The High Court allowed an appeal by the taxpayer against the tribunal decision ([2003] BVC 2,086) that assessments to VAT could properly be amended and increased, where the proper course would have been for Customs to issue new assessments, if they had acted in time.

Facts

The taxpayer companies (three members of a group of companies) appealed from the decision of the VAT tribunal (No. 17,815; [2003] BVC 2,086) dismissing their appeals against assessments to VAT totalling 4,666,105 made by Customs on the basis that they were not entitled to recover input tax arising under group exit schemes designed to enable the group, which made primarily exempt supplies, to recover the input tax attributable to large purchases of services from outside suppliers.

The tribunal and the court ([2004] BTC 5,003) held that the group exit scheme did not work in relation to the supplies of services and the House of Lords in C & E Commrs v Thorn Materials Supply Ltd [1998] BTC 5,252 had held that the scheme did not work in relation to supplies of goods.

The taxpayer, entirely properly given the advice which it had received, had submitted its periodical VAT returns on the basis that there were large reclaims of input tax and small liabilities to output tax. Customs, considering that the returns were wrong, had sought to correct the position by making VAT assessments. Customs should have made the assessments partly on output tax grounds (affecting output tax on supplies of goods by the taxpayer) and partly on input tax grounds (affecting input tax on supplies of services received by the taxpayer). However, in fact they made assessments solely on input tax grounds. The taxpayer accepted that the assessments were correct in so far as they affected services, but contended that they were incorrect (and could not be enforced against the taxpayer) in so far as they purported to apply to supplies of goods. Customs accepted that the assessments had been made partly on the wrong basis, but they nevertheless submitted that it was open to the tribunal to adjust the amounts and the VAT periods so as to be the correct amounts and periods. The tribunal in essence accepted Customs' submissions.

Issue

Whether the amended assessments to VAT were valid; and whether it had been appropriate to use the power contained in VATA 1994, s. 84(5) to increase the amount of the assessment for the specified assessments.

Decision

Park J (allowing the appeal in principle) said that it could not be said that as long as the original assessment had been made in time, the assessment remained valid. The proper course would have been to issue new assessments in reliance upon the legally correct justification for the assessments on the basis of facts known to Customs throughout. The taxpayer was entitled to be informed of the basis of his assessment in particular so that he had sufficient information to enable him to decide whether he should appeal. The sole reason for the assessments, clearly explained to the taxpayer before they were notified to it, was that its returns had overclaimed input tax. That reason was only partly correct. It was correct in so far as the amounts which the returns claimed as deductible input tax were input tax attributable to services. It was not correct in so far as the amounts so claimed were input tax attributable to goods. Customs did not realise their mistake until after the time limits which prevented them from making new assessments on the correct basis.

It could not be said that the amounts of the assessments were right, but for the wrong reasons, since the amounts for which Customs contended and which the tribunal accepted differed, sometimes substantially, sometimes not, from the amounts comprised in the original assessments. Customs were trying to support the assessments as (in part) assessments for underdeclared output tax for different amounts. On the basis of Ridgeons Bulk Ltd vC &E Commrs [1994] BTC 5,090 it was not open to them to do that. Their proper course (if they had acted in time) would have been to issue new assessments, relying not on the proviso which covered cases where new facts had come to their attention, since none had, but rather relying on the legally correct justification for assessments made on the basis of the facts which they had known all along. Although the court was not strictly bound by the decision in Ridgeons Bulk, it would not be appropriate to decline to follow the considered and reasoned decision of another High Court judge. It might be different if it appeared that the judge (Popplewell J) had obviously overlooked some critical point, or that he had in some other way fallen into a manifest error; but that did not appear by any means to be the case.

Following the principles applied by Popplewell J in Ridgeons Bulk, in this case, although the requirements had been fulfilled in relation to services supplied under the group exit scheme, they had not been fulfilled in relation to goods supplied under the scheme. It was true that a result was that the taxpayer ended up in a fortuitous position where it paid less than its full liability under the statute ought in principle to have been. However all cases involving time limits were in a sense technical. Where a defendant in civil proceedings would have lost on the merits but successfully raised a limitation defence, he did not have to pay what his legal liability in principle was. A valid limitation point was available to the taxpayer in this case, and the taxpayer should not be deprived of it through Customs maintaining on grounds of output tax assessments which were made on grounds of input tax and which for all of the periods concerned claimed different amounts of input tax from the amounts of output tax which Customs now wished to charge by virtue of them. Whilst it might have been true that, taking all the monthly periods together, the aggregate of all of the correct assessments was quite close to the aggregate of all the incorrect assessments, the correctness of the assessment for any one period had to be ascertained by reference to that period alone.

As regards s. 84(5), which gave power to the tribunal to increase an assessment if it considered that the assessment was lower than it ought to have been, the two issues stood or fell together. Since the assessment should not be confirmed at its original amount, the assessment should not have been increased under 84(5).

Chancery Division. Judgment delivered 7 October 2005.