Eurochoice: Company and its director held jointly and severally liable for HMRC's costs

In Eurochoice Ltd v HMRC [2020] UKFTT 449 (TC), the First-tier Tribunal (FTT) has held that a company and its director were jointly and severally liable for HMRC's costs in circumstances where only the company was party to the appeal proceedings.

Background

In 2015, HMRC notified Eurochoice Ltd (Euorochoice) that it was refusing it the right to deduct input tax in the sum of £5.8m and raised corresponding VAT assessments on the grounds that it knew, or should have known, that the transactions involved were connected with a fraudulent loss of tax.  Euorochoice appealed this decision to the FTT in February 2016 and the case was allocated to the Complex category.  

In February 2019, Mr Salman Ahmed, Euorochoice's sole director and shareholder, pleaded guilty in criminal proceedings to one count of cheating the public revenue and one count of conspiracy to commit money laundering, both in relation to the transactions to which the assessments raised by HMRC related.  

Consequently, in September 2019, HMRC applied to the FTT, pursuant to Rule 8 of the Tribunal Rules, for Eurochoice's appeal to be struck out on the grounds that it stood no reasonable prospect of success.  Eurochoice did not respond to this application and the appeal was struck out in March 2020.  In July 2020, HMRC sought a direction from the FTT that Eurochoice and Mr Ahmed pay its costs.

Section 29, Tribunals Courts and Enforcement Act 2007 (TCEA) grants the Tribunal a discretion to make a costs award, subject to the FTT's own procedure rules.  Under Rule 10(1)(c) of the Tribunal  Rules, the taxpayer, in a case allocated to the Complex category, has the right to opt out of the FTT's cost-shifting regime (and if such an opt-out is made, each party bears its own costs irrespective of the outcome of the litigation).  Eurochoice had not opted out of the costs regime.

FTT decision 

The application was successful. 

There was no dispute that HMRC had succeeded in the litigation as Eurochoice's appeal had been struck out.  Accordingly, in the view of the FTT, there was no reason for it to depart from the general rule that Eurochoice, as the unsuccessful party in an appeal before the FTT which had been allocated to the Complex category, should pay HMRC's costs. 

Although not a party to the litigation, HMRC also sought a costs order against Mr Ahmed.  

The FTT said that section 29, TCEA, enabled it to determine by whom and to what extent costs were to be paid and it decided that this extended to costs awarded against those who were not parties to (or representatives of parties to) the litigation before it.   

The FTT noted that it was "exceptional" for costs orders to be made against non-parties.  The discretion to make such costs orders would not generally be exercised against pure funders, but where the non-party not merely funded the proceedings but also substantially controlled or benefited from the proceedings, a costs award could be made against the non-party in favour of the successful party (Dymocks Franchise Systems (NSW) Pty v Todd and others (Associated Industrial Finance Pty Ltd, Third Party) [2004] 1WLR 2807).  

Comment

Mr Ahmed had been the sole shareholder and director of Eurochoice since 2012 and, in the view of the FTT, could be considered the "real party" to the litigation.  The FTT agreed with HMRC that Mr Ahmed had instigated the commencement of the appeal by Eurochoice in bad faith, that he had had opportunities to respond to all relevant applications and correspondence and had chosen not to do so.  In such circumstances, it is not surprising that  the FTT decided to grant HMRC's application and make Mr Ahmed and Eurochoice jointly liable for HMRC's costs. 

This decision illustrates that the corporate veil will not always protect those directing the mind of a company from adverse costs consequences, particularly in cases involving VAT fraud.

The decision can be viewed here.