Value added tax - Costs - Jurisdiction

Revenue and Customs Commissioners v Atlantic Electronics Ltd: TCC (Mr Justice Warren): 6 February 2012

The taxpayer company issued proceedings in the VAT and Duties Tribunal (the VAT tribunal) appealing against the decision of the defendant Revenue and Customs Commissioners (the Revenue) to disallow input tax claimed on the returns for periods in 2006.

The Revenue issued a statement of case in August 2008 stating that it would ask for costs if the taxpayer’s appeal was dismissed.

The proceedings were defended on the grounds that the taxpayer knew, or ought to have known, that its transactions were connected with the fraudulent evasion of VAT. During the course of the proceedings, the VAT tribunal was abolished and the jurisdictions previously exercised by it were transferred to the First-tier Tribunal (Tax Chamber) (FTT). The transfer of functions were effected by the Transfer of Tribunal Functions and Revenue and Customs Appeals Order 2009 (the transfer order).

For the purposes of the provisions of the transfer order, the taxpayer’s proceedings were ‘current proceedings’, and ‘the tribunal’ was the FTT, and the Value Added Tax Tribunals Rules 1986 were the ‘procedural rules which applied to the proceedings before the commencement date’, namely 1 April 2009.

In April 2010, the FTT consented to an application by the taxpayer for a stay of the proceedings, and that consent included a provision that ‘costs to be in the cause’. Subsequently, the taxpayer applied for a direction that rule 10 of the Tribunal Procedure (First-Tier Tribunal) (Tax Chamber) Rules 2009, which precluded the making of a costs order other than in three circumstances listed in rule 10(1), should not be disapplied. The right to opt out under rule 10 of the 2009 rules had to be exercised within 28 days of the allocation of the case as a complex case. In response, the Revenue issued a notice in October 2010 opposing the taxpayer’s application, and applied for the application of the 1986 rules, which had the effect of a full costs-shifting regime.

The FTT concluded that a determining factor against applying rule 29 of the 1986 rules was the lapse in time since the commencement date of the transfer order until the making of the application by the Revenue, some 19 months, and that there had been nothing in the conduct of the taxpayer or otherwise to have made it necessary to apply the 1986 rules to ensure that the proceedings were dealt with fairly and justly. Accordingly, the FTT acceded to the taxpayer’s application to confirm the application of rule 10 of the 2009 rules to the proceedings. The Revenue appealed to the Upper Tribunal (Tax and Chancery Chamber) (the tribunal).

The issue for determination was whether the FTT had been correct to refuse to exercise its discretion to disapply the costs provisions of the 2009 rules and apply the previous regime under the 1986 rules. The tribunal ruled: It was incumbent on the party who had wished to operate in a costs-shifting regime to make an application disapplying rule 10 of the 2009 rules and applying rule 29 of the 1986 rules. Unless that party had been prepared to make a direction for different regimes, the FTT and the tribunal had a dilemma, namely, on the one hand, it had before it proceedings part of which were conducted in a costs-shifting regime in accordance with the then subsisting policy in respect of costs; and on the other hand, it had before it proceedings part of which were and would be conducted in a regime in which, in default of contrary direction, there was no costs shifting.

A party to a tax appeal, whether the taxpayer or the Revenue, had not only a reasonable expectation that the relevant procedural rules would be applied, but also the right to have them applied in fact. In the case of ‘current proceedings’, the relevant rules were to be found in the 2009 rules read with paragraph 7 of the transfer order. Neither a taxpayer nor the Revenue were entitled to have the 2009 rules applied as if paragraph 7 of the transfer order had not existed. However, unless a direction was made under paragraph 7 of the transfer order, whether a prospective direction or a direction at the time when a costs order came to be made, then rule 10 of the 2009 rules would apply.

In that sense, it was perfectly true that a taxpayer had a reasonable expectation that rule 10 of the 2009 rules would apply, indeed he had a right to that effect. However, that was not to say that there was some justified expectation that the default regime would apply which was, of itself, a factor which should be taken into account in the exercise of discretion (see [49], [54], [55] of the judgment).

In the instant case, it had been within the range of reasonable decisions open to the FTT to have reached the conclusion that the lapse of time had been such that the Revenue should not obtain the prospective costs order which it had sought in relation to the entire proceedings, including the costs in the VAT Tribunal. In particular, the FTT had been entitled to reach that conclusion notwithstanding that the Revenue had indicated, early in the proceedings, that it would seek a costs order if successful. That indication had been given before the jurisdiction of the VAT Tribunal had been transferred to the FTT and before the 2009 rules had come into force.

The Revenue’s indication that it would seek costs under the 1986 rules, which had given the Revenue a right to do so, was not to have been taken as an indication about how costs would be dealt with under the entirely different regime found in the 2009 rules. Further, the FTT had been entitled to reach that conclusion notwithstanding earlier orders on interim applications that costs would be ‘in the case’ or ‘in the cause’. The particular circumstances of those orders could not be taken as an acceptance by the taxpayer that a costs-shifting regime was to have applied to the entire proceedings (see [70] of the judgment).

Abbas Lakha QC and Edmund Vickers (instructed by Jeffrey Green Russell) for the taxpayer; Jonathan Swift QC (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Revenue.