GC Field & Son Ltd v The Commissioners for HMRC

The Appellant claims costs under rule 10(1)(b) and not 10(1)(a) FTT Rules. Their claim is predicated on the basis that HMRC bore the burden of proving negligence and the Tribunal found that they had failed to lead any evidence as to the negligent conduct of either the Appellants or the promoter. They acknowledge that the fact that HMRC’s arguments on negligence failed is not sufficient to constitute unreasonable conduct and emphasise that the unreasonable conduct relied on was a failure “to make any attempt to satisfy their burden of proving that the Appellants or [the promoter] acted negligently”.

The Appellant notes that HMRC’s statement of case asserts negligence in the form of a failure to amend the SDLT return following the legislative change and also asserts that the loss of tax was attributed to that negligent conduct. In respect of the promoters again the statement of case made a simple assertion.

The Appellant also relies on the complete absence of any evidence from HMRC’s witness as to negligence. The statement addressed only the question of discovery.

It is contended that there is, and can be, no explanation for a party adducing no evidence and advancing their case on bare assertion where that party bears the burden of proof. In this regard it is contended that HMRC’s conduct was not within a range reasonable conduct – the obligation on HMRC was to particularise their case and adduce evidence.

A parallel is drawn by the Appellant to the conclusion of the FTT in the matter of Gardiner v HMRC [2015] UKFTT 0115. That case concerned the imposition of a penalty predicated on taxpayer negligence. The taxpayer in that case had put HMRC to strict proof and HMRC led no evidence raising a prima facie case of negligence. The FTT considered such conduct to be unreasonable and awarded costs against HMRC.

HMRC’s objection narrates at some length the history of the dispute between the parties making particular reference to the underlying issue that the Appellants had participated in an unsuccessful tax avoidance scheme. A point which the Appellants conceded more than 2 years after bringing the appeals.

Reliance is placed on the FTT’s conclusion that the Appellants were required pursuant to the retrospective amendment to section 194 FA 13 to have rendered amended returns but they did not do so. HMRC also emphasise that the Tribunal did not find the Appellants to be credible witnesses. They also point to the introduction of the later abandoned claim that the discovery justifying each assessment was stale.

HMRC contend that they did produce evidence to demonstrate that the promoter was aware of the potential impact of section 194 FA 13 by reference to the correspondence from HMRC in connection with the Shaw Appellants and a ministerial statement concerning the amendment and it was simply a case of the Tribunal concluding that the evidence provided was insufficient to meet the burden of proof.

In the circumstances, HMRC contend that it was not unreasonable for them to defend the appeals and that whilst finding against HMRC that negligence was proven Judge McKeever had not indicated that HMRC’s position had been unsustainable.

HMRC distinguish Gardiner on the basis it concerned penalties in circumstances in which the underlying tax had been paid and that the taxpayer in that case had put HMRC to strict proof. In the present case it is asserted that a prima facie case of negligence was made out on the evidence, particularly in the context of the allegation of negligence on the part of the promoter.

In the first instance it is to be noted that the FTT Rules do not provide for the payment of costs in standard category appeals. As noted by the Upper Tribunal in MG v Cambridgeshire County Council [2017] UKUT 00172 (ACC) at paragraph [26] “… the general rule … is that there should be no order for costs”.

Where the Tribunal identifies that there had been unreasonable conduct in the proceedings it is established that there is a discretion and not an obligation for the Tribunal to award costs (see Tarafdar v HMRC [2014] UKUT 0362 (TCC).

The question of the threshold for unreasonableness has been considered in the context of the tax tribunal by the Upper Tribunal in Market & Opinion Research International Ltd v HMRC [2015] UKUT 12 (TCC) (MORI). In that case the Upper Tribunal endorsed the summary by the FTT of what might constitute unreasonable conduct. As far as relevant in the present application unreasonable conduct was identified as:

The leading authority on the circumstances in which costs are payable pursuant to rule 10(1)(b) FTT rules in the Tax Chamber is to be found in the Court of Appeal judgment in Distinctive Care v HMRC [2019] EWCA Civ 1010. The issues which arose in that case are not, in the main, pertinent to the present application for costs. However, and of relevance to the present application, the Court endorsed the approach adopted in MORI.

It also endorsed, at least in the limited circumstances in which it was relevant, the analysis of the president of the Upper Tribunal Asylum and Immigration Chamber, sitting as a FTT judge in Cancino v Secretary of State for the Home Dept; Cancino (Costs – First-tier Tribunal – new powers) [2015] UKFTT 59 (IAC) (Cancino).

On the basis of this endorsement, and the standing of the panel considering the costs application in Cancino, this Tribunal considers the views adopted in that case are highly relevant and persuasive on the approach to be adopted. They also largely apply the binding authority of Ridehalgh v Horsefield [1994] Ch 205 (Ridehalgh) to the Tribunal.

In Cancino the Tribunal reinforced the discretionary nature of a wasted or unreasonable costs order identified in paragraph [33] above.

The Tribunal considered in some detail provisions similar to rule 10 FTT Rules which, as set out above, provides for a discretion to make an award of costs where costs have been wasted and/or where conduct is unreasonable. By reference to the Court of Appeal judgment in Ridehalgh the Tribunal (at paragraph [16]) identified the mischief intended to be addressed by the wasted costs rules as:

“the causing of loss and expense to litigants by the unjustifiable conduct of litigation by their or the other side’s lawyers. Where such conduct is shown, Parliament clearly intended to arm the Courts with an effective remedy for the protection of those injured.”

Wasted costs were identified in Ridehalgh (at page 232d-h, quoted in Cancino paragraph [16]) as payable where there was improper, unreasonable or negligent conduct which were defines as follows:

“Improper means what it has been understood to mean in this context for at least half a century. The adjective covers, but is not confined to, conduct which would ordinarily be held to justify disbarment, striking off, suspension from practice or other serious professional penalty. It covers any significant breach of a substantial duty imposed by a relevant code of professional conduct. But it is not in our judgement limited to that. Conduct which would be regarded as improper according to the consensus of professional (including judicial) opinion can be fairly stigmatised as such whether or not it violates the letter of a professional code. …

Unreasonable also means what it has been understood to mean in this context for at least half a century. The expression aptly describes conduct which is vexatious, designed to harass the other side rather than advance the resolution of the case and it makes no difference that the conduct is the product of excessive zeal and not improper motive. But conduct cannot be described as unreasonable simply because it leads in the event to an unsuccessful result or because other more cautious legal representatives would have acted differently. The acid test is whether the conduct permits of a reasonable explanation. If so, the course adopted may be regarded as optimistic and as reflecting on a practitioner’s judgment, but it is not unreasonable. …

We are clear that negligent should be understood in an untechnical way to denote failure to act with the competence reasonably to be expected of ordinary members of the profession. …We would however wish firmly to discountenance any suggestion that an applicant for a wasted costs order under this head need prove anything less than he would have to prove in an action for negligence.”

As noted in Cancino, the Court in Ridehalgh went on to apply the decision of the House of Lords in Saif Ali v Sidney Mitchell [1980] AC 198, in this context “negligent” conduct arises where a solicitor (or representative) in respect of “advice, acts or omissions in the course of their professional work which no member of the profession who was reasonably well informed and competent would have given or done or omitted to do.”

Ridehalgh also recognised that a “Court’s satisfaction that a legal representative has acted improperly, unreasonably or negligently and that such conduct has caused the other side to incur an identified sum of wasted costs, is not bound to make an order, but in that situation it would of course have to give sustainable reasons for exercising its discretion against making an order.” (Ridehalgh page 239e quoted paragraph 18 of Cancino).

The Tribunal also endorsed the application of a three-stage test when exercising the discretion to award wasted costs as set out in Ridehalgh:

In the context of a wasted costs order it was also noted (again applying Ridehalgh at page 234):

“A legal representative is not to be held to have acted improperly, unreasonably or negligently simply because he acts for a party who pursues a claim or a defence which is plainly doomed to fail”.

In the context of wasted costs (which are awarded against the legal representative of a party rather than the party who they represent) the rationale for this conclusion is that legal representatives may advise their clients of the weakness of a position but may nevertheless be instructed to run the case.

Having undertaken a thorough exposé of the history, rationale and theoretical application of the equivalent to rule 10(1)(a) FTT Rules, the Tribunal went on to consider the equivalent provision to 10(1)(b). At paragraph [23] it states (as it would apply to rule 10 FTT Rules):

“… [10(1)(b)] is concerned only with one species of unacceptable conduct, namely that which is unreasonable. We consider that the question of whether conduct is unreasonable under this limb of rule [10] is to be determined precisely in accordance with the principles which relate to unreasonable conduct under rule [10(1)(a)]. We find nothing in the 2007 Act or the rule itself to suggest otherwise. Thus the basic test will be whether there is a reasonable explanation for the conduct under scrutiny. …”

On the question of the threshold, again by reference to Ridehalgh, the Tribunal stated that the cost shifting rule was to be used in only the clearest of cases and should not be invoked without good reason (see paragraph [27]).

Finally, when considering the reasonableness of a party’s conduct, the Tribunal considered that the conduct of a litigant in person cannot be evaluated by reference to the standard of qualified lawyers, but neither may that be permitted to operate as a carte blanche to misuse the process of the Tribunal.

In that context the Tribunal also has in mind the considerations of the Supreme Court in BPP Holdings International Ltd and others v HMRC [2017] UKSC 55. In the context of a debarring decision issued against HMRC, Counsel for HMRC invited the Supreme Court to take account of the fact that the debarring order prevented HMRC from discharging its public duty and could lead to the public interest being harmed. Lord Neuberger (with whom the other justices agreed) considered that to so hold would set a dangerous precedent and would discourage public bodies from living up to the standards expected of individuals and private bodies. He considered that there was “at least as strong an argument for saying that the courts should expect higher standards from public bodies than from private bodies or individuals”. However, he went on to determine that all courts and tribunals should hold all parties to the same standard.

BPP is the later of these authorities and the Tribunal considers, in the context of a jurisdiction in which parties more commonly represent themselves and/or are not legally represented (including where HMRC conduct litigation through non-legally qualified litigators), the standard to be applied for a wasted costs order, personal to the representative, is that of reasonable competence by reference to their skills and experience.

By reference to the analysis provided in Ridehalgh and considered as applicable to the Tribunal costs regime in Cancino, the Tribunal distils the test to be applied in determining whether an unreasonable costs order should be made as follows:

It is clear, in the view of the Tribunal, that HMRC have behaved arrogantly. An assertion as to negligence was made predicated on a statutory amendment which was publicly promulgated but in circumstances, as identified by Judge McKeever, which did not specifically address the situation of the Appellants.

HMRC’s case was predicated on the bold proposition that the public announcement of the legislative amendment which referenced closing out two particular schemes, neither of which were the scheme adopted by the Appellants, was sufficient to establish negligence. It is apparent that they assumed that the Tribunal would thereby accept, without more, that either the Appellants or the promoter had been negligent in not rendering an amended SDLT return. The statement was their only “evidence” of negligence in the case of the Field Appellants.

HMRC are wrong to assert that they established a prima facie case of negligence for either Appellant or the promoter in the present appeal. Had HMRC established a prima facie case they would have met the burden of proof and the appeal would have failed. On the contrary, no prima facie case was established in the judgment of Judge McKeever.

The burden of proof lay on HMRC. By the amended grounds of appeal it was plain that the Appellants understood that the discovery assessments had been raised on the basis of paragraph 30(3) Schedule 10 FA 03 and not paragraph 30(2). They did not even consider negligence to be in issue and thus, at least by implication, HMRC were put to strict proof on the question of negligence. HMRC put negligence in issue by their statement of case but then, and by reference to the findings of Judge McKeever, HMRC produced “no evidence” of negligence by the Appellants (see paragraph [126]) and “did not produce any evidence of what a reasonably competent tax adviser would have done or whether a reasonably competent tax advisor would have taken the view at the time, that section 194 applied to the scheme” (see paragraph [151]). Contrary to HMRC’s submission there was a complete paucity of evidence as to negligence.

Without such evidence the underlying nature of the insufficiency in tax is immaterial because the discovery assessments are reliant on a combination of a discovery and either negligent/fraudulent conduct or meeting the condition in paragraph 30(3) Schedule 10 FA 03. For these discovery assessments, it was accepted that paragraph 30(3) Schedule 10 FA 03 was not in issue due to the disclosure made, fraudulent conduct was not asserted and there was no evidence to support the assertion of negligence.

The Tribunal bears in mind that for a wasted costs order it is sufficient that the conduct of the representative is negligent in the sense of failing to act with the competence reasonably expected of ordinary members of the profession, or in the case of a litigant in person, the conduct that may be so expected.

This case has been presented throughout by Mr Goulding a litigator of HMRC. The Tribunal understands that litigators are not legally qualified but are entrusted by HMRC with the conduct of a significant volume of litigation matters. Indeed, HMRC appear to choose between the appointment of counsel and litigators. The Tribunal, on balance, does not consider that Mr Goulding failed to act with the competence of an unqualified representative. However, and on balance, the Tribunal considers that HMRC, as the party to the litigation, has acted unreasonably. It prosecuted a matter in respect of which it bore the burden of proof in circumstances in which, without evidence meeting that burden, there could never have been any reasonable prospect of success for the appeal.

By reference to the acid test as to whether the conduct permits of reasonable explanation the answer is no. The Appellant had not understood negligence to be in issue until the statement of case. The Tribunal found that no evidence had been led, the explanation is arrogance on the part of HMRC that the Tribunal would offer latitude on the basis that the tax insufficiency arose as a consequence of engagement in an accepted and unsuccessful attempt to avoid SDLT. That is not a reasonable explanation.

HMRC’s decision to call no evidence to support their case on negligence, in the circumstances of this case, essentially rendered the hearing pointless putting the Appellants to the unnecessary costs of preparing for and attending a hearing that had only one possible outcome. It was irrelevant whether there was a discovery because without established negligence (or any articulated case on paragraph 30(3) Schedule 10 FA 03) the discovery assessments failed and it did not matter that there was an insufficiency, it was an irremediable insufficiency.

In relation to this part of the test the Tribunal has regard to:

Taking all these factors into account the Tribunal considers that it is just and fair to make an award of costs. This Tribunal sees very many costs applications from HMRC made pursuant to rule 10(1)(b). In the vast majority of instances it is the Appellant which bears the burden of proof and HMRC, rightly, puts Appellants to strict proof, particularly where an Appellant makes allegations against assessing officers. It is wrong that taxpayers are held to a different standard to that expected of HMRC when it is HMRC which bears the burden of proof.

However, these Appellants have benefited from a lucky strike. Relief to which they know they were not entitled has been secured. An award of substantive costs in such a situation would be to compound their luck and to doubly jeopardise the general body of taxpayers for HMRC’s failure.

The application is therefore allowed, and quantum assessed at £1.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.