Introduction

In the case of Softhouse Consulting Ltd v. Revenue And Customs ([2014] UKUT 197 (TCC)), the Upper Tribunal (Tax and Chancery Chamber) addressed significant issues regarding the awarding of costs in the context of applications for permission to appeal. The parties involved were Softhouse Consulting Ltd ("Softhouse") as the appellant and Her Majesty's Commissioners of Revenue and Customs (HMRC) as the respondent. The central dispute revolved around whether HMRC should be directed to bear the costs associated with Softhouse's unsuccessful application for permission to appeal a First-tier Tribunal decision.

Summary of the Judgment

The Upper Tribunal, led by Judge Colin Bishopp, dismissed HMRC's application to direct Softhouse to pay the costs incurred by HMRC in responding to Softhouse's application for permission to appeal. The case primarily considered whether the Upper Tribunal has the jurisdiction to make such a cost direction in the specific context of an application for permission to appeal. The Judge concluded that while there is jurisdiction to make cost directions, it should only be exercised in favor of the respondent when it is reasonable. In this instance, HMRC failed to demonstrate that incurring the costs was reasonable, leading to the dismissal of their application.

Analysis

Precedents Cited

The Judgment references several key precedents that influenced the court’s decision. Notably:

• Kittel v Belgium, Belgium v Recolta Recycling 20 SPRL (C‑439/04 and C‑440/04): This case provided a test for determining the connection between transactions and fraud, which was pertinent to Softhouse’s arguments regarding MTIC appeals.
• Mobilx Ltd (in administration) v Revenue and Customs Commissioners; Blue Sphere Global Ltd v Revenue and Customs Commissioners; Calltel Telecom Ltd and another v Revenue and Customs Commissioners (No 2) [2010] STC 1436: These cases were cited by HMRC to argue against the reasonableness of incurring costs in defending repetitive applications to overturn established precedents.
• Fonecomp Ltd v HMRC [2013] UKUT 0599 (TCC) and Edgeskill Ltd v HMRC [2014] UKUT 0038 (TCC): These cases reinforced the notion that arguments about connection to fraud through a contra-trader lack merit, aligning with the Tribunal’s consistent rejection of such claims.

Legal Reasoning

The core legal reasoning centered on the interpretation of the Tribunal Procedure (Upper Tribunal) Rules 2008, specifically Rule 10, in conjunction with Section 29 of the Tribunals, Courts and Enforcement Act 2007. The Judge analyzed whether the Upper Tribunal had the authority to direct costs related to an application for permission to appeal, determining that such costs are indeed "incidental to" the appeal and thus fall within the Tribunal's discretionary power.

Furthermore, the Judge evaluated the reasonableness of HMRC incurring costs to defend the application. While HMRC demonstrated a legitimate interest, the Tribunal found that the application was not so clearly misconceived as to warrant the imposition of costs on Softhouse. The consistent rejection of similar arguments in prior cases suggested that HMRC's efforts to defend such applications were not unreasonable in this context.

Impact

This Judgment underscores the Upper Tribunal's discretion in awarding costs related to applications for permission to appeal. It clarifies that while cost directions are permissible, they must be justified by the reasonableness of incurring such costs. This decision may influence future cases where respondents seek to recover costs for defending repeat or seemingly meritless applications to appeal, emphasizing the need for a balanced approach that considers both the legitimacy of the respondent's interests and the fairness to appellants.

Complex Concepts Simplified

MTIC Appeal: This stands for "Making Tax Digital for VAT to Income Tax," referring to appeals where input tax credits are denied on the basis that transactions are linked to fraudulent activities.

Contra-Trader: A contra-trader is an entity connected to another party in a transaction chain, possibly engaging in illicit activities, thereby implicating others in the chain by association.

Costs Direction: A legal order that determines which party is responsible for paying the legal costs incurred during litigation.

Permission to Appeal: Before an appellant can proceed to a substantive appeal, they must obtain permission from the tribunal, which assesses whether the appeal has sufficient grounds.

Reasonableness of Incurring Costs: This assesses whether it was justifiable for a party to incur certain legal costs based on the circumstances and the likelihood of success.

Conclusion

The decision in Softhouse Consulting Ltd v. Revenue And Customs establishes important precedent regarding the awarding of costs in applications for permission to appeal. It affirms the Upper Tribunal's authority to impose cost directions but emphasizes that such decisions must be grounded in the reasonableness of incurring those costs. This ensures a fair balance between protecting the interests of respondents and preventing unnecessary financial burdens on appellants. The Judgment reinforces the necessity for both parties to demonstrate the validity and reasonableness of their actions in the appeals process, promoting judicial efficiency and fairness.