Essex Trading Limited v The Commissioners for HMRC

On 5 December 2022, the Appellant, Essex Trading Limited (“ETL”), made an application for specific disclosure. Although both ETL and HMRC had consented to the application being determined “on the papers”, the Tribunal decided that the application should be determined at an “in person” hearing. The application was heard by me on 21 June 2023. I gave an extempore decision immediately following the hearing, and subsequently released directions ordering disclosure by HMRC as if CPR 31.7 applied.

On 14 July 2023, ETL made an application under Rule 10 of the Tribunal’s Rules for costs of and incidental to its application for specific disclosure on the grounds that its application for specific disclosure had been unreasonably opposed by HMRC.

The parties agreed that ETL’s application for costs could be determined “on the papers”.

The relevant provisions of Rule 10, Tribunal Procedure (First-tier Tribunal)(Tax Chamber) Rules 2009, are as follows:

ETL’s application is made under Rule 10(1)(b) on the grounds that HMRC acted unreasonably in opposing its application for specific disclosure.

What constitutes “unreasonable conduct” for the purposes of Rule 10 was considered by the Upper Tribunal in Distinctive Care Ltd v HMRC [2018] UKUT 155 (TCC), and upheld on appeal by the Court of Appeal ([2019] EWCA Civ 1010). In its decision, the Upper Tribunal set out at [44] to [46] the basis on which conduct is to be assessed:

ETL also referred me to the decision of the Upper Tribunal in Catana v HMRC [2012] UKUT 172 (TCC). I find that the decision of the Upper Tribunal in Catana (which was primarily directed at whether the FTT had unreasonably exercised its discretion in refusing to make an award of costs) does not provide any material assistance in the determination of this application.

Appeal reference number TC/2021/02307 and part of TC/2022/11336 relate to a seizure by HMRC of 132,375.45 litres of mixed alcoholic products on 20 and 21 September 2019.

The underlying factual background is in dispute. Those disputed facts remain to be determined at the substantive hearing of this appeal. I did not make any findings of fact in my decision to direct specific disclosure, should anything in this decision on costs be treated as having made any factual findings.

ETL’s account is that in August 2019 it purchased Hi Line Wines Limited’s (“Hi Line”) entire stock. Hi Line was unable to pay rent due to its landlord, and the landlord was threatening to forfeit the lease and repossess its premises. Hi Line was therefore under commercial pressure to sell its stock. ETL did not undertake a stocktake, but agreed to purchase all the stock at Hi Line’s premises together with racking and other equipment. The consideration was the assumption of a loan Hi Line owned to another company. The sale was documented in a manuscript invoice which described the stock being sold as “warehouse stock clearance”.

The stock was delivered over 14-17 August 2019 to premises in Croydon, where ETL say it was going to be stored temporarily pending ETL being ready to take the stock to new permanent premises nearby. At some point, Hi Line provided printed invoices. The goods sold were described in the printed invoices by reference to Hi Line’s stock sheets, copies of which accompanied the invoices. ETL say that it did not check the stock sheets against the physical stock, and assert that the stock sheets did not accurately record the alcoholic products purchased from Hi Line. It is ETL’s case that all the goods stored at the Croydon premises had been purchased from Hi Line, even if they were not listed on the stock sheets.

On 19 September 2019, HMRC visited ETL’s premises. On 20 September 2019 they came back to the Croydon site and seized and removed all the stock at that location on the grounds that ETL was trading from premises that did not have AWRS approval and there was no evidence of the alcohol having been duty paid. HMRC’s officers recorded the seized goods on tally sheets. A comparison of HMRC’s tally sheets with Hi Line’s stock sheets indicates that more goods had been seized than had been recorded on Hi Line’s stock sheets.

Unbeknown to ETL, one of Hi Line’s creditors had presented a winding up petition on 24 July 2019. Accordingly, by virtue of s127 Insolvency Act 1986, the sale by Hi Line was void as it took place after the presentation of the petition. On 18 February 2020, Farleys Solicitors LLP (acting for the liquidators of Hi Line) wrote to ETL asserting that the sale of 132,375.45 litres of mixed alcoholic goods to ETL was void. Farleys demanded that ETL abandon all claims for restoration and all challenges to the seizure of those goods by HMRC on the basis the goods did not belong to ETL. On 2 March 2020, Mr Thornton (acting on behalf of ETL) confirmed that ETL would abandon its claim for restoration of the goods from HMRC, and acknowledged that the sale by Hi Line was void.

A central legal issue in this appeal is whether ETL was holding goods when a duty point arose, and whether they were holding non-duty paid goods. It is agreed that goods which had been acquired by ETL from Hi Line should not give rise to an excise duty assessment or penalty assessment on ETL. The origin of the goods seized by HMRC is therefore key – in particular the excess goods recorded on HMRC’s tally sheets that were not recorded on Hi Line’s stock sheets. HMRC have assessed ETL to duty and penalties in respect of the excess stock on the grounds that these goods had not been acquired from Hi Line. ETL’s case is that the excess stock had been purchased from Hi Line, and as this purchase was void, it was Hi Line and not ETL that owned the excess stock.

Included in the hearing bundle were copies of correspondence between Farleys and ETL relating to the goods seized by HMRC, from which it appeared that Hi Line may have sought restoration of all of the goods seized by HMRC. ETL submit that (at the date of the hearing) they did not know whether Hi Line’s liquidators had sought restoration for all, or only some, of the goods seized by HMRC. ETL submit that the extent of Hi Line’s restoration claim is material to the determination of whether all (or only some) of the goods seized were held by ETL at the duty point.

HMRC opposed the application for disclosure on the grounds that they had already given disclosure in accordance with Rule 27 of the Tribunal Rules. Whilst HMRC recognised that the Tribunal had discretion to order further disclosure, requiring additional disclosure was exceptional and not to be given routinely. In this case, HMRC submitted that the documents sought by ETL related to the tax affairs of another taxpayer, and HMRC were under a duty not to disclose them pursuant to s19, Commissioners for Revenue and Customs Act 2005 (“CRCA”) (the notice of objection referred to Good Law Project v HMRC [2019] EWHC 3125 (Admin) at [35]). Further, HMRC submitted that the documents in respect of which disclosure was sought did not relate to the goods that were the subject of the assessment of duty and penalties, and the documents were not therefore relevant to ETL’s appeal.

I gave an extempore decision immediately following the hearing, and subsequently released directions ordering disclosure by HMRC of evidence relating to the seized goods as if CPR 31.7 applied.

ETL acknowledge that HMRC had given disclosure in accordance with the requirements of Rule 27 of the Tribunal Rules, and that ETL had to apply to the Tribunal for any additional disclosure. For this reason, ETL have not sought to claim the costs incurred in making the application for disclosure itself. However, ETL submit that once the application for specific disclosure had been made, HMRC acted unreasonably in opposing it. ETL submit that HMRC had no good reason for opposing the application. In particular:

HMRC dispute ETL’s submission that HMRC knew that it could not have reasonably defended the application for specific disclosure.

HMRC assert that a reasonable person in the same position would have objected to the ETL’s application for specific disclosure. This is because an order for specific disclosure in the First-tier Tribunal is the exception rather than the rule and the outcome of the application was dependent upon the Tribunal’s exercise of discretion. The documents sought by ETL relate to a third-party taxpayer and HMRC was not permitted to disclose them as they were confidential. Therefore, a court order was required pursuant to section 18 CRCA in order to avoid HMRC breaching that confidentiality.

Rule 27 of the Tribunal Rules require the parties to disclose only documents on which they intend to rely. HMRC had complied with that rule, and there is no suggestion that they did otherwise.

HMRC submit that the fact that I agreed with the ETL’s submission that the letter of 18 February 2020 from Farleys to the ETL raised questions does not make HMRC’s opposition to the disclosure application unreasonable, as it was not a foregone conclusion that specific disclosure would be ordered. HMRC further submit that this is not a case where they ought to have known that the disclosure application would be successful, given that directions for specific disclosure were the exception rather than the rule, and my decision to make such an order followed a consideration of both written and oral submissions from both sides and application of the overriding objective.

HMRC therefore submit that their objection to the disclosure application was reasonable.

HMRC dispute ETL’s submission that their handling of their opposition was unreasonable.

As regards the length of the notice of objections, HMRC assert that a substantial part of the notice set out the background facts relevant to the application and the relevant law. These are not indicators of unreasonable conduct. HMRC had also stated that as it was content for the application to be dealt with “on the papers”, in these circumstances it is standard practice for a party to set out the background facts to assist the Tribunal. The notice set out the background facts and law relating to HMRC’s case on the basis that they would be the sole representations that the Tribunal would be considering on behalf of HMRC. HMRC submit that there is no correlation between the length of HMRC’s Notice of Objection and the Tribunal listing the application as an “in person” hearing.

HMRC disputes ETL’s assertion that HMRC’s skeleton abandoned the majority of the claims raised in its notice of objection. It was agreed between Ms. Brown and Mr. Thornton prior to the hearing that given the detailed written submissions that had been served by both parties, the Tribunal would not need to be taken through every point made in those written submissions. It was on that basis that the parties’ oral submissions were considerably shorter than the written submissions relied upon by each of them.

My starting position is that these appeals have been allocated to the standard category. It follows that there is no costs shifting regime and the default position is that each party bears its own costs. This is clear from the Court of Appeal judgment in Distinctive Care Ltd at [7] where it held that:

If there has been unreasonable conduct in the proceedings there is a discretion, but not an obligation for the Tribunal to award costs, but such discretion must be exercised judicially (see Tarafdar v HMRC [2014] UKUT 0362 (TCC) at [20]).

There is no definition of “unreasonable conduct”. The Upper Tribunal in its decision in Distinctive Care gave guidelines as to the factors that should be taken into account in assessing conduct, of which I consider the most relevant to this application is set out at [44](7), namely:

In considering whether opposing specific disclosure is unreasonable, I take note of the fact that an order for specific disclosure is exceptional, and it is not unreasonable for a party against whom such an order is sought to test the strength and validity of the application. It is only if the opposition to the application persists in the face of an unbeatable argument to the contrary that the conduct of that party rises to being unreasonable for the purposes of Rule 10.

I therefore find that the mere fact that HMRC opposed ETL’s application does not of itself amount to unreasonable conduct. Nor am I persuaded that the HMRC’s conduct was unreasonable merely because its notice of objection ran to 13 pages, and that many of the issues raised in that notice were not pursued in HMRC’s skeleton or in the course of oral submissions. I was concerned from my pre-reading about the volume of documents before me, that there might be insufficient time available to deal with the evidence and submissions in the time that had been listed. At the beginning of the hearing, I therefore told the representatives that I had read the suggested pre-reading, and that the skeletons and written submissions were to be taken as read. This allowed the representatives to give focus to their submissions at the hearing.

HMRC assert that their objection to disclosure on the grounds of confidentiality was well founded, and could only be overruled by an order of the Tribunal. Reference was made in the notice of objection to Good Law Project. In that case, HMRC had submitted that in order to avoid any suggestion that HMRC may have committed an offence under s19 CRCA, they made an application to the court for disclosure under s18(2)(e), rather than simply relying in s18(2)(c). The court held at [44] that:

The decision of the Administrative Court in Good Law Project is supported by the decision of the Court of Appeal in Mitchell which held:

I therefore agree with ETL that HMRC’s objection to giving disclosure on the grounds that they owed a duty of confidentiality to Hi Line was misplaced. As these are civil proceedings, they had discretion to give disclosure under s18(2)(c) without the need for an order for disclosure – and if they were concerned about their duty to Hi Line, they could have given notice to Hi Line to give them an opportunity to object. Nonetheless, if there were any residual concerns about the duty of confidentiality owed under s19 CRCA, HMRC could – as suggested by ETL – have taken a neutral stance on the issue, drawing the attention of the Tribunal to the issues and the relevant statute and cases, and leaving the point to be determined by the Tribunal. I find that, in the light of the case law, HMRC’s argument that they were bound by a duty of confidentiality was unsustainable, and that in actively opposing disclosure on this ground, they acted unreasonably.

I find HMRC’s objection to disclosure on grounds of relevance to raise more serious issues. I find that ETL’s application for specific disclosure was not speculative. The correspondence between Farleys and ETL that was included in the hearing bundle clearly raised the question of whether Hi Line had claimed ownership of, and sought restoration of, all of the alcohol seized by HMRC. This issue is then brought into sharper focus by the letter of 18 February 2020 from Farleys to HMRC, to which were attached HMRC’s tally sheets, and which were disclosed pursuant to my direction for additional disclosures. This supports ETL’s submission that Hi Line had claimed ownership, and restoration, of all of the goods that had been seized by HMRC. This is clearly relevant to ETL’s case, and it was misleading for HMRC to have submitted at the hearing and in their notice of objection that the correspondence with Hi Line and its representatives was irrelevant. HMRC must have been aware at the time that ETL made its application for disclosure that there was (to put it at its mildest) an issue as to who owned the “excess alcohol”, and that this was relevant to ETL’s liability to duty and penalties. I find that HMRC’s argument that its correspondence with Hi Line and its representatives were irrelevant to ETL’s case was unsustainable, and that HMRC acted unreasonably in opposing ETL’s application for disclosure.

It was the strength of HMRC’s opposition to ETL’s application that led to the Tribunal determining that the application should be determined by an “in person” hearing. Absent those strong (and unreasonable) objections, the application may well have been dealt with “on the papers”, saving costs for all concerned.

In the light of my finding that HMRC acted unreasonably in opposing ETL’s application for disclosure on grounds of confidentiality and irrelevance, I order HMRC to pay costs incurred by ETL in having to address HMRC’s opposition to its application for disclosure.

I find that this matter is appropriate for summary assessment. A summary assessment is not an occasion for a detailed review such as would be carried out on assessment by the Senior Courts Costs Office. Nonetheless, matters of reasonableness and proportionality are to be taken into account.

Included with ETL’s application for costs was a schedule of the costs incurred. This sets out the time costs incurred by ETL’s representative after 5 December 2023 (the date of the application for specific disclosure) as being 14.2 hours of Mr Thornton’s time charged at £215/hr, broken down broadly as follows:

The costs claimed in total were £3053.00.

In its subsequent submissions, ETL claim an additional £537.50 being 2.5 hrs of time costs incurred by Mr Thornton in relation to the application for costs.

The total claim for costs is therefore £3590.50.

HMRC submit that Mr Thornton’s hourly rate is excessive, and that given his location (London SE3) and expertise, he falls within Grade C of the guideline hourly rates (£185). HMRC submit that 1hr 30 min of time relate to agreeing hearing dates and preparation of bundles, and these should not be chargeable as they are purely administrative.

Mr Thornton has over 15 years’ experience, and although he was called to the bar in 2006, he did not take pupillage, and is therefore not a legal representative. Nonetheless, I find that by virtue of his qualifications and experience he falls within grade A of the guideline hourly rates. I find that it was reasonable for ETL to engage someone of Mr Thornton’s experience and seniority given the nature of the issues under appeal and the amounts involved. However, as he is based in London SE3, his overheads will not be of the same order as those incurred by representatives based in the City or Central London. I therefore consider that his rates fall into London 3 (Outer London). The guideline rate for such lawyers (prior to 31 December 2023) is £282. The rate actually charged by Mr Thornton is £215, which is less than the guideline rate.

I agree with HMRC that it is not appropriate to charge at Mr Thornton’s full hourly rate for work on agreeing dates for the hearing and preparation of the bundles, as this does not require the expertise of a grade A professional. I find that this work could have been undertaken by a fee earner in grade D at a guideline hourly rate of £129 (1.5 hrs at £129 = £193.50). However, I allow the time costs incurred in dealing with the application for costs as being incidental to the costs of pursuing the application for disclosure.

I find that £3461.50 of costs is reasonable in amount, reasonably incurred, and proportionate to the issues.

I summarily assess costs in the amount of £3461.50 and direct that HMRC make payment to ETL within 28 days.

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.