HMRC v Blue Sphere Global Ltd: tax appeals, Part 36 and indemnity costs

Offers to settle a claim made in accordance with Part 36 of the Civil Procedure Rules (CPR) have become an established part of the landscape of mainstream civil litigation.

Part 36 aims to encourage parties to settle their claims by attaching cost consequences to a party’s decision to continue with proceedings rather than to accept what turns out to be a good offer of settlement.

The Court of Appeal decision in HMRC v Blue Sphere Global Ltd [2010] EWCA Civ 1448 is believed to be the first time the consequences of Part 36 have been applied in a tax dispute, and therefore should be borne in mind by practitioners involved in tax dispute resolution.

The case

Blue Sphere Global Ltd (BSG) had successfully resisted an HMRC appeal in the Court of Appeal in relation to substantial repayments of VAT input tax where HMRC had alleged knowledge of missing trader fraud.
BSG had previously made a Part 36 offer which HMRC rejected. Following their success, BSG sought an order for costs on the indemnity basis along with enhanced interest on costs and sums due from the date the Part 36 offer expired.

Application of Part 36 to appeals begun under the Tribunal Rules

HMRC submitted that Part 36 did not apply to appeals begun under the Tribunal Rules where the CPR costs regime did not apply.

The court considered the application of the CPR and noted that proceedings under the VAT and Duties Tribunal (where the proceedings in this case had begun) were not identified in the table listing proceedings to which the CPR do not apply.

The court also concluded that there was nothing within the CPR to suggest that Part 36.3(2) has no application to appeals from the Tribunal to either the High Court or to the Court of Appeal (either directly or from the High Court).

HMRC had also contended that, as Part 36.3(2)(a) referred to the time before the commencement of proceedings and during first instance proceedings, Part 36.3(2)(b) should only apply to appeals to which Part 36.3(2)(a) could have applied.

However, the court disagreed and said that if such exclusion was intended then the CPR could and should have said so.

Unjust to grant the order?

HMRC’s second submission was that it would be unjust to grant the order; BSG had only beaten the Part 36 offer by a small amount and it would be unjust in the light of HMRC’s duty to defend the public purse.

The court considered that BSG had won ‘by a significant margin’. Moses LJ noted that Part 36 requires, in the case of a claimant’s offer, that the judgment obtained be ‘at least as advantageous’ to the claimant as their offer, and that where a defendant rejects a claimant’s offer, the claimant ‘is compelled to continue in order to recover at least the sum for which [he] is prepared to settle’.

The court acknowledged that the appeal was pursued by HMRC in the public interest but did not agree that as a result it would be unjust to grant the order, stating that ‘it is difficult to see why … a particular trader which vindicated its rights to repayment of input tax should be deprived of the effect of its Part 36 offer.’

The court therefore gave full effect to the Part 36 offer and made the order granting indemnity costs and enhanced interest to BSG.

Making Part 36 offers?

It is believed that Part 36 offers have been little used in tax cases. This case may encourage the more widespread use of Part 36 as, although the case relates to a Part 36 offer on an appeal from the old VAT and Duties Tribunal, the reasoning of the court would seem to be equally applicable to direct tax appeals.

Stockler Charity (a firm) v HMRC [2008] STC 2070 supports this; although the issue in that case was a penalty concerning the filing of a partnership’s tax returns, the issue arose after HMRC had accepted a Part 36 offer made by the firm following an appeal from the Special Commissioners to the High Court.

The application of Part 36 to tax appeals in the Court of Appeal seems clear following the BSG case. What is less certain, now that the role of the High Court in tax proceedings has been assumed by the Upper Tribunal, is the place of Part 36 on appeals to the Upper Tribunal.

It could be argued that as the appeal is no longer to the High Court, the reasoning adopted by the court in BSG in deciding that Part 36 should apply, would not apply on an appeal to the Upper Tribunal as that is not a High Court proceeding.

However, the position under the Upper Tribunal Rules is not entirely clear; rule 10(9) on detailed assessment of costs can bring in provisions of the CPR ‘with necessary modifications’ as if the proceedings had been in a court to which the CPR applied.

It is unclear whether an offer in terms similar to Part 36 could be taken into account.

That said, as a matter of policy, given that HMRC should be under the same incentive to accept reasonable offers of settlement as other litigants, it is arguable that the cost consequences of Part 36 should apply in such appeals.

In any event, the case illustrates that a properly considered Part 36 offer could be a useful tool to focus settlement discussions, and potentially to offer some protection of a client’s costs position through the possibility of securing indemnity costs with enhanced interest.