Revenue and Customs v Jackson Grundy Ltd (MONEY LAUNDERING)

Factual and Procedural Background

This opinion concerns an appeal by the Commissioners for Her Majesty's Revenue and Customs ("HMRC") against a costs decision made by the First-tier Tribunal ("FTT") in relation to a financial penalty imposed on an estate agency, Jackson Grundy Limited ("JGL"), under Regulation 42 of the Money Laundering Regulations 2007 ("the Regulations").

JGL was originally fined £169,652 by the Office of Fair Trading ("OFT") for significant and widespread failings in complying with money laundering regulations, including inadequate client due diligence, poor record-keeping, failure to maintain appropriate policies, and insufficient staff training. There was no allegation that these failings led to actual money laundering.

Following the transfer of supervisory functions from the OFT to HMRC on 1 April 2014, HMRC upheld the penalty after internal review, applying the OFT's interim penalty policy ("IPP"). JGL appealed to the FTT, which reduced the penalty substantially to £5,000 on the basis that the original penalty was disproportionate.

JGL then applied for a costs order against HMRC, alleging unreasonable conduct in defending the penalty appeal. The FTT judge granted the costs application, directing HMRC to pay JGL's costs. HMRC appealed only the costs decision to the Upper Tribunal.

Legal Issues Presented

1. Whether the FTT erred in law by concluding HMRC acted unreasonably in defending the appeal without first hearing HMRC's representations on the issue of reasonableness.
2. Whether the FTT judge deciding the costs application erred by failing to exercise his own discretion independently and instead adopting the FTT's prior observations as binding.
3. Whether HMRC acted unreasonably in defending the appeal against the penalty imposed under the Regulations.
4. Whether HMRC was obliged or justified in defending the penalty given the circumstances of the case and the regulatory framework.
5. Whether the costs order made against HMRC was appropriate in light of the conduct of the parties and the statutory provisions governing costs.

Arguments of the Parties

Appellants' (HMRC) Arguments

• The FTT prejudged the issue of HMRC's unreasonable conduct without allowing HMRC to make representations, leading to unfairness.
• HMRC had no power under the Regulations to vary or reduce the penalty after statutory review, thus defending the full amount was reasonable.
• JGL did not initiate settlement negotiations, and HMRC did not consider the suggested reduced penalty appropriate.
• Reasonable people could differ on the seriousness of the breaches and the appropriate penalty amount.
• HMRC was legitimately seeking the FTT's determination on the appropriate penalty, not simply defending the OFT's figure.
• HMRC did not act unreasonably in defending the appeal given the regulatory context and the evidence available at the time.

Respondent's (JGL) Arguments

• HMRC acted unreasonably by dogmatically defending the original penalty of nearly £170,000 solely because it was set by the OFT under the IPP, despite accepting that the FTT had to determine the penalty afresh.
• It was not procedurally unfair for the FTT to find HMRC's conduct improper after hearing all evidence, including oral evidence from JGL's managing director.
• JGL had indicated willingness to accept a penalty between £15,000 and £20,000, yet HMRC rejected this and persisted in defending the higher amount.
• HMRC should have adopted its own penalty policy rather than relying on the abolished OFT's approach.

Table of Precedents Cited

Court's Reasoning and Analysis

The Upper Tribunal first addressed whether the FTT had erred in law by concluding HMRC acted unreasonably without allowing HMRC to make representations on that issue. It found that although the FTT expressed strong views about HMRC's conduct in the Penalty Decision, it correctly deferred the costs decision to a separate application with opportunity for submissions. However, the subsequent FTT judge deciding costs (Judge Brooks) improperly treated the FTT's earlier observations as determinative, failing to exercise independent discretion and adequately consider HMRC's submissions. This procedural irregularity amounted to an error of law requiring the costs decision to be set aside.

On the substantive question of whether HMRC acted unreasonably in defending the appeal, the Tribunal emphasized that the test under Rule 10(1)(b) focuses on conduct in the proceedings, not on the reasonableness of the original penalty decision itself. The Tribunal accepted that HMRC was entitled to seek the FTT's determination of the appropriate penalty. However, HMRC's position, as stated in their statement of case and skeleton argument, was to uphold the full OFT penalty without inviting the FTT to determine a different amount.

The Tribunal found that there was no formal settlement offer from JGL but that JGL had clearly indicated willingness to accept a penalty between £15,000 and £20,000. HMRC did not engage in settlement discussions and maintained the full penalty was appropriate, despite the FTT's eventual finding that the penalty was disproportionate.

Critically, the Tribunal analyzed the penalty calculation process under the OFT's IPP and found that step 4, requiring an overall assessment of whether the penalty is effective, proportionate, and dissuasive, was improperly applied by the OFT and HMRC. The penalty imposed was vastly disproportionate to JGL's size, profitability, and the nature of the breaches, which were largely technical and related to record-keeping rather than substantive failings enabling money laundering.

Given these flaws, it should have been apparent to HMRC at the time of the appeal that the penalty could not reasonably be defended. The Tribunal concluded that HMRC acted unreasonably in defending or conducting the appeal proceedings by persisting in upholding the excessive penalty without proper consideration of its disproportionality or engaging with JGL's suggested reduced penalty.

The Tribunal exercised its discretion to order HMRC to pay JGL's costs, subject to detailed assessment, while noting that some costs claimed might fall outside the scope of allowable costs under the relevant rules.

Holding and Implications

The Upper Tribunal ALLOWED the appeal against the FTT's Costs Decision, set aside that decision, and remade the costs order.

The Tribunal held that HMRC acted unreasonably in defending the appeal by failing to properly consider the disproportionality of the original penalty and by refusing to engage with JGL's reasonable proposal for settlement. Consequently, HMRC was ordered to pay JGL's costs of and incidental to the appeal before the FTT, with the amount to be subject to detailed assessment if not agreed.

No new precedent was established beyond the application of existing principles governing costs awards for unreasonable conduct in tribunal proceedings. The direct effect is that HMRC bears the costs of the appeal, reflecting the Tribunal's view on appropriate conduct in regulatory penalty appeals.