HM Revenue & Customs v Brayfal Ltd

Brayfal appeal (in fact by cross-appeal) against a costs order made by the VAT & Duties Tribunal in its decision of 22 August 2008. Brayfal had appealed against the refusal by HMRC to allow its claim to deduct input tax on the ground that it knew or should have known that its transactions were connected with fraud. The Tribunal allowed the appeal, subject to one point. The Tribunal unanimously found that HMRC had failed to prove that Brayfal knew or had the means of knowing at the time that it entered into the transactions in question that they were connected to fraud. HMRC appealed against that decision, principally on the ground that the Tribunal had given inadequate reasons for its decision. By consent the appeal was remitted so that the Tribunal could give further reasons for its decision. In the meantime the VAT & Duties Tribunal had been replaced by the First Tier Tribunal (“the FTT”) and so it was that tribunal that reconsidered the decision. It released its decision on 3 March 2010. This time the FTT decided by a majority of two to one that HMRC had failed to prove that Brayfal knew or had the means of knowing at the time that it entered into the transactions in question that they were connected to fraud. HMRC appealed again. That renewed appeal came before me, sitting as a judge of the Upper Tribunal. By a decision which I hope will reach the parties at the same time as this judgment, I dismissed that appeal.

Although Brayfal was the successful party in the VAT & Duties Tribunal; and the Tribunal made a costs order in its favour, the Tribunal did not order HMRC to pay all Brayfal’s costs, but only 90 per cent of them. It is that deduction against which Brayfal appeals. The reason for the deduction was explained by the Tribunal as follows (§§ 99, 100):

“Ordinarily, at this point we should simply have allowed the appeal. However, as Brayfal has failed to pay the VAT on the two invoices on which it based its input tax claim for 05/06 section 26A of the Value Added Tax Act 1994 comes into operation in relation to that claim. Section 26A effectively restricts recovery of input tax where the full consideration has not been paid within six months of the date of supply to the tax which would have been payable on the basis that the consideration in fact paid was tax inclusive. Consequently, in the instant case, Brayfal’s claim for period 05/06 must be reduced from £200,900 to £170,978.72, and we reduce it accordingly. (That does not mean that Brayfal’s admitted contractual liability to Future is also reduced; it is not, it remains at £200,900).

Mr. Patchett-Joyce made application for Brayfal’s costs in the event of the appeal being successful. We accede to his application, but since we have reduced the tax recoverable by almost £30,000, only to the extent of nine-tenths thereof. If agreement cannot be agreed as to the extent of the costs, as calculated on the standard basis, we direct that they be determined by a Tax Judge of the Supreme Court.”

This point emerged only in the course of evidence which the Tribunal recorded at §§ 59 to 63 in the course of which the Tribunal rejected the evidence of Mr Kibbler (who was the moving spirit behind Brayfal) on this point.

Mr Patchett-Joyce takes four essential points:

The starting point is that the Tribunal were exercising a discretion. Accordingly the court can only interfere if the Tribunal erred in principle by leaving out of account some factor that it ought to have taken into account; or by taking into account some factor that they ought not to have taken into account; or by exceeding the generous ambit within which reasonable disagreement is permissible.

I do not consider that the Tribunal erred in not giving Mr Patchett-Joyce an opportunity to dissuade them from making the deduction. As the Tribunal recorded he made his application for costs in the event that the appeal succeeded. It did not succeed in full; and therefore the Tribunal were, in my judgment, entitled to proceed to make their decision on costs in the light of their decision on the substantive appeal.

The decision to deduct 10 per cent of Brayfal’s costs was founded on the fact that the Tribunal had disallowed part of the claim to deduct input tax. Part of the Tribunal’s reasoning in disallowing that part of the claim was that they disbelieved the evidence of Mr Kibbler on this point. It is well-known that a tribunal is entitled to make a partial costs order when a party has not been wholly successful; and it is equally well-known that a party who exaggerates his case or who gives false evidence may be deprived of part of his costs. In my judgment the Tribunal were entitled to make a deduction on that ground. So far as the quantum of the deduction was concerned, the fact that the point only emerged in the course of Mr Kibbler’s oral evidence demonstrates that some time was taken up at the hearing with this point. The Tribunal is not required mechanically to count days or hours (or for that matter pages of documents) in deciding what deduction to make. They were in my judgment entitled to take a broad brush view and, in taking that view, to take account in deciding the quantum of the deduction of their rejection of Mr Kibbler’s evidence.

In my judgment their decision was within the wide ambit within which reasonable disagreement is possible. Other Tribunals might have reached different decisions, for all the reasons that Mr Pattchett-Joyce gave. But in my judgment they do not demonstrate that the VAT & Duties Tribunal made any error of law.

It follows that Brayfal’s cross-appeal will be dismissed. It was agreed at the hearing that costs would follow the event. So Brayfal will pay HMRC’s costs of the cross-appeal (only) on the standard basis if not agreed.