R10: Protective costs orders etc.
HMRC’s “Rees practice”
“The general rule in the appeal courts is that losing party risk having to pay the other side’s costs, and I do not think it would be right to treat tax cases differently as a matter of course. However, both revenue departments exercise their discretion on matters of costs and are willing in appropriate circumstances, and in particular where it is they who are appealing against an adverse decision, to consider waiving their claims to costs or making other arrangements. Influential factors include the risk of financial hardship to the other party and whether the case is one of significant interest to taxpayers as a whole, turning on a point of law in need of clarification. If the revenue authorities are to come to an arrangement of this nature, they would expect to do so in advance of the hearing and following an approach by the taxpayer involved.”
“...This practice was first formulated in a Parliamentary statement made by Mr Peter Rees, then Minister of State at the Treasury, on 12 March 1980. The Rees Practice applied in particular but was not limited to appeals where HMRC are the appellants. In a written ministerial statement on 30 March 2009, Stephen Timms, then Financial Secretary to the Treasury, confirmed that HMRC would continue to apply the Rees Practice in tax cases in the UT.” (Drummond v. HMRC  UKUT 221 (TCC), Judge Sinfield)
Upper Tribunal has no jurisdiction to review HMRC decision on Rees practice
“…the Upper Tribunal has no jurisdiction in relation to whether HMRC apply the Rees Practice in a particular case. It is for HMRC, subject to any possible application for judicial review, to decide whether an appeal meets the criteria of the Rees Practice and whether to apply it.” (HMRC v. TGH (Commercial) Limited  UKUT 519 (TCC), §18, Judge Sinfield).
Upper Tribunal suggesting taxpayer asks for Rees practice
 There is, of course, nothing wrong with HMRC bringing this appeal to determine legal propositions of some general application. However, if questions of general application are to be determined, I do have some concerns about “equality of arms” (noting that HMRC are represented by specialist tax counsel, whereas the taxpayer is apparently not). I also wonder whether it is right that the taxpayer should run the risk of being subject to an adverse costs award if HMRC are successful in an appeal involving just £1,631.58 if HMRC are indeed appealing against the Decision because it raises questions of general application.
 It is with those concerns in mind that I make the following directions which are in addition to, and in not in substitution for, the usual requirements that apply following a grant of permission to appeal (namely the provision by the taxpayer of a Response to HMRC’s appeal and the provision of a Reply by HMRC if so advised):
(1) The taxpayer may wish to ask HMRC to apply the “Rees Practice” in relation to this appeal. Details of the Rees Practice are set out in the attached hyperlink to HMRC’s manuals https://www.gov.uk/hmrc-internal-manuals/appeals-reviewsand-tribunals-guidance/artg8670
(2) If the taxpayer wishes to ask HMRC to apply the Rees Practice, it should apply to HMRC (and not to the Tribunal) no later than 24 June 2022." (HMRC v. Pub Stuff Limited  UKUT 145 (TCC), Judge Richards)
Upper Tribunal does have jurisdiction to make PCO, CCO and CLO
“It is common ground that the Upper Tribunal has jurisdiction to make a PCO (see my decision in Drummond v HMRC  UKUT 221 (TCC) (‘Drummond 1’)… In Drummond 1, however, I also concluded that the 5 Upper Tribunal could make a costs capping order (‘CCO’) applying the same approach as the High Court would do under CPR 3.19 and an order limiting costs in an appeal (‘CLO’) applying the rules in CPR52.9A by analogy.” (HMRC v. TGH (Commercial) Limited  UKUT 519 (TCC), §13, Judge Sinfield).
Form of application
“ All applications for a PCO, CCO or ACO should include:
(1) a description of the circumstances of the case, including the amount involved, the financial resources of the applicant, the level of costs already incurred and the further costs likely to be incurred in the appeal (including whether the applicant’s representative is acting pro bono);
(2) the order sought;
(3) why the order should be made in the case;
(4) what consequences are likely to follow if the application is not granted;
The statements in the application about the applicant’s financial resources and the costs already incurred and likely to be incurred in the appeal should be supported by evidence.
 In addition, an application for a PCO should state why the issues raised are of general public importance and the public interest requires that the issues should be resolved. The application should also set out what interest the applicant has in the outcome of the case.
 In the case of a CCO, the application should also state why the applicant considers that there is a substantial risk that, without a CCO, costs will be disproportionately incurred and why that risk could not be adequately controlled by effective case management or detailed assessment of costs.” (Drummond v. HMRC  UKUT 221 (TCC), Judge Sinfield).
Form of response
“ Any submissions in response should state whether the respondent opposes the application and, if so, on what grounds. In addition, the response should include an estimate of the costs likely to be incurred by the respondent in the appeal that are potentially recoverable from the applicant.” (Drummond v. HMRC  UKUT 221 (TCC), Judge Sinfield).
General principles to applied to PCO
“We would therefore restate the governing principles in these terms:
(1) A protective costs order may be made at any stage of the proceedings, on such conditions as the court thinks fit, provided that the court is satisfied that:
(i) the issues raised are of general public importance;
(ii) the public interest requires that those issues should be resolved;
(iii) the applicant has no private interest in the outcome of the case;
(iv) having regard to the financial resources of the applicant and the respondent(s) and to the amount of costs that are likely to be involved, it is fair and just to make the order; and
(v) if the order is not made the applicant will probably discontinue the proceedings and will be acting reasonably in so doing.
(2) If those acting for the applicant are doing so pro bono this will be likely to enhance the merits of the application for a PCO.
(3) It is for the court, in its discretion, to decide whether it is fair and just to make the order in the light of the considerations set out above.” (R (Corner House Research) v Secretary of State for Trade and Industry  EWCA Civ 192, §74)
Apply general principles flexibly
“...It is now clear that the principles in Corner House are guidelines which are not to be read as statutory provisions but are to be interpreted and applied flexibly…” (Drummond v HMRC  UKUT 221 (TCC), Judge Sinfield)
Exceptionality not a requirement but a prediction
“...Exceptionality is not an additional criterion to be satisfied but a prediction as to the effect of applying the principles set out in  of Corner House…” (Drummond v HMRC  UKUT 221 (TCC), Judge Sinfield)
Any case concerning the proper construction of a tax statute raises issues of general importance
“HMRC accept that these criteria are satisfied in this case because the central issue in this appeal is the proper construction of Note (5) and any appeal concerning the proper construction of a provision of a taxing statute raises issues of general public importance that the public interest requires should be resolved. Further, HMRC state that they are concerned that the construction of Note (5) adopted by the FTT could lead to abuse by allowing a building that would not otherwise qualify for zero-rating to qualify for zerorating simply because it was constructed at the same time as a building used for relevant residential purposes. I agree that the first and second of the Corner House criteria are satisfied for the reasons given by HMRC.” (HMRC v. TGH (Commercial) Limited  UKUT 519 (TCC), §19, Judge Sinfield).
Private interest not necessarily a bar
“I consider that I must balance TGHCL’s private interest in the outcome of the appeal against the importance of the issue to the general public and the public interest in it being resolved. Both parties accept that this case raises issues of general public importance and the public interest requires that those issues should be resolved because that will clarify the true construction of Note (5) to Group 5 of Schedule 8 to the VATA. The issue is whether that public importance and interest outweigh TGHCL’s private interest. In my view, they do. Although HMRC have said that this is the first case to consider Note (5) and it would only apply to cases with the same or similar facts that does not mean that the issues are not significant and important. HMRC are concerned that the construction of the provision adopted by the FTT could lead to abuse by allowing the zero rating of the construction of a building that would not otherwise qualify for zero-rating. That interpretation of Note (5) would lead to a loss of tax to the 10 exchequer. I have not been given any estimate of the amount of tax that could potentially be lost but I observe that Note (5) does not only apply to buildings constructed by charities providing residential accommodation but to all buildings intended for use solely for a relevant residential purpose, ie by various institutions that provide accommodation. It is obvious that, while the amount at stake in this appeal is only £60,000, the costs of constructing institutional residential buildings can be significant and large amounts of tax could be involved. In conclusion, I am not satisfied that TGHCL has no private interest in the outcome of the appeal but, in my view, that private interest is outweighed by the public interest in resolving the issue of statutory construction that arises in this case.” (HMRC v. TGH (Commercial) Limited  UKUT 519 (TCC), §31, Judge Sinfield).
“ Although private interest is a factor to be taken into consideration, it is not a bar to a PCO (see Hinton Organics at  - ). I understood HMRC to agree with the following approach to the issue of private interest, derived from [the unpublished decision of the Upper tribunal in Ames v HMRC]. It is inevitable that all tax appeals will have an element of private interest but it is the extent of the general public importance of the issue which must be taken into account, alongside other factors relevant to the fairness and justice of making such an order in appeal proceedings.” (Drummond v HMRC  UKUT 221 (TCC), Judge Sinfield)
Financial resources of the parties
“TGHCL submits that an analysis of turnover, debtors and creditors is not a credible basis for determining whether an organisation can afford further costs. I agree that simply looking at such figures does not necessarily reveal an organisation’s cash position at a later point in time or ability to meet future costs. In this case, however, it seems to me that the accounts show that TGHCL has an ongoing and profitable business which should provide TGHCL with sufficient resources to meet HMRC’s costs of the appeal. There is simply no evidence to show that TGHCL is unlikely to have the means to pay HMRC’s costs at the level estimated by HMRC, if the Upper Tribunal decides to make an award of costs in favour of HMRC.” (HMRC v. TGH (Commercial) Limited  UKUT 519 (TCC), §37, Judge Sinfield).
Take into account resources of associated entities
“It seems to me that it is, as HMRC submit, appropriate to take account of the Great Hospital’s means in this case because TGHCL is, in reality, engaging in the proceedings on behalf of its parent, the Great Hospital (see the comments of Waller LJ on this point in Compton at ). Taking account of the interest of the Great Hospital in this appeal and its resources, reinforces my conclusion that it would not be fair and just to make a PCO in favour of TGHCL when it should be able to afford those costs.” (HMRC v. TGH (Commercial) Limited  UKUT 519 (TCC), §38, Judge Sinfield).
Irrelevant that applicant donates its profits to charity
“I do not regard the fact that TGHCL makes a charitable donation equal to its annual profit to the Great Hospital affects my assessment. The fact that TGHCL does not retain its profits does not mean that it does not have the resources to meet HMRC’s costs. If TGHCL is required to pay HMRC’s legal costs, that will reduce the amount available to be paid to the Great Hospital just as any other expense incurred by TGHCL would do.” (HMRC v. TGH (Commercial) Limited  UKUT 519 (TCC), §37, Judge Sinfield).
Applicant would withdraw and be behaving reasonably in doing so
“The last of the Corner House criteria is that the applicant will probably discontinue the proceedings if the PCO is not made and will be acting reasonably in so doing. HMRC accept that, as the respondent, TGHCL cannot discontinue the proceedings but, in this context, I take “discontinue” to mean conceding or withdrawing from the appeal. However, TGHCL has not suggested that it will concede the appeal or withdraw and take no further part in the proceedings if a PCO is not made. In the absence of any suggestion to the contrary, I am not satisfied that TGHCL will probably discontinue the proceedings if I do not make a PCO. It follows that I do not need to consider whether TGHCL would be acting reasonably in conceding or withdrawing from the appeal.” (HMRC v. TGH (Commercial) Limited  UKUT 519 (TCC), §39, Judge Sinfield).
Stand back and consider overall fairness
“Having considered each of the Corner House criteria individually, I now consider them together and decide the overarching question which is whether it would be fair and just, in all the circumstances, to grant the PCO… I consider that the overriding objective of the UT Rules does not require that TGHCL is insulated from the risk of having to pay HMRC’s costs. In my opinion, it would not be fair and just to HMRC to prevent or limit their ability to recover their costs where the Corner House criteria have not been satisfied.” (HMRC v. TGH (Commercial) Limited  UKUT 519 (TCC), §41, Judge Sinfield).
Conduct of HMRC in FTT not a relevant factor
“I do not consider, however, that HMRC’s conduct below is a relevant factor in deciding whether to make a PCO in relation to an appeal in the Upper Tribunal. The conduct of the other party is not mentioned as a consideration in either Corner House or CPR 3.19 or CPR52.9A. Such conduct could, of course, be part of the “circumstances of the case” in CPR 3.19 and CPR52.9A but it is difficult to see how that conduct could be relevant to a CCO, which is designed to prevent costs in the current proceedings being disproportionately incurred, or a CLO which is also concerned with the level of the other party’s costs in the appeal proceedings rather than what happened at first instance.” (HMRC v. TGH (Commercial) Limited  UKUT 519 (TCC), §17, Judge Sinfield – T argued HMRC failed to present their case properly).
Costs capping order: general principles
Intended to protect a party from disproportionate costs that cannot be controlled by case management
“A CCO is intended to protect a party where there is a substantial risk that, without a CCO, the other party would incur costs disproportionately and that risk cannot be adequately controlled by effective case management or detailed assessment of costs. There is no reason to believe that, in the absence of a CCO, HMRC would incur costs disproportionately in this case or that such behaviour could not be dealt with by detailed assessment of costs after the event. Accordingly, I refuse TGHCL’s application for a CCO.” (HMRC v. TGH (Commercial) Limited  UKUT 519 (TCC), §44, Judge Sinfield).
Limited costs order
"(1) Subject to rule 52.19A [Aarhus Convention claims], in any proceedings in which costs recovery is normally limited or excluded at first instance, an appeal court may make an order that the recoverable costs of an appeal will be limited to the extent which the court specifies.
(2) In making such an order the court will have regard to—
(a) the means of both parties;
(b) all the circumstances of the case; and
(c) the need to facilitate access to justice.
(3) If the appeal raises an issue of principle or practice upon which substantial sums may turn, it may not be appropriate to make an order under paragraph (1)." (CPR 52.19(1) - (3))
" In summary, I consider that, as the High Court has the power to make PCOs, CCOs and ACOs and nothing in the UT Rules expressly limits the UT's power to make similar orders in respect of costs, the UT can make costs orders including PCOs, CCOs and ACOs in appropriate cases. In exercising the same powers as the High Court to make a PCO, CCO or ACO, I take it as axiomatic that the UT should look to the same rules and criteria that govern the High Court when it exercises those powers, bearing in mind that the UT is governed by the UT Rules and especially the overriding objective in those rules and not the CPR. Whether to make such an order is a matter for the UT, in its discretion, to decide based on its evaluation of the circumstances of the case." (Drummond v. HMRC  UKUT 221 (TCC), Judge Sinfield - CPR 52.19 is what is there referred to as ACO)
Reason for rule
' In [Corner House] and a subsequent line of cases the Court of Appeal developed rules for protective costs orders in the context of judicial review. Such orders were made both at first instance and on appeal. In [Eweida], the claimant, who was appealing from the EAT to the Court of Appeal, applied for costs protection on the basis that she was moving from a “no costs” jurisdiction to a costs shifting jurisdiction. The Court of Appeal dismissed her application, on the grounds that it did not have power to make a protective costs order or a costs capping order.
 The outcome of Eweida, although correct on the law as it stood, was unsatisfactory for a number of reasons. Many individuals of modest means who litigate in “no costs” jurisdictions are often without legal representation. Indeed, the claimants in this case litigated before the Ashford Employment Tribunal without representation. It is usually unjust to subject such litigants to a risk of adverse costs when they proceed to a higher level. This is particularly so if they win at first instance and are dragged unwillingly into an appeal. It may also be unjust to impose a costs risk if the litigant loses at first instance, but has proper grounds for bringing an appeal. This was the case with Mrs Eweida.
 Of course it is not always desirable to suspend costs shifting rules when a case comes up from a “no costs” jurisdiction. A classic example is an appeal from the EAT where one party is a well resourced employer and the other party is an employee or a group of employees backed by their union. Such a case may well involve issues of principle or practice on which substantial sums turn. Obviously, in cases like that, there is no reason to disapply the normal costs shifting rules.
 It is against this background that the rule committee has recently promulgated the new rule 52.9A. This rule will come into force on 1 April 2013. It provides as follows:
 This new rule is intended to address the mischief which has emerged in cases such as Eweida. Where justice so requires, the court can exclude or limit costs recovery when a case passes from a “no costs” or “low costs” jurisdiction to a court with full costs shifting powers. The new rule will not only apply to appeals from the EAT to the Court of Appeal. The enactment of this rule constitutes implementation of recommendation 71 in the Review of Civil Litigation Costs Final Report (published in January 2010)." (Manchester College v. Hazel  EWCA Civ 281, Jackson LJ)
Application must be made as soon as possible
(4) An application for such an order must be made as soon as practicable and will be determined without a hearing unless the court orders otherwise." (CPR 52.19(4))
" It is most unfortunate that an application was not made in this case as soon as Ms Hughes' solicitors received this letter. If such an application had been made at that stage I consider it highly probable that an order under CPR 52.19 would have been made which might have limited the recoverable costs to the court fees, or even directed that no costs were to be recoverable at all. But since the application was not made as soon as practicable CPR 52.19 is simply not available." (Office Equipment Systems Ltd v. Hughes  EWCA Civ 1842, Bean LJ)
Determined without a hearing
(4) An application for such an order must be made as soon as practicable and will be determined without a hearing unless the court orders otherwise." (CPR 52.19(4))
Costs of failed application for protective costs order
“I consider that HMRC are entitled to their costs of defending this application. Although I readily accept the principle behind the comments in  of Corner House, I consider that the expectation in 2005 that proportionate costs would not exceed £1,000 might have to be modified in 2016.” (HMRC v. TGH (Commercial) Limited  UKUT 519 (TCC), §47, Judge Sinfield – T directed to pay HMRC’s costs subject to summary assessment).
UT refusing costs of hearing allowing HMRC to establish limited scope for PCOs
“…I have decided that it would not after all be appropriate to make a direction in respect of the costs of the hearing of that application. There was no prior authority directly in point and HMRC have, therefore, established the principle for which they argued, that a protective costs direction should be made only in exceptional circumstances. For that reason I am now of the view that it would not be appropriate to direct the appellant to pay or contribute towards the costs of their doing so.” (Pine v. HMRC  UKUT 236 (TCC), §8)