The High Court held that Customs had correctly made a separate assessment to VAT under the tour operators' margin scheme (TOMS) where the taxpayer had wrongly treated coach travel as zero-rated for VAT purposes in the relevant period when it should have been standard-rated.

Facts

The taxpayer carried on business as a tour operator. Customs carried out an inspection of its business in 2004 and identified that coach travel had been incorrectly treated by the taxpayer as zero-rated under the tour operators' margin scheme (TOMS). Having reworked the scheme calculations, Customs issued an assessment in June 2004 in the sum of £17,260.

The taxpayer appealed to the VAT tribunal contending that, since the annual adjustment in period 6/01 related to periods 4/00 to 3/01, it was outside the three-year time-limit and the assessment was invalid. Customs took the view that, since the annual adjustment was applicable to period 6/01, the June 2004 assessment was within the statutory three-year period.

The tribunal allowed the taxpayer's appeal. It held that, in applying the annual adjustment Customs were obliged to carry out the calculation in the following quarter and apply the result to the prescribed accounting period immediately preceding that calculation. The ‘prescribed accounting period’ under VATA 1994, s. 77(1)(a) for the purpose of the appeal was the period 4/00 to 3/01. That period was outside the three-year cap. The annual adjustment was no more than a method of re-calculating the prescribed accounting period, and in attempting to assess the tax for that period outside that period the commissioners were seeking to widen the purpose of the Act. Since the four quarters in question fell outside the period of three years prior to the 2004 assessment, Customs were seeking to assess in respect of a period barred by virtue of s. 77(1)(a)) ([2006] BVC 4,088; Decision No. 19,580).

Customs appealed to the High Court arguing that what Customs did in 2004 was issue an assessment in respect of the period 06/01, because it was assessing respect of a return that was not made or was wrongly made in that period. It was assessing for the year-end calculation. The correct figure for the year end calculation was a necessary figure or return in its own right, which had to be made in that period. That period was within three years of the 2004 assessment, s. 77 did not bar it.

The taxpayer contended that what Customs had sought do was to tax periods outside the three-year period provided by s. 77 because the annual adjustment adjusted the earlier periods. It was the returns for those earlier periods that were wrong, and while they could have been corrected by assessments made within three years, the assessment in this case (June 2004) was made more than three years after all those periods, and so was out of time. Further, so far as the TOMS scheme purported to allow that then as secondary (or tertiary) legislation it was in conflict with the primary legislation in s. 77, and should not be construed.

Issue

Whether the assessment was a separate assessment for the purposes of s. 77(1)(a) or whether it was in law and substance an assessment in respect of the four preceding quarters.

Decision

Mann J (allowing the appeal) said that VATA 1994, s. 53 provided that the Treasury might by order modify the application of the Act in relation to supplies of goods or services by tour operators or in relation to such of those supplies as might be determined by or under the order. The Value Added Tax (Tour Operators) Order 1987 (SI 1987/1806) was made pursuant to that provision. It defined ‘designated travel service’ and provided that the value of a designated service was to be determined by the margin between the buying and the selling prices calculated in such manner as Customs should specify.

The specification was done in the TOMS notice which determined and required the method for calculating the value of the relevant services and supplies. The structure was one which made the year-end calculation, and exercise, the one which generated the true VAT figure, and the figure thus generated was offset by the amounts already paid. The nature of that process was one in which a final liability had been provisionally paid in part over a preceding period. It was not correct to regard anything as adjusted, but if it was then it was certainly not the provisional payments and calculations that were adjusted. They were left intact, and were merely a method of paying on account.

Accordingly, the tribunal's analysis was wrong. It was not correct to say that there was an ‘annual adjustment’. The year-end calculation produced the amount due, and was offset by the provisional figures.

The year-end calculation was carried out in the first prescribed accounting period ending after the end of the financial year during which the supplies were made. It could not be done before then but had to be done in that particular period. It therefore became a liability calculated, and arising, in that period.

In this case the assessment of 24 June 2004 purported to assess for the period 06/01. It relied on an underdeclaration in a specified amount. There was no doubt as to what was being claimed and why. What was being alleged was an under-declaration of the annual amount, on the footing of a proper calculation of a year-end amount and giving credit for sums paid. That was treated by Customs as being an incomplete or incorrect return in the period 06/01. For that exercise to be barred by s. 77, the assessment had to be raised more than three years after the prescribed accounting period concerned.

In the present case, that period was plainly the period 06/01. On its face the assessment complained of an under-declaration in the 06/01 period, and on analysis that was what happened. A year-end calculation could and should be carried out by reference to the correct figures after the year-end, and it was neither necessary nor sensible to recalculate the provisional values and amounts in the preceding four quarters. It was no part of the required exercise. What was required was that the sums paid be deducted from the year-end figure.

Therefore, the decision of the tribunal that the assessment related to the earlier periods and its implicit determination that Customs had assessed for the earlier periods were wrong. Nor was it the case that Customs had somehow sought to widen the purpose of the Act in some impermissible way by means of the notice and the assessment. The notice provided for a method of calculation which was, in itself, unobjectionable (apart from its complexity). It threw up a liability in a given prescribed accounting period in respect of a preceding year, and it was not some sort of impermissible evasion of the s. 77 limitation provision that it was calculated by reference to sums paid on account in the preceding yearly period. It followed that the appeal should be allowed and the decision of the Tribunal set aside.

The taxpayer's alternative argument was that the manner in which the provisional payments were taken into account was wrong. It was said that the assessment ought to have been calculated on the footing that the provisional payments had been correctly calculated. Although that had been done in the same assessment for later years, there was no requirement for that in the wording of the scheme. What was required to be brought into the adjustment was the amount of VAT paid on the provisional value of those supplies. It was not the amount of VAT correctly calculated on that provisional value. The wording was clear and coincided with common sense. When Customs made an assessment for the year-end, it was doing what the taxpayer should have done, so there was no warrant for, or sense in, the tax authorities doing the back calculation either. The fact that Customs had apparently done it for the period after 06/01 did not mean that it had to be done. If there were errors in the quarterly returns it was technically open to Customs to assess the relevant quarters under s. 73 (but subject to the limitation period in s. 77), but it did not have to.

Chancery Division.
Judgment delivered 26 February 2007.