The Supreme Court decided that the First-tier Tribunal cannot use its case-management powers to order one party to pay the other’s costs of a hearing bundle where the costs rules forbid that order. Eclipse had opted out of costs liability in a Complex tax appeal, so the Tribunal could award costs only for wasted costs or unreasonable conduct. A direction that the parties share the cost of bundles prepared by Eclipse was still an order that the Revenue pay costs, and it was made without jurisdiction.
The costs rules
Section 29 of the Tribunals, Courts and Enforcement Act 2007 gives the First-tier Tribunal a discretion over the costs of proceedings before it, and full power to make costs orders. Both are subject to Tribunal Procedure Rules. The rules governing this appeal were the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The court was told that its conclusion would also apply to the Tribunal’s other Chambers.
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Rule 10 provides that the Tribunal may order costs only in limited circumstances: a wasted costs order under section 29(4) of the 2007 Act; unreasonable conduct by a party or representative in bringing, defending or conducting the proceedings; or a case allocated as Complex under rule 23 in which the taxpayer has not, within 28 days, asked to be excluded from potential liability for costs or expenses. In other cases, and in a Complex case where that request has been made, there is no general power to shift costs. Rule 5 nevertheless gives broad case-management powers, including power to require a bundle, permit an amendment and grant an adjournment. The overriding objective in rule 2 is to deal with cases fairly and justly, including proportionately.
The bundle direction
Eclipse filed a tax return for the period ending on 5 April 2007. The Revenue issued a closure notice determining that Eclipse did not carry on a trade or business. If correct, that would have had severely adverse tax consequences, so Eclipse appealed. The appeal was allocated as a Complex case, and Eclipse served a request that the proceedings be excluded from potential liability for costs or expenses under rule 10(1)(c).
The parties agreed directions, which the Tribunal made. They were to try to agree a bundle prepared by Eclipse; if they could not agree, each was to prepare its own. They could not agree. At a hearing, the Tribunal directed orally that Eclipse prepare the bundle and that the costs should be shared. The bundle was very extensive. The parties’ copies ran to more than 700 lever-arch files, partly because the Revenue asked for documents which some might have thought of marginal relevance.
After fourteen days of evidence and argument, the Tribunal dismissed Eclipse’s appeal against the closure notice. The Upper Tribunal and the Court of Appeal upheld that decision, and on 13 April 2016 the Supreme Court refused permission to appeal on the tax issue. This appeal concerned only the costs direction. Eclipse’s agents sent the Revenue invoices for £108,395.48 including VAT, representing half the cost of preparing the bundles. The Revenue asked the First-tier Tribunal to set the sharing direction aside, saying that rule 10 left no jurisdiction to make it. The First-tier Tribunal held that it had had jurisdiction. The Upper Tribunal disagreed, held that the direction had been made without jurisdiction, and set it aside. The Court of Appeal dismissed Eclipse’s further appeal.
Sharing the cost was still an order to pay it
The Upper Tribunal and the Court of Appeal, and the Revenue before the Supreme Court, reasoned that the opt-out left only wasted costs and unreasonable conduct, and that neither applied. Eclipse first said that the direction ordered the costs to be shared rather than paid. Lord Neuberger rejected that distinction. Reimbursing Eclipse for half the expense of the bundles would still be a payment of costs. The direction required Eclipse to incur that expense and then recover half from the Revenue. The second step was an order for the recovery of costs, even though it was made before the expense had been incurred.
Case management does not create another costs power
Eclipse’s main argument was that a direction under rule 5 can include terms as to costs. It would otherwise be unrealistic, Eclipse said, for the Tribunal to allow an amendment or an adjournment without being able to compensate the other party. Lord Neuberger, with whom Lord Mance, Lord Sumption, Lord Toulson and Lord Hodge agreed, rejected that reading.
First, it would rob rule 10 of much of its force. The rule shuts out cost-shifting in ordinary cases unless a party or its legal advisers have behaved unreasonably or worse, and lets a taxpayer in a Complex case opt out. Its principal purpose is to protect a taxpayer from a costs exposure beyond the cost of his own lawyers. Lord Neuberger referred to Warren J’s statement in Atlantic Electronics Ltd v Revenue and Customs Comrs [2012] STC 931 that, in cases other than Complex cases, the inability to recover costs is not seen as likely to lead to a denial of access to justice, whereas in Complex cases the taxpayer’s choice is to prevail. His only qualification was that, in non-Complex cases, the normal inability of either the taxpayer or the Revenue to recover costs is positively intended to improve access to justice in the majority of such cases. If every direction under rule 5 could carry a costs order without unreasonable conduct, that scheme would be very significantly cut down.
Secondly, rules 10(3) to 10(7) prescribe how a costs application is made, how the potential payer can make representations, and how costs are assessed and recovered, including through the County Court or the Costs Office of the High Court. A separate power to award costs under rule 5 would leave no equivalent machinery. That gap is particularly clear in the provisions on assessment and recovery.
Thirdly, the Tribunal can still protect a party when granting an indulgence. It may refuse permission to amend, or refuse an adjournment, unless the party seeking it pays the other party’s costs wasted or incurred as a result. That is not what happened here. The Tribunal did not make preparation of the bundle conditional on the Revenue agreeing to contribute. It simply directed that the costs be shared.
Fourthly, rule 16 requires a witness summons to provide for the witness’s necessary expenses and to state who is to pay them. Eclipse suggested that this showed rule 10 was not a complete code. Lord Neuberger thought that, if anything, it supported the Revenue: where the Rules intend the Tribunal to make a party liable for costs, they say so.
Points which did not change the result
The issue turned on the Tribunal Procedure Rules. The merits of the tax appeal did not determine the Tribunal’s powers over costs.
He also rejected a looser interpretation on the ground that the Rules govern a tribunal rather than a court. Tribunal procedure is intended to be less formal and more flexible, and that may properly be taken into account. It did not justify a different result. If anything, it supported the conclusion, because the Rules point strongly against costs-shifting in the Tribunal, whereas costs-shifting remains the norm in the traditional courts.
It was also irrelevant that a different direction might have achieved the same practical result. As Moses LJ had pointed out, the Tribunal could have ordered both parties to prepare the bundles jointly. There would then have been a powerful argument that Eclipse could recover the £108,395.48 as a contribution between jointly liable parties. That was not the order made. Eclipse alone was liable for preparing the bundles, and the direction could not sensibly be treated as anything other than an order that the Revenue pay some of Eclipse’s costs. Rule 10(1) precluded that order.
During the hearing, Lord Toulson raised the possibility of a restitutionary claim for the same sum, by analogy with a claim for services performed under a contract which is unenforceable or void. That argument could not be pursued, and Lord Neuberger said no more about it.
Verdict: Eclipse’s appeal was unanimously dismissed. The direction requiring HMRC to share the cost of preparing the bundles remained set aside. The Court expressed no view on a separate claim in restitution.
Source: Eclipse Film Partners No 35 LLP v Commissioners for Her Majesty’s Revenue and Customs [2016] UKSC 24
