There are three scenarios in which the FTT can make a costs order:
- Wasted costs.
- Unreasonable conduct.
- Complex cases, i.e. where a case has been allocated to the Complex case category under r.23.
In GC Field & Son Ltd & ors v. HMRC [2022] UKFTT 00314 (TC), which was an application for costs in the FTT, Judge Amanda Brown QC stated the following principles in relation to the test to be applied in a claim for unreasonable costs:
- Rule 10(1) FTT Rules provides: ‘(1) The Tribunal may only make an order in respect of costs (or, in Scotland, expenses): (a) under section 29(4) of the 2007 Act (wasted costs) …
(b) if the Tribunal considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings.’
- The FTT Rules do not provide for the payment of costs in standard category appeals.
- ‘[T]he general rule … is that there should be no order for costs”. MG v Cambridgeshire County Council [2017] UKUT 00172 (ACC) at paragraph [26].
- Where the Tribunal identifies that there had been unreasonable conduct in the proceedings there is a discretion and not an obligation for the Tribunal to award costs (see Tarafdar v HMRC [2014] UKUT 0362 (TCC).
- The question of the threshold for unreasonableness was considered in the context of the tax tribunal by the Upper Tribunal in Market & Opinion Research International Ltd v HMRC [2015] UKUT 12 (TCC) (MORI).
- The UT endorsed the summary by the FTT of what might constitute unreasonable conduct.
- Acting unreasonably may take the form of a single piece of conduct and may include an omission.
- The test does not preclude the possibility that there were a range of reasonable ways of acting rather than only one.
- Wrong assertions are not automatically unreasonable.
- Rule 10(1)(b) FTT Rules is not to be used as a backdoor to cost shifting not otherwise permitted under the FTT Rules.
- The leading authority on the circumstances in which costs are payable pursuant to rule 10(1)(b) FTT rules in the Tax Chamber is to be found in the Court of Appeal judgment in Distinctive Care v HMRC [2019] EWCA Civ 1010.
The Court endorsed the approach adopted in MORI.
It also endorsed, at least in the limited circumstances in which it was relevant, the analysis of the president of the Upper Tribunal Asylum and Immigration Chamber, sitting as a FTT judge in Cancino v Secretary of State for the Home Dept; Cancino (Costs – First-tier Tribunal – new powers) [2015] UKFTT 59 (IAC) (Cancino).
On the basis of this endorsement, and the standing of the panel considering the costs application in Cancino, this Tribunal considers the views adopted in that case are highly relevant and persuasive on the approach to be adopted. They also largely apply the binding authority of Ridehalgh v Horsefield [1994] Ch 205 (Ridehalgh) to the Tribunal.
In Cancino the Tribunal reinforced the discretionary nature of a wasted or unreasonable costs order identified in paragraph [33] above.
The Tribunal considered in some detail provisions similar to rule 10 FTT Rules which, as set out above, provides for a discretion to make an award of costs where costs have been wasted and/or where conduct is unreasonable. By reference to the Court of Appeal judgment in Ridehalgh the Tribunal (at paragraph [16]) identified the mischief intended to be addressed by the wasted costs rules as:
“the causing of loss and expense to litigants by the unjustifiable conduct of litigation by their or the other side’s lawyers. Where such conduct is shown, Parliament clearly intended to arm the Courts with an effective remedy for the protection of those injured.”
- Wasted costs were identified in Ridehalgh (at page 232d-h, quoted in Cancino paragraph [16]) as payable where there was improper, unreasonable or negligent conduct which were defines as follows:
“Improper means what it has been understood to mean in this context for at least half a century. The adjective covers, but is not confined to, conduct which would ordinarily be held to justify disbarment, striking off, suspension from practice or other serious professional penalty. It covers any significant breach of a substantial duty imposed by a relevant code of professional conduct. But it is not in our judgement limited to that. Conduct which would be regarded as improper according to the consensus of professional (including judicial) opinion can be fairly stigmatised as such whether or not it violates the letter of a professional code. …
Unreasonable also means what it has been understood to mean in this context for at least half a century. The expression aptly describes conduct which is vexatious, designed to harass the other side rather than advance the resolution of the case and it makes no difference that the conduct is the product of excessive zeal and not improper motive. But conduct cannot be described as unreasonable simply because it leads in the event to an unsuccessful result or because other more cautious legal representatives would have acted differently. The acid test is whether the conduct permits of a reasonable explanation. If so, the course adopted may be regarded as optimistic and as reflecting on a practitioner’s judgment, but it is not unreasonable. …
We are clear that negligent should be understood in an untechnical way to denote failure to act with the competence reasonably to be expected of ordinary members of the profession. …We would however wish firmly to discountenance any suggestion that an applicant for a wasted costs order under this head need prove anything less than he would have to prove in an action for negligence.”
- As noted in Cancino, the Court in Ridehalgh went on to apply the decision of the House of Lords in Saif Ali v Sidney Mitchell [1980] AC 198, in this context “negligent” conduct arises where a solicitor (or representative) in respect of “advice, acts or omissions in the course of their professional work which no member of the profession who was reasonably well informed and competent would have given or done or omitted to do.”
- Ridehalgh also recognised that a “Court’s satisfaction that a legal representative has acted improperly, unreasonably or negligently and that such conduct has caused the other side to incur an identified sum of wasted costs, is not bound to make an order, but in that situation it would of course have to give sustainable reasons for exercising its discretion against making an order.” (Ridehalgh page 239e quoted paragraph 18 of Cancino).
- The Tribunal also endorsed the application of a three-stage test when exercising the discretion to award wasted costs as set out in Ridehalgh:
(1) Has the legal representative of whom complaint is made acted improperly, unreasonably or negligently?
(2) If so, did such conduct cause the applicant to incur unnecessary costs?
(3) If so, is it, in all the circumstances of the case, just to order the legal representative to compensate the applicant for the whole or any part of the relevant costs?
- In the context of a wasted costs order it was also noted (again applying Ridehalgh at page 234):
“A legal representative is not to be held to have acted improperly, unreasonably or negligently simply because he acts for a party who pursues a claim or a defence which is plainly doomed to fail”.
- In the context of wasted costs (which are awarded against the legal representative of a party rather than the party who they represent) the rationale for this conclusion is that legal representatives may advise their clients of the weakness of a position but may nevertheless be instructed to run the case.
- Having undertaken a thorough exposé of the history, rationale and theoretical application of the equivalent to rule 10(1)(a) FTT Rules, the Tribunal went on to consider the equivalent provision to 10(1)(b). At paragraph [23] it states (as it would apply to rule 10 FTT Rules):
“… [10(1)(b)] is concerned only with one species of unacceptable conduct, namely that which is unreasonable. We consider that the question of whether conduct is unreasonable under this limb of rule [10] is to be determined precisely in accordance with the principles which relate to unreasonable conduct under rule [10(1)(a)]. We find nothing in the 2007 Act or the rule itself to suggest otherwise. Thus the basic test will be whether there is a reasonable explanation for the conduct under scrutiny. …”
- On the question of the threshold, again by reference to Ridehalgh, the Tribunal stated that the cost shifting rule was to be used in only the clearest of cases and should not be invoked without good reason (see paragraph [27]).
- Finally, when considering the reasonableness of a party’s conduct, the Tribunal considered that the conduct of a litigant in person cannot be evaluated by reference to the standard of qualified lawyers, but neither may that be permitted to operate as a carte blanche to misuse the process of the Tribunal.
- In that context the Tribunal also has in mind the considerations of the Supreme Court in BPP Holdings International Ltd and others v HMRC [2017] UKSC 55. In the context of a debarring decision issued against HMRC, Counsel for HMRC invited the Supreme Court to take account of the fact that the debarring order prevented HMRC from discharging its public duty and could lead to the public interest being harmed. Lord Neuberger (with whom the other justices agreed) considered that to so hold would set a dangerous precedent and would discourage public bodies from living up to the standards expected of individuals and private bodies. He considered that there was “at least as strong an argument for saying that the courts should expect higher standards from public bodies than from private bodies or individuals”. However, he went on to determine that all courts and tribunals should hold all parties to the same standard.
- BPP is the later of these authorities and the Tribunal considers, in the context of a jurisdiction in which parties more commonly represent themselves and/or are not legally represented (including where HMRC conduct litigation through non-legally qualified litigators), the standard to be applied for a wasted costs order, personal to the representative, is that of reasonable competence by reference to their skills and experience.
- By reference to the analysis provided in Ridehalgh and considered as applicable to the Tribunal costs regime in Cancino, the Tribunal distils the test to be applied in determining whether an unreasonable costs order should be made as follows:
(1) Where a case is allocated to the standard category the cost shifting regime provided under rule 10(1)(a) and (b) should be applied only where the conduct of the party (in the case of an unreasonable costs order) and the representative (in the case of a wasted costs order) should, on the facts, be reserved for the clearest of cases and only where there is good reason to make an award of costs justifying cost shifting.
(2) The circumstances in which an award of costs is to be made under rule 10(1)(b) is unreasonable conduct. Whilst it should readily be concluded that improper conduct (within the description provided in Ridehalgh) would naturally fall within unreasonable conduct (as improper conduct is likely to also to be considered vexatious) the same is not true for negligent conduct (in an “untechnical” way). The inclusion of negligence within a waste costs order can be reconciled with the fact that a wasted costs order imposes a costs penalty on a representative and not on the party appointing the representative.
(3) The acid test for unreasonable conduct is whether the conduct permits of a reasonable explanation.
(4) There is a three-stage approach to exercising the Tribunal’s discretion when awarding unreasonable costs as identified in paragraph [43] above. It is the overriding objective of acting justly and fairly in all the circumstances which underpins that three-stage approach.