Introduction

The case of Marshall & Co v Revenue and Customs ([2016] UKUT 116 (TCC)) is a pivotal decision adjudicated by the Upper Tribunal (Tax and Chancery Chamber) in the United Kingdom. This case delves into the intricate dynamics between a VAT-registered chartered accountancy practice and Her Majesty's Revenue and Customs (HMRC) concerning allegations of dishonest conduct and the subsequent penalties imposed. Central to the dispute was whether HMRC acted unreasonably in defending or conducting the proceedings, which has profound implications for the awarding of costs under the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.

Summary of the Judgment

Marshall & Co, the appellant, contested VAT assessments and penalties levied by HMRC, specifically targeting alleged dishonest evasion related to input tax claims on the purchase of a motorhome. After a series of appeals and a negotiated settlement, Marshall & Co sought an order for costs against HMRC under Rule 10(1)(b), arguing unreasonable conduct by HMRC during the proceedings. The First-tier Tribunal (FTT) refused the application, leading to an appeal heard by the Upper Tribunal.

The Upper Tribunal meticulously reviewed the FTT's decision, scrutinizing whether HMRC's actions post-commencement of the tribunal proceedings were unreasonable. Referencing pertinent precedents, the tribunal concluded that HMRC had acted reasonably, dismissing the appellant's arguments. Consequently, the appeal was dismissed, affirming the FTT's refusal to award costs to Marshall & Co.

Analysis

Precedents Cited

The judgment extensively references several key precedents that shape the legal landscape concerning the reasonableness of conduct in tribunal proceedings:

• Catanã v Revenue and Customs Commissioners [2012] UKUT 172 (TTC): This case established that the phrase "bringing, defending or conducting the proceedings" is inclusive of various forms of unreasonable behavior, such as pursuing untenable appeals or resisting meritorious ones.
• Bulkliner Intermodal Limited v HMRC [2010] UK FTT 395 (TC): Emphasized that unreasonable behavior prior to tribunal proceedings cannot form the basis for cost awards unless it directly informs actions during the proceedings.
• Carvill v Frost [2005] STC (SCD) 2008: Highlighted the relevance of HMRC's internal review processes in determining the reasonableness of their conduct.
• Tarafdar (t/a Shah Indian Cuisine) v Revenue and Customs Comrs [2014] UKUT 362 (TCC): Introduced a three-question test to assess unreasonable conduct when a party withdraws from an appeal.
• Market & Opinion Research International Ltd v Revenue & Customs Comrs [2015] UKUT 12 (TCC): Endorsed the Tarafdar test, guiding tribunals in evaluating the reasonableness of HMRC's conduct.
• Procter & Gamble UK v Revenue and Customs Comrs [2009] EWCA Civ 407: Reinforced the principle that value judgments by tribunals are generally upheld unless there is a clear legal error.

Legal Reasoning

The Upper Tribunal's legal reasoning centered on the interpretation and application of Rule 10(1)(b) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009, which governs the awarding of costs based on unreasonable conduct during proceedings. The tribunal meticulously examined whether HMRC's actions post-commencement of the proceedings met the threshold of unreasonableness as defined by the cited precedents.

Judge Kempster's initial assessment involved evaluating HMRC's delay in locating crucial telephone records, which Marshall & Co contended were mishandled. The Upper Tribunal concurred with the FTT's finding that HMRC's subsequent efforts to trace the records were diligent and reasonable, especially given the complexity and context of the case.

Moreover, the tribunal addressed Marshall & Co's argument regarding the applicability of section 83G VATA, contemplating whether the procedural nuances precluded the awarding of costs. While identifying a technical error in the FTT's application of this section, the Upper Tribunal deemed it immaterial to the overall decision, thus upholding the FTT's refusal to grant costs.

Impact

This judgment reinforces the stringent standards required to qualify HMRC's conduct as unreasonable in tax tribunal proceedings. By upholding the FTT's decision, the Upper Tribunal emphasizes that HMRC must demonstrate clear evidence of unreasonable behavior to incur cost penalties. This sets a precedent that minor delays or administrative oversights by HMRC do not automatically equate to unreasonableness unless they significantly prejudice the taxpayer's position.

Additionally, the affirmation of the Tarafdar test in evaluating withdrawals from appeals provides a structured framework for future cases, ensuring consistency and fairness in assessing the conduct of parties in similar disputes.

Complex Concepts Simplified

Conclusion

The Marshall & Co v Revenue and Customs judgment serves as a critical affirmation of the High Tribunal's discretion in assessing the reasonableness of HMRC's conduct during tax proceedings. By upholding the FTT's decision to deny cost awards, the Upper Tribunal underscores the necessity for substantial evidence of unreasonable behavior before penalizing HMRC financially. This decision not only reinforces existing legal standards but also provides clarity on the application of these standards in complex tax disputes, ensuring that tribunals maintain fairness and consistency in adjudicating similar cases in the future.