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UT (Tax & Chancery) UT/2022/000103 - [2024] UKUT 00183 (TCC)
Fecha: 13-Mar-2024
Ground 3 – Cause of action estoppel
Ground 3 – Cause of action estoppel
In the light of our findings on Grounds 2 and 4 it is not strictly necessary for us to determine Ground 3. However, having had full argument, we shall set out our views, although relatively briefly.
TTSL says that the FTT was wrong in law to find that cause of action estoppel applied to bar it from pursuing the Claim Appeal.
The FTT referred to the familiar description of cause of action estoppel set out by Lord Keith in Arnold at p104:
Cause of action estoppel arises where the cause of action in the latter proceedings is identical to that in the earlier proceedings, the latter having been between the same parties or their privies and having involvedthe same subject matter. In such a case the bar is absolute in relation to all points decidedunless fraud or collusion is alleged, such as to justify setting aside the earlier judgment. The discovery of new factual matter which could not have been found out by reasonable diligence for use in the earlier proceedings does not, according to the law of England, permit the latter to be reopened…
The FTT’s conclusion on cause of action estoppel appears at [191] – [193]:
The Assessment Appeal and the Overlap part of the Claim Appeal have identical subject matter and are between identical parties or their privies. Those are the conditions set out in Arnold for cause of action estoppel to apply.
I reject Mr Jones’s submission that there are two different causes of action because there were two HMRC decisions: the dicta on which he relied from the Tribunal judgment in Durwin Banks 2 cannot displace the authoritative and binding judgment in Arnold which was reaffirmed in Virgin.
I thus find that cause of action estoppel applies and operates as an absolute bar to the Overlap Part of the Claim. That is sufficient to allow HMRC’s strike out application, but in case there is an onward appeal, and because it was fully argued, I have also considered whether the Appellant is also blocked by issue estoppel and/or by abuse of process.
The FTT described at [186] what is meant by a “cause of action”, for the purposes of civil litigation governed by the civil procedure rules. Namely, “the fact or combination of facts which gives rise to a right of action”. That definition was derived from Osborn’s Concise Law Dictionary, and neither party has taken issue with the definition. The dispute arises in translating that definition into the context of VAT disputes in the FTT.
Mr Jones KC submitted that the FTT was wrong to conclude that in the present case the two appeals concerned the same cause of action. In the context of VAT, it is HMRC’s decision which gives the taxpayer a right to bring an appeal under section 83 VATA 1994 and the decision is the cause of action. A subsequent decision giving rise to a further right of appeal is a different cause of action. In the present case, the Assessment Appeal was against a decision to assess and was brought under s.83(1)(p) VATA 1994. The Claim Appeal was against HMRC’s decision to refuse the claim for repayment and was brought under s.83(1)(c) VATA 1994. The subject matter of each appeal is different and the appeals involve different causes of action.
We note that there is some overlap between the various rights of appeal under section 83(1) VATA 1994. Hence, the amount of input tax which may be credited to a person may be relevant to an appeal under section 83(1)(c) and an appeal under section 83(1)(p). It is not surprising therefore that the Claim Appeal was in fact expressed to be made pursuant to sections 83(1)(c) and (p) VATA 1994, amongst other sub-paragraphs.
Mr Jones KC relied on the VAT Tribunal decision in Durwin Banks v HM Revenue & Customs (2008 VAT Decision 20695) (“Durwin Banks”). The tribunal in that case at [40] quoted Lord Keith’s description in Arnold of issue estoppel as involving the same issue but a different cause of action. The tribunal then said:
Clearly a decision giving rise to a right of appeal is analogous to a cause of action. A further decision gives rise to a further right of appeal.
Durwin Banks involved issue estoppel and not cause of action estoppel and there was no argument as to what constituted a cause of action. In the circumstances, we do not gain much assistance from what the VAT Tribunal said in passing about what constitutes a cause of action.
Mr Jones KC argued that the basic foundation of the FTT’s decision on cause of action estoppel at [191] was incorrect. Appeals having the same subject matter and between identical parties do not necessarily give rise to cause of action estoppel. He submitted that Arnold itself illustrates that proceedings involving the same subject matter and the same parties as previous proceedings do not necessarily involve the same cause of action. The parties were a landlord and tenant who had disputed the true construction of a rent review clause in a lease. The same dispute arose between them on a subsequent rent review which involved the same rent review clause in the same lease as the earlier proceedings. Nevertheless, as Lord Sumption observed in Virgin Atlantic Airways Ltd v Zodiac Seats UK Ltd [2013] UKSC 46 at [20], Arnold was treated as a case of issue estoppel and not cause of action estoppel. He stated as follows:
…The case before the committee was treated as one of issue estoppel, because the cause of action was concerned with a different rent review from the one considered by Walton J. But it is important to appreciate that the critical distinction in Arnold was not between issue estoppel and cause of action estoppel, but between a case where the relevant point had been considered and decided in the earlier occasion and a case where it had not been considered and decided but arguably should have been. The tenant in Arnold had not failed to bring his whole case forward before Walton J. On the contrary, he had argued the very point which he now wished to reopen and had lost. It was not therefore a Henderson v Henderson case. The real issue was whether the flexibility in the doctrine of res judicata which was implicit in Wigram V-C’s statement extended to an attempt to reopen the very same point in materially altered circumstances. Lord Keith of Kinkel, with whom the rest of the committee agreed, held that it did.
In response, Mr Elliott for HMRC relied on the judgment of Henderson J, as he then was, in Littlewoods, which concerned compound interest on repayments of VAT. The FTT very briefly summarised what is a complicated case at [177] of the Decision. We do not need to set out the facts, or to describe the decision in any detail. It suffices to say that Littlewoods was claiming compound interest on certain overpayments of VAT. As we have mentioned, the history of the proceedings involved two different section 85 agreements and HMRC were seeking to withdraw certain admissions as to the VAT treatment of the underlying supplies. There was also a previous decision of the Court of Appeal dealing with the VAT treatment of the supplies. Littlewoods contended that issue estoppel prevented HMRC from raising new contentions as to the correct VAT treatment of the underlying supplies, and in any event the application amounted to an abuse of process.
Henderson J held that issue estoppel could not apply because the previous proceedings had related to the substantive tax liability and the proceedings before him related to interest (applying King v Walden (Inspector of Taxes) [2001] STC 822). However, if he were wrong in that conclusion, he went on to consider issue estoppel. He conducted an exhaustive analysis of the authorities and policy issues in relation to the Caffoor principle in the context of VAT. He accepted that it applied in relation to appeals against VAT assessments and that no issue estoppel arose in the circumstances of that case, subject to potential arguments based on abuse of process.
In a considerably oversimplified sense, Henderson J found that the Caffoor principle applied to VAT such that on an appeal concerning interest on VAT, HMRC were not prevented from arguing that VAT was due even though there were previous determinations and agreements that it was not due. That was HMRC’s submission in its wider form in that case. If that was wrong, Henderson J found that any estoppel would be limited to interest on VAT in the specific quarterly periods covered by the determinations and agreements. His conclusions were stated as follows:
[207] I will now state my conclusions on this issue:
In the light of my review of the law, I accept HMRC’s second overriding contention in its broader form. I consider that the Caffoor principle applies to the underlying determinations of VAT and s 85 agreements in the present case, and that no issue estoppel can arise in relation to the separate claims for interest now advanced by the claimants so as to prevent HMRC from arguing that the VAT was in fact due as a defence to the claims. The position is in my judgment similar in all essential respects to that considered by Jacob J in King v Walden, which I respectfully think was correctly decided.
If the above conclusion is wrong, I would accept HMRC’s contention in its alternative, narrower, form, and hold that HMRC are not estopped from arguing that the VAT was in fact due save in relation to the specific quarterly periods and the specific companies covered by the earlier determinations and s 85 agreements.
For the avoidance of doubt, my conclusion in either its broader or its narrower form still leaves open the question whether it would be an abuse of process to permit HMRC to argue that the VAT was due. Although Mr Swift appeared at times to question this proposition, he rightly accepted in his closing submissions that issue estoppel and abuse of process are analytically separate issues. His point was, rather, that if issue estoppel did in principle apply, but the case fell within the Arnold exception, then the question of abuse of process should also be decided in HMRC’s favour for substantially the same reasons as brought the case within the Arnold exception.
I have already held that the Arnold exception would not apply, if and to the extent that I am wrong in my view that issue estoppel is excluded by the Caffoor principle. Before coming on to abuse of process, however, I must first deal as briefly as I can with the technical arguments on issue estoppel which were addressed to me, on the footing that (contrary to what I have now held) the doctrine of issue estoppel applies in the usual way and is not excluded by the Caffoor principle.
Henderson J went on to consider abuse of process. He concluded that there would be an abuse of process and gave a further summary of the outcome at [252]:
In bare outline, my conclusions on this complex part of the case are as follows:
There is no scope for issue estoppel to operate, because (a) the Caffoor principle applies, and (b) the present claims are all for interest, which is not an issue which has previously been determined.
Alternatively, the Caffoor principle applies so as to prevent the operation of issue estoppel save in relation to the claims for interest on the particular amounts of VAT which were determined to have been overpaid, by specific companies for specific periods, in (a) Littlewoods (CA), (b) the 10% Commission Appeal, and (c) so much of the GMAC Appeal as was settled by the 2008 s 85 Agreement.
If I am wrong about the application of the Caffoor principle, HMRC would be issue-estopped from defending all of the present claims on the ground that the VAT was due, and the Arnold exception to issue estoppel would not apply.
Littlewood’s separate contractual estoppel argument in relation to the 2008 s 85 Agreement must be rejected.
Whether or not issue estoppel applies, it would in any event be an abuse of process if HMRC were permitted to defend the present claims on the ground that the VAT was due.
In the course of considering issue estoppel, Henderson J identified the causes of action and the issues capable of giving rise to issue estoppel as follows:
(d) Issue estoppel: the technical issues
The same issue
As I have explained (see at para [152] above), it is a requirement if an issue estoppel is to arise that the same question, or issue, should previously have been decided in proceedings between the same parties (or their privies). But what is meant by ‘the same issue’, bearing in mind the distinction between cause of action estoppel and issue estoppel? The answer, as it was put by Lord Keith in Arnold ([1991] 3 All ER 41 at 47, [1991] 2 AC 93 at 105) (quoted at para [153] above), is that issue estoppel may arise ‘where a particular issue forming a necessary ingredient in a cause of action" (my emphasis) has been previously litigated and decided. It is therefore not enough that the issue was only incidental or collateral to the earlier cause of action.
The point was made with typical clarity by Diplock LJ in Thoday v Thoday [1964] P 181 at 198:
"There are many causes of action which can only be established by proving that two or more different conditions are fulfilled. Such causes of action involve as many separate issues between the parties as there are conditions to be fulfilled by the plaintiff in order to establish his cause of action; and there may be cases where the fulfilment of an identical condition is a requirement common to two or more different causes of action. If in litigation upon such cause of action any of such separate issues as to whether a particular condition has been fulfilled is determined by a court of competent jurisdiction, either upon evidence or upon admission by a party to the litigation, neither party can, in subsequent litigation between one another upon any cause of action which depends upon the fulfilment of the identical condition, assert that the condition was fulfilled if the court has in the first litigation determined that it was not, or deny that it was fulfilled if the court in the first litigation determined that it was."
Translated into the context of VAT, the relevant causes of action in the earlier litigation may in my judgment be identified as:
the VAT treatment under the Sixth Directive of the 2.5% element of TPP commission taken in goods by agents (i.e. the question in dispute between the parties in the proceedings which culminated in Littlewoods (CA));
the VAT treatment under the Sixth Directive of the 10% element of TPP commission, whether taken in goods or in cash (that being the issue in the 10% Commission Appeal, which was settled by the 2004 section 85 Agreement); and
the VAT treatment under the Second Directive of the 10% element of TPP commission taken in goods before 1978 (i.e. the subject matter of the 2008 section 85 Agreement).
The issues which HMRC now seek to re-open are identical to the issues which arose in (b) and (c) above, although they wish to rely on them as defences to a different cause of action (namely the claims for interest on overpaid tax). Furthermore, one of the issues decided by the Court of Appeal in Littlewoods (CA), as a fundamental part of its reasoning, was that the entirety of TPP commission taken in goods (and not just the 2.5% element) is properly to be treated as a reduction in the consideration paid by the agent for secondary goods, and is not consideration for services provided by the agent. This, too, is an issue which HMRC now wish to re-open in the light of Grattan (ECJ).
It seems to me, therefore, that all of the issues which HMRC now wish to reargue are the same as ones which were determined in the earlier proceedings, either as a necessary and fundamental part of the reasoning of the Court of Appeal in Littlewoods (CA) or by virtue of the two section 85 Agreements. The first of the three requirements of issue estoppel is therefore satisfied.
Mr Jones KC observed that claims for repayment of overpaid VAT under section 80 VATA 1994 could only be upheld if there was an overpayment and the tax paid was not in fact due. In contrast, an assessment stands good unless the taxpayer establishes that it is bad. We have already dealt with that submission in the context of issue estoppel.
HMRC endorse the reasoning of the FTT and rely particularly on what Henderson J said in Littlewoods at [210]. TTSL say there was no debate or discussion in Littlewoods about what amounts to a cause of action. It was all about issue estoppel. As such, we should not regard it as authoritative or indeed persuasive. Certainly Littlewoods concerned issue estoppel and not cause of action estoppel. However, Henderson J will have had the difference well in mind and referred to cause of action estoppel at [153] and [154]. In our view, the observations of Henderson J are persuasive and we respectfully consider that he was right in his identification of the causes of action in that case.
In the present case, we agree with Mr Elliott and the FTT that TTSL’s cause of action in the Claim Appeal was the same cause of action as in the Assessment Appeal. The cause of action was TTSL’s claim to be entitled to input tax credit on fees paid to investment advisers in relation to the Escrow Account. The FTT was therefore right to strike out the appeal on the grounds of cause of action estoppel, and we reject Ground 3 of the appeal.
Overall, that is not a surprising result. It would be surprising if TTSL had the right to assert entitlement to input tax credit twice in relation to the same input tax in the same VAT period, either because of a narrow interpretation of section 85 or on the basis that there is no cause of action estoppel. In substance TTSL was making the same claim arising out of the same facts. Whilst it is true that the first decision being challenged was an assessment and the second decision was the refusal of a claim, they were based on exactly the same facts and matters. If cause of action estoppel does not apply, then one would expect issue estoppel to apply.