The past 12 months have been something of a ‘roller coaster’, in terms of the tax tribunal’s approach (following guidance from the courts) to procedural errors, such as the late filing of appeals and non-compliance with procedural directions. Although it looked as though it may have taken a draconian approach, the position has settled firmly against encouraging ‘satellite litigation’, which distracts from the main picture. However, taxpayers should pay meticulous attention to directions and time limits to ensure that they are met.
There have been a number of very recent decisions examining the consequences of failing to comply with time limits and court or tribunal orders generally. It has resulted in a period of considerable uncertainty; and the situation is not entirely clear even now, with the latest decision of the Upper Tribunal having been released as recently as 3 November 2014. This is not a particularly satisfactory situation, and the question of ‘what approach to take’ when a time limit or direction has been breached could be a key concern for anyone who is engaged in or faces the prospect of litigation.
By way of illustration, if it was possible to have HMRC struck-out of the proceedings as a result of the breach of an important deadline, such as the presentation by HMRC of its statement of case, a taxpayer would be foolish not to take that point. Moreover, failing to advise a taxpayer of the potential to make such an application could result in a professional indemnity (PI) claim.
However, weighing against this could be the prospect of a costs order against the taxpayer for having taken the point, if the application is comprehensively rejected by the tribunal.
Equally, if a taxpayer’s appeal could be struck out as a result of missing a deadline, whether for an appeal or pursuant to a procedural direction, this would be crucial to know. It could result in PI claims against advisers that failed to comply with time limits.
In short, this area is a potential minefield for any taxpayer or adviser conducting litigation before the tribunal. There is a definite need for clarity.
The story starts with a decision of the Upper Tribunal (Morgan J) in Data Select Ltd v HMRC [2012] UKUT 187 (TCC). Briefly, the case concerned an application by a taxpayer for an extension of time (under VATA 1994 s 83G) to allow it to bring an appeal against a decision made by HMRC almost a year previously. The Upper Tribunal upheld the finding of the First-tier Tribunal (FTT), which had dismissed the taxpayer’s application. The FTT had used as its starting point the factors set out in the Civil Procedure Rules (CPR), SI 1998/3132, rule 3.9(1) and the ‘overriding objective’ in rule 2 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules, SI 2009/273 (‘the FTT rules’). These rules are designed to enable the tribunal to deal with cases fairly and justly.
On the basis of these tests, and particularly considering CPR rule 3.9 (as it was then drafted), the ruling in Data Select gave a tribunal a great deal of latitude to apply common sense.
However, with effect from 1 April 2013, the CPR rule 3.9 changed. The list of factors to be considered were replaced with the following:
‘On an application for relief from any sanctions imposed for a failure to comply with any rule, practice direction or court order, the court will consider all the circumstances of the case, so as to enable it to deal justly with the application, including the need:
No change was made to the tax tribunal rules.
In a case wholly unrelated to tax, the former government chief whip, Andrew Mitchell MP, brought an action against News Group Newspapers (Andrew Mitchell MP v News Group Newspapers Ltd [2013] EWCA Civ 1537). This was in relation to the infamous ‘plebgate’ incident (which at the time of writing is being heard by the High Court). In ancillary proceedings in November 2013, Mr Mitchell appealed against a High Court ruling, the effect of which was that because his solicitor had failed to file a costs budget on time, the budget was limited to the Court fees alone (and not Mitchell’s professional fees).
In the Court of Appeal, Lord Dyson, the Master of the Rolls, made reference to the ‘Jackson reforms’ and the adoption by the courts of a more ‘robust’ approach, reflective of those referred to in the revised CPR rule 3.9:
‘It will usually be appropriate to start by considering the nature of the non-compliance with the relevant rule, practice direction or court order. If this can properly be regarded as trivial, the court will usually grant relief provided that an application is made properly … If the non-compliance cannot be characterised as trivial, then the burden is on the defaulting party to persuade the court to grant relief … If there is a good reason for it, the court will be likely to decide that relief should be granted … But mere overlooking a deadline, whether on account of overwork or otherwise, is unlikely to be a good reason ... the need to comply with rules, practice directions and court orders is essential if litigation is to be conducted in an efficient manner. If departures are tolerated, then the relaxed approach to civil litigation which the Jackson reforms were intended to change will continue.’
As a result, the Court of Appeal dismissed Mr. Mitchell’s appeal, concluding: ‘The defaults by the claimant’s solicitors were not minor or trivial and there was no good excuse for them. They resulted in an abortive cash budgeting hearing and an adjournment that had serious consequences for other litigants’.
So how does this affect tax and the position established in Data Select?
On 10 January 2014, the Upper Tribunal (Judge Sinfield) issued its decision in HMRC v McCarthy & Stone (Developments) Ltd [2014] UKUT 196. HMRC was notified that it had been granted permission to appeal this case by the FTT. The UT rules provided that an appellant has 30 days from permission being granted to lodge an appeal. In this case, HMRC lodged its appeal 56 days late.
HMRC’s case was that the email granting permission was ‘simply overlooked’ by HMRC Solicitor’s Office and that it had ‘slipped through the cracks’. It argued that, applying the overriding objective, it would be ‘unfair’ and ‘unjust’ for HMRC to be prevented from pursuing the appeal because of a ‘relatively short delay’ of just under two months.
Although he held that the CPR rules did not apply to tribunals, the judge did not accept that the differences in wording of the overriding objectives in the CPR and UT rules meant that the UT should adopt a ‘different, i.e. more relaxed, approach to compliance with rules, directions and order than the courts are subject to’. He concluded that ‘the reasons given by the Court of Appeal in Mitchell on how the courts should apply the new approach to CPR rule 3.9 in practice are also useful guidance when deciding whether to grant an extension of time to a party who has failed to comply with a time limit in the UT rules’.
He held that HMRC’s failure was ‘neither minor nor trivial’ and refused to admit HMRC’s notice of appeal. Game, set and match to McCarthy & Stone (Developments) Ltd.
Shortly following this, in Peter Arnett Leisure v HMRC [2014] UKFTT 209, the FTT decided to allow an out of time appeal, having considered both Data Select and Mitchell – and the decision in McCarthy & Stone (although the actual McCarthy decision had not been available at the hearing itself). The FTT drew a distinction between cases such as Mitchell and McCarthy, which concerned compliance with litigation procedure, and reverted to more of a Data Select approach, having regard in particular to the explanation for the delay (which the appellant submitted had been reliant, in good faith, on a third party).
However, all was shortly to change dramatically in Denton v TH White [2014] EWCA Civ 906. On 4 July 2014, the Court of Appeal opined that the courts were adopting an unreasonable approach to CPR rule 3.9 following Mitchell. Having reviewed Mitchell in detail, Lord Dyson stated:
Justifiable concern has been expressed ... about the satellite litigation and the non-cooperation between lawyers that Mitchell has generated.’ He said: ‘It is wholly inappropriate for litigants and their lawyers to take advantage of mistakes made by opposing parties in the hope that relief from sanctions will be denied and they will obtain a windfall strike out as the litigation advantage ... It should be very much the exceptional case where a contested application for relief from sanctions is necessary.’
How would the tax world respond to this latest turn? On 29 July 2014, in the Upper Tribunal, in Leeds City Council v HMRC [2014] UKUT 350 (TCC), Judge Bishopp (who is also the president of the Tax Chamber of the FTT) rejected an application by Leeds to strike out a costs application that had been submitted late by HMRC (Leeds having lost the substantive case).
Applying Denton for the first time in the tax tribunal, he observed that if he found for HMRC and admitted the late costs application, Leeds would not have lost out, as it would have expected to pay HMRC’s costs. However, if he found for Leeds, Leeds would have gained an unexpected ‘windfall’.
‘I am satisfied, following Denton, that opposition to short extensions when a mistake has been made and there is no real prejudice beyond the loss of a windfall gain is not within the spirit of the overriding objective ... and should be the exception rather than the norm.’
Perhaps most pointedly, he held Judge Sinfield’s reasoning in McCarthy & Stone, as to the impact of the overriding objective, as being ‘wrong’ (with greatest respect, naturally). He pointed out that the Tribunal Procedure Committee has not so far changed the Upper Tribunal rules to mirror the changes made to CPR. He observed: ‘It may do so at some time in the future, or it may not. It does not seem to me that it is open to a tribunal judge to anticipate a decision which might never be taken and apply, by analogy, changes to the CPR as if they had also been made to the Upper Tribunal rules’.
As if to prove a point, back sitting in the FTT on 1 August 2014, Judge Bishopp decided in favour of the appellant taxpayers in Kumon Educational UK Co Ltd v HMRC [2014] UKFTT 772 (TC), in rejecting an attempt (this time by HMRC) to block an application by the taxpayers for an extension of time for the service of a costs schedule. Being in the position where he was clearly bound by precedent set in the Upper Tribunal, he noted that he had two contrasting authorities of equal weight to choose from: Judge Sinfield in McCarthy & Stone; and himself in Leeds City Council. Unsurprisingly, he opted to be bound by his own decision of only a few days earlier. The practical effect of this was that HMRC’s attempt to block the appellants’ time extension was rejected.
More recently still, on 25 September 2014, in BPP University College of Professional Studies Ltd v HMRC [2014] UKFTT 917 (TC), the FTT (Judge Herrington) dismissed an application by HMRC under rule 8(5) of the FTT rules to lift a ‘barring order’, which prevented HMRC from taking further part in the proceedings and which had been imposed by another FTT judge (Judge Mosedale) on 1 July (prior to Denton and Leeds).
The barring order had been the result of an application by BPP, which claimed that HMRC had failed to provide further and better particulars of its statement of case to comply with a practice direction. HMRC applied to the FTT for the bar to be lifted, on the basis that Judge Mosedale had exercised her powers unlawfully and that relief from the barring sanction was necessary and appropriate. HMRC also applied for permission to appeal (separately) to the Upper Tribunal on the ground that Judge Mosedale’s decision was erroneous in law (see below).
Judge Herrington refused to ‘lift the bar’ under rule 8(5), stating that it was not permissible to adopt that course unless:
The decision on the appeal against Judge Mosedale’s decision was released by the Upper Tribunal on 3 November 2014, reported at [2014] UKUT 496 (TCC). Apart from approving Judge Herrington’s analysis of the rule 8 point, Judge Bishopp, perhaps unsurprisingly, upheld HMRC’s appeal and set aside the barring order against HMRC. He concluded that Judge Mosedale had been wrong to base her conclusions on Mitchell (i.e. following what the Upper Tribunal had said in McCarthy & Stone).
Judge Bishopp ‘remade’ the decision by stating that, whilst there had been much that was unsatisfactory in HMRC’s conduct, there was no reason to think that the fairness of the substantive appeal hearing (which he was reinstating) or the FTT’s ability to deal with it, had been compromised. In doing so, he returned to Morgan J in Data Select, citing him at para 34 (in relation to time limits specifically, but extrapolating some general principles), being in broad terms:
However, in the particular circumstances of BPP’s overarching appeal (and even if viewed in the context of the undisputed default on the part of HMRC), barring HMRC would constitute a ‘windfall’ to BPP, as well as avoiding determination of the fundamental question as to whether or not BPP’s supplies are properly zero rated.
Where does this leave us? The sensible conclusion has to be that the much trumpeted reign of Mitchell and McCarthy & Stone looks to have been very short lived; and that the default position in relation to procedural arrangements before the tax tribunal is back to those set out by Morgan J in Data Select. All is not lost (well, not quite all) if minor deadlines are missed, although the tribunals are more sympathetic to ‘innocent’ errors than to ‘careless’ ones. Taxpayers (and HMRC) should be more vigilant than they have been in the past in observing time limits; and if an application has to be made for an extension of time, it should wherever possible be made in advance of the expiry of the deadline.
Meanwhile, taxpayers (or HMRC) looking to secure ‘windfalls’ through the pursuit of ancillary litigation on procedural points need to be mindful, following Denton, that the tribunals can be expected to have little sympathy for them – and they could, in extreme circumstances, end up on the thick end of a costs order for their bare-faced cheek! Acting reasonably and sensibly is the watchword. In the meantime, we await the next instalment.
