The Commissioners for HM Revenue & Customs v Eclipse Film Partners No 35 LLP [2013] 01041 (TC)IntroductionWhere an appeal has been allocated as a "complex case" by the First-tier Tribunal (the
The Commissioners for HM Revenue & Customs v Eclipse Film Partners No 35 LLP [2013] 01041 (TC)
Introduction
Where an appeal has been allocated as a "complex case" by the First-tier Tribunal (the "Tribunal"), the taxpayer (but not HMRC) subsequently may opt out of the costs regime that would otherwise apply. This provides certainty as to costs; if the taxpayer is unsuccessful, then he will not be required to pay HMRC's costs of the appeal. It is often the case, however, that even when a taxpayer has opted out, the parties will agree to share costs that are ancillary to the litigation (such as in respect of photocopying or transcription).
The issue that was considered by the Upper Tribunal in Eclipse 35 was whether opting out has the consequence that the FTT has no power to direct that there be a sharing of ancillary costs between the parties. The Upper Tribunal held that was the consequence.
The background facts
The appeal by Eclipse 35 was allocated as a complex case. Eclipse 35 then opted out of the costs regime. At a case management hearing, the Tribunal directed that the costs of preparing the hearing bundles for the substantive appeal be shared by the parties. HMRC opposed that direction, but did not seek to appeal against it. Following the hearing of the appeal, Eclipse 35 sent a schedule of its costs for preparing the bundles and claimed from HMRC £108,395.48 towards such costs.
HMRC applied to the Tribunal to set aside the relevant direction or to limit its costs to pure copying costs (i.e. excluding legal time that had spent on preparation of the bundles). That application was unsuccessful. The Tribunal noted that it had a specific power (under Rule 5(3)) to direct a party to produce a bundle and concluded that, on a purposive interpretation of the costs rule (Rule 10), its direction that the parties share the cost of compliance with that direction could: "in no sense … be said to be a purported award of costs which Rule 10 prohibits in the circumstances of the case."
HMRC appealed to the Upper Tribunal.
Decision of the Upper Tribunal
The Upper Tribunal disagreed with the Tribunal. It held that Rule 5 contains no express power that entitles the Tribunal to give any direction regarding costs and that Rule 10 is exhaustive of the Tribunal's power to make orders in respect of costs. An order that costs be borne by a party or parties is an order in respect of costs. According to the clear terms of Rule 10, such an order may be made only by the Tribunal in the circumstances prescribed by that rule. The Upper Tribunal allowed HMRC's appeal.
Consequences of the decision
As the Upper Tribunal noted, there is a difference between directions that are agreed and those that are not agreed. It is common for the parties in standard cases (where the costs regime (under Rule 10 (c)) does not apply) to agree to a sharing of ancillary costs. The Upper Tribunal recognised that there is "nothing wrong in principle with the [Tribunal] recording in directions an agreement to share costs of complying with any direction of the Tribunal." Also, parties to an appeal may enter into a contract with each other regarding the sharing of ancillary costs.
The taxpayer's right to opt out of the costs regime has to be exercised within 28 days of the allocation of the case as complex by the Tribunal. It is recommended that during this time (or even before) taxpayers discuss, and ideally seek to agree, with HMRC how the parties will deal with ancillary costs, regardless of the outcome of the substantive appeal.
Introduction
Where an appeal has been allocated as a "complex case" by the First-tier Tribunal (the "Tribunal"), the taxpayer (but not HMRC) subsequently may opt out of the costs regime that would otherwise apply. This provides certainty as to costs; if the taxpayer is unsuccessful, then he will not be required to pay HMRC's costs of the appeal. It is often the case, however, that even when a taxpayer has opted out, the parties will agree to share costs that are ancillary to the litigation (such as in respect of photocopying or transcription).
The issue that was considered by the Upper Tribunal in Eclipse 35 was whether opting out has the consequence that the FTT has no power to direct that there be a sharing of ancillary costs between the parties. The Upper Tribunal held that was the consequence.
The background facts
The appeal by Eclipse 35 was allocated as a complex case. Eclipse 35 then opted out of the costs regime. At a case management hearing, the Tribunal directed that the costs of preparing the hearing bundles for the substantive appeal be shared by the parties. HMRC opposed that direction, but did not seek to appeal against it. Following the hearing of the appeal, Eclipse 35 sent a schedule of its costs for preparing the bundles and claimed from HMRC £108,395.48 towards such costs.
HMRC applied to the Tribunal to set aside the relevant direction or to limit its costs to pure copying costs (i.e. excluding legal time that had spent on preparation of the bundles). That application was unsuccessful. The Tribunal noted that it had a specific power (under Rule 5(3)) to direct a party to produce a bundle and concluded that, on a purposive interpretation of the costs rule (Rule 10), its direction that the parties share the cost of compliance with that direction could: "in no sense … be said to be a purported award of costs which Rule 10 prohibits in the circumstances of the case."
HMRC appealed to the Upper Tribunal.
Decision of the Upper Tribunal
The Upper Tribunal disagreed with the Tribunal. It held that Rule 5 contains no express power that entitles the Tribunal to give any direction regarding costs and that Rule 10 is exhaustive of the Tribunal's power to make orders in respect of costs. An order that costs be borne by a party or parties is an order in respect of costs. According to the clear terms of Rule 10, such an order may be made only by the Tribunal in the circumstances prescribed by that rule. The Upper Tribunal allowed HMRC's appeal.
Consequences of the decision
As the Upper Tribunal noted, there is a difference between directions that are agreed and those that are not agreed. It is common for the parties in standard cases (where the costs regime (under Rule 10 (c)) does not apply) to agree to a sharing of ancillary costs. The Upper Tribunal recognised that there is "nothing wrong in principle with the [Tribunal] recording in directions an agreement to share costs of complying with any direction of the Tribunal." Also, parties to an appeal may enter into a contract with each other regarding the sharing of ancillary costs.
The taxpayer's right to opt out of the costs regime has to be exercised within 28 days of the allocation of the case as complex by the Tribunal. It is recommended that during this time (or even before) taxpayers discuss, and ideally seek to agree, with HMRC how the parties will deal with ancillary costs, regardless of the outcome of the substantive appeal.