The Court of Appeal held that when, following an assessment under VATA 1994, s. 73(1), Customs decided to accept that additional input tax was deductible, they were not prevented from deducting underdeclared output tax in respect of the same transactions as formed the basis of the assessment which had not previously been taken into account.

Facts

The taxpayer companies (three members of a group) appealed from the decision of the VAT tribunal ([2003] BVC 2,086; No. 17,815) 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 taxpayers, entirely properly given the advice which they had received, had submitted 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 taxpayers) and partly on input tax grounds (affecting input tax on supplies of services received by the taxpayers). However, in fact they made assessments solely on input tax grounds. The taxpayers 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 taxpayers) 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.

The High Court allowed the taxpayers’ appeal against that decision, holding that, following the decision in Ridgeon's Bulk Ltd v C &E Commrs [1994] BTC 5,090, a fresh assessment was always required when an assessment was sought to be upheld partly because tax initially thought to be due wholly or partly because of over-declarations of input tax was found correct because of equivalent under-declarations of output tax. The judge held that the tribunal should not have exercised its power to increase any of the assessments under VATA 1994, s. 84(5). He held that the appropriate form of order was that the assessments should be confirmed, not in the amounts directed by the tribunal, but in amounts equal to the original amount as reduced by eliminating elements which were intended to recover alleged over-claimed input tax in respect of goods ([2005] BTC 5,637). Customs appealed to the Court of Appeal.

Issue

Whether the judge had erred in law in holding that Customs ought to have issued fresh assessments which would have been out of time and that the tribunal could not properly increase the amount of the assessments in those circumstances.

Decision

Arden LJ (Auld and May L JJ agreeing) (allowing the appeal) said that, as a matter of interpretation, it was an essential part of an assessment for the purposes of VATA 1994, s. 73(1) that it determined the net amount due by way of VAT. Section 73 stated that an assessment under that section was of ‘the amount of VAT due’. Accordingly, unless the assessment determined the net amount of VAT due, it could not be an assessment for the purposes of s. 73(1). Similarly, in s. 73(6) the assessment was described as an assessment ‘of an amount due’. Thus there could not be an appeal against an assessment under s. 73(1) unless it assessed that there was a net amount of VAT due. If a taxpayer contended that he was entitled to a repayment of VAT, he would have to appeal on some other ground, such as against the amount of input tax allowed and VATA 1994 made express provision for that in s. 83.

As a matter of statutory interpretation, the statutory consequences as to alteration which applied to an assessment under s. 73(1) did not apply to the reasons for an assessment which had to be given by Customs. It was common ground that, as a matter of public law, Customs had to provide the basis on which they made an assessment, supplementing the assessment with a notification of reasons. But that duty was grounded in public law and not in the statute. The duty of Customs under public law might be discharged by the provision of the estimates as to input and output tax on which the assessment was based. In other cases it might need supplementary narrative. Accordingly, the fact that VATA 1994 referred to input tax and output tax and made them part of an assessment for the purposes of s. 73(1) did not mean that VATA treated the reasons required for an assessment as part of the assessment which could not therefore be changed.

Customs had power to reduce an assessment and it followed that, when they did so, they had power under VATA 1994 to change the calculation as to input tax or output tax on which the assessment was based. It inevitably followed from the fact that Customs had power under s. 73(9) to reduce the net amount which they had assessed as due by way of VAT from the taxpayer that they had power to reduce the amount of output tax or to increase the amount of input tax which formed the basis of the assessment of that amount.

To hold that Customs could only reduce an assessment with respect to either output tax or input tax, rather than by output tax or input tax (as the case might be) less any offset, or that Customs could only make adjustments to input tax and output tax if they were exercising their power to reduce an assessment, was inconsistent with the intention of Parliament appearing from the power to make assessments to the best of their judgment. In setting the standard at best judgment, Parliament had recognised that there was no absolute certainty about the amount of VAT due or its components in an assessment under s. 73(1).

There was no express power for Customs to amend the input and output tax elements of the computation where no alteration was made to the overall amount of VAT due. However, such a power, as well as a power to take into account by deduction offsets of over-claimed input tax or under-declared output tax, followed from and were implicit in the best judgment requirement. Those powers were reasonably necessary for carrying out the assessment process. Otherwise, Customs could find that even though they raised an assessment to the best of their judgment at an appropriate time that assessment could not be amended to reflect facts and matters becoming known later where it would be proper and reasonable for them to make those changes.

It was not an objection to the alteration of the input tax and output tax components of an assessment that both would require amendment and, in so far as the Ridgeon's Bulk case decided otherwise, it should be overruled. Part of the rationale in Ridgeon was in effect that there were separate statutory assessments of input tax and output tax. Accordingly, neither of those components could be increased and there would have to be a new assessment if any increase were sought in either component. On the true interpretation of VATA 1994, that was not correct and the conclusion of the court in C & E Commrs v Sooner Foods Ltd [1983] BTC 5,011 that Customs could amend input tax and output tax forming the basis of a single assessment was to be preferred.

Furthermore, the power of the tribunal under s. 84(5) extended to increasing the amount of an assessment in this type of case where Customs, having reviewed the input tax and output tax elements of an assessment previously made, concluded that further VAT was due (without themselves being in a position to increase the amount of VAT due). The submission that such an interpretation exposed the taxpayer to a potentially unlimited liability for a potentially unlimited time was rejected. A taxpayer could not be rendered liable to pay, by a direction by the tribunal to pay a further amount in respect of VAT due, more than he ought to have paid in the first place. The process before the tribunal limited the time within which he was exposed to an order under s. 84(5).

Court of Appeal (Civil Division).
Judgment delivered 12 June 2007.