The First-tier Tribunal (Tax Chamber) has the power to make a non-party costs order (NPCO), a judge has decided in the first case to consider the issue.
Golden Harvest Wholesale Ltd v Revenue and Customs (COSTS – application by HMRC for costs) [2020] UKFTT 369 (TC) concerned an application for an NPCO by HM Revenue and Customs (HMRC) against Divyesh Kuji Karsan, the sole shareholder and director of drinks wholesaler Golden Harvest.
The company had appealed three HMRC decisions: to refuse claims to input tax in respect of 362 transactions totalling £1.5m on the basis that it knew or ought to have known that they were connected with fraudulent tax loss; to deregister it from VAT because it was principally registered for VAT for abusive purposes; and assessing the company to pay £22m in denied input tax recovery.
In March 2019, after having first been arrested in 2015, Mr Karsan pleaded guilty to cheating the public revenue, was sentenced to five years and two months in prison, and made subject to a confiscation order. In July 2019, Golden Harvest dropped the appeals.
Judge Brown said the case of Europeans Ltd v HMRC [2011] EWHC 948 confirmed that the power to make NPCOs extended to the Upper Tribunal and also “that prima facie the power must extend to the FTT subject to any restriction on its application contained within the FTT rules”.
She found that the power to make an order against a non-party only applied to the FTT in the case of a wasted costs order under rule 10(1)(a) and an order for costs to the successful party in a complex case within the costs regime.
As this case was categorised as complex and Mr Karsan did not opt out of the costs regime (as he could have done), “there is no inhibit under the FTT rules precluding an order” against him.
Applying the generally principles of NPCOs, Judge Brown found it was “an incontrovertible fact that, given his admission of guilt on the count of cheating the public revenue, Mr Karsan cannot have legitimately authorised the appellant’s appointed representatives to submit appeals on behalf of the appellant by reference to the stated grounds”.
He knew that the supplies were part of a fraudulent chain of transactions for which there was therefore no entitlement to recover input tax. This meant that bringing the appeals was an abuse of process, she said.
The criminal proceedings also confirmed that Mr Karsan was “the guiding mind” of the appellant. “It is therefore to be concluded that the appeals were bought with a view to providing a fig leaf of consistency with his not guilty plea in the criminal proceedings. The reasonably prompt withdrawal of the appeals following conviction substantiates this conclusion.”
This rendered the circumstances of the application exceptional. “Mr Karsan, as the sole director and shareholder of the appellant business, caused an appeal to be lodged which he knew to be hopeless and which he needed in order corroborate his not guilty plea;
“Mr Karsan’s personal interest in the appeal is therefore precisely of the nature identified in the case law as relevant in justifying a non-party costs order.”
However, the judge said HMRC’s entitlement to costs should not include any costs arising between 27 March 2019 – the day Mr Karsan pleaded guilty – and 9 October 2019, the day it notified him that it would seek an NPCO. “In that period HMRC should, in the tribunal’s view, have put Mr Karsan on notice of their intention to make an application against him.”