The High Court granted an application by Revenue and Customs for an order for security for its costs in respect of an appeal to the High Court by two taxpayer companies where the taxpayers were both insolvent and had failed to show that such an order would stifle their appeal.

Facts

The taxpayers were connected companies under the common ownership and control of a single director and were both wholesale dealers in mobile phones. The taxpayers rendered VAT returns for the three months to 31 March 2006 claiming repayments in the combined sum of £18,248,712. Customs had concerns about the validity of the claims and undertook an extended verification of the returns. That led to their decision to withhold the repayments claimed, apart from a small amount relating to overhead costs. Customs maintained that they were not required to pay the tax because the taxpayers dealt in goods knowing, or with the means of knowing, that their so doing was connected with a fraud elsewhere in the chain of supply or in a related chain. The transactions in question involved the purchase of phones from UK suppliers for immediate sale to customers, usually in other European member states, or for transfer between the appellant companies before supply. Customs contended that the true purpose of the chain of supply was to defraud the revenue. The tribunal upheld that decision to refuse the taxpayers’ claim, concluding on the evidence that all, or almost all, of the transactions into which the taxpayers entered were wholly artificial and nothing more than a device to cheat the tax authorities. Therefore the tribunal dismissed the taxpayers’ appeal and ordered the taxpayers to pay Custom's costs of the appeal ([2007] BVC 2,544; Decision No 20,266). The taxpayers appealed to the High Court and Customs applied under r. 25.12 of the Civil Procedure Rules 1998 for security for the costs of the appeal and for the costs already awarded by the tribunal in their favour. They argued that since the taxpayers were insolvent and had ceased to trade, it was unlikely that they would be able to pay Customs’ costs if their appeal failed. The taxpayers opposed the application contending inter alia that the application was misconceived, bearing in mind the exhaustive legislative code in VATA 1994, s. 84, in respect of security for costs applications in relation to VAT. Further if such an order were made it would stifle their appeal.

Issue

Whether it was appropriate to order security for costs.

Decision

Briggs J held that, in all the circumstances, it was just to grant the application. Contrary to the taxpayers’ submissions, VATA 1994, s. 84 did not set out a comprehensive code for security of costs in a VAT appeal to the High Court. The section had nothing to do with appeals to the High Court. It was prefaced by s. 84(1) which referred to s. 82 which, in turn, clearly referred to an appeal to the VAT tribunal rather than the High Court. Furthermore, s. 83 related to tax due and payable and did not concern costs or case management in respect of costs such as in the CPR.

The burden was on the taxpayers to show that an order for security of costs would stifle their appeal. It was not enough that they could show that they were insolvent. The court also had to consider whether there were backers who could provide funds for security for costs. In the present case, the taxpayers had provided no independent evidence as to their impecuniosity but had relied on the accountant's report provided by Customs to show their insolvency. It was also clear that the taxpayers’ case had so far been heavily funded from outside sources with the employment of leading counsel and new solicitors to pursue their appeal. Accordingly the court could not accept that an order for security of costs would stifle the taxpayers’ appeal.

Chancery Division.
Judgment delivered 6 June 2008.