P10: Unreasonable behaviour costs regime

Meaning of bringing, defending or conduct proceedings

 

Bringing, defending or conducting the proceedings is an inclusive phrase

 

“Mr Catanã has made a number of points about the phrase “bringing, defending or conducting the proceedings”. It is, quite plainly, an inclusive phrase designed to capture cases in which an appellant has unreasonably brought an appeal which he should know could not succeed, a respondent has unreasonably resisted an obviously meritorious appeal, or either party has acted unreasonably in the course of proceedings, for example by persistently failing to comply with the rules and directions to the prejudice of the other side”. (Cantana v. HMRC [2012] UKUT 172 (TCC), §14 and see Marshall v. HMRC [2016] UKUT 116 (TCC), §10).

 

Proceedings means proceedings before the FTT

 

“The reference to “the proceedings” in Rule 10(1)(b) is to proceedings before the Tribunal which has jurisdiction of the appeal, whilst it has such jurisdiction.” (Marshall & Co v. HMRC [2016] UKUT 116 (TCC), §11).

 

HMRC only liable for unreasonable behaviour after appeal lodged, T liable for unreasonable behaviour in lodging appeal

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"[25] Drawing those tribunal decisions together, in my judgment the passage from Catanã and the questions posed by the UT (IAC) in Cancino show the correct approach to the application of rule 10(1)(b). I would sound a note of caution about the proviso discussed in Bulkliner and Marshall & Co that pre-commencement conduct may be relevant if there is bad faith. That should not be read as suggesting that there is some exception to the general principle such that if an assessment or penalty is issued in bad faith by HMRC, that can in some way bring conduct before the start of the appeal within the scope of rule 10(1)(b). There may be circumstances in which behaviour before the appeal is brought is relevant to the tribunal's assessment of the reasonableness of conduct post-commencement but an applicant cannot extend the scope of the tribunal's inquiry by alleging bad faith at an earlier stage on the part of HMRC. The parties and the tribunal must always bear in mind first that the focus should be on the standard of handling the case rather than the quality of the original decision: see Maryan (t/a Hazeldene Catering) v HMRC [2012] UKFTT 215 (TC) and secondly, that the 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.

...

[31] It would be inconsistent with the structure of the FTT Rules to treat the conduct of the respondent prior to being notified of the appeal as conduct 'in the proceedings' for the purposes of rule 10(1)(b). The FTT Rules do not require the appellant to serve the notice on the respondent and in the present case DCL did not do so. It is the tribunal itself that gives notice of the proceedings to the respondent under rule 20(5). At that point HMRC must consider their position in relation to the case in order either to notify the appellant of any new grounds under rule 24(4) or to deliver the statement of case to the tribunal and the appellant within the 60 days allowed by rule 25(1)(c). HMRC must act promptly, once notified, if it becomes clear that the appeal cannot properly be defended." (Distinctive Care Ltd v. HMRC [2019] EWCA Civ 1010, Rose LJ)

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“The appellant’s case, if correct, would effectively permit a costs award against HMRC for unreasonable decisions and/or reviews:  if Parliament had intended the Tribunal to have jurisdiction to award costs on that basis, it would have said so.  On the contrary, the Rules provide HMRC is only liable in costs for omissions or acts after the appeal is lodged.” (Distinctive Care Ltd v. HMRC [2016] UKFTT 764 (TC), §50, Judge Mosedale).

 

Reasonableness of original decision relevant to whether it is reasonable to defend appeal (rigorous review should be carried out)

 

“Nevertheless, in the circumstances of a case such as this, where the FTT reduced the penalty imposed and upheld on review by as much as 97%, one has to consider whether HMRC were, as this tribunal put it in Catana, unreasonably resisting an obviously meritorious appeal. In that context the reasonableness or otherwise of the original and review decisions is, plainly, an important factor. The question has, of course, to be considered, not with the benefit of hindsight and knowledge of the FTT’s conclusion, but from the position in which HMRC found themselves when the appeal was brought and as it progressed.” (HMRC v. Jackson Grundy Limited [2017] UKUT 180 (TCC), §67 Judges Bishopp and Herrington).

 

“(5) A failure to undertake a rigorous review of assessments at the time of making the appeal to the tribunal can amount to unreasonable conduct (Carvill v Frost (Inspector of Taxes) [2005] STC (SCD) 208 and Southwest Communications Group Ltd v HMRC [2012] UKFTT 701 (TC)) at [45]).” (Market & Opinion Research International Limited v. HMRC [2015] UKUT 12 (TCC), §22(5), Judges Berner and Powell).

 

“The reasonableness of the original decision against which the appeal has been made is not directly in point, but is relevant to the question of whether it was reasonable of HMRC to defend, or to continue to defend, the appeal.” (Tarafdar v. HMRC [2014] UKUT 0362 (TCC), §19, Judge Berner and Powell).

 

“However, in my view the correct approach is for the Tribunal to put itself in the shoes of the Respondents’ officer who, on reviewing the notice of appeal has to consider whether to defend the appeal or concede that a further review should be undertaken with a view to restoring the vehicle…In my view a person in that hypothetical officer’s position, acting reasonably, would have reviewed Mr Brenton’s decision and considered the prospects of success on the appeal. In my view such an officer  would have had no hesitation in concluding that the appeal should not be defended.  It should have been readily  apparent to such an officer that Mr Brenton’s approach was perverse, essentially failing to take proper account of the findings of fact made by the Tribunal in its first decision.  No reasonable officer could have concluded that the recommendation in the first decision was pointing to anything other than restoration without a fee; indeed the Respondents’ policy in the light of the Tribunal’s findings of fact would indicate strongly such an outcome.” (Logistika Peklaj AS v. Director of Border Revenue [2014] UKFTT 246 (TC), §§9…10, Judge Herrington).

 

Unreasonable failure to withdraw a decision after appeal lodged may lead to costs order

 

“An omission to withdraw such an assessment after an appeal is lodged may be unreasonable behaviour for the purposes of Rule 10 but it seems to me that it could only be unreasonable because the behaviour after the lodging of the appeal is unreasonable and that means that the defendant has to have a reasonable time to consider the appealed assessment.  By any measure, HMRC acted reasonably in this case because they withdraw the information notice two weeks after notification of notification of the appeal and without taking any steps to defend the appeal.” (Distinctive Care Ltd v. HMRC [2016] UKFTT 764 (TC), §45, Judge Mosedale).

 

Pre-appeal behaviour may “inform” actions taken during proceedings

 

“The correct approach in law to the relative importance of behaviour prior to proceedings is clearly set out in the FTT judgment. Judge Kempster adopts that approach by considering both parties’ submissions in this area, and concluding on the facts (at [28]) that he rejects Mr Cannon’s suggestion that HMRC were “wilfully blind” and that he prefers the explanation of Mr Brooke as regards the disputed telephone calls. Given that there was no evidence of bad faith in the making of the assessment or the raising of the penalties (by contrast with Farthings Steak House as referred to in Bulkliner), we find that Judge Kempster made no error of law in his evaluation of HMRC’s behaviour prior to proceedings. He clearly found on the facts that such prior behaviour had not, in the terminology of Bulkiner, informed actions taken during the proceedings.” (Marshall & Co v. HMRC [2016] UKUT 116 (TCC), §28).

 

“It is not possible under the 2009 Rules, any more than it was under the Special Commissioners’ regulations, for a party to rely on the unreasonable behaviour of the other party prior to the commencement of the appeal, at some earlier stage in the history of the tax affairs of the taxpayer, nor, even if unreasonable behaviour were established for a period over which the Tribunal does have jurisdiction, can costs incurred before that period be ordered... That is not to say that the behaviour of a party prior to the commencement of proceedings can be entirely disregarded. Such behaviour, or actions, might well inform the actions taken during proceedings, as it did in Scott and another (trading as Farthings Steak House) v McDonald [1996]STC(SCD) 381, where bad faith in the making of an assessment was relevant to consideration of behaviour in the continued defence of an appeal.” (Bulkliner Intermodal Ltd v. HMRC [2010] UKFTT 395 (TC), §11).

 

For example where there is bad faith

 

“HMRC’s conduct before the commencement of an appeal may be relevant if it shows that defending an appeal is unreasonable e.g. where an assessment was issued in bad faith as in the Farthings’ Steak House case.  Finding bad faith requires much more than a refusal by an inspector to accept that he or she is wrong, even in the face of compelling arguments by the appellant.  It is a high hurdle to surmount and requires proof of some egregious conduct.  In Farthings’ Steak House, the Special Commissioner accepted evidence indicating that the investigation had been inspired by the Inspector’s desire to get his own back on the taxpayers’ accountant.  There is no suggestion of any such malice on the part of Mr Millions in this case.” (Adderson v. HMRC [2016] UKFTT 273 (TC), §41).

Scott and anor (trading as Farthings’ Steak House) v McDonald (Inspector of Taxes) [1996] STC (SCD) 381

 

But:

 

“I have considered the Appellant’s reference to the much cited Bulkliner case and the relevance of HMRC’s previous behaviour, but have concluded that it is not legitimate, in a costs application under Rule 10(1)(b), to simply import into HMRC’s actions after proceedings have been issued, any alleged unreasonable behaviour prior to the start of the relevant proceedings.  The judge’s reference in Bulkliner to the earlier behaviour of a party “informing actions taken during proceedings” suggests only that it is one element which needs to be taken account of in determining whether HMRC’s actions are reasonable. Previous unreasonable behaviour is not enough, in itself, to change the character of HMRC’s behaviour after the issue of proceedings from reasonable to unreasonable.” (Archer v. HMRC [2016] UKFTT 141 (TC), §35).