[2013] UKFTT 523 (TC)
TC02911
Appeal number: TC/2011/06689
COSTS – whether
unreasonable behaviour by HMRC – no reasonable prospect of success and HMRC
should have known this - application allowed
FIRST-TIER TRIBUNAL
TAX CHAMBER
NATHANIEL DAVID
RODEN
AND
REBECCA CATHERINE
RODEN
Appellant
- and -
THE COMMISSIONERS
FOR HER MAJESTY’S
Respondents
REVENUE &
CUSTOMS
|
TRIBUNAL:
|
JUDGE BARBARA MOSEDALE
|
At both parties’ request this
application was decided on the papers on the basis of their written submissions
Mr T Brown, Counsel,
instructed by Francis Clark LLP, for the Appellant
Mrs R Paveley, officer of
HMRC, for the Respondents
© CROWN COPYRIGHT
2013
DECISION
1.
On 13 September 2012 the Tribunal upheld the appellants’ appeal against
a review decision issued by HMRC refusing to repay £70,000 in input VAT. The
appellants now apply for their costs under Rule 10(1)(b) of the Tribunal
Procedure (First Tier Tribunal) (Tax Chamber) Rules 2009 on the grounds that
they consider that HMRC acted unreasonable in defending their appeal.
2.
In their substantive appeal, there was no dispute on the facts and the
only issues the Tribunal had been called to decide were ones of law. The
decision ([2012] UKFTT 586 (TC)) records this Tribunal’s findings of the law
and there has been no appeal against it.
The facts relevant to the costs application
3.
HMRC’s case at the substantive hearing was in essence that the supply of
accommodation in an hotel made by the appellants was exempt because it was not
within Item 1(d) of Group 1 of Schedule 9 to Value Added Tax Act 1994:
“the provision in a hotel of sleeping accommodation”
because the appellant’s supply of an hotel room was
(deemed) not to be made to a person who would actually use the accommodation
and sleep in the room, but to an intermediary for such a person.
4.
The appellant challenged this view of the law on two grounds. The first
was that the deemed supply to the undisclosed agent necessarily had to have the
same VAT status as the deemed supply by the undisclosed agent to the
appellants’ customer (the hotel guest). The second ground was that in any
event Item 1(d) was not limited to supplies made to the actual user of the
hotel accommodation.
5.
The appellant failed on ground one in that I found that the deemed
supply principal to undisclosed agent did not necessarily have to have the same
status as the deemed supply by undisclosed agent to the principal’s customer:
see §§21-41.
6.
The appellant succeeded on ground two in that I found that Item 1(d) and
in particular the provision of the Principal VAT Directive which it implemented
applied to all supplies of sleeping accommodation in an hotel irrespective of
the identity of the recipient of the supply and whether or not that recipient
would actually occupy the room.
7.
Nothing more needs to be said on Ground one (which the appellants lost
on) because HMRC’s case depended on the Tribunal agreeing with their view of
Item 1(d). Whatever the outcome of the appellants’ case on ground one, to
succeed in defending the appeal HMRC had to win on ground two. The question
therefore is whether HMRC’s case on Item 1(d) had a reasonable prospect of
success.
8.
I dealt with ground two quite shortly in the main decision at §§42-47.
I dismissed HMRC’s case for three reasons which were that:
(a)
the distinction HMRC drew between supplies to persons who would
physically use the room and others was illogical and unlikely to have been
intended by Parliament when enacting the legislation (and I noted, while not
strictly relevant to an interpretation of the law that it was inconsistent with
the prevailing understanding not least of HMRC’s that supplies of hotel
accommodation to companies for the use of their employees was standard rated);
(b)
there was even less justification for reading the provision of the
Principal VAT Directive which Item 1(d) enacted as intending such an illogical
distinction between physical users of the room and others;
(c)
it was a well established rule of EU law that exclusions from exemptions
(such as Item 1(d)) should not be interpreted strictly – so I should not read
in a limitation to physical users unless compelled to do so.
9.
HMRC’s skeleton did not advance any reason for its view that Item 1(d)
only applies to supplies to the physical user of the room other than relying on
the wording of that Item and in particular the use of the words “the
provision…of sleeping accommodation” Much the same was said at the hearing.
No authority for their view was cited. So far as I am aware it was a novel
point and had not been raised before.
10.
In pursuing their point on Item 1(d) in Tribunal were HMRC acting
unreasonably?
What is unreasonable behaviour in law?
11.
As I understand the appellants’ position on costs it is that HMRC should
not have defended the appeal because the position HMRC adopted on the law was
(in the appellants’ view) unsustainable.
12.
What amounts to unreasonable behaviour? Is it unreasonable behaviour in
all cases to defend (or pursue) an appeal on the on the basis of a legal
position which did not have a reasonable prospect of success? Or would it only
be unreasonable behaviour if the losing party ought to have known that it had
no reasonable prospect of success?
13.
HMRC drew to the Tribunal’s attention the decision at first instance in Leslie
Wallis TC2499:
“It seems to us that it cannot be that any wrong
assertion by a party to an appeal is automatically unreasonable…The rules
clearly do not intend that just because a party is wrong that that party should
be ordered to pay the other’s costs….In our judgment before making a wrong
assertion constitutes unreasonable conduct in an appeal that party must
generally persist in it in the face of unbeatable argument that he is wrong.
Thus for example a party who persists in a legal argument which is precisely
the same as one recently dismissed by the Supreme Court and which has been
drawn to his attention…..could be acting unreasonably….”
14.
In that decision, it appears that the Tribunal was of the opinion that
the party would not be acting unreasonably when pursuing a case without merit
unless he ought to have known his case was without merit.
15.
I agree. The Tribunal should not be too quick to characterise pursuing
what is found to be an unsuccessful case as unreasonable behaviour: the
Tribunal rules provide for a no-costs regime in virtually all tax cases (and
the exception for complex cases does not apply in this case). So if in this
case HMRC’s view had no reasonable prospect of success, HMRC would have been
acting unreasonably if they ought to have known this but not otherwise. In
considering whether HMRC ought to have known whether the case had a reasonable
prospect of success, I consider that I should consider HMRC as a whole and not
just the individual officer presenting the case.
Conclusion
16.
Was HMRC’s case without a reasonable prospect of success?
17.
My conclusion is that, taking into account:
·
No authority even by analogy was presented to me;
·
Unless expressly stated in the legislation, the identity of the
recipient of a supply is irrelevant to the status of the supply
·
Exceptions to exemptions are not interpreted narrowly
·
There was nothing in the wording of either the UK legislation or EU Directive which implied that the identity of the recipient was significant;
HMRC’s case did not have a reasonable prospect of
success.
18.
Should HMRC have realised its case did not have a reasonable prospect of
success?
19.
Taking into account HMRC’s resources, they ought to have been aware of
the normal rules of interpretation of exceptions to exemptions. They should
have been aware that, without some kind of authority by analogy to support
their case, or at least some kind of argument founded in law, it was extremely
unlikely a Tribunal would read into Item 1(d) a limitation that was not
indicated on its face, was irrational, and (in view of its unfortunate
consequences for taxpayers in the hotel business) was unlikely to have been
intended by the EU Council.
20.
In conclusion, while there is nothing wrong in principle with taking to
tribunal novel points of law unsupported by authority, in this case I find that
HMRC acted unreasonably in defending this case based on this single, novel
point of law which they ought to have known had no reasonable prospect of
success.
21.
I order HMRC to pay the appellant’s costs in this appeal to be assessed
on the standard basis if not agreed.
22.
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.
BARBARA
MOSEDALE
TRIBUNAL JUDGE
RELEASE DATE: 1 October 2013
