The Court of Appeal held that the correct interpretation of VATA 1994, s. 60 was that a penalty might be assessed on the basis that a larger amount of VAT was due than that finally determined as between the taxpayer and the Revenue and Customs Commissioners (‘Customs’). There was no basis for reading into s. 60 a requirement that the amount of the penalty be fixed only by reference to the amount of the VAT finally determined to be due.

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 and imposed a penalty. The taxpayer accepted that there had been dishonest suppression, but contended that it had not been to the degree alleged by the commissioners. The assessment for the first 12 months after the business should have been registered for VAT was in the sum of £6,971.

Customs later purported to increase that assessment to £14,284 to reflect the amount allegedly dishonestly evaded. The civil penalty was in the same amount less ten per cent mitigation. Customs accepted before the tribunal that the amended assessment was invalid. The VAT tribunal upheld the penalty on the basis 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. (See [2005] BVC 4,070; Decision No. 18,974.)

Hart J ([2006] BTC 5,116) allowed an appeal by the taxpayer in part. He accepted the taxpayer's submission that he could not be said to have evaded tax which was not due from him, and that therefore the penalty could not be imposed by reference to a higher amount of tax evaded than £6,971. Customs appealed.

Issue

Whether the judge was right to conclude that a civil evasion penalty could not validly be imposed in respect of VAT which the taxpayer was not liable to pay.

Decision

Lloyd LJ (Arden and Tuckey LJJ agreeing) (allowing the appeal) said that a civil evasion penalty was a sanction for dishonest conduct, rather than for failure to pay tax which was due. Hence, a penalty might be imposed even if no tax had been lost. That was clear from VATA 1994, s. 60(3)(a) with the words ‘(if any)’, and from s. 70(4)(b) which dealt with mitigation, and had the effect that it was not relevant by way of mitigation that no or no substantial amount of tax had been lost, and from s. 60(1) itself with its words ‘or sought to be evaded’.

Except in a most unusual situation in which the taxpayer had put in a timely return which Customs were prepared to accept as accurate, there was likely to be a tax assessment, to secure payment of what Customs considered to be the right amount of tax. In any case in which there was a penalty assessment it was, in practical terms, certain that there would be a tax assessment as well. That was true of the present case and of all other relevant cases to which the court's attention had been drawn. This case was untypical in that there was, first, one tax assessment and then another, but the latter was invalid.

A tax assessment was subject to the time-limits in s. 77 and those in s. 73(6), the latter overriding the former if there was any conflict. Under s. 73(6) the time expired on the later of two dates: two years after the end of the relevant accounting period, and one year after Customs acquired knowledge of evidence of facts sufficient to justify the making of the assessment. In the present instance it was possible to make a tax assessment within the two-year period, but that might not be so in some cases of dishonest evasion. Section 77(1) applied to any assessment under s. 73 or 76. It precluded an assessment being made more than three years after the end of the relevant accounting period. Section 77(2) which applied to an assessment of a civil evasion penalty rather than an assessment of tax, allowed up to two years from the time when the amount of VAT due for the relevant accounting period ‘has been finally determined’. In addition, s. 77(4), which applied to both penalty and tax assessments, allowed a period of 20 years after the end of the relevant accounting period, if VAT had been lost as a result of conduct falling within s. 60(1) or for which a person had been convicted of fraud.

Thus, as regards tax, if an assessment was not made within two years after the end of the accounting period in question, it had to be made within one year of Customs’ becoming aware of evidence sufficient in their opinion to justify the assessment, but that one-year period was subject to the overall limit of three years from the end of the accounting period, unless tax had been lost by reason of dishonesty, in which case the three years was extended to 20 years. In the case of a civil evasion penalty, it was necessary to form a view as to the effect of s. 77(2) to which the judge attached importance. The reason for that provision was to allow Customs a further period of two years after a final decision as to the amount of tax due. It did not, however, provide that a civil evasion penalty assessment could not be made before the beginning of the two-year period.

After the determination of an appeal against a tax assessment, Customs had two years under s. 77(2) to make a penalty assessment on the basis of dishonesty in any event, and they might have a longer period by virtue of s. 77(4). If they discovered further evidence within that period which enabled them to show that the outcome of the taxpayer's successful appeal was procured by dishonest evidence, it might be too late for them to make a new tax assessment. But there was no reason why they should not be able to raise a civil evasion penalty assessment relying on the dishonest conduct of the appeal, in respect of tax which would have been successfully evaded. That was a situation in which it seemed to be reasonable to suppose that Parliament would have intended that Customs could raise a civil evasion penalty assessment, even though they could no longer make a tax assessment for the higher amount of tax.

There was no express provision in the 1994 Act which linked the amount of tax evaded, for the purposes of s. 60, to the amount of tax found to be due, upon a return (if any), an assessment and (if there was one) an appeal. In all the circumstances, on the tribunal's findings, it was open to Customs to make a civil evasion penalty assessment on the basis of tax evaded of £14,284, subject to the ten per cent deduction for mitigation.

Court of Appeal (Civil Division).
Judgment delivered 24 November 2006.