Generator Power Limited v The Commissioners for HMRC

The Appellant’s application for an order for costs under rule 10(1)(b) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 is refused.

The Appellant applies under rule 10(1)(b) of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (the “Rules”) for an order that HMRC be required to pay its costs in these proceedings. Under this rule, the Tribunal can make an order for costs “if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings”.

This appeal was categorised as a complex case, but the Appellant opted out of the costs regime. The substantive hearing of the appeal was listed for three days. On the day before the hearing, and at the hearing, the Appellant produced additional evidence. On the last day of the hearing, it was decided to recall the Appellant’s witness who had completed giving evidence the previous day. HMRC requested and were granted a 28-day adjournment to consider the new evidence and to decide whether they wished to cross-examine the witness on the additional evidence given on the last day of the hearing or to make written submissions on that oral evidence. Within that 28-day period, HMRC indicated that they no longer wished to defend the appeal, which was then allowed by consent.

The Appellant contends that the new evidence presented at the hearing was not the reason for HMRC’s decision to concede the appeal, that it should have been apparent to HMRC much earlier that its defence of the appeal was unmeritorious, and that HMRC acted unreasonably in defending the proceedings for as long as it did. In this decision, the Tribunal refuses the application.

The Appellant is a generator hire specialist. It hires out generators, and also supplies fuel (red diesel) for the generators.

There is broad agreement between the parties that the Appellant supplied fuel to customers under five different scenarios (referred to below as “Scenario (1)” to “Scenario (5)” respectively), as follows:

The supply of the generator hire is subject to VAT at the standard rate. The Appellant applied reduced rate (5%) VAT to the fuel element of its supplies, on the basis that the fuel was a separate supply to the supply of the generator hire.

On 10 February 2020, HMRC notified the Appellant that it was of the view that the supply of generator hire and fuel should be characterised as a single composite supply subject to VAT at the standard rate. HMRC subsequently issued various assessments to give effect to this decision.

The Appellant commenced this Tribunal appeal against the HMRC assessments on 5 February 2021. Scenario (1) was outside the scope of the appeal as it had not been included in the assessments. The appeal was stayed for a period for ADR.

It was common ground that the only issue in the appeal was whether (1) as the Appellant contended, there were separate supplies of generator hire and fuel, with the supply of fuel attracting VAT at the reduced rate, or whether (2) as HMRC contended, there was a single composite supply that was standard rated. It was also common ground that the determination of this issue involved the application of established principles, found in cases such as Card Protection Plan Ltd v Commissioners of Customs and Excise [1999] ECR I-973, [1999] 2 AC 601, Levob Verzekeringen v Staatssecretaris van Financiën [2005] ECR I-9433, and RLRE Tellmer Property sro v Finanční ředitelství v Ústí nad Labem [2009] STC 2006. Twelve key principles are identified in HMRC v The Honourable Society of Middle Temple [2013] UKUT 250 (TCC) at [60] (the “Middle Temple Principles”). Middle Temple Principle 3 is that “There is no absolute rule and all the circumstances must be considered in every transaction”. Middle Temple Principle 8 is that “There is also a single supply where one or more elements are to be regarded as constituting the principal services, while one or more elements are to be regarded as ancillary services which share the tax treatment of the principal element”. Middle Temple Principle 9 is that “A service must be regarded as ancillary if it does not constitute for the customer an aim in itself, but is a means of better enjoying the principal service supplied”. Middle Temple Principle 10 is that “The ability of the customer to choose whether or not to be supplied with an element is an important factor in determining whether there is a single supply or several independent supplies, although it is not decisive, and there must be a genuine freedom to choose which reflects the economic reality of the arrangements between the parties”.

On 13 October 2021, the Tribunal notified the parties that the appeal had been allocated to the complex category. On 10 November 2021, the Appellant opted out of the costs regime pursuant to rule 10(1)(c)(ii) of the Rules.

On 22 September 2022, HMRC filed its statement of case, in which it said:

On 5 June 2023, the Appellant served a witness statement of Mr Cardwell, the director of the Appellant (the “First Cardwell Statement”). This stated amongst other matters that customers may elect to supply their own fuel and manage the frequency of deliveries themselves, and that in February 2023 only some 38% of live contracts included fuel management.

On 2 November 2023, a differently constituted Tribunal issued its decision in the unrelated appeal of GAP Group Ltd v Revenue And Customs [2023] UKFTT 970 (TC) (“GAP”). The appellant in GAP was a plant hire company which hired out plant to customers and supplied customers with red diesel to fuel the plant. In that case, the appellant had argued that its supplies of plant hire and its supplies of red diesel fuel constituted separate supplies for VAT purposes, such that the hire of the plant should be standard rated and the supplies of fuel should be at the reduced rate. HMRC had argued that the supply of red diesel formed part of the main supply of plant hire, as a single composite standard-rated supply of plant hire. The Tribunal agreed with the appellant that the supplies of plant and supplies of red diesel constituted multiple supplies for VAT purposes, and the appeal in that case was accordingly allowed.

On 22 November 2023, this appeal was listed for a three-day hearing on 30 January to 1 February 2024.

On 18 January 2024, the Appellant filed and served a further witness statement of Mr Cardwell dealing with the decision in GAP (the “Second Cardwell Statement”).

On 18 January 2024, the Appellant also made an application for the appeal to be reinstated within the costs regime, or alternatively, for costs under rule 10(1)(b) of the Rules. The Appellant has since withdrawn the application to be reinstated within the costs regime, and there is no need to mention it further. The question whether the Tribunal has any power to reinstate a party back into the costs regime was not decided. It was subsequently common ground that any application for costs under rule 10(1)(b) should be made after the Tribunal had given its decision disposing of the appeal.

On 19 January 2024, the Appellant served its skeleton argument. On 26 January 2024, HMRC served their skeleton argument.

The skeleton argument of the Appellant argued amongst other matters as follows.

The skeleton argument of HMRC argued amongst other matters as follows.

On 29 January 2024, the day before the hearing commenced, the Appellant served a third witness statement of Mr Cardwell (the “Third Cardwell Statement”), and a framework agreement.

On the first day of the hearing, the Tribunal admitted the Third Cardwell Statement and the framework agreement into evidence. In his opening submissions, counsel for the Appellant said amongst other matters as follows. It is not the case (as HMRC contended) that 99% of customers purchase fuel from the Appellant. Rather, it is the case that 99% of the Appellant’s fuel sales fall into Scenarios (2), (3) or (4). Less than half of the Appellant’s customers choose the fuel management option (Scenario (3)). Customer choice would be “if not one of, possibly the major analytical bone of contention, both on the facts and on the law between the parties”.

On the second day of the hearing, Mr Cardwell gave evidence. He gave evidence in chief, and was cross-examined, on specific facts and circumstances of the Appellant’s business. Some of the evidence he gave concerned the reasons why customers obtain their fuel from the Appellant rather than from a different supplier, when they have freedom of choice. He spoke of the needs that particular customers might have. For instance, a telephone company might hire one of the Appellant’s generators for work on a phone mast in the middle of a muddy field. Some customers needed fuel out of hours or on weekends, or at short notice. He said that:

In her closing submissions, counsel for HMRC said that “if there is a lack of choice because there are no other providers in the market, I would say there’s no choice at all”. Subsequently, the Tribunal asked her to clarify the parties’ positions on who else the customers could realistically get their fuel from if they did not get it from the Appellant. It emerged that there was not a common understanding of what Mr Cardwell had said about this in his evidence, and counsel for the Appellant proposed that Mr Cardwell could be asked the next day, as he was no longer in the hearing.

On the third day of the hearing, before Mr Cardwell was recalled as a witness, the Tribunal asked counsel for HMRC to clarify HMRC’s case. She confirmed that it was HMRC’s case that “it has not been established that the hirers of the generators had any real choice but to use the appellant’s fuel management option, because as a matter of practical reality there was … no evidence presented by the appellant that they could have got the red diesel from anywhere else”. The Tribunal then asked counsel for HMRC whether it was not the case there must be a network of red diesel sellers covering the entire country to supply farms that use red diesel, and that these suppliers are required to be registered with HMRC such that HMRC must know of their existence. If so, the Tribunal questioned whether the Appellant’s customers would not have been able to obtain red diesel from any one of them.

Counsel for the Appellant then made an application to introduce new evidence, in the form of printouts from the internet. These were said to show “the existence of a highly developed nationwide network of suppliers of diesel, red and white”, and “pages and pages of people claiming to offer 24/7 service”. The Tribunal thereupon encouraged the parties to see whether they could agree if there is indeed a nationwide network of red diesel suppliers who are willing to supply 24/7. The Tribunal also proposed to ask Mr Cardwell about this when he was re-called. Subsequently, counsel for HMRC said that she was not in a position to cross-examine Mr Cardwell immediately. She said that “My client wants time to properly consider and review the evidence received this morning and the oral evidence that was received, because that is all new to my client”.

At the conclusion of the hearing, the Tribunal decided, after discussion with the parties, to issue directions requiring HMRC by 29 February 2024 to confirm whether they wished to further cross-examine Mr Cardwell on the oral evidence that he gave on the third day of the hearing or to make written submissions on that oral evidence.

On 29 February 2024, HMRC sent notification to the Tribunal and the Appellant as follows:

The parties subsequently agreed on a consent order, which was issued by the Tribunal on 15 April 2024, allowing the appeal and setting aside the assessments under appeal. The consent order set a time limit for the making of any costs application under rule 10(1)(b) of the Rules.

On 22 May 2024, the Appellant made the present application for costs. HMRC subsequently filed a written response, to which the Appellant filed a written reply. The Appellant’s request for an extension of time for the filing of the reply is hereby granted.

Section 29 of the Tribunals, Courts and Enforcement Act 2007 (“TCEA”) relevantly provides:

Rule 10 of the Rules relevantly provides:

The power under s 29(1) TCEA is subject to the Rules. Rule 10 reflects the intention that the First-tier Tribunal generally be a “no costs shifting” jurisdiction, in which both sides bear their own costs, whatever the result of the appeal. Rule 10 should be regarded as an exception to this general expectation. (Distinctive Care Ltd v Revenue And Customs [2019] EWCA Civ 1010 (“Distinctive Care CA”) at [7], [41], [42].)

Rule 10 should not be used as a “backdoor method of costs shifting”. (Distinctive Care Ltd v The Commissioners for HM Revenue and Customs [2018] UKUT 155 (TCC) (“Distinctive Care UT”) at [44(8)].)

“[T]he jurisdiction to award costs is intended to be exercised in a straight-forward and summary way and should not trigger a wide-ranging analysis of HMRC’s conduct relating to the applicant's tax affairs.” The focus should be on the standard of handling the case, rather than on the quality of the original decision. (Distinctive Care CA at [25], [41], [42]; Distinctive Care UT at [44(6)].)

The words “acted unreasonably” in rule 10 is an imprecise standard, involving a value judgment upon the particular facts and circumstances of each case, on which reasonable people may differ. These words require the Tribunal to consider what a reasonable person in the position of the party concerned would reasonably have done, or not done. (Market & Opinion Research International Ltd v Revenue & Customs [2015] UKUT 12 (TCC) (“MORI”) at [48]-[50].) “Questions of reasonableness should be assessed by reference to the facts and circumstances at the time or times of the acts (or omissions) in question, and not with the benefit of hindsight” (Distinctive Care UTat [45]). “A party may have acted reasonably in defending proceedings at a given point in time even though with the benefit of hindsight it might be said the appeal could have been settled then” (MORI at [27]-[28], quoting and approving Market & Opinion Research International Ltd v Revenue & Customs [2013] UKFTT 475 (TC) at [42]).

“[T]he test of reasonableness must be applied to the particular circumstances of a case, which will include the abilities and experience of the party in question. The reasonableness or otherwise of a party’s actions fall to be tested by reference to a reasonable person in the circumstances of the party in question. There is a single standard, but its application, and the result of applying the necessary value judgment, will depend on the circumstances.” (MORI at [56].)

Acting unreasonably may include cases where an appellant unreasonably brings an appeal which they should know cannot succeed, or where a respondent unreasonably resists an obviously meritorious appeal, or either party acts unreasonably in the course of proceedings, for example by persisting in an argument in the face of an unbeatable argument to the contrary, or persistently failing to comply with the rules and directions to the prejudice of the other side (Distinctive Care UT at [38] and [44(7)], citing Catanã v Revenue & Customs [2012] UKUT 172 (TCC), [2012] STC 2138; Tarafdar v Revenue & Customs [2014] UKUT 362 (TCC) (“Tarafdar”) at [18]). It may include cases where a party fails to appreciate something that would be obvious to the properly comparable reasonable observer, or otherwise acts unreasonably in not applying reasonable diligence, whether by applying their mind to the issue, or by making reasonable enquiries (MORI at [48]-[50]).

A party does not act unreasonably by pursuing a case without merit unless that party ought to have known its case was without merit. (Roden and Roden v HMRC [2013] UKFTT 523 (TC) at [11] to [15].)

“[I]t is to be assumed that HMRC will [once HMRC has been notified of proceedings] review all the relevant material that has been put before it, something which it will need to do in any event to finalise a Statement of Case and List of Documents, and will make an ongoing assessment of whether a case should continue to be defended. … HMRC must act promptly, once notified, if it becomes clear that the appeal cannot properly be defended”. (Distinctive Care CA at [30]-[31], [41], [42], quoting and approving Southwest Communications Group Ltd v Revenue & Customs [2012] UKFTT 701 (TC) at [45].)

“[A] tribunal faced with an application for costs on the basis of unreasonable conduct where a party has withdrawn from the appeal should pose itself the following questions: (1) What was the reason for the withdrawal of that party from the appeal? (2) Having regard to that reason, could that party have withdrawn at an earlier stage in the proceedings? (3) Was it unreasonable for that party not to have withdrawn at an earlier stage?” (Distinctive Care UT at [48]-[49], approving Tarafdar at [34].)

“Even if the tribunal is satisfied that a party has acted unreasonably in the terms of rule 10, the tribunal nevertheless has a discretion whether or not to make a costs order, or as regards the extent of a costs order. Such a discretion, like any other discretion conferred on the tribunal, must be exercised judicially.” (Tarafdar at [20].)

The Appellant argues as follows.

HMRC’s conduct and delays prior to the hearing resulted in significant unnecessary and avoidable costs being incurred by the Appellant.

This was a very simple case.

HMRC’s arguments were hopeless, and this should have been reasonably apparent to HMRC long before it gave up.

The new evidence adduced during the course of the hearing was not the reason why HMRC abandoned their defence of the appeal. All the relevant material to allow proper consideration of the case was available to HMRC before the hearing. No material new evidence was established at the hearing.

Even to the extent that it is considered that there was new evidence, then HMRC’s conduct prior to the hearing effectively precluded opportunities for that evidence to be established. Had HMRC engaged more constructively with the Appellant prior to the hearing, then the application of the relevant facts to the scenarios would have been accepted by both parties and there would have been no need for the hearing. HMRC had adequate opportunity to raise further questions and obtain further clarity if it was considered necessary to do so prior to the hearing. There were several opportunities before the hearing for HMRC to identify the evidence that they claim was the trigger to the withdrawal of the claim. HMRC did not have regard to the Appellant’s exposure to significant costs. HMRC did not regard the hearing as a last resort.

HMRC’s continued defence of the appeal became unreasonable once the GAP decision was issued.

HMRC stated in its skeleton argument that the Appellant’s own evidence admitted that 99% of customers purchase fuel from the Appellant (see paragraph 20(3)). This is incorrect (see paragraph 22 above).

HMRC’s withdrawal of their case in relation to Scenario (5) on the first day of the hearing demonstrates inadequate consideration and preparation by HMRC in advance of the hearing, and suggests a very belated realisation that the Appellant’s case was unanswerable.

All of the Appellant’s supplies were business-to-business, such that there was no net tax due, and it is difficult to see the point of spending public money on the litigation at all. There was no wider principle at stake.

The true reason behind the HMRC withdrawal was the realisation that the publicity of defeat would not be helpful to the overall HMRC position.

HMRC argues as follows.

HMRC withdrew from the appeal on 29 February 2024 on the basis of new evidence adduced by the Appellant the day before the hearing commenced and on the last day of the hearing. The new evidence showed that the choices available to typical consumers were genuine and realistic.

The GAP decision would not definitively resolve all the issues under appeal. That decision was not binding on this Tribunal, and the parties had opposing views as to its significance.

The issue of choice was the crux of the dispute between the parties, and the majority of the openings focussed on the law that dealt with this very question. It was clear to the Appellant even before the Tribunal intervened to ask about alternative suppliers (paragraph 25 above), that the element of choice was the key battleground. One of the Appellant’s grounds of appeal was that its customers had an element of choice as to whether to purchase fuel from them. All evidence relied upon by the Appellant in this regard should have been provided by the Appellant as part of the disclosure and witness evidence stages.

At no point did HMRC prevent the Appellant from providing additional evidence and indeed, HMRC had to repeatedly request supporting evidence throughout the course of its enquiries and sought confirmation of whether there was any outstanding information relied upon by the Appellant.

HMRC withdrew from this appeal on the basis of the new evidence produced the day before the hearing and at the hearing. This was material evidence, introduced by the Appellant at the eleventh hour to fill a gap in its evidence.

This was not a simple case, as is demonstrated by the size and seniority of the Appellant’s legal team. The amount of costs incurred by the Appellant is completely at odds with the assertion that this was a simple case.

The HMRC case was not intrinsically hopeless.

It is for the applicant for an order for costs to identify and establish the facts on which the application is based, and to persuade the Tribunal that the application should be granted. The applicant must do so in the application for costs itself.

In this appeal, new documentary evidence was introduced the day before the hearing started, and at the hearing itself (see paragraphs 21 and 25 above).

The new documentary evidence contained evidence of material facts not previously in evidence in the proceedings, in particular that there is a nationwide network of suppliers of diesel, claiming to offer 24/7 service.

The costs application does not establish that these material facts were already known to HMRC.

There is no duty on HMRC, as a party to Tribunal proceedings, to point out to the Appellant every possible additional fact that might make a different to the outcome of the appeal, and to invite information from the Appellant in relation to that fact. That is particularly so in a case such as the present, where the appeal must be decided on the basis of the facts and circumstances of the case as a whole (see Middle Temple Principle 3, paragraph 10 above).

It was not unreasonable of HMRC not to accept that the decision in GAP was determinative of the outcome of the appeal.

The Tribunal is not persuaded that the HMRC case, even at the point that HMRC withdrew from the appeal, was bound to fail.

The Tribunal is not persuaded that it was unreasonable of HMRC to defend the appeal in relation to all Scenarios until the time of the hearing. In a case of this kind, the Tribunal has to consider all of the facts and circumstances of the case as a whole (Middle Temple Principle 3, paragraph 10 above). All of the various Scenarios were collectively part of the overall facts and circumstances of the case.

The Tribunal is not persuaded that any misreading by HMRC of the Appellant’s evidence was unreasonable.

The Tribunal must decide appeals on the basis of their legal merits. The claimed motives of a party in pursuing proceedings are not in principle relevant, other than in exceptional cases, for instance, where it is claimed that the bringing or defence of an appeal is an abuse of process affecting the fairness of the proceedings. The Appellant has not alleged an abuse of process affecting the fairness of the proceedings, and the Tribunal is in any event not satisfied that there has been any such abuse. The Appellant has not provided any other valid reason why a consideration of “motives” of HMRC would be relevant.

The Tribunal does not accept the suggestion that it is unreasonable for HMRC to defend appeals involving business-to-business supplies, on the basis that there is “no net tax due” (see paragraph 52 above). It is generally not unreasonable for HMRC to defend appeals involving business-to-business supplies. There is nothing specific about this case that would lead to a different conclusion.

The Tribunal finds that:

The application for a costs order is therefore refused.

The Tribunal adds the following.

Where a party’s case is hopeless, it may become unreasonable for that party to continue with the appeal from the point at which that party should realise that this is so (see paragraphs 36, 38 and 39 above). However, in circumstances where a party’s case is not hopeless, such that it would not be unreasonable for that party to continue proceedings to finality, it will in principle not be unreasonable for that party to withdraw at any time prior to finality.

In this case, the Tribunal is not persuaded that HMRC’s defence of this appeal was bound to fail (paragraph 68 above). The Tribunal therefore considers that HMRC’s continued defence of the appeal up to the point at which it withdrew was not in principle unreasonable. The Appellant has not established any particular circumstances that made withdrawal at that point unreasonable.

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.