Upper Tribunal's Approach to Cost Orders in Mixed Success Proceedings: Bastionspark LLP & Ors v. HMRC

Introduction

Bastionspark LLP & Ors v. Revenue And Customs ([2016] UKUT 425 (TCC)) is a pivotal case adjudicated in the Upper Tribunal (Tax and Chancery Chamber) on October 5, 2016. This case involves four Limited Liability Partnerships (LLPs) – Bastionspark LLP, Edgedale LLP, Starbrooke LLP, and Hawskbridge LLP – appealing against closure notices issued by HM Revenue and Customs (HMRC). The primary contention revolves around HMRC's disallowance of specific partnership expenditures claimed as deductible in calculating trading losses. Additionally, the LLPs contested the costs order directing them to pay two-thirds of HMRC's costs, asserting that HMRC was erroneously identified as the substantial victor in the proceedings.

Summary of the Judgment

The LLPs appealed the costs order made by the First-tier Tribunal (FTT), which mandated that the LLPs pay two-thirds of HMRC's costs. The LLPs contended that the FTT erred in identifying HMRC as the primary winner, arguing that they had achieved significant partial successes, especially in allowing certain deductions. However, upon thorough examination, the Upper Tribunal (UT), presided by Mr Justice Nugee, upheld the FTT's decision. The UT concluded that HMRC emerged as the substantial victor based on various factors, including the financial significance of the issues upheld in HMRC's favor and the overall impact of the decisions. Consequently, the appeal against the costs order was dismissed.

Analysis

Precedents Cited

The judgment extensively references several key cases to elucidate the principles governing cost orders, especially in scenarios where both parties achieve partial successes. Noteworthy among these are:

Ensign Tankers (Leasing) Ltd v Stokes: Highlighted the importance of recognizing overall Victory based on substantive outcomes rather than partial gains.
Versteegh Ltd v HMRC: Demonstrated that even if a taxpayer achieves partial success, the overarching outcome determines the identification of the successful party.
Day v Day: Emphasized that achieving any substantive result can qualify a party as successful, influencing cost orders even if the victory is partial.
Fox v Foundation Piling Ltd: Reinforced that a claimant recovering more than a defendant's offer is typically considered the successful party.
Roache, Islam v Ali, Painting, Pindell Ltd v Airasia Berhad, Medway, and Magical Marking Ltd v Ware & Kay LLP: These cases collectively illustrated the complexities in determining the successful party in multifaceted disputes, especially when outcomes are mixed.

These precedents collectively underscore the judiciary's nuanced approach in cost determinations, moving beyond mechanical applications of either party bearing costs to a more balanced assessment based on the substance and significance of the outcomes.

Legal Reasoning

The core legal issue in this case was the identification of the "successful party" for the purposes of a costs order. The FTT had deemed HMRC the substantial victor, thereby ordering the LLPs to bear two-thirds of HMRC's costs. The LLPs challenged this on the grounds that they had achieved significant partial successes, particularly in securing deductions that had been previously disallowed by HMRC.

Mr Justice Nugee, after meticulous evaluation, concurred with the FTT's characterization of HMRC as the substantial victor. His reasoning was anchored in multiple facets:

Financial Impact: HMRC's success in upholding the disallowance of the significant portion (£4,636,600) of the total disallowed expenses (£5,188,500) at Hawksbridge LLP was a pivotal factor, rendering the vast majority of the disallowed amounts.
Number of Successful Issues: HMRC prevailed on more critical issues, notably the non-deductibility of the Final Minimum Sum and the Advisory Services Fee, compared to the LLPs' success solely on the Administrative Services Fee.
Substance Over Form: The primary objective of the LLPs was to secure deductions to achieve a net financial benefit. The failure to deduct the Final Minimum Sum undermined this objective fundamentally, overshadowing their partial successes.
Complexity and Significance of Issues: The issues HMRC prevailed upon were deemed more substantial and central to the LLPs' claims.

Drawing from the mentioned precedents, the UT affirmed that cost orders should reflect the relative success and significance of each party's claims. The tribunal's decision to classify HMRC as the substantial victor was thus justified within this jurisprudential framework.

Impact

This judgment has significant implications for future tax and legal disputes, particularly concerning cost orders in cases with mixed outcomes:

Clarification on Cost Orders: Establishes that cost orders in the FTT need not follow a strict "costs follow the event" principle but can accommodate proportionality based on the substantive success of each party.
Enhanced Predictability: Provides clearer guidance on how tribunals may assess and allocate costs in complex cases, fostering a more equitable approach.
Jurisprudential Consistency: Aligns FTT's approach more closely with established legal principles from higher courts, ensuring consistency in judicial reasoning across different judicial bodies.
Encouragement for Detailed Appeals: Encourages appellants to meticulously present their successes and challenges within appeals, knowing that partial victories are recognized but do not necessarily reclassify the overall victor.

Overall, the judgment reinforces a balanced and equitable approach to cost allocation, acknowledging both parties' successes without rigidly adhering to one-dimensional criteria.

Complex Concepts Simplified

Several intricate legal concepts underpinning this judgment warrant clarification:

Cost Orders: Legal rulings that determine which party bears the costs of litigation. Typically, the unsuccessful party pays the successful party's costs, but exceptions exist, especially in complex cases with mixed outcomes.
Substantial Victor: The party whose position has been upheld on the most significant or impactful aspects of the case. Determining the substantial victor involves assessing both the outcomes and their significance to the parties' core objectives.
Tribunals Procedure Rules (FTT Rules): Specific regulations governing how the First-tier Tribunal operates, including how it handles cost orders. These rules provide a framework but allow for judicial discretion based on fairness and justice.
Overriding Objective: A principle guiding tribunals to ensure that cases are dealt with fairly and justly, focusing on both parties being heard and achieving a proportionate outcome.
Composite Order: A type of cost order where the tribunal issues a single directive that may involve aggregating or balancing the costs owed by each party rather than making separate orders for each.
Cause of Action: A set of facts sufficient to justify a right to sue to obtain money, property, or the enforcement of a right against another party.

Understanding these concepts is essential for comprehending how the tribunal balanced the interests of both HMRC and the LLPs in rendering a fair cost order.

Conclusion

The Bastionspark LLP & Ors v. HMRC judgment underscores the judiciary's commitment to equitable cost allocation in complex litigation scenarios. By recognizing that both parties can achieve partial successes, the Upper Tribunal exemplifies a balanced approach that transcends traditional "winner-takes-all" paradigms. This case serves as a crucial precedent, guiding future tribunals in assessing cost orders with nuanced consideration of each party's substantive victories and overall objectives. Ultimately, it reinforces the principle that justice in litigation extends beyond mere binary outcomes, embracing a comprehensive evaluation of the multifaceted nature of legal disputes.