Eclipse Film Partners No. 35 LLP v Revenue & Customs

The issue in this appeal is whether the First-Tier Tribunal (Tax Chamber) (“FTT”) has jurisdiction to make an order that the costs of preparing hearing bundles for a substantive appeal by the appellant taxpayer, Eclipse 35, should be shared equally between the taxpayer and the Commissioners for Her Majesty’s Revenue and Customs. That order had been made on 1 June 2011 on the application of Eclipse 35, despite the opposition of the Revenue. But the Revenue at that stage did not question the jurisdiction of the FTT to make that order. Following rejection of the taxpayer’s appeal, its solicitors, Freshfields Brookhaus Deringer Llp, sent the Revenue a schedule of its own costs in preparing the bundles, seeking the Revenue’s contribution of £108,395.48, inclusive of VAT. It was only then that the Revenue applied to set aside the order, leading to the decision of the First-Tier Tribunal of 31 May 2012, ruling that it did have jurisdiction. Upper Tribunal Judge Berner, in the Upper Tribunal (Tax and Chancery Chamber) ruled that the FTT had no jurisdiction to make that order. Eclipse 35 now appeals.

The issue turns on the proper construction of the Tribunal Procedure Rules governing the practice and procedure to be followed in the FTT. Section 29 of the Tribunals, Courts and Enforcement Act 2007 provides:-

“Costs or Expenses

(1)

The costs of and incidental to –

(a)

all proceedings in the First-tier Tribunal…

shall be in the discretion of the Tribunal in which the proceedings take place.

(2)

The relevant Tribunal shall have full power to determine by whom and to what extent the costs are to be paid.

(3)

Subsections (1) and (2) have effect subject to Tribunal Procedure Rules.

(4)

In any proceedings mentioned in subsection (1), the relevant Tribunal may –

(a)

disallow, or

(b)

(as the case may be) order the legal or other representative concerned to meet, the whole of any wasted costs or such part of them as may be determined in accordance with Tribunal Procedure Rules.”

The Tribunal Procedure Rules are made under s.22 of the 2007 Act and their content is described in broad terms in paragraph 12 of Schedule 5.

Three Rules are relevant to the issue in the instant appeal. The overriding objective and the parties’ obligation to co-operate with the Tribunal is identified in Rule 2:-

“(1)

The overriding objective of these Rules is to enable the Tribunal to deal with cases fairly and justly.

(2)

Dealing with a case fairly and justly includes –

(a)

dealing with the case in ways which are proportionate to the importance of the case, the complexity of the issues, the anticipated costs, and the resources of the parties.”

In interpreting any Rule, the Tribunal must seek to give effect to the overriding objective (Rule 2(3)) and the parties are required to help the Tribunal to further the overriding objective and to co-operate with the Tribunal generally (Rule 2(4)(a)(b)).

By Rule 5:-

“(1)

Subject to the provisions of the 2007 Act and any other enactment, the Tribunal may regulate its own procedure.

(2)

The Tribunal may give a direction in relation to the conduct or disposal of proceedings at any time, including a direction amending, suspending or setting aside an earlier direction.

(3)

In particular, and without restricting the general powers in paragraphs (1) and (2), the Tribunal may by direction –

…

(i)

require a party to produce a bundle for a hearing…”

Rule 10, under the rubric Orders for Costs, provides:-

“10.—(1) The Tribunal may only make an order in respect of costs (or, in Scotland, expenses)—

(a)

under section 29(4) of the 2007 Act (wasted costs);

(b)

if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings;

(c)

if—

(i)

the proceedings have been allocated as a Complex case under rule 23 (allocation of cases to categories); and

(ii)

the taxpayer (or, where more than one party is a taxpayer, one of them) has not sent or delivered a written request to the Tribunal, within 28 days of receiving notice that the case had been allocated as a Complex case, that the proceedings be excluded from potential liability for costs or expenses under this sub-paragraph;

…

(2)

The Tribunal may make an order under paragraph (1) on an application or of its own initiative.

(3)

A person making an application for an order under paragraph (1) must—

(a)

send or deliver a written application to the Tribunal and to the person against whom it is proposed that the order be made; and

(b)

send or deliver with the application a schedule of the costs or expenses claimed in sufficient detail to allow the Tribunal to undertake a summary assessment of such costs or expenses if it decides to do so.

(4)

An application for an order under paragraph (1) may be made at any time during the proceedings but may not be made later than 28 days after the date on which the Tribunal sends—

(a)

a decision notice recording the decision which finally disposes of all issues in the proceedings; or

(b)

notice of a withdrawal under rule 17 (withdrawal) which ends the proceedings.

(5)

The Tribunal may not make an order under paragraph (1) against a person (the “paying person”) without first—

(a)

giving that person an opportunity to make representations; and

(b)

if the paying person is an individual, considering that person’s financial means.

(6)

The amount of costs (or, in Scotland, expenses) to be paid under an order under paragraph (1) may be ascertained by—

(a)

summary assessment by the Tribunal;

(b)

agreement of a specified sum by the paying person and the person entitled to receive the costs or expenses (the “receiving person”); or

(c)

assessment of the whole or a specified part of the costs or expenses incurred by the receiving person, if not agreed.

(7)

Following an order for assessment under paragraph (6)(c) the paying person or the receiving person may apply—

(a)

in England and Wales, to a county court, the High Court or the Costs Office of the Supreme Court (as specified in the order) for a detailed assessment of the costs on the standard basis or, if specified in the order, on the indemnity basis; and the Civil Procedure Rules 1998 shall apply, with necessary modifications, to that application and assessment as if the proceedings in the tribunal had been proceedings in a court to which the Civil Procedure Rules 1998 apply;

…

(8)

In this rule “taxpayer” means a party who is liable to pay, or has paid, the tax, duty, levy or penalty to which the proceedings relate or part of such tax, duty, levy or penalty, or whose liability to do so is in issue in the proceedings.”

Mr Maugham, in his beguiling submissions on behalf of Eclipse 35, accepted that he could not rely on either s.29 or Rule 2 as free-standing sources of authority to make the order that the costs be shared. He contended, that on a true construction of Rules 5 and 10, the order that the costs of preparing the bundles be shared, was an order which fell within Rule 5 and was not precluded by Rule 10.

Rule 10 provides that in complex cases there may be a regime whereby costs are shifted at the end or, should the taxpayer so decide, that there should be no costs shifting. Since a decision must be made within 28 days of receiving notice of allocation, the regime which is to apply in relation to the shifting of costs is decided and certain at an early stage (see Warren J in HMRC v Atlantic Electronics [2012] STC 931, paragraphs 7, 22 and 28).

Eclipse 35’s appeal was allocated as a complex case (under Rule 23 of the 2009 Rules). Accordingly, the Tribunal would have had power to make an order for costs at the end of the appeal (Rule 10(1)(c)). But it could not do so in the instant appeal because, on 23 September 2009, Eclipse 35 had notified the Tribunal that the proceedings in its case were to be excluded from potential liability for costs. In other words, it took a particular view as to the risks it was prepared to face in pursuing the appeal.

Once it had done so, the full-out words at the beginning of Rule 10(1) seem to make it clear that the Tribunal has no power to make “an order in respect of costs” save by the exercise of its power under s.29(4) of the 2007 Act, to make an order in respect of wasted costs, (Rule 10(1)(a)) or because it considers a party has acted unreasonably (Rule 10(1)(b)).

Notwithstanding the apparently clear restriction on the power to make an order in respect of costs contained in the opening full-out words of Rule 10(1), Mr Maugham seeks to uphold the power of the Tribunal to make an order that the costs be shared by reference to Rule 5. He rightly points out that the fact that Eclipse 35 chose to opt out of a cost-shifting regime is not of assistance in construing either Rule 5 or Rule 10. The correct construction of Rules 5 and 10 must hold good irrespective of whether the case is allocated as a complex case or not. Those rules apply in a standard case in respect of which no costs order could be made unless it was a wasted costs order or a party had behaved unreasonably. In a standard case a taxpayer cannot opt out under Rule 10(1)(c)(ii). Accordingly, the rules must be construed disregarding the fact that a taxpayer has the power to reject a costs-shifting regime in a complex case.

The essential argument advanced by Mr Maugham is that the order made by the Tribunal that the costs be shared was merely an integral part of a case management decision under Rule 5. It was not a costs-shifting order proscribed by Rule 10 but rather was an order that costs be shared which followed directly from the case management ruling as to the preparation of the bundles.

It is beyond argument that a Tribunal may exercise its case management powers in a way which requires both parties to participate in the preparation of, for example, bundles of documents or authorities (see Rule 5(3)(d) and (i)). Inevitably, such an exercise of case management powers will involve costs and expense being shared between the two parties, required to make the preparations ordered by the Tribunal. Rule 15 affords a clear example of an order of the Tribunal which will involve expense being shared. Under Rule 15(1)(c) the Tribunal may give directions that the parties must “jointly appoint a single expert” to provide evidence. That will inevitably carry with it a shared burden of cost and expense. The instant case affords another example of an order which involves shared expense. Directions agreed on 15 March 2011 provided that an official transcript should be taken of the hearing, “the costs of which should be borne equally”. The Revenue did not suggest that such a direction fell foul of Rule 10.

The examples I have identified of case management orders open to a Tribunal, demonstrate that the proscription on orders in respect of costs save as provided by Rule 10(1) does not restrict the power of the Tribunal to make case management directions under Rule 5, even though they will have the consequence that the burden of costs will be shared.

In those circumstances, Mr Maugham argues that the mere fact that the Tribunal articulates the inevitable consequence of its case management directions whether made under Rule 5 or, for example, under Rule 15, ought not to make any difference. The express articulation that costs be shared is not an order in respect of costs within the meaning of Rule 10(1), but rather merely part and parcel of the case management directions which the Tribunal is empowered to make under Rule 5.

Once it is accepted, as it must be, that the Tribunal has power to make orders under Rule 5, which have the effect that a party will incur costs, Mr Maugham argues that it must follow that the Tribunal has power expressly to order that the parties should share the costs of compliance. It makes no sense to draw a distinction between a case where a Tribunal makes a case management direction which has the inevitable result that a party will incur costs, and the express articulation of that consequence in the form of an express order that the costs be shared.

In my view, it does not follow that because the Tribunal has power to make a case management direction which has costs consequences, it has power to make an order that one or both parties bear the costs of compliance. I agree with Judge Berner in his decision at [29] and [30]. Whilst many case management decisions will have the consequence of imposing a costs burden on one or both parties, the order made in this case, that the costs of preparing the bundle be shared was, “an order in respect of costs” within the meaning of Rule 10(1) and thus outwith the power of the Tribunal.

The order was caught by Rule 10 notwithstanding that it was made during the course of the preparation of the proceedings rather than after the proceedings had been determined. Rule 10(4) makes it clear that an order “in respect of costs” within the meaning of Rule 10 may be made at any time during the proceedings. It is true that Rule 10(3) is most apt in circumstances where a case has been concluded and the mechanics of Rule 10 are geared to orders for costs being sought after the event. But an order for costs made during the course of the proceedings is within the scope of Rule 10(1), whether it is made as a consequence of a case management direction or not.

The provisions of Rules 10(3)(5)(6) and (7) provide a comprehensive code for dealing with costs orders. This is a powerful pointer to the exhaustive scope of Rule 10. It is true, as Mr Maugham points out, that s.29(2) of the 2009 Act provides that a relevant Tribunal has power to determine the extent to which costs are to be paid. But that is subject to the rules and it is, to put it at its lowest, surprising that if the Tribunal had power to make an order as to whether the parties should bear the costs of compliance with a case management direction no provision as to how those costs are to be assessed has been made.

With conspicuous skill Mr Maugham sought to divert our attention from the facts of this case. He argued that they were not of importance since the issue had to be dealt with as a matter of principle. I do not agree. The essential problem in this case arises out of the sequence of events which took place. The order that Eclipse 35 prepare the bundle was agreed on 15 March 2011. It provided that the parties should endeavour to agree an indexed and paginated bundle for the hearing, but that the hearing bundle was to be prepared by Eclipse 35, and that three copies of the hearing bundle be served on the respondent and three copies on the clerk (paragraph 30(a)). It provided that in default of agreement on the hearing bundle, each party should, by the date specified, serve three copies, upon the other party and on the clerk, of an indexed and paginated bundle of those documents upon which they wished to rely.

As the FTT records, the preparation and copying of the bundles was a complex and lengthy process. It involved a very substantial amount of material to be included in the bundles which had to be categorised with regard to chronology, subject matter and the need to exhibit documents to various statements. The FTT records that a significant part of the material comprised documents which the Revenue required to be included. Proposals made by Eclipse 35 to limit the number of documents were rejected by the Revenue.

Accordingly, on 1 June 2011 Mr Maugham made an application that the costs be shared. He pointed out that 70 lever arch files needed to be prepared, most of which contained documents on which the Commissioners relied. The Revenue, so he pointed out, were saying that in total, having regard to the full number of sets required, 700 lever arch files should be prepared in circumstances in which the Revenue asserted that they should not bear any of the costs of preparation. The FTT set out the reasons why it was sensible that a single and agreed bundle, at the expense of both parties, be prepared, and in the interests of all concerned:-

“It was clearly in the interests of all concerned – both the parties and the Tribunal itself – that there should be a single and agreed bundle, compiled and organised in a way which best facilitated the presentation of a very complex case. Had we directed each party to prepare its own bundle the costs would (by effect rather than specific direction) have been divided between the parties but to the detriment of the efficient conduct of the hearing generally and to the detriment of the parties in preparing for the hearing. A direction for one party to prepare an agreed bundle and the required copies of that bundle, and for the costs of that exercise to be met equally by the parties is fair and just in the circumstances of this case, and a proper exercise of the case management powers conferred on the Tribunal by Rule 5. In no sense, having regard to the purpose of Rule 10, could such a direction be said to be a purported award of costs which Rule 10 prohibits in the circumstances of this case.”

The good sense of ordering that one set of the bundles be prepared is obvious. It would have been a recipe for chaos and not good case management for one party to prepare bundles with the documents on which it sought to rely and for the Revenue to prepare a different bundle containing those documents on which it sought to place reliance. It would have been open to the FTT to order that both parties prepare a single set of bundles, leaving it to them as to how that was to be done and, should there be obduracy on the part of one or the other, to make further directions to resolve any dispute. Had the FTT made that order, both sides would have borne the costs of their contribution to the single sets of bundles, just as both sides would have had to contribute to the cost of a single expert or, as they did, to the cost of transcripts. But this is not what happened. Eclipse 35 had already agreed to prepare the bundle and the question of expense arose only because of the Revenue’s insistence on the insertion of a large number of documents, leading to ever more files. If this proves to be unreasonable then it will be open to the FTT to say so since the question of the conduct of the Revenue has been adjourned.

But I share the view of the Upper Tribunal, for the reasons it gives, that there was no power to make an express order that the costs be shared. Faced with a dispute as to what documents should be included, the FTT could have varied the original agreed order and required the Revenue to prepare any amendment to the bundle proposed by Eclipse 35. Thereby, it would have imposed a burden of costs on the Revenue. But the FTT was not empowered to make the express order it purported to make once Eclipse 35 had complained as to the approach of the Revenue to its bundle.

I am conscious of the fact that this issue could have been avoided had Eclipse 35 not sought an order for costs, but had sought variation of the management directions as to the preparations of the bundle. I am also aware that the Revenue did not take the jurisdiction point at the time. Perhaps, had it done so, the FTT might, rather than making the impugned order for costs, have itself varied the order as to preparation of the bundles and required both parties, as I have said, to produce one set and to produce copies of that set. But, I do not believe that the plain meaning of the Rules can be distorted in order to accommodate the unfortunate sequence of events in this case. If the Revenue’s insistence on the inclusion of the documents it wished to rely upon was unnecessarily obdurate then an order can be made to reflect any unreasonable conduct on the Revenue’s part. I agree with Judge Berner and with the reasons he gave that the order made by the FTT did fall within the scope of the prohibition under Rule 10 and that there was no power to make it. I would dismiss the appeal.

I agree.

I also agree.