not impressed with this excuse and confirmed that "pressure of work" will seldom constitute a good reason for default. Nevertheless, the absence of a justifiable excuse for the default was not sufficient for the judge to direct HMRC to be barred from further participation in the litigation. The breach was not considered serious enough.
Finally, in relation to the issue of costs, the FTT was of the view that HMRC had acted unreasonably in the conduct of the proceedings, for the purpose of Rule 10(1)(b) of the Tribunal Rules, and accordingly the Appellant was awarded his costs.
This case is a timely reminder that although the FTT is generally a 'no costs' regime, which means that parties bear their own costs irrespective of whether they are successful or not (a factor which in practice offers considerably more assistance to HMRC than it does to the taxpayer), the FTT may make an award of costs against HMRC under Rule 10(1)(b) where it has acted unreasonably. The FTT was not impressed by HMRC's failure to engage with the Appellant in respect of draft directions which led to a needless directions hearing and the incurring of additional costs.
It is important to remember that Rule 10(1)(b) enables the FTT to order HMRC to pay the taxpayer's costs where HMRC (or its representative) has "acted unreasonably in bringing, defending or conducting the proceedings".
HMRC's recent tendency for obfuscation, to argue every point irrespective of the merit, and willingness to rely upon 'procedural' points, is likely to lead to more applications by taxpayers for cost orders against HMRC.