Eclipse Film Partners No 35 LLP v Revenue and Customs [2016] UKSC 24

Eclipse Film Partners challenged whether the First-tier Tribunal could order HMRC to share bundle preparation costs in a Complex tax case where Eclipse had opted out of cost-shifting. The Supreme Court unanimously held the FTT had no jurisdiction to make such an order under Rule 10.

Facts

Eclipse Film Partners No 35 LLP appealed to the First-tier Tribunal (FTT) against a closure notice issued by HMRC, which had determined that Eclipse did not carry on a trade or business. The proceedings were allocated as a ‘Complex case’ under Rule 23 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. Within the 28-day period prescribed by rule 10(1)(c)(ii), Eclipse served a request that the proceedings be excluded from potential liability for costs.

The parties were unable to agree on a bundle of documents for the hearing. At a case management hearing, the FTT gave an oral direction that Eclipse prepare the Bundle (which ultimately ran to over 700 lever-arch files) and that ‘the costs should be shared’. Following the FTT’s substantive decision dismissing Eclipse’s appeal, Eclipse invoiced HMRC for £108,395.48, representing half the bundle preparation costs. HMRC applied to set aside the costs-sharing direction on jurisdictional grounds. The FTT dismissed HMRC’s application, but the Upper Tribunal reversed that decision, and the Court of Appeal upheld the Upper Tribunal. Eclipse appealed to the Supreme Court.

Issues

The central issue was whether the FTT’s jurisdiction to make orders for costs is fettered by rule 10 of the Rules, or whether the case management powers in rule 5 enable the FTT to attach costs terms to procedural directions notwithstanding rule 10(1). Specifically, where a taxpayer in a Complex case has served a request under rule 10(1)(c)(ii) opting out of cost-shifting, can the FTT nonetheless order one party to pay or share another’s costs under rule 5?

Arguments

Eclipse’s submissions

Eclipse first argued that the Order was not truly an order for the payment of costs but rather one for the sharing of costs. Secondly, and more substantively, Eclipse contended that it is inherent in rule 5(3) that orders made thereunder can include terms as to costs — for example, when granting permission to amend under rule 5(3)(c) or an adjournment under rule 5(3)(h), the FTT must be able to impose costs terms to compensate the other party for prejudice suffered. Eclipse also relied on rule 16(2)(b) to argue that rule 10(1) was not an absolute code.

HMRC’s submissions

HMRC argued that, this being a Complex case in which Eclipse had served the rule 10(1)(c)(ii) request, the FTT could only make costs orders within rule 10(1)(a) (wasted costs) or rule 10(1)(b) (unreasonable behaviour), neither of which applied.

Judgment

Lord Neuberger, with whom Lord Mance, Lord Sumption, Lord Toulson and Lord Hodge agreed, dismissed the appeal.

On Eclipse’s first argument, the Court held that the sharing of costs necessarily involved the payment of costs: Eclipse incurred the expense and would recover half from HMRC, which was plainly an order, albeit partially proleptic, for the recovery of costs.

On the main argument, the Court rejected the contention that rule 5(3) implicitly empowered costs orders, giving four reasons:

First, Eclipse’s interpretation would rob rule 10(1) of much of its force. The purpose of rule 10(1) is to exclude cost-shifting in ordinary cases save where a party or their advisers have acted unreasonably, with Complex cases allowing the taxpayer to opt out. Lord Neuberger cited Warren J in Atlantic Electronics Ltd v Revenue and Customs Comrs [2012] STC 931, para 8, who observed that the policy was 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’

but that

‘in Complex cases, the choice of the taxpayer is to prevail’

. Lord Neuberger added that in non-Complex cases, the inability to recover costs is positively intended to improve access to justice.

Secondly, Eclipse’s argument was inconsistent with rules 10(3) to 10(7), which provide the procedural machinery for assessment and recovery of costs. If rule 5 conferred a power to award costs, there would be a lacuna with no equivalent procedural provisions.

Thirdly, rejecting Eclipse’s case does not prevent the FTT from imposing costs terms when granting permission to amend or an adjournment — the FTT may make such permission conditional upon the applicant party paying the other party’s wasted costs. That, however, was not what occurred here.

Fourthly, rule 16(2)(b), which requires provision for witness expenses, supports rather than undermines HMRC’s case: where the Rules intend to render a party liable for costs, they say so explicitly.

The Court further observed that the case raised an issue of principle turning on interpretation of the Rules, so the detailed facts surrounding bundle preparation were not pertinent. The Court accepted that tribunal procedure is intended to be less formal and more flexible than court procedure, but this did not justify a different result; if anything, it reinforced the conclusion since the Rules point strongly against cost-shifting. The fact that alternative procedural arrangements (such as ordering both parties to prepare the Bundle jointly) might have achieved the same result was irrelevant. Lord Toulson raised the possibility of a restitutionary claim, but this was not pursued.

Implications

The decision confirms that rule 10(1) of the Tax Chamber Rules operates as a comprehensive code governing the FTT’s costs jurisdiction. Where a taxpayer in a Complex case has exercised the opt-out under rule 10(1)(c)(ii), the FTT may only make costs orders for wasted costs (rule 10(1)(a)) or unreasonable behaviour (rule 10(1)(b)). The general case management powers in rule 5 cannot be deployed to circumvent that restriction by making freestanding costs orders.

The Court was told that, although the case concerned the Tax Chamber Rules, the conclusion would apply to the Rules governing other Chambers of the FTT, giving the decision broad application across tribunal practice.

The judgment leaves intact the FTT’s ability to attach costs conditions to discretionary indulgences such as permission to amend or grant an adjournment — these are conditional rather than freestanding costs orders. The decision also expressly preserves (without deciding) the possibility of a restitutionary claim outside the Rules.

The case is significant for practitioners advising on tribunal litigation strategy, particularly the decision whether to opt out of cost-shifting in Complex cases, and underscores the policy that the no-costs-shifting regime in the FTT is designed to promote access to justice.

Verdict: Appeal dismissed. The First-tier Tribunal had no jurisdiction to make the costs-sharing order, as rule 10(1) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 precluded it, the case being a Complex case in which the taxpayer had opted out of cost-shifting.

Source: Eclipse Film Partners No 35 LLP v Revenue and Customs [2016] UKSC 24