Prior to 1 April 2009, tax tribunals had discretion as to costs. For appeals commenced after this date, costs awards are usually limited to complex cases, and even then taxpayers can opt out of the costs shifting regime. Although the tribunal has the power to set aside the new rules in transitional cases and award costs under the old rules, complexity will not be relevant to this decision – because to consider it would disregard the taxpayer’s right to opt out of the new regime.
Background
Reform of the tribunal system in 2009 brought with it a new, more restrictive, costs regime. Under the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules, SI 2009/273 (the 2009 rules), unless a case is sufficiently complex, the First-tier Tribunal can only issue a wasted costs order, or allow recovery where a party has acted unreasonably (rules 10(1)(a), (b)).
The old system was very different. The Value Added Tax Tribunals Rules, SI 1986/590 (the 1986 rules) allowed the award of a sum ‘incidental to and consequent on the appeal’. Traditional costs shifting on appeal particularly benefited the taxpayer as HMRC by convention only sought costs against unsuccessful appellants if extensive work or some impropriety was involved.
Current proceedings
When the changes came into effect on 1 April 2009, any outstanding appeals became subject to the new rules. However, in these cases (known as ‘current proceedings’) the tribunal can disapply the 2009 rules in favour of 1986 ones, if necessary, to deal with proceedings ‘fairly and justly’ (see Transfer of Tribunal Functions and Revenue and Customs Appeals Order, SI 2009/56, Sch 3 para 7(3) (the Transfer Order)).
The reforms also introduced a multi-track allocation system. Appeals are now categorised according to their complexity, importance and value. Those requiring detailed examination at hearing are placed in either the Complex or Standard categories, useful guidance on which was provided in Capital Air Services Ltd v HMRC [2010] UKUT 373 (TC) (see ‘Capital Air Services and “Complex” cases’ by David Ward and Matthew Hodkin, Tax Journal, 8 November 2010). The important difference is that costs orders in favour of the winning party are usually only made in complex cases.
Hawkeye Communications v HMRC [2010] UKFTT 636 (TC) was a current proceeding in which HMRC were successful and sought to obtain costs. Had Hawkeye been commenced under the 2009 rules, it would have been a complex case and costs would in principle have been allowed (rule 10(1)(c)). However, a current proceeding cannot be allocated to any category, regardless of its complexity (see Surestone Ltd v HMRC [2009] UKFTT 352). Although tribunals can re-categorise, this also requires initial allocation. Since current proceedings were never allocated, they cannot be re-allocated either.
HMRC accepted this in its submissions and, unable to claim costs under the 2009 rules, it requested the tribunal use para 7(3) of the Transfer Order to apply the 1986 rules, in order to apply for costs under the old regime.
Which rules apply?
In its decision, the Tribunal cited Atec Associates Ltd v HMRC [2010] UKUT 176 TCC, stating that 2009 rules are prima facie applicable, subject only to the discretion under para 7(3) to disapply them. The discretion must be used to dispose of proceedings ‘fairly and justly’. In Atec, the Tribunal had decided not to disapply the 2009 rules, as to do so there would have been a ‘retrograde step’.
The Tribunal in Hawkeye held that a balancing exercise of all relevant factors was required before discretion could be exercised under para 7(3). It clarified that there is neither a ‘retrograde step’ nor a ‘compelling reason’ test. Most surprising of all though, the hypothetical categorisation of a case is not necessarily relevant. Thus, although Hawkeye was complex by the standards of the decision in Capital Air, this was not a relevant factor.
The Tribunal refused to consider complexity, as to do so would disregard the taxpayer’s ability to opt out of the new costs-shifting regime. Under rule 10(1)(c)(ii) a taxpayer can opt out by written submission to the Tribunal within 28 days of notice of allocation. Consequently, HMRC only have a legitimate expectation of costs where the case has been categorised as complex and the taxpayer has not opted out.
There were several factors which could weigh in favour of applying the 1986 rules, for example, the division of work and time between the old and new rules – as up until the changes it could be assumed the old cost shifting regime applied. Furthermore, the circumstances of the application, particularly regarding its timing, will be relevant. In Hawkeye, HMRC had reinforced the Appellant’s expectation that the 2009 rules applied by failing to apply earlier under para 7(3). This was balanced against the division of work, and the taxpayer’s expectation of the new rules applying throughout outweighed any prejudice suffered by HMRC.
The question of complexity is not relevant to deciding whether current or previous procedure governs the case. Only once this is established can complexity be relevant. In addition though, whenever a taxpayer argues against the application of the old rules, it can be assumed that, given the option, he would opt out of the costs shifting regime under the new rules.
The end result in Hawkeye should be of comfort to the taxpayer. Had the case been commenced and concluded under either the old or the new rules (assuming the opt-out was not exercised) HMRC could have claimed costs. Instead, being caught between the two, it could not. The judgment not only demonstrates the limits of the tribunal’s discretion under para 7(3) to award costs, but also shows that complexity will not always be relevant. In light of this, and the assumptions made when an application is opposed by the taxpayer, it will be extremely difficult for HMRC to recover costs in current proceedings before the tribunal.
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Oliver Neil, Trainee Solicitor, Dorsey & Whitney
