The High Court held that a civil penalty assessment should be reduced where the VAT tribunal had based the amount of the penalty on a sum greater than the VAT determined to be due in accordance with the statutory machinery.

Facts

The taxpayer carried on business as an Indian restaurateur. Following an investigation, Customs concluded that sales had been suppressed at rate of 70 per cent and issued two assessments for the relevant years in the combined sum of £32,769, and imposed a penalty of £36,062. The taxpayer accepted that there had been dishonest suppression, but contended that it had not been to the degree alleged by the commissioners.

The VAT tribunal decided that there was abundant evidence of suppression and the rate of suppression as calculated by Customs was acceptable. The penalty mitigation of ten per cent allowed by the commissioners was all that was merited in view of the taxpayer's refusal to admit suppression until the date of the hearing and his lack of co-operation. Accordingly both the assessment and the penalty were upheld ([2005] BVC 4,070; Decision No. 18,974). The taxpayer appealed to the High Court alleging procedural unfairness before the tribunal; failure of the tribunal to appreciate or properly execute its true role; and challenging the validity of the assessments on technical grounds.

Issue

Whether the civil penalty assessments were valid.

Decision

Hart J (allowing the appeal in part) said that, on the evidence, there was nothing to indicate any shortcomings in the procedure adopted at the tribunal hearing.

It could not be said, as the taxpayer had argued, that the tribunal had failed to distinguish between its supervisory (in determining whether the assessment had been made to best judgment by Customs) and its original role (in determining the correct amount of the relevant assessments). It plainly had in mind the distinction when it drew to the attention of the taxpayer the decision of C & E Commrs v Pegasus Birds [2004] BTC 5,729, inviting him to consider whether he wished to amend his pleaded case in so far as it related to best judgment.

Once the tribunal had rejected the alternative figures put forward on the taxpayer's behalf, it was inevitable that they should consider whether the evidence was capable of supporting the inferences which Customs had drawn from the evidence in making the assessments and were now inviting the tribunal to accept as correct.

Moreover it could not be said that the tribunal, in assessing the evidence before it, reached a conclusion at which no reasonable tribunal could have arrived. In all the circumstances, the tribunal was entitled to conclude that the approach taken by Customs was a fair one to adopt, in the sense that it did not lead to an assessment which was in excess of what would have been due from the taxpayer had he made honest returns.

Technical argument

Customs had impermissibly purported to amend the second assessment by increasing it and the taxpayer argued that the civil penalty in respect of the second assessment was flawed in so far as it was based on the amended assessment.

The tribunal plainly understood how the figures had been calculated and were clearly of the view that, as a matter of fact, there had been suppression in the relevant period sufficient to justify the amended assessment and therefore the penalty. The question was whether as a matter of law that was a permissible approach to the penalty.

The Value Added Tax Act 1994, s. 60 set out the conditions of liability for, and s. 76 provided the machinery for assessment of, civil penalties. Section 76(1) empowered Customs to assess and notify the penalty. Section 76(3) defined ‘relevant period’ as ‘the prescribed accounting period in respect of which the VAT evaded was due’. Section 76(5) permitted, inter alia, a civil penalty assessment to be combined with an assessment under s. 73 but the amount of the penalty had to be separately identified. An assessment under s. 76 might be made at any time before the expiry of two years from the time ‘when the amount of VAT due for the prescribed accounting period concerned has been finally determined’ (s. 77(2)).

The answer lay in s. 77(2) which dealt with the time within which a civil penalty assessment might be raised and allowed such an assessment at any time before the expiry of two years from the time when the VAT due in respect of an accounting period had been ‘finally determined’. The process of final determination would include, but was not necessarily confined to, an assessment. The premise of the subsection was, therefore, that there would have been an assessment. If a civil penalty assessment could be raised without there having been any determination of the VAT due in accordance with the statutory machinery, there would be no time-limit applicable to it, which could not have been Parliament's intention. Accordingly, the penalty should be reduced by the sum ascribable to the difference between the amount of the second assessment and the amount of the amended assessment.

Chancery Division. Judgment delivered 23 January 2006.