The Court of Appeal upheld a decision of the High Court ([2007] BTC 5,387) that Customs had correctly made a separate assessment to VAT under the tour operator's 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 TOMS. Having re-worked 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 in 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, so s. 77 did not bar it.

Mann J (allowing the appeal) held that 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. It 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 ([2007] BTC 5,387). The taxpayer appealed.

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

Rix LJ (dismissing the appeal) (Laws LJ and Sir John Chadwick agreeing) said that the tribunal had been wrong to say that the relevant prescribed accounting periods were those of 6/00 to 3/01 and that the annual adjustment was no more than a method of recalculating the VAT due in those accounting periods; and the judge was right to reason the matter as he did.

When it came to the fifth quarter, the VAT due in respect of the whole of the previous financial year had to be calculated entirely anew by reference to the formula set out in section 8 of the TOMS notice 709/5. That was ‘the full calculation’ so-called (unless section 10's ‘simplified calculation’ could be adopted, but even that was a recalculation by a new formula).

The VAT due was then the ‘difference between the amount of VAT due … and the amount of VAT paid’. That difference, between what was due and what had been previously paid had to be adjusted on the VAT return ‘for the first prescribed accounting period ending after the end of the financial year during which the supplies were made’. Therefore, ‘the prescribed accounting period … concerned’ for the limitation purposes of s. 77(1)(a) was that fifth quarter. It followed that if the taxpayer had overpaid VAT on the basis of his provisional figures in the previous financial year, he would still be in time to claim back his overpayment if he was within three years from the end of the fifth quarter. The position for interest would follow accordingly.

That conclusion, which was mandated by the language of the TOMS notice 709/5, under section 12, Tertiary Law TL5, was supported by two further considerations: first, if an accurate in-year provisional value calculation of VAT to be accounted for had been made, but no VAT in fact paid, it was unarguable that the amount of VAT to be paid and accounted for in the fifth quarter would be the total amount of VAT finally determined by the full or simplified calculation. There was no reason why, if that quarter lay within the three-year limitation period, a tour operator could not be assessed for that.

The second consideration related to the purpose and rationale of the limitation period itself, designed to avoid the need, after the three years stipulated, to enter into the calculations of a prescribed accounting period which lay beyond the statutory limitation. Irrationally, however, and counter-intuitively, the taxpayer's submissions would require the Customs’ assessment to do precisely that. For it was the essence of the taxpayer's submission that, in order to find out the limit of an assessment which could be made in respect of the fifth quarter, one had to perform an additional calculation in respect of each of the four quarters of the previous financial year in order to discover what was the VAT which should have been determined and paid albeit on a provisional basis in each of those quarters. It was then only the excess of that provisionally determined VAT which could be accounted for and assessed in the fifth quarter in accordance with the full calculation then required.

That would, at least in theory, run counter to the purpose of the limitation period. On the contrary, it was Customs’ approach, which emphasised that the fifth quarter calculation, whether full or simplified, was an entirely new calculation which derived an entirely new figure for the VAT due in respect of the previous financial year, which fell rationally within the three-year period prescribed. The taxpayer recognised that by conceding that any additional VAT due (or any reclaim for VAT overpaid) thrown up by that fifth quarter calculation was within and not outside the three-year limitation. It followed that the ‘rule of primary intention’ to be derived from s. 77(1)(a) could not in this case assist the taxpayer (see Bennion on Statutory Interpretation (4th edn), at section 59; C & E Commrs v Laura Ashley Ltd [2004] BTC 5,200 distinguished).