Ulster Metal Refiners Limited v The Commissioners for HMRC

Where a party has plainly succeeded overall, a costs tribunal must begin from that party’s success. In a complex tax case, success on approximately 90% of identifiable disputed transactions and the resulting substantial VAT credit made the taxpayer the clear winner. A failure to adopt that starting point is an error of law.

The costs discretion remains broad. It must reflect partial success and the parties’ conduct. Dishonesty by a successful party does not displace the usual starting point, but may justify a substantial reduction where it caused unnecessary work and costs. The relevant assessment considers the nature, degree, relevance and costs consequences of the misconduct.

Ulster Metal Refiners Limited appealed against the First-tier Tribunal’s refusal to award it costs after its VAT appeal had succeeded in relation to the Irwin transactions, representing about 90% of the VAT originally denied. HMRC had succeeded concerning the Magee and PCB transactions.

The First-tier Tribunal’s merits decision was [2021] UKFTT 286 (TC). The earlier procedural history included a remittal by the Court of Appeal in Northern Ireland in [2017] NICA 26. The costs decision under appeal held that neither party was the clear winner and made no substantive-hearing costs order.

The central issue was whether the First-tier Tribunal had erred by failing to identify the taxpayer as the clear winner before exercising its costs discretion.

1. Appeal allowed. The First-tier Tribunal made an error of law by treating the substantive appeal as having no clear winner. The taxpayer had succeeded on about 90% of specific disputed transactions and HMRC had credited £427,278 to its VAT account. On a common-sense assessment, it was the overall winner.

2. Although the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 do not reproduce the Civil Procedure Rules’ general rule, fairness and justice ordinarily require costs to follow the event where there is a clear winner and loser. The tribunal should identify the successful party before considering a departure from that position. Day v Day and Bastionspark LLP and others v HMRC supported that approach.

3. The taxpayer’s director’s dishonesty did not alter the required starting point. Consistently with Hutchinson v Neale, dishonesty by the successful party is relevant to discretion but does not replace the usual costs starting point.

4. The Upper Tribunal remade the decision under section 12 of the Tribunals, Courts and Enforcement Act 2007. It reduced the award by 15% for HMRC’s partial success on the Magee/PCB transactions. It then reduced the remaining share to 40% because the director’s dishonest, unreliable and insufficiently candid conduct had caused HMRC unnecessary preparatory work and costs. The effect on public funds was relevant, but did not create a special category warranting an additional deterrent sanction.

5. HMRC was ordered to pay 40% of the taxpayer’s costs of the substantive hearing on the standard basis, subject to detailed assessment unless agreed.

• Upper Tribunal (Tax and Chancery Chamber): allowed the appeal against the costs decision, held that the taxpayer was the clear winner, and remade the costs order.
• First-tier Tribunal: on 7 April 2022 refused the taxpayer’s application for substantive-hearing costs, holding that there was no clear winner.
• First-tier Tribunal: allowed the taxpayer’s underlying VAT appeal concerning the Irwin transactions but dismissed it concerning the Magee/PCB transactions: [2021] UKFTT 286 (TC).
• Court of Appeal in Northern Ireland: held that the earlier First-tier Tribunal determination had been procedurally unfair, remitted the appeal for rehearing, and later awarded the taxpayer its costs to that stage: [2017] NICA 26.