Neutral Citation Number: [2008] EWHC 1945 (Ch)
Case No: HC08C00665
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 04/08/2008

Before:

MR JUSTICE DAVID RICHARDS
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Between:

	The Commissioners for Her Majesty's Revenue and Customs	Claimant	
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	Xicom Systems Limited	Defendant	

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Nicholas Bacon (instructed by Solicitor to HM Revenue and Customs) for the Claimant
Colin Challenger (instructed by Thomas Cooper) for the Defendant

Hearing date: 10 July 2008
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Judgment
The Hon. Mr Justice David Richards: 
1.	The Commissioners for Her Majesty’s Revenue and Customs (HMRC) apply for an order to set off their liability to Xicom Systems Limited (Xicom) under an order for costs arising out of proceedings before the VAT and Duties Tribunal (the Tribunal) against Xicom’s liability under a county court judgment for unpaid PAYE income tax and national insurance contributions. The liability of HMRC for costs amounts to £30,500 and an order to pay that sum was made in the High Court by the Supreme Court Costs Office (SCCO) on 3 March 2008. It comprises two sums: a sum of £23,750 in respect of costs awarded by the Tribunal on 11 October 2007, and a sum of £6,750 in respect of the costs of the application to the SCCO for assessment. The county court judgment, entered by the Reading County Court on 13 November 2007, is for £104,654.58, including interest.
2.	Xicom opposes the application on two grounds. First, it submits that this Court lacks jurisdiction to make the order. Secondly, if the Court has the necessary jurisdiction, it should decline to make the order in the exercise of its discretion.
3.	In order to set these issues in context, I shall set out briefly the relevant facts.
4.	Xicom dealt in mobile phones and was registered for VAT. It says that because of the nature of its business it is entitled to a rebate of VAT at the end of each monthly VAT period. For the period April 2006 HMRC suspended payment of a claim for rebate of £1.7 million pending investigation of the claim. Further claims for rebate were also suspended, so that a total of over £2.3 million has been withheld. Xicom ceased business in August 2006, as a result it says of the suspension of rebates. In due course HMRC has by a number of decisions formally refused to pay these claims, on the grounds that they are not recoverable as input tax under section 24 of the Value Added Tax Act 1994 because the transactions giving rise to the claims were part of an overall scheme to defraud HMRC by means of missing trader intra-community fraud, in circumstances where Xicom knew or should have known that this was the case.
5.	The PAYE income tax and national insurance contributions, for which judgment was given in the Reading County Court, related to periods in 2005/06 and 2006/07.
6.	Xicom appealed HMRC’s decisions to deny the right to input tax deduction to the Tribunal. On 5 October 2007 the Tribunal issued directions in two appeals, and ordered that HMRC should pay Xicom’s costs of one of the appeals from 20 July 2007 to 5 October 2007 on the standard basis to be assessed if not agreed. HMRC thereafter failed to serve its statement of case and list of documents in accordance with the directions. At a hearing on 30 November 2007 HMRC’s failure was waived but the Tribunal directed that Xicom’s appeals would be allowed if HMRC failed to comply with further directions for service of those documents. No further order for costs was made but in its Reasons issued on 17 December 2007 the Tribunal noted that HMRC’s failure to comply with the earlier directions had been “material” and that it had “seriously delayed” service of its statement of case in the second appeal. The Tribunal went on to state:
“7. The Respondents’ serial failures to comply with the limits in the tribunal rules and its directions are a cause of concern. Such actions hamper the administration of justice and can prejudice the other party.
8. In UK Tradecorp (VATD 18992) the tribunal allowed an appeal where a party had failed to fulfil a condition in an order specifying that unless the condition was fulfilled the appeal shall be allowed. In that case the tribunal found that the Respondents had not advanced compelling reasons for waiving the default and that the Appellant’s lack of assertion of any prejudice from the failure does not preclude the tribunal from allowing the appeal under rule 19(4).
9. It seemed to this tribunal that the Respondents’ actions (or inactions) in the present case had not been as culpable as they had in Tradecorp, and that the timetable originally laid out in the October Direction could be adapted to progress to a hearing and so that they would not materially prejudice the Appellant. In the circumstances the tribunal did not feel it right to allow the appeal.
10. But the tribunal was concerned about the tardy behaviour of the Respondent and is keen to ensure that there is no future failure to comply. The directions made therefore include a direction that unless the Respondents comply with these directions affecting it (being directions which enable proper progress towards the timetable envisaged by the October Direction), the appeal will be allowed.
11. The tribunal considered whether to exercise its power under paragraph 10 of the Schedule 12 VATA 1994 to impose a penalty upon the Respondents. It was decided not to impose a penalty – such a course generally being more appropriate where the behaviour concerned had some element of contempt.”
7.	By early January 2008 agreement was reached on the amount of Xicom’s costs due under the Tribunal’s order of 5 October 2007 in a sum of £23,750. There was however disagreement as to whether the SCCO’s order should provide for a set off against the county court judgment. In late February 2008 HMRC agreed that the SCCO’s order should not deal with set-off, which it considered should be determined by a High Court judge. It doubted that the Costs Judge would have jurisdiction to make an order for set off. There was a hearing before the Costs Judge on 3 March 2008 at which he ordered by consent HMRC to pay £23,750 in respect of the costs awarded by the Tribunal and he further ordered HMRC to pay Xicom’s costs of the application to the SCCO which he assessed at £6,750.
8.	There have been further hearings for directions by the Tribunal. HMRC sought permission to adduce further evidence as to the fraud of persons in the chain of supply to Xicom. It is clear from the terms of the Tribunal’s decision on 17 May 2008 that it considered that the evidence could have been adduced, or the application made, at an earlier stage. The Tribunal gave permission for the production of such further evidence before 20 June 2008, failing which no further evidence as to fraud by the traders was to be adduced. It gave further directions with a view to bringing the appeals to a substantive hearing. At a hearing on 26 June 2008, further directions were given by the Tribunal, including the admission of new evidence by HMRC. The Chairman of the Tribunal considered that this evidence should have been made available at a much earlier stage and said in his reasoned decision:
“I bear in mind in relation to costs the discretion to permit such amendment on terms and the objectionable way in which the Respondents [HMRC] appear to drip feed evidence and allegation: it delays and confuses and prolongs the preparatory steps unfairly.”
He ordered Xicom’s costs of preparing evidence in answer and the costs of the hearing to be paid by HMRC in any event. These costs have yet to be assessed and are not the subject of the present application for set off.
9.	I deal first with jurisdiction. The application is made under section 72 of the County Court Act 1984 which provides:
“(1)     Where one person has obtained a judgment or order in a county court against another person, and that other person has obtained a judgment or order against the first-mentioned person in the same or in another county court or in the High Court, either such person may, in accordance with rules of court, give notice in writing to the court or the several courts as the case may be, and may apply to the court or any of the said courts in accordance with rules of court for leave to set off any sums, including costs, payable under the several judgments or orders.
(2)     Upon any such application, the set-off may be allowed in accordance with the practice for the time being in force in the High Court as to the allowance of set-off and in particular in relation to any solicitor's lien for costs.
(3)     Where the cross judgments or orders have not been obtained in the same court, a copy of the order made on any such application shall be sent by the proper officer of the court to which the application is made to the proper officer of the other court.”
Section 72(1) permits either the High Court or the county court in which a judgment has been entered to give leave to set off a High Court judgment against a county court judgment. For Xicom, Mr Challenger submitted, as what he called his first but not his primary point, that the order for costs against HMRC was made by the Tribunal, not the High Court, and that there was no authority in section 72 or elsewhere for a set off of a tribunal order against a county court judgment. The answer in my view to this point is that although the award of costs was made by the Tribunal, it was the SCCO as part of the High Court which in terms ordered the payment of £23,750 and £6,750 by HMRC to Xicom. It is an order in the High Court to which section 72 applies.
10.	Secondly, Mr Challenger submitted that the application for set-off should have been made to the SCCO. I am doubtful that the SCCO, whose task was to assess the costs awarded by the Tribunal and to make an order for their payment in the assessed amount, had jurisdiction to consider the issue of set-off. But even if it did, it cannot in my view deprive HMRC of a right to apply instead by a new application to the High Court under section 72.
11.	Mr Challenger’s primary ground for his submission that the court had no jurisdiction to give leave for a set-off was based on section 25 of the Crown Proceedings Act 1947, which provides:
“(1)     Where in any civil proceedings by or against the Crown, or in any proceedings on the Crown side of the King's Bench Division, or in connection with any arbitration to which the Crown is a party, any order (including an order for costs) is made by any court in favour of any person against the Crown or against a Government department or against an officer of the Crown as such, the proper officer of the court shall, on an application in that behalf made by or on behalf of that person at any time after the expiration of twenty-one days from the date of the order or, in case the order provides for the payment of costs and the costs require to be taxed, at any time after the costs have been taxed, whichever is the later, issue to that person a certificate in the prescribed form containing particulars of the order:
Provided that, if the court so directs, a separate certificate shall be issued with respect to the costs (if any) ordered to be paid to the applicant.
(2)     A copy of any certificate issued under this section may be served by the person in whose favour the order is made upon the person for the time being named in the record as the solicitor, or as the person acting as solicitor, for the Crown or for the Government department or officer concerned.
(3)     If the order provides for the payment of any money by way of damages or otherwise, or of any costs, the certificate shall state the amount so payable, and the appropriate Government department shall, subject as hereinafter provided, pay to the person entitled or to his solicitor the amount appearing by the certificate to be due to him together with the interest, if any, lawfully due thereon:
Provided that the court by which any such order as aforesaid is made or any court to which an appeal against the order lies may direct that, pending an appeal or otherwise, payment of the whole of any amount so payable, or any part thereof, shall be suspended, and if the certificate has not been issued may order any such directions to be inserted therein.
(4)     Save as aforesaid no execution or attachment or process in the nature thereof shall be issued out of any court for enforcing payment by the Crown of any such money or costs as aforesaid, and no person shall be individually liable under any order for the payment by the Crown, or any Government department, or any officer of the Crown as such, of any such money or costs.”
12.	A certificate in respect of the costs order was duly issued under section 25(1) on 7 March 2008. Mr Challenger submitted that the issue of this certificate created a statutory duty under section 25(3) on HMRC to pay the certified amount. This duty could not be avoided by a set-off under section 72. The proviso to section 25(3) was not applicable because it provided only for a suspension of payment.
13.	Section 25 involves a trade-off between a prohibition on any execution to enforce orders against the Crown and the creation of a statutory duty to pay the amount due under orders. It would be a remarkable result if the Crown, alone among litigants, could not benefit from a set-off of orders for payment. Nothing in section 25 suggests that this was the intended result, and there is in my view a clear answer to Mr Challenger’s submission. Section 21(1) provides:
“In any civil proceedings by or against the Crown the court shall, subject to the provisions of this Act, have power to make all such orders as it has power to make in proceedings between subjects, and otherwise to give such appropriate relief as the case may require:”
In my judgment this section permits the court to give leave for a set-off of orders in favour of, and against, the Crown. 
14.	I am accordingly satisfied that this court has jurisdiction to give leave for a set-off under section 72 of the County Courts Act 1984 of the orders as between HMRC and Xicom.
15.	I turn therefore to the application of section 72 of the County Court Act 1984 to the present case. It is as well to note first what is not involved. First, the set-off for which the section provides is not the legal or equitable set-off which provides a defence to claim and which does not involve an exercise of discretion: see R (on the application of Burkett v London Borough of Hammersmith and Fulham [2004] EWCA Civ 1342 at paras 45-46. Secondly, it does not arise as part of the court’s discretion to order costs under section 51 of the Supreme Court Act 1981, as it did in the Burkett case.
16.	Section 72(1) speaks of an application to the court for “leave to set off” sums payable under judgments or orders. Section 72(2) provides that the set-off “may be allowed in accordance with the practice for the time being in force in the High Court as to the allowance of set-off and in particular in relation to any solicitor’s lien for costs”. Both the language of these provisions and the practice of the High Court as established by the cases shows that the court has a discretion to permit or refuse set-off in all the circumstances of the case: see Edwards v Hope 14 QBD 922, Reid v Cupper [1915] 2 KB 147.
17.	As regards the practice of the High Court “in relation to any solicitor’s lien for costs”, the practice has for many years been not generally to take it into account when deciding whether to order a set-off: Puddephatt v Leith (No 2) [1916] 2 CH 168, In re a Debtor (No 21 of 1950) [1951] Ch 612. Mr Challenger for Xicom did not rely on a solicitor’s lien as such but submitted that in the circumstances of this case, the fact that the amount due to Xicom was for costs was a relevant  factor against set-off.
18.	In the absence of persuasive factors against permitting set-off, I would think it right to give leave for set-off. Where one party has no prospect of paying its debts, it would usually run counter to common notions of good sense and justice to require the other party to pay, as opposed to set-off, its debt. As Dankwerts J said in In re a Debtor (No 21 of 1950) at p 616:
“It seems somewhat remarkable if a debtor, who owes a creditor a sum of £409, is entitled to issue execution against that creditor to recover a much smaller sum of £72 for costs directed to be paid by the creditors.”
Xicom accepts that it has no means of paying the County Court judgment against it. HMRC has not sought to enforce the judgment and makes the present application only because Xicom is seeking payment of the smaller sum of costs in its favour.
19.	Xicom relies on a number of factors in support of its opposition to an order for set-off. Some of these I can deal with shortly. First, it is said that HMRC has delayed unduly with its investigation into the VAT position of Xicom. I am not in a position on this application to investigate into and adjudicate on that assertion, but in any case I do not see how it can be a relevant factor as to whether to permit a set-off. The only possible link is with Xicom’s ability to meet the judgment but it would be able to do so only if it succeeded in its appeal to the Tribunal and it is not suggested that I can form any view on the merits of its appeal.
20.	Secondly, Xicom suggests that its inability to meet the judgment stems from the decision of HMRC to suspend and then withhold the rebate. But HMRC may have been entirely justified in doing so and that can only be decided on the appeal. In any event, Xicom’s failure to pay PAYE and national insurance contributions on which the judgment is based cannot be blamed wholly on the suspension of rebates. Xicom ceased trading in August 2006. The judgment is for over £104,000 and relates to the year to 5 April 2006 as well as the 2006/07 year. It follows that Xicom’s failure to account for at least part of the PAYE and NIC is unrelated to the suspension and refusal of rebates.
21.	Thirdly, it was suggested that if set-off is permitted, Xicom will be unable to pay its solicitors the costs covered by the Tribunal’s award against HMRC and the solicitors may withdraw from acting for Xicom, leaving Xicom in great difficulty in pursuing its appeal to the Tribunal which may be well-founded. Xicom’s solicitors are acting under a Conditional Fee Agreement (CFA) dated 14 February 2007. By para 7(b) of the Standard Conditions to the CFA, the solicitors can terminate the agreement only in specified circumstances. None of them applies in circumstances where these costs are not paid by HMRC to Xicom and hence to the solicitors. It was said on behalf of Xicom that the solicitors only agreed to continue to act after the great expansion in the case following the directions hearing in October 2007 because it knew that it would receive the costs awarded to Xicom.
22.	If the effect of permitting a set-off were to deprive Xicom of representation in the appeal to the Tribunal, I accept that it would be a factor to be taken into account. It does not however seem from the terms of the CFA that this is the case. If the solicitors had been told earlier of Xicom’s liability for PAYE and NIC and of the County Court proceedings which led to the judgment on 13 November 2007, they might have acted differently. It was a failure of Xicom, not HMRC, to inform their solicitors.
23.	The fourth factor on which Xicom relies is in my view the strongest. The tribunal awarded costs against HMRC because of its “serial failures to comply with the time limits in the tribunal rules and its directions”, which “hamper the administration of justice and can prejudice the other party”. The Tribunal’s comments in its recent decision show its continuing concerns as regards HMRC’s conduct of the appeal proceedings. The costs awarded by the Costs Judge arose from the way in which HMRC first asserted, and then abandoned, a claim to set-off before the SCCO.
24.	These are considerations which could justify a refusal of leave to permit set-off, so as to impress on HMRC the importance of the timely and proper conduct of proceedings. As against that, Mr Bacon submits for HMRC that not only was it deprived of its own costs but it will by set-off lose the right to recover £30,500 from its judgment against Xicom.
25.	On balance, I consider it right to permit the set-off sought by HMRC. But it must recognise that it cannot assume that orders for costs made in the future as a result of its tardy or inadequate conduct of the Tribunal proceedings will be treated in the same way.