High Court awards increased costs and criticises Inland Revenue
Tax Alert - May 2015
By Emma Marr and Brad Bowman
In the December 2013 Tax Alert, we commented on Trustpower securing a rare taxpayer win in the High Court, with the outcome that feasibility expenditure was deductible. The High Court has now ruled on the level of costs payable by Inland Revenue, with Trustpower again coming out on top. Justice Andrews considered that both the nature of the proceedings and the Commissioner of Inland Revenue’s (Commissioner) conduct had contributed to increased costs of the dispute and ordered the Commissioner to pay further costs of over $750,000 to Trustpower.
The underlying tax dispute centred on expenditure of $17.7 million incurred by Trustpower in applying for, and obtaining, resource consents in respect of four potential projects that never proceeded. The High Court agreed with Trustpower’s position that these expenses were ordinary operating costs in the nature of feasibility expenditure and were therefore deductible. The Commissioner’s position was that the consents were stand-alone/separate assets of a capital nature and that associated costs were non-deductible.
The two parties then squared-off over costs.
While Inland Revenue accepted liability for costs and disbursements of $639,967, the parties could not agree on:
- Increased costs for listing documents on discovery, preparing an agreed statement of facts, preparation of briefs of evidence and preparation for trial; and
- Payment of various disbursements in respect of expert witnesses, litigation support services and travel/accommodation of senior counsel.
The costs payable by the unsuccessful party to a court case are largely prescribed by the High Court Rules. However there is some discretion for the court to order a party to pay “increased costs” in certain situations, such as where the nature of the proceedings means that the time required substantially exceeds that allocated under the rules, or where a party has contributed unnecessarily to the time or expense of the proceedings.
The Commissioner accepted that the nature of the proceedings required an award of costs above the normal allocation, and the only dispute was as to quantum. The Court agreed that the nature of the proceeding was such that “the scale does not begin to approach being a reasonable time allocation for discovery in this proceeding” – a comment that applied equally to each category of cost considered by the Court. As a result, substantial increases in costs were awarded.
The second issue was whether increased costs were justified on the basis that the Commissioner contributed unnecessarily to the time or expense of the proceedings. On this issue the Court found for Trustpower, awarding a 10% uplift on costs. This was based on two main factors:
- The discovery (i.e. production of documents) required by the Commissioner was ‘considerably greater than necessary’. The Commissioner requested a broad range of categories of documents be discovered (back to the early 2000’s), and discovery extended beyond the categories agreed between the parties. Trustpower’s solicitors calculated that they spent 1,612.7 hours (being 201.6 working days) on the discovery process. The majority of the “common bundle” of discovered documents, which comprised 60 Eastlight folders, was never referred to.
- The Commissioner’s statement of defence directly contradicted evidence expressly or implicitly accepted by the Commissioner in the report produced by Inland Revenue’s Adjudication Unit during the pre-litigation disputes process. The Commissioner denied or asserted no knowledge of factual matters which had been accepted in that report, which meant Trustpower was then required to call expert witnesses to provide extensive evidence to deal with those matters.The High Court found that the awards for increased costs made due to the nature of the proceeding had to some extent addressed the Commissioner’s conduct, but that a further uplift of 10% was warranted to recognise the contribution of that conduct to the costs.
Inland Revenue also disputed, for various reasons, disbursements claimed by Trustpower for fees charged by expert witnesses, litigation support services and travel/accommodation of senior counsel. The High Court confirmed that the costs satisfied the criteria set out in the High Court Rules, therefore Trustpower was entitled to recover all of the fees, travel and accommodation costs, and a portion of the litigation support expenses.
- The High Court was critical of how Inland Revenue and Crown Law managed the dispute and legal proceedings. Justice Andrews found that Inland Revenue and Crown Law caused the breadth and extent of discovery to be considerably greater than necessary. We hope that the Commissioner takes on board this criticism in the conduct of future disputes, with the awareness that seeking detailed discovery could lead to a higher award of costs for the taxpayer if the Commissioner is ultimately unsuccessful. It may potentially also inform the Commissioner’s approach to the exercise of her statutory information gathering powers (i.e. section 17 notices).
- Of particular concern is the divergent approach taken in the report prepared by Inland Revenue’s Adjudication Unit during the pre-litigation disputes process and the statement of defence prepared by Crown Law during the legal proceedings. Although Crown Law is not strictly obliged to follow arguments, facts or conclusions drawn by Inland Revenue in the adjudication report, it is disappointing to see the Commissioner willing to put a taxpayer to significant time and expense in disputing facts that another arm of Inland Revenue has already accepted (particularly given the unit functions in an independent review / quality control manner). On this point, as with other aspects, the disputes process does appear to be unfairly stacked in Inland Revenue’s favour.
- Where Crown Law diverges from a position previously accepted by Inland Revenue’s Adjudication Unit, and additional costs are incurred as a result, taxpayers can take solace that the High Court has the discretion to order Inland Revenue to pay increased costs to compensate the taxpayer. However, as it is not the function of the costs regime, the taxpayer is unlikely to ever be fully reimbursed for the additional work required.