UT (Tax & Chancery) UT/2022/000099 - [2024] UKUT 00184 (TCC)

HMRC applied for (a) the costs of the strike-out application and (b) 10% of its costs of the main hearing to reflect their success in relation to the Magee/PCB deals. Because the case had been allocated as complex and the Appellant had not opted out, the costs were claimed under Rule 10(c), and in the alternative, under Rule 10(b) on the basis that the Appellant had acted unreasonably in conducting the proceedings.

The Appellant applied for all its costs (including those relating to the strike-out hearing) under Rule 10(c), on the basis that it was “ultimately successful” in relation to 90% of the denied invoices.

“The decision to award costs is always discretionary. CPR 44.2 provides guidance as to the framework for that discretion. Applying that guidance, the Tribunal has a discretion as to whether costs are payable by one party to another, and, if it decides to make an order about costs, the ‘general rule’ is that the unsuccessful party will be ordered to pay the costs: CPR 44.2(2)(a), albeit the Court may make ‘a different order’. CPR 44.2(4) and (5) make ‘conduct’ a relevant consideration when exercising the discretion to make a costs order.”

In relation to the substantive appeal, each party was successful in part. UM's appeal succeeded in relation to the Revenue's failure to establish connection to fraud for one set of deals. Its appeal did not succeed in relation to other sets of deals where the Appellant, through its director Mr Donaldson, was found to have had actual knowledge of connection to fraud.

It is fair to say, arithmetically, that the scales ended up tilted in favour of the Appellant because there were about 135 denied invoices, with the Appellant ultimately succeeding in relation to about 90% of them. However, I decline to follow the arithmetic approach when it comes to deciding on costs. It is too simple, and fails to capture the bigger picture.

Standing back, it does not seem to me as if the substantive appeal did produce a clear winner. Neither party really got what they wanted. UM ended up paying more tax than it wanted to (ie not getting back its input tax claimed on the Magee and PCB deals); and HMRC failed to get as much as it wanted (ie having to pay UM the input tax claimed on purchases from Irwin Enterprises Ltd). It does not seem to me as if the exact figures, and the fact that one may over-top another, really matter for the purposes of this analysis.

In my view the ‘general rule’ does not apply. It seems to me that this is a case in which ‘a different order’ should be considered: CPR 44.2(2)(b)…”

Mr Donaldson had been untruthful “in relation to all the groups of deals”.

The FTT Decision “is pervaded with comments which were adverse to Mr Donaldson's credibility, and those are findings which simply cannot be ignored”.

As regards the PCB/Magee deals, Mr Donaldson “actually knew of the connection to fraud”, and “it does not matter that those deals, empirically, amounted to just a small proportion of the overall deals in dispute”.

In conducting the litigation, Mr Donaldson had engaged in “a misguided game of forensic ‘hide and seek’ with HMRC, rather than “putting his cards fairly and candidly on the table”, and he had also not been “candid” with the FTT.

The costs order should be “appropriately reflective of all the circumstances, including…the strong public interest in discouraging the deployment of dishonest evidence to obtain public funds (ie VAT)”.

It was therefore “not going too far, and is fair and just, to deprive UM (despite its success in relation to a large proportion of the deals in issue) of the ability to recover any of its costs from HMRC”.

HMRC had waited until the hearing itself to abandon its pursuit of some of the deals; and

HMRC’s case in relation to the Irwin Deals had already been considered and rejected by the FTT in 2015.