REASONABLY UNREASONABLE

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REASONABLY UNREASONABLE

I have been reading the FTT decision in Elliott Knight Ltd v HMRC (TC 6338).  It is an odd case but seems to me to have wider implications.  HMRC issued a penalty notice to the company on the basis that it had breached Regulations 7, 8, 14 and 20 of the Money Laundering Regulations.

At the Tribunal hearing, Counsel for the company cross-examined the HMRC Officer who had imposed the penalty.  She accepted that there was no requirement for the company’s risk assessment policies either to be in writing or to be in English, so there was no breach of Regulation 7.  She also accepted that there was no fixed time after which the due diligence records should be re-examined if it was up to the trader’s judgement.  There was accordingly no breach of Regulation 8.  She also accepted that her report on which the penalty was based did not demonstrate any breach of Regulations 14 or 20.  When Counsel specifically asked at the end of his cross-examination whether she considered there were any breaches of any of the four Regulations, she replied “No”.  HMRC then asked for an adjournment and, on resuming, said that HMRC were withdrawing from the case.

Elliott Knight then sought an order for HMRC to pay its costs.  The Tribunal could make such an order only if it considered that HMRC “has acted unreasonably in bringing, defending or conducting the proceedings” (Tribunal Rules, para 10).  To paraphrase, did HMRC act unreasonably in defending a penalty assessment that they had raised when, had they carried out a detailed analysis of the penalties both as to the facts and the law, they would not have identified anything to justify raising the assessment?

HMRC referred the Tribunal to an Upper Tribunal case.  In Tarafdar v HMRC (2014 UKUT 362 (TCC)) the Tribunal has said that in considering an application for costs, a Tribunal should ask itself three questions:

1.      What was the reason for the withdrawal?

2.      Having regard to that reason, could that party have withdrawn at an earlier stage?, and

3.      Was it unreasonable for that party not have withdrawn at an earlier stage?

Based on an earlier Court of Appeal decision, the Tribunal said that ““Unreasonable” conduct includes conduct which is vexatious and designed to harass the other side rather than advance the resolution of the case.  It is not enough that the conduct leads in the event to an unsuccessful outcome.  The test may be expressed in different ways.  Would a reasonable person in the position of the party have conducted themselves in the manner complained of? …  Is there a reasonable explanation for the conduct complained of?”.

HMRC also pointed out that even if conduct is found to be unreasonable, the Tribunal is entitled to exercise its discretion and is not compelled to award costs.

So far, so good.  An award of costs is intended to be exceptional.  Losing a case does not imply it should never have been pursued.  If the law was always clear, there would be no need for a Tribunal system at all.

But Elliott Knight is a case where a penalty was imposed for a breach of the statute and the Tribunal did not even have to decide if the statute had been breached, because when the HMRC Officer was taken through the law by Elliott Knight’s barrister, she agreed that the law had not been breached and HMRC’s barrister (presumably after taking instructions from her client) promptly withdrew from the appeal.  That certainly suggests that had HMRC’s solicitor or barrister themselves considered the facts and the law earlier, they would have settled the appeal without the need for a hearing.

So, what was the reason for the withdrawal?  Because, said HMRC, the decision-making Officer was persuaded to agree with Elliott Knight’s barrister that her decision was flawed and should not stand.  Yes, said the Tribunal, “But we do not think we could say that every Officer of HMRC faced with this line of questioning would do as Ms Dunsmore did.  We do not think it could be said that the withdrawal would inevitably have happened as a result of the lack of analysis of the type Mr Jones suggest was the proximate cause”.  But all that Ms Dunsmore did was give honest answers to the questions posed by Mr Jones.  So what differently could a different Officer have done?  And the fact that Ms Dunsmore accepted that there had been no breach of the Regulations did not mean that HMRC had to concede the case.  They could have said that Ms Dunsmore is not a lawyer and her understanding of the law does not actually reflect the law and their barrister could have herself explained how Elliott Knight had breached the law.  Withdrawal from the case as a result of the cross-examination certainly suggests that once the law had been explained to Ms Dunsford and she accepted that she had not grounds to raise the penalties, HMRC accepted that in fact there were no such grounds.  It is hard to see that they would not have reached the same decision had they discussed the law with Ms Dunsmore prior to the hearing.

Could HMRC have withdrawn at an earlier stage? No, said the Tribunal, the taxpayer should have made clearer why they were opposing the penalties instead of leaving it to HMRC to work out for themselves that it was because the taxpayer had not in fact breached the law.  “Faced with such limited and unspecific grounds of appeal, they cannot be blamed for pursuing the case”.

I find that astounding.  It seems to be saying that if HMRC assess a penalty, they have no obligation to ensure that the law entitles them to do so, but it is up to the taxpayer to tell them that they have no legal basis for the assessment and if the taxpayer is ignorant of the law (as most are), it is fair game for HMRC to extract cash from the taxpayer under false pretences.

Of course this case relates to a claim for costs before the FTT, a fairly rare occurrence.  But it is based on what is “reasonable”, which is an ordinary English word.  In 2008, it is a word that the then government agreed to sprinkle throughout Schedule 36 as a “safeguard” for taxpayers.  But if the Tribunals do not think it unreasonable for HMRC not to at least try to satisfy themselves that there is a legal basis behind an assessment before taking it to the FTT, it is hard to understand what sort of “safeguard” the insertion of “reasonable” in fact provides to taxpayers.

ROBERT MAAS