Valentines Homes & Construction Ltd, R (on the application of) v HM Revenue & Customs

This is an appeal by Valentines Homes & Construction Limited (“the appellants”) against a costs order made by Mr Justice Lloyd Jones on 13 May 2009. The judge had, on 10 February 2009, refused an application by the appellants for permission to apply for judicial review of a decision by Her Majesty’s Revenue & Customs (“HMRC”) to seek to recover a debt from the appellants. The ground for refusal was that “this matter has become academic because of the settlement of the proceedings in the Aldershot and Farnham County Court in June 2008”. In relation to costs in the Administrative Court, the judge ordered:

“The [appellant] will pay the [respondents] costs of preparation of the acknowledgement of service summarily assessed at £500.

Reasons: The [appellant] was not justified in pursuing the application for permission to apply for judicial review once the proceedings in the Aldershot and Farnham County Court had been settled. As to summary assessment, I consider that the reasonable amount which the [appellant] should pay is £500.”

The appellants seek to quash the costs order for £500 against them and obtain a costs order in their favour.

The lengthy sequence of events which led to the order challenged needs to be set out in some detail. The appellants are a construction company with two directors, Mr Zinzan Brooke and his wife. On 28 May 2007, Mr Brooke sustained a serious head injury in Spain and was detained in hospital there for some weeks. Brain surgery was required. At the time, Mrs Brooke, who was also tending to her husband, had three young children and was pregnant with a fourth. As a result of the incapacity of the directors, the appellants failed to account for PAYE for the four months from May to August 2007. The enforcement procedure which may be followed by HMRC in that event appears in Regulations 78 of the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682). Liability to pay is provided by Regulation 68.

Where an employer does not pay PAYE under Regulation 68 within 17 days of the end of a tax period, HMRC are authorised to specify to the best of their judgment the amount of tax they consider the employer is liable to pay and to serve notice on the employer requiring payment of that amount within 7 days of the issue of the notice (Regulation 78(4)). If the amount of tax specified in the notice, or any part of it, is not paid during the notice period, the amount unpaid is treated as an amount of tax which the employer was liable to pay for that tax period under Regulation 68 (Regulation 78(8)). It is open to the employer to satisfy HMRC, during the notice period, that no amount, or no further amount, is due for that tax period (Regulation 78(9)). There is a procedure whereby HMRC may certify how much of the tax specified in a notice remains unpaid and for setting off the excess paid (Regulation 78(8)(b), (10) and (11)) but it has not been followed in this case.

HMRC issued two notices under Regulation 78(4), one on 2 July 2007 and one on 10 September 2007. The appellants did not receive the second but nothing turns on that for present purposes.

On 9 October 2007, HMRC instituted proceedings in the County Court against the appellants claiming £83,967.52, the sum stated in their notices, and a court fee of £630. The appellants’ defence, dated 16 November 2007, admitted that £60,613.35 was owed to HMRC for the relevant period but denied that the appellants owed the balance of the sum claimed, stating that “it does not coincide with the returns or records of the company”. The defence also stated that Mr Brooke was “injured, hospitalised and not fully functioning for a period of months”.

In a letter dated 29 November 2007, HMRC stated that the appellants had “7 days from each of these [the dates of the notices] to send your actual figures and payment. As you did not, my estimate is legally due and payable”. It was added that “Mr Brooke’s period of incapacity is not relevant to my claim” and that “any payment made will be accepted without prejudice but, as I do not accept your part admission, I will apply to the court and the case will be listed for a hearing”.

By letter of 11 December 2007, the appellants’ accountants, having done further work on the accounts, stated that the amount due to HMRC was £64,884.26. HMRC did not respond but in March obtained a hearing date for the County Court claim, 14 May 2008. Eventually, in a letter of 21 April 2008, signed by Mr Eames, Assistant Debt Management Officer for HMRC, it was stated:

“The [notice] gives the opportunity for the company to make payment of the specified debt within 7 days of the issue of a letter. Alternatively, if the amount of the specified debt is not agreed by the company, payment for the full amount that the company calculates as due should be paid instead within the same time period.

Our position therefore is that as actual figures were not provided in time we shall not be amending our claim in line with your figures.

It will be our intention at the hearing of 14 May 2008 to request judgment for full payment of our claim plus any additional interest due to date. If the company wishes to continue to dispute the claim, then the representative of the company should attend the hearing.”

On 2 May, the appellants’ accountants wrote expressing concern about the lack of response to previous letters and HMRC’s “zealous desire to pursue an incorrect debt in court rather than attempt to accept evidence and avoid unnecessary attendance by all parties”. The letter continued:

“We are also concerned about the significant amount of relevant information missing from the summary in Mr Eames’s letter of 21 April 2008; the fact that it has taken nearly four months to reply to our letter and our reminders of 29 January 2008 and 28 March 2008 (attached) without the decency of a reply and the listing of the case for a hearing (received 26 March) without letting us know as to exactly why the hearing is going ahead until Mr Eames’ letter four weeks later.

We also wish to formally protest at the short time at which we have been given to prepare our records in response to your letter prior for the hearing. You had four months to prepare a response which clearly has factual holes in it and which flew in the face of conversations we had with Mr Eames in December 2007 which you now claim to have no record of.”

There followed a very detailed explanation of how the sum due had been calculated and drawing attention to the response to HMRC’s letter being made “in just over a week from receiving it compared to the four months that you had our letter for”. On 9 May 2008, the appellants sent a cheque for £63,350 to HMRC (to include interest) and referred to a payment of £4,443.32 already made.

A further attempt at agreement was made by the accountants in a letter dated 9 May. It concluded:

“If you do not do so, we will have to consider making a judicial review application in relation to your refusal to do so, and making an application to stay the County Court proceedings pending the outcome of the judicial review hearing in the High Court.”

On 13 May 2008, a claim for judicial review was made in the Administrative Court and an application for a stay of proceedings in the County Court.

By letter of 16 May 2008, again signed by Mr Eames, HMRC stated that “the payment of £63,350 has been accepted without prejudice to our court claim”. The County Court adjourned HMRC’s claim to 16 June 2008 when the application for a stay was also to be heard.

However, On 10 June 2008, Mr Eames wrote stating:

“Due to the particular circumstances on this case and bearing in mind that the return has been received for the period ending 5 April 2008 [a later period] with actual debt paid in full, HM Revenue and Customs request your agreement to withdraw our case from the County Court and the Judicial Review.

This will be subject to further agreement that Valentines Homes and Construction Limited pay the costs of our original claim for £630.00 and that the company pays their own costs.

Any additional costs claimed by HM Revenue and Customs will be met by us.”

Solicitors acting for the appellants replied on 12 June:

“Further to our telephone conversation today and your letter of 10 June, we confirm our client will pay to you the sum of £630.00 in relation to costs in full and final settlement of the claim in this matter.”

Mr Eames wrote to the court on 13 June stating that agreement on settlement of the case had been reached and adding:

“I will therefore be pleased if the hearing on 16 June 2008 can be vacated as we no longer wish to proceed with the case and wish to withdraw further proceedings.”

The appellants’ solicitors wrote to the court in similar terms. HMRC have not claimed at this hearing that the judicial review proceedings were also compromised by consent by that exchange of letters. I am not surprised at that given the content of the letters and the surrounding circumstances. No court order was drawn up, HMRC not having submitted a draft to the court.

A week later, on 20 June 2008, the appellants wrote to HMRC:

“Please be aware that we cannot over emphasise our clients desire to settle the correct debt and that we see absolutely no reason why this could not be dealt with outside of court. We do not understand your reluctance to discuss the case and in the circumstances, your desire to pursue estimated amounts rather than the correct amounts of PAYE and NIC due.

That said, we hereby respond to your letter accurately and fill in some of the serious holes outlined in your letter. We would ask why you left it so late in the day to respond to our letter and reminders and why the letter was not sent out at the same time as it was listed (a month earlier)?”

For the judicial review, costs of £10,549.88 were claimed.

No response having been received, the appellants pursued their application for permission to apply for judicial review. On 14 October 2008, Mitting J granted the application on a consideration of the papers, stating:

“Unless the defendant disputes the accuracy of the claimant’s accountant’s calculations, which appear to be provided in good faith and to be soundly based, it is difficult to understand how it can rationally justify its failure to issue the certificate under regulation 78(8)(b) of the PAYE Regulations which would permit the claimant to recover any overpayment of tax. Further, unless it disputes the facts relating to Mr Brooke’s incapacity and his wife’s distraction, it is difficult to understand why it has not exercised the discretion which (by very close analogy with its published statement in Tax Bulletin 18(1995) it has not to collect the full assessed amount. Understanding is made even more difficult by the defendant’s failure to lodge an Acknowledgement of Service and Summary Grounds of Defence.

The claim is, at the very least, highly arguable.”

Reference had been made, in the judicial review claim, to HMRC Tax Bulletin 18 (August 1995) headed: ‘Excessive assessments: The practice known as “Equitable Liability”’. That provides:

“Most people keep their tax affairs up to date and pay their tax at the right time. If people have genuine difficulties in meeting their payments they should let us know as soon as possible. The more we are kept informed, the more we are likely to be able to help.

. . .

However, where the taxpayer has exhausted all other possible remedies, the Inland Revenue may, depending on the circumstances of the particular case, be prepared not to pursue its legal right to recovery for the full amount where it would be unconscionable to insist on collecting the full amount of tax assessed and legally due.

This practice is known as 'equitable liability'

. . .

The Inland Revenue may be prepared to consider applying 'equitable liability' where, in the circumstances of the particular case and in the light of all the evidence, it is clearly demonstrated that:

•

the liability assessed is greater than the amount which would have been charged had the returns, and necessary supporting documentation, been submitted at the proper time, and

•

acceptable evidence is provided of what the correct liability should have been.

In such cases the Inland Revenue may be prepared to accept a reduced sum based on the evidence provided, and not to pursue its right of recovery for the full amount.

This treatment will depend on the circumstances of the particular case, and is conditional on the taxpayer's affairs being brought fully up to date. The Inland Revenue would expect full payment to be made of the reduced sum. Furthermore, it would be most unusual for such treatment to be applied more than once in favour of the same taxpayer.

In determining the revised liability, the Inland Revenue will have regard to all the relevant circumstances of the case. Acceptable evidence of the reduced liability must be produced. It will not be sufficient to seek to replace the assessment merely with the taxpayer's or the accountant's estimate of the liability.”

The claim also included a request to issue a certificate under Regulation 78(8)(b) of the Regulations. It is unnecessary to consider that issue further.

That permission was set aside by Mitting J on 20 November 2008 when he found that the claim for judicial review had not been served, as required, on the solicitor to HMRC. Service had been upon HMRC itself. It was sent to Mr Eames, Assistant Management Officer of the HMRC office in Woking, who had conducted the correspondence and was clearly the Officer responsible for the case.

By letter of 27 November 2008 to HMRC, the appellants’ solicitors stated that “the only issue that remained was on the question of costs, which is the same issue as remains today”. They added:

“However, it is your intention to disregard the letter and defend the proceedings on merit, our client would have no alternative but to continue the claim on the issue of costs as the matters in question have been resolved.”

That letter was written in reply to a letter from HMRC, signed by a Senior Legal Officer, stating:

“Please note that as the original application was not properly served on this office we will not entertain your request for costs.”

By letter of 28 November 2008, HMRC, the same Senior Legal Officer, stated that, if the claim for judicial review had been properly served, “this Office would have taken immediate charge of the situation, found out what the HMRC officers were involved in, giving our advice and this would have doubtlessly obviated the need for the work which you subsequently embarked on. If you had even served us with the notice this would have had the same effect. I fail to see why the public purse should be called upon to pay your fees in such circumstances”. Apart from the implied admission of the merits of the claim that is, with respect, a little difficult to swallow when the claim had been served on Mr Eames, the responsible officer of HMRC involved in the case. He wrote, on receipt of the claim form:

“Our file will be submitted to our Head Office on the morning of Monday, 19 May 2008 for further instructions.”

In the letter of 28 November 2008, it was also stated that, if the claim for judicial review was pursued, HMRC “will robustly defend the action”.

On receipt of detailed grounds from HMRC contesting the claim for judicial review, the appellants’ solicitors wrote a long letter to HMRC on 10 February 2009, making points which predictably arose out of the events I have described. They also took the point that “it is difficult to see how HMRC can reconcile its prima facie duty to collect all tax due with its current view that it would have allowed part payment in settlement of the debt owed by our client”. At the hearing in this court, Mr Conolly, for the appellants, has sought to develop the point that the appellants need protection from the possibility that HMRC may yet seek to collect the balance of their County Court claim of £84,000. Thus what in the earlier correspondence had only been a request for costs was expanded to include this issue.

In summary grounds for contesting the claim for judicial review, HMRC submitted that the points sought to be taken by the appellants in a judicial review could and should have been taken before the County Court. It was further submitted, although without supporting material, that it was “belated payment by the [the appellant] that led to the settlement, not the threat of JR”. To seek to stall or handicap ordinary and proper County Court debt proceedings by a “side challenge judicial review” is, it was submitted, corrosive of the proper and efficient functioning of justice. It was also submitted that reliance on Tax Bulletin 18 was inappropriate because the appellants had not exhausted all other possible remedies.

The judicial review claim would have turned upon the alleged failure of HMRC to follow its own equitable liability practice. That provided that, if people have genuine difficulties, they should let HMRC know as soon as possible. The more HMRC are kept informed, the more they are likely to be able to help. HMRC may be prepared, it is said, not to pursue its legal right to recovery of the full amount where it would be unconscionable to insist on collecting the full amount of tax assessed and legally due. Tax Bulletin 18 states that HMRC may be prepared to consider applying it where it is clearly demonstrated that the liability assessed is greater than the amount which would have been charged had the returns, and necessary supporting documentation, been submitted at the proper time and acceptable evidence is provided of what the correct liability should have been. It is stated that the treatment will depend on the circumstances of the particular case and acceptable evidence of the reduced liability must be produced.

The present case would appear to be one where there was every expectation that the equitable liability practice would be applied:

I add that, soon afterwards, the appellants paid the amount actually due to HMRC but HMRC persisted in their County Court claim until the judicial review proceedings had been commenced and were submitted by Mr Eames to Head Office. Mr Clarke, for HMRC, did seek to avoid a finding that it was the commencement of the judicial review that led to HMRC’s change of front, but, on the timetable, and in the absence of another contemporaneous explanation, I am quite unable to accept his submission.

If the equitable liability practice is ever followed, this appears on the evidence before the court to be a case in which it would be followed. The insistence of HMRC in persisting with its claim for the deemed sum, and its complete lack of flexibility, was susceptible to challenge. On consideration of the papers, Mitting J considered that the claim for judicial review was “at the very least, highly arguable”. He stated that is was difficult to understand why HMRC had not exercised its discretion under Tax Bulletin 18 not to collect the full assessed amount. Mitting J’s readiness to give leave supports the appellants’ case.

For HMRC, Mr Clarke’s central submission is that the appellants’ public law points should have been raised as a defence in the County Court proceedings. It was a waste of time and money, and a contradiction of the overriding objective of modern civil litigation, it was submitted, to commence judicial review proceedings instead of contesting the debt in the County Court. The claim was for a statutory debt in a private law action and it was not reasonable, given the relatively small claim, to commence judicial review to challenge it,

Reference was made to the decision in Wandsworth London Borough Council v Winder [1985] AC 461 where, in proceedings in the County Court claiming arrears of rent and possession of a flat, the defendant contended that he was not liable to pay the arrears because the council resolutions and notices of increase, pursuant to powers under the Housing Act 1957, were ultra vires and void. In a speech with which the other members of the Committee agreed, Lord Fraser of Tullybelton stated, at page 509E:

“It would in my opinion be a very strange use of language to describe the respondent's behaviour in relation to this litigation as an abuse or misuse by him of the process of the court. He did not select the procedure to be adopted. He is merely seeking to defend proceedings brought against him by the appellants. In so doing he is seeking only to exercise the ordinary right of any individual to defend an action against him on the ground that he is not liable for the whole sum claimed by the plaintiff. Moreover he puts forward his defence as a matter of right, whereas in an application for judicial review, success would require an exercise of the court's discretion in his favour.”

Lord Fraser added, at page 501C:

“If the public interest requires that persons should not be entitled to defend actions brought against them by public authorities, where the defence rests on a challenge to a decision by the public authority, then it is for Parliament to change the law.”

Lord Fraser added, at page 510E:

“I would adopt the words of Viscount Simonds in Pyx Granite Co. Ltd. v. Ministry of Housing and Local Government [1960] A.C. 260, 286 as follows:

‘It is a principle not by any means to be whittled down that the subject's recourse to Her Majesty's courts for the determination of his rights is not to be excluded except by clear words.’”

In Kay v Lambeth LBC [2006] 2 AC 465, a defendant in possession proceedings sought to rely on Article 8 of the European Convention on Human Rights dealing with the right to respect for private and family life. Lord Bingham of Cornhill, at paragraph 30 referred to section 7(1)(b) of the Human Rights Act 1998. While in a minority as to its application in the circumstances of that case, Lord Bingham stated:

“This is express authority entitling the occupier to raise his article 8 challenge to the possession order sought against him in those proceedings. It is consistent with authorities such as Wandsworth London Borough Council v Winder[1985] AC 461 and Boddington v British Transport Police[1999] 2 AC 143, and respects the principle that if other means of redress are conveniently and effectively available to a party they ought ordinarily to be used before resort to judicial review: see, for example, R v Huntingdon District Council, Ex p Cowan [1984] 1 WLR 501, 507. Where a party seeks relief, on conventional judicial review grounds, which only the Administrative Court can grant, there will, of course, be no alternative to an application for judicial review, but that will very rarely, if ever, be the case where an occupier seeks to resist a possession order in reliance on article 8.”

The majority view on the application of the principles was expressed by Lord Hope of Craighead at paragraph 110.

In Cowan, the claimants sought by judicial review to quash the refusal of a local authority to grant a liquor licence and a music and dancing licence, notwithstanding a right of appeal to the Magistrates Court. Glidewell J stated:

“As I have said, the relief sought is discretionary. Where there is an alternative remedy available but judicial review is sought, then in my judgment the court should always ask itself whether the remedy that is sought in the court, or the alternative remedy which is available to the applicant by way of appeal, is the most effective and convenient, in other words, which of them will prove to be the most effective and convenient in all the circumstances, not merely for the applicant, but in the public interests. In exercising discretion as to whether or not to grant relief, that is a major factor to be taken into account.”

Glidewell J granted relief, stating, at page 508A:

“What I am being asked to deal with is a matter which affects the conduct by Local Authorities throughout the country of their functions under the legislation.”

The question in the present case is the question converse to that in Winder: Is it an abuse or misuse by the appellants of the process of the court, or at least a course of action which disentitles them to the cost of taking it, for the appellants in the circumstances to have commenced proceedings for judicial review? On the Regulations, there was no private law defence to the claim for a debt of £84,000 deemed to be due.

I accept of course the importance of retaining flexibility and pragmatism in the distinction between public and private law (Mercury Communications Ltd v Director General Telecommunications [1996] 1 WLR 48, Trustees of the Dennis Rye Pension Fund v Sheffield City Council [1998] 1 WLR 840). In Mercury, Lord Slynn of Hadley stated, at page 57E:

“Some flexibility as to the use of different procedures is necessary. It has to be borne in mind that the overriding question is whether the proceedings constitute an abuse of the process of the court.”

I do not consider that it was an abuse of the process of the court or unreasonable for the appellants to resort to a public law claim in the prevailing circumstances. Despite the good sense and relevance of the equitable liability practice, HMRC had initiated, and despite all reasonable efforts by the appellants to settle for the sum actually due, persisted in their statutory claim for the amount deemed to be due. HMRC failed to respond to the appellants’ proposals for over four months, notwithstanding reminders. They were then supplied with detailed and, it appears, scrupulous, calculations of the sum actually due but persisted in a claim for the sum deemed to be due under Regulation 78.

In such circumstances, the words of Viscount Simonds in Pyx Granite include, in my view, the appellants’ right of recourse to the Administrative Court. Whether the County Court Judge would have been prepared to construe and apply, in a debt collection case, an HMRC policy document we shall not know. There was no certainty that he would do that rather than leave the appellants to an attempted public law remedy after the hearing before him. In any event, it was reasonable to seek to stay the County Court proceedings and to challenge in the Administrative Court HMRC’s failure to apply its policy.

Moreover, there is a public interest in issues such as the status, relevance and application of policy documents of general application emerging from the HMRC, or any Government Department, being resolved in the Administrative Court. It is the court with expertise in this area. Normally, I would expect the public body concerned to prefer that such an issue, which may have considerable implications, be resolved in the Administrative Court. I readily acknowledge that it all depends on the context of the document and all the circumstances. I accept that there are many situations (of which Winder was one) in which a public law defence can be advanced in the County Court. There are situations in which it should be advanced there as a defence to the private law action but in my judgment the present situation, which I hope and would expect to be unusual, is not one of them.

I would grant the appellants’ application for the costs of commencing the claim for judicial review and pursuing their claim for its costs. In making his order that the appellants should pay costs of £500, Lloyd Jones J appears to have accepted, by stating that the appellants were not justified in pursuing judicial review once the County Court proceedings had been settled, that the appellants were justified in pursuing the application for permission to apply for judicial review until then. However, he appears to have taken no account of that in the order made. A reconsideration of the issue of costs is required in this court.

Until a late stage in the history described, once the County Court proceedings had settled, the appellants were claiming only the costs of their judicial review claim. However, at a late stage, it was suggested that the settlement between the parties may have been ultra vires the HMRC. The point was developed at the present hearing as justifying a judicial review because of the risk that HMRC might reopen the County Court settlement and claim the balance of £84,000.

Reliance was placed by Mr Conolly, for the appellants,on the decision of the Inner House of the Court of Session in Al Fayed v Advocate General for Scotland [2004) SPC 1703. The Revenue were permitted, in exercise of a managerial discretion, to resile from an agreement made with a taxpayer as to forward tax. The Lord President, giving the judgment of the court, stated, at paragraph 49:

“Parliament imposed tax on actual transactions. Since that was so, a compromise required to relate to actual transactions, for it was in relation to them that the respondents were entitled to collect tax. A forward tax agreement did not involve the taxation of taxable transactions that had occurred. It did not involve the agreement and collection of a compromise sum in relation to an existing liability to tax. It involved the agreement to pay and accept a fixed sum in respect of future transactions which might or might not occur. The sum was unrelated to the amounts involved in future transactions. It was arbitrary, and did not relate to the actual level of taxation which was due on transactions. It particularised the exact sum which was to be paid, but without the respondents having any inkling as to the actual level of taxable transactions.”

I consider the suggestion that HMRC might seek to apply Al Fayed in present circumstances to be fanciful. While the basis for doing so was not clearly expressed at the time, HMRC settled at the figure at which they had always been invited to settle and at which they were entitled to settle under the equitable liability practice. There was nothing arbitrary about the figure; it was based on calculations made by responsible accountants and found to be accurate. It related to back tax and not forward tax. The court acknowledged in Al Fayed, at paragraph 49, and in relation to back tax:

“In that context they have power to arrange a compromise with the taxpayer, taking into account such factors as may be relevant.”

If HMRC attempted to reopen its claim, Al Fayed would not assist.

While the conduct of HMRC in relation to this claim is difficult to understand and was not justified, as their belated concession appears to have acknowledged, I find it unthinkable that HMRC would now resort to claiming the balance of £84,000.

The costs of commencing the judicial review should be awarded to the appellants. The sum of £10,500 was claimed on 20 June 2008, that is very soon after the County Court proceedings had settled. It was particularised only as between sums for accountants, solicitors and counsel. No further particulars were either provided or requested. A further £4,000 is now claimed for costs incurred after 20 June 2008. The work done to justify that sum has not been particularised, though it is clear that there was substantial correspondence. Further, as already stated, the basis of the claim was at a later stage broadened in the manner described.

I accept that substantial work was required to initiate the claim for judicial review. Research into HMRC policy was required, consideration of the equitable liability practice and its relation to the facts and figures found. The claim had to be prepared and served.

For HMRC, Mr Clarke submitted that no sum beyond £10,500 should, in the circumstances, even be considered and that about half that sum was all that could be justified. I agree with Mr Clarke that it is unsatisfactory (and very surprising) that a party comes to this court on a claim for costs without any proper particularisation and analysis of the sum claimed. On the basis of such material as has been supplied, an award of £6,000 is in all the circumstances in my view appropriate. This does not include any element for the ultra vires suggestion made at a late stage.

I would allow the appeal, quash the order in HMRC’s favour of £500 and substitute an order for costs of £6,000 in the appellants’ favour.

I agree.

I also agree.