National Provident Institution v Customs And Excise [2005] UKVAT V18944 (18 February 2005)

18944

VALUE ADDED TAX – input tax –Appellant made exempt supplies of finance (the sale of securities) outside the member states with a right to recovery of input tax (specified supplies) as well as taxable and exempt supplies  - no goods or services supplied to the Appellant were used exclusively in making specified supplies - whether the input tax on goods or services used in part in making specified supplies was to be attributed to specified supplies by first estimating the percentage of employees engaged in all dealings with  securities; then applying that percentage to the amount of residual input tax; and then reducing that amount by a further percentage which was calculated by reference to the values of specified supplies in relation to the value of total supplies of dealing in securities – no – or by reference to the proportion which the value of the specified supplies bore to the value of  total supplies – yes - appeal on this issue allowed but figures not yet determined - VATA 1994 Ss 24-26; VAT (Input Tax) (Specified Supplies) Order 1992 SI 1992 No. 3123; VAT General Regulations 1995 SI 1995 No. 2518 Regs 101 to 103.     

VALUE ADDED TAX – time limits – whether an assessment to recover a repayment of tax had been made within three years after the end of the prescribed accounting period – no - whether some assessments of tax were made within one year after evidence of facts sufficient to justify the making of the assessments came to the knowledge of Customs and Excise – no – whether some assessments of interest previously paid by Customs and Excise to the Appellant were made within two years after evidence of facts came to the knowledge of Customs and Excise – no – appeals on this issue allowed – VATA 1994 S73(2) and (6); s 77(1)(a); and s 78A(2)  	 
LONDON TRIBUNAL CENTRE

	NATIONAL PROVIDENT INSTITUTION	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

			Tribunal:	DR A N BRICE (Chairman)
MR J N BROWN CBE FCA CTA ATII

Sitting in public in London on 12 – 16 July 2004 and 15 and 16 November 2004

Roderick Cordara QC with Paul Key of Counsel, instructed by Messrs Pricewaterhouse Coopers, Chartered Accountants, for the Appellant

Peter Mantle of Counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

The appeal
1.	National Provident Institution (the Appellant) appeals against:

(1)	an assessment dated 14 July 2000 for tax of £366,308; recovery of interest which had been previously paid by Customs and Excise to the Appellant of £17,400; and default interest of £49,434 making a total of £433,142; the assessment was in respect of the accounting periods ending in  March 1997 and  June 1997 (the first assessment);

(2)	an assessment dated 29 September 2000 for tax of £3,597,408 and default interest of £222,556 making a total amount assessed of £3,819,964; the assessment was in respect of the accounting periods from September 1997 to December 1999 (the second assessment); and

(3)	an assessment dated 13 March 2001 for tax of £202,830 and recovery of interest which had been previously paid by Customs and Excise to the Appellant of £15,437 making a total amount assessed of £218,267; the assessment related to the accounting period ending in December 1996 (the third assessment). At the date of the hearing the assessment for the tax of  £202,830 had been withdrawn and only the amount of £15,437 for the recovery of interest which had been previously paid by Customs and Excise to the Appellant remained in dispute. 

2.	The assessments were made because Customs and Excise were of the view that the Appellant had incorrectly calculated its input tax. The Appellant had included the value of exempt supplies of the sale of securities outside the member states with a right to recovery of input tax (specified supplies) in its normal partial exemption calculation as if they were taxable supplies. Customs and Excise were of the view that input tax on goods or services used in part in making specified supplies should be calculated by reference to use and specifically by first estimating the percentage of employees engaged in all dealings with securities; then applying that percentage to the amount of residual input tax; and then reducing that amount by a further percentage which was calculated by reference to the values of specified supplies in relation to the value of total supplies of dealing in securities.

3.	The Appellant was also of the view that the first assessment, the second assessment in so far as it related to the four accounting periods ending in September 1997, December 1997, March 1998 and June 1998, and the third assessment had been made outside the statutory time limits.

The legislation

The legislation relating to partial exemption 

4.        	Section 24 of the Value Added Tax Act 1994 (the 1994 Act) defines input tax as tax on the supply to a taxable person of goods or services used for the purpose of a business carried on by him. Section 25(2) provides that a taxable person is entitled at the end of each accounting period to credit for so much of his input tax as is allowable under section 26 and then to deduct that amount from any output tax that is due from him. Section 26 contains the provisions which describe the input tax allowable under section 25 and the relevant parts of section 26 provide:

“26(1)         The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period … as is allowable by or under regulations as being attributable to supplies within subsection (2) below. 

(2)        The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business:

(a)          taxable supplies;
(b)	 supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom;
(c)	such other supplies outside the United Kingdom and such exempt supplies as the Treasury may by order specify for the purposes of this subsection.

(3)	       The Commissioners shall make regulations for securing a fair and reasonable attribution of input tax to supplies within subsection (2) above, … .

(4)           Regulations under subsection (3) above may make different provisions for different circumstances and, in particular… for different descriptions of goods or services; … . “	

5.	Thus section 26(2) makes it clear that the only input tax for which credit may be given is that attributable to taxable supplies, to supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom (called foreign or out-of-country supplies); and to such exempt supplies as are specified by order (specified supplies). This means that input tax attributable to exempt supplies does not give any entitlement to credit. 

Specified supplies

6.	At the relevant time the regulations made under section 26(2)(c) were the Value Added Tax  (Input Tax) (Specified Supplies) Order 1992 SI 1992 No. 3123 (the 1992 Order). The 1992 Order specified the supply of services to a person who belongs outside the member states provided the supply was exempt or would have been exempt if made in the United Kingdom by virtue of any of the items 1-7 of Group 5 of Schedule 6 of the Value Added Tax Act 1983 (the 1983 Act). Items 1 to 7 of Group 5 of the 1983 Act specified certain services relating to finance including the sale of securities. In this Decision we call the supplies of securities made by the Appellant under section 26(2)(c) “specified supplies” as they are the supplies specified by the 1992 Order. 

7.	At the relevant time the regulations made under section 26(3) were regulations 99 to 111 of the Value Added Tax Regulations 1995 SI 1995 No 2518 (the 1995 Regulations) and particularly regulations 101 and 103.

The standard method of calculating input tax for partial exemption
 
8.	Regulation 101 is headed “Attribution of input tax to taxable supplies”. It provides that, subject to regulation 102, the amount of input tax which a taxable person is entitled to deduct is the amount attributable to taxable supplies. This is calculated by attributing to taxable supplies the whole of the input tax used exclusively in making taxable supplies; by providing that no part of the input tax used exclusively in making exempt supplies is attributable to taxable supplies; and by providing that, where supplies are used to make both taxable and exempt supplies, the amount of input tax attributable to taxable supplies is that proportion of the input tax used to make both taxable and exempt supplies which the value of the taxable supplies bears to the value of total supplies. The calculation under regulation 101 is thus an outputs based calculation This method of attributing input tax to taxable supplies is called the standard method and input tax on supplies used to make both taxable and exempt supplies is called residual input tax. 
 
The special method 

9.	Regulation 102 provides that Customs and Excise may approve or direct the use by a taxable person of a method other than that specified in regulation 101. Where Customs and Excise approve a method under regulation 102 it is called a special method.	

The method for specified supplies

10.	Regulation 103 is headed “Attribution of input tax to foreign and specified supplies”. Regulation 103(1) provides:

“(1)	Input tax incurred by a taxable person … on … goods or services supplied to him which are used … by him in whole or in part in making-

(a)	supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom, or

(b)	supplies specified in an Order under section 26(3)(c) of the Act …

shall be attributed to taxable supplies to the extent that the goods or services are so used or to be used expressed as a proportion of the whole use or intended use.”

11.	Thus regulation 103 provides for a method of attribution of input tax where goods or services are used in whole or in part to make specified supplies. It is regulation 103 which is in issue in this appeal. 

The legislation relating to the time limits for making assessments 

12.	Section 73 of the 1994 Act contains the provisions about assessments. The relevant parts of section 73 provide:

“(2)	In any case where, for any prescribed accounting period, there has been paid or credited to any person-
(a)	as being a repayment or refund of VAT; or
(b)	as being due to him as a VAT credit
an amount which ought not to have been so paid or credited, … the Commissioners may assess that amount as being VAT due from him for that period and notify it to him accordingly.
(6)	An assessment under subsection … (2) … above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided for in section 77 and shall not be made after the later of the following-
(a)	two years after the end of the prescribed accounting period; 
(b)	one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, come to their knowledge”
13.	Section 77 provides an overall three year time limit for the making of an assessment and the relevant part provides:

“77(1)	 Subject to the following provisions of this section an assessment under section 73 …shall not be made -

(a)	more than three years after the end of the prescribed accounting period  … .”

14.	Section 78A of the 1994 Act contains the provisions about the assessment of interest previously paid by Customs and Excise to a taxable person. Section 78A(1) provides that where any amount has been paid to any person by way of interest under section 78 (interest in certain cases of official error) but that person was not entitled to that interest then Customs and Excise may assess the amount so paid to which the person was not entitled. Section 78A(2) provides:

“(2)	An assessment under subsection (1) above shall not be made more than two years after the time when evidence of facts sufficient in the opinion of the Commissioners to justify the making of the assessment comes to the knowledge of the Commissioners.”

The issues

15.	It was accepted that the Appellant had no input tax used exclusively in making specified supplies and so the main issue in the appeal concerned only input tax used in part to make specified supplies and in part to make other supplies (both taxable and exempt). Thus the input tax at issue in the appeal is only residual input tax. It was also not disputed that the calculation under regulation 103 of the attribution of input tax on goods or services used partly in making specified supplies had to be based on use. What was in dispute was how use should be determined.

16.	As far as time limits were concerned, it was the Appellant’s case that the first assessment (which was made under section 73(2)) had been made for the accounting periods ending in March 1997 and June 1997 and, as it had been made on 14 July 2000, it had been made outside the three year time limit in section 77(1)(a). Customs and Excise accepted that if the first assessment had been made for the accounting periods ending in March 1997 and June 1997 then it had been made out of time but they argued that the assessment had been correctly made for the accounting period ending in December 1997 and so it was in time. The Appellant had an alternative argument about the first assessment which was that the first assessment was invalid because it had been made for the wrong accounting period as it should have been made for the accounting period ending in June 1998. 

17.	It was the Appellant’s case that the second assessment in so far as it related to the four accounting periods ending in September 1997, December 1997, March 1998 and June 1998, had been made after the end of one year after evidence of the facts sufficient to justify the making of the assessment came to the knowledge of Customs and Excise within the meaning of section 73(6)(b) whereas Customs and Excise argued that those assessments had been made within a year of evidence of the facts coming to their knowledge  

18.	It was the Appellant’s case that the third assessment (which concerned interest which had previously been paid by Customs and Excise to the Appellant) had been made after the end of two years after evidence of the facts sufficient to justify the making of the assessment came to the knowledge of Customs and Excise within the meaning of section 78A(2). Customs and Excise argued that the assessment had been made within two years of evidence of the facts coming to their knowledge.  

19.	Thus the issues for determination in the appeal were:

(1)	whether the input tax on goods or services used in part in making specified supplies was to be attributed to specified supplies under regulation 103(1) by first estimating the percentage of employees engaged in all dealings with securities; then applying that percentage to the amount of residual input tax; and then reducing that amount by a further percentage which was calculated by reference to the values of specified supplies in relation to the value of total supplies of dealing in securities (as argued by Customs and Excise) or whether it should be calculated by reference to the proportion of the value of specified supplies to total supplies (as argued by the Appellant); the parties requested a decision in principle on this issue, leaving the amounts of the assessments to be determined at a later date;   

(2)	whether the first assessment had been made for the accounting periods ending in March 1997 and June 1997 (as argued by the Appellant) or for the accounting period ending in December 1997 (as argued by Customs and Excise);  alternatively whether the assessment had been made for the wrong accounting period;

(3)	whether the second assessment as far as it concerned the four accounting periods ending in September 1997, December 1997, March 1998 and June 1998, had been made after the end of one year after evidence of the facts sufficient to justify the making of the assessment came to the knowledge of Customs and Excise within the meaning of section 73(6)(b); and

(4)	whether the third assessment had been made after the end of two years after evidence of the facts sufficient to justify the making of the assessment came to the knowledge of Customs and Excise within the meaning of section 78A(2).  

20.	The parties also mentioned to us that there was an issue concerning the application of the principle in R v Customs and Excise Commissioners, ex parte Building Societies Ombudsman Co Ltd [2000] STC 892 to the facts of this appeal. However, in the time available, this issue was not argued before us at the hearing and the parties agreed that this issue be deferred. 
The evidence 

21.	On 19 November 2004 (three days after the conclusion of the hearing) we were sent an agreed statement of facts. Three bundles of documents were produced at the hearing. Oral evidence was given on behalf of the Appellant by: 

Mr Michael Bailey, a partner in the firm of Messrs PricewaterhouseCoopers, Chartered Accountants; Mr Bailey advised the Appellant about its value added tax affairs and also advised the Appellant in its negotiations with Customs and Excise about its partial exemption calculations; and

Mr Andrew Walton, the appointed actuary of National Provident Life Limited. Prior to 1 January 2000 Mr Walton was Deputy Actuary of the Appellant.  

22.	Oral evidence was given on behalf of Customs and Excise by Mr Peter Jeremy Knight, an Officer of HM Customs and Excise. Mr Knight made the assessments the subject of the appeal. 

The facts

23.	From the evidence before us we find the following facts.

The Appellant and its business

24.	The Appellant was formed in 1835 and later was incorporated, regulated and managed as a mutual life assurance society under the National Provident Institution Act 1987. On 1 January 2000 the Appellant was de-mutualised and was acquired by AMP UK plc. On that date the Appellant’s business was transferred to National Provident Life Limited, a wholly owned subsidiary of AMP UK plc. These appeals relate only to accounting periods prior to January 2000.

25.	The Appellant was registered for value added tax on 1 April 1973 and, at the relevant time, was the representative member of a group of companies. The Appellant had a number of subsidiary companies of which two are mentioned in this Decision, namely National Provident Institution Asset Management, which was a management company, and National Provident Institution Investment Managers. Neither of these subsidiary companies made any specified supplies.  

The supplies made by the Appellant

26.	At the relevant time the Appellant was a provider of retirement-related financial services products to individual and corporate clients. Its principal activities were the provision of pensions, life assurance and annuity business, and the related investment management activity. As at 31 December 1997 over 79% of the assets managed by the Appellant were in respect of pension policies and at the same date the Appellant had 600,000 policy holders and total funds under management of £11.6 billion. We saw an analysis of sales of securities for the relevant accounting periods from which it emerged that, of total sales of securities, about 20% were made in other member states; about 20% were made outside member states (specified supplies); the remainder being made in the United Kingdom. These proportions changed from month to month depending upon the investment activity in that month. We accept the evidence of Mr Walton that the costs of managing an overseas fund were higher than the costs of managing a United Kingdom fund.  

The administration of the Appellant 

27.	As at 31 August 1998 the Appellant had offices in Tunbridge Wells, Cardiff and London and branch offices throughout the United Kingdom. The functions of sales management, marketing, finance and the administration of individual pensions were based in Tunbridge Wells; the functions of group and company pension plan business were administered in Cardiff; the functions of investment were administered in London; and the branch offices dealt with sales and sales administration. 1,197 employees worked in Tunbridge Wells, 664 at Cardiff, 118 in London and 268 in the branch offices. The total was, therefore, 2,247. The Appellants’ audited accounts for the year 1998 indicated that overall 60 employees were employed to deal with investments; 443 with sales and marketing; and 1,472 with administration. That total is 1,975. We received no explanation as to why the total numbers differed as between the two dates and so assume that the difference arose for the normal reasons of retirement and recruitment. Nothing turns on the exact numbers. Most of the administration was concerned with customer services including dealing with application forms, cashing cheques, issuing statements, answering enquiries from policyholders, changing policies and paying out claims.     

28.	Although only a limited number of the Appellant’s employees were directly involved with making and managing investments, other employees were indirectly involved in generating or maintaining the funds which required investment. Product development teams formulated the financial products which attracted premium income which had to be invested. Sales staff generated new premium income which had to be invested. The customer service department processed the premium income and allocated it into the fund in which it was to be invested. The assets department invested the funds. The information provided to the investment managers came primarily from the customer services area. Conversely, investment managers gave presentations to sales employees about the importance of the Appellant’s investment policy, its strategies and successes and also about the Appellant’s past and future investment performance. Most of the Appellant’s products which were sold to individuals were sold through independent financial advisers who liked to be informed about such matters.  

The Appellant and value added tax

29.	From the point of view of value added tax most of the Appellant’s supplies were either supplies of financial services products like personal pensions (which supplies were mostly made in the United Kingdom) or supplies of dealing in investments (which supplies were made in the United Kingdom, in other member states and outside the member states). Thus the Appellant sold pensions to individuals which were linked to investments and the premiums received by the Appellant were used to buy investments for the pension fund. During the life of a pension fund the  investments might be sold and other investments purchased on a number of occasions. The sale of financial products was an exempt supply and the sale of investments in the United Kingdom and in other member states was also an exempt supply. Where dealings in investments were made outside the member states the supplies made by the Appellant were exempt supplies with a right to recovery of input tax (specified supplies). The Appellant also received income from property in the United Kingdom in respect of which it had elected to waive exemption and so it made some taxable supplies. Thus, although most of the supplies made by the Appellant were exempt supplies, the supplies made by the Appellant which gave a right to deduct input tax consisted of standard-rated property sales or rentals and specified supplies of the sale of securities outside the member states. 

30.	Some of the supplies made to the Appellant were used exclusively in making either taxable or exempt supplies. However, most of the supplies made to the Appellant (about 98%) were used to make taxable, exempt and specified supplies and so the tax on these supplies was residual input tax. Such supplies consisted of advertising and marketing; audit, accountancy and actuarial fees; consultants’ fees; data processing (including hardware rental); printing, photocopying and stationery; and telephone and communications charges. The single biggest cost for the year ending on 31 December 1999 was consultants’ fees.

31.	At the relevant time the Appellant’s group had an annual turnover of about £5,400,000,000. Of this about 83% represented exempt supplies, of which three-quarters was of the sale of securities in the United Kingdom and other member states. Of the remaining 17% about 95% consisted of specified supplies and the rest was taxable supplies being almost entirely relating to property where the Appellant had elected to waive exemption. All the specified supplies made by the Appellant were the sale of securities outside the member states. Thus of total supplies, specified supplies represented about 16.15% in value.  

1990 – 1996 – the special method 

32.	On 17 April 1990 Customs and Excise approved a special partial exemption method which governed the way in which the Appellant calculated the amount of the residual input tax which it was entitled to deduct. This method was later described in Mr Bailey’s letter of 16 June 1996 in the following way: 

“In effect the method requires NPI [ the Appellant ] to split their business into a number of sectors to determine input tax deductibility. Taxable input tax incurred within each sector is recovered in full. Exempt input tax is restricted and unattributable input tax is recovered on the basis of the ratio of taxable income to  total income within the sector concerned.” 

33.	In 1993 the special method was amended and after that date taxable supplies and specified supplies were treated in the same way.

34.	On 16 June 1996 Mr Bailey reviewed the workings of the special method and wrote to Mr Knight to say that in practice, while input tax wholly attributable to taxable or exempt activities had been identified and treated accordingly, residual input tax which related to “expenses of management” had been incorrectly allocated to the “remainder” sector for partial exemption purposes. The income allocated to this category comprised all premium income, commissions, and interest earned and so was predominantly exempt. As a result only 1% (rounded up) of the residual input tax relating to expenses of management had been recovered.  In Mr Bailey’s view this  attribution had created a distorted result which was not fair and reasonable and which did not properly identify the value added tax costs to the sectors specified in the method. Mr Bailey went on to calculate that, in the years from 1990 to 1995, input tax of £2,909,054.40 had been under-claimed. That claim was not disputed and the amount was repaid to the Appellant by Customs and Excise. 

35.	However, because of the amount of the claim, Mr Knight formed the view that, although this application of the special method was entirely proper, it did not produce a fair and reasonable result. He thought that the inclusion of specified supplies in the numerator of the partial exemption calculation had resulted in the recovery of too high a proportion of the residual input tax. Accordingly, on 18 September 1996 the approval of the use of the special method was withdrawn with effect from 1 October 1996. The Appellant was invited to propose an alternative special method to be effective from 1 October 1996 failing which the standard method had to be used.  

April 1997 –proposals for an alternative special method

36.	On 8 April 1997 Mr Bailey wrote to Mr Knight with some proposals for an alternative special method. He argued that investment activities constituted a fundamental part of the Appellant’s business and premium income was invested in order to generate returns; accordingly, investment income could not be disregarded as incidental. The method proposed was that there should be a sectorisation of the value added tax group with the subsidiary companies isolated from the Appellant. The input tax wholly attributable to taxable supplies and specified supplies would be recovered in full; input tax wholly attributable to exempt supplies would not be recovered; and input tax not wholly attributable to taxable, specified or exempt supplies (that is, residual input tax) would be recovered by using the fraction of:

taxable and specified supplies
-------------------------------------
total supplies

37.	This calculation would then give the percentage of residual input tax which could be recovered. Attached to Mr Bailey’s letter of 8 April 1997 were some calculations illustrating his proposed partial exemption method showing that, of the residual input tax, the recoverable percentage was in the region of 17%. In practice, Mr Bailey’s proposals went back to the methodology of the special method. 

May – October 1997 – Mr Knight’s consideration of the alternative special method 

38.	On 9 May 1997 Mr Knight wrote a lengthy memorandum to his colleagues seeking their comments on Mr Bailey’s proposals. He noted that the Appellant’s accounts system did not allow attribution of costs to subsequent specific outputs which meant that there was a large proportion of residual input tax. He summarised the two main contentious points as being: first, the inclusion of the value of securities in the special method; and, secondly, the large proportion of residual input tax (which was 98% of all input tax). As far as the first point was concerned Mr Knight thought that he could not justify ignoring the sale of securities because they were integral to the business of the Appellant and not just incidental. They did not distort the calculation because they included both taxable and exempt supplies. Once it was accepted that a life insurance company could have a recovery rate of, say, 17% then the proposals appeared to fulfil the required criteria because they were workable, they could be easily checked, they did not allow more tax to be recovered than had been incurred in making taxable supplies, and they were therefore fair and reasonable. 

39.	On 8, 13 and 23 May Mr Knight’s colleagues wrote to say that they agreed with his conclusion and suggested that he prepare an approval letter. However, Mr Knight thought that he could secure a better deal.

40.	Accordingly, on 25 June 1997 Mr Knight replied to Mr Bailey’s letter of 8 April 1997 and commented on his suggestions. The letter stated that the fact that supplies of securities were not seen as incidental did not mean that the values should be included in an outputs based formula. The figures for sales of securities were very high value but there was no evidence of any relationship between the value of sales and the expense incurred to reflect the input tax incurred in making taxable supplies. Part of the letter mentioned that it was reasonable to accept that overhead costs would be spread in approximately the same proportion as staff allocation. This suggestion was intended to apply to all sales of securities, both exempt and specified supplies. (The assessments in dispute in this appeal were subsequently calculated using a methodology based on staff allocation for specified supplies but on a methodology based on values for exempt supplies of securities in the United Kingdom.) Mr Bailey replied fully on 14 July 1997 and his letter considered a number of alternative approaches to the agreement of a special method. On the subject of staffing he stated that the conclusion that only London staff were concerned with investments was incorrect. Staff in other locations were concerned with investment performance including the actuarial department at Tunbridge Wells and the customer care group at Cardiff and so a partial exemption method based on staffing levels would be inaccurate.  

41.	On 23 July 1997 Mr Knight sent a written memorandum to the partial exemption branch at Customs and Excise’s headquarters asking for advice about the proposed special method for the Appellant. The memorandum did not seek to suggest that the approach to the attribution of input tax relating to sales of securities which were specified supplies should be any different from the approach to the attribution of input tax to the sales of securities which were exempt supplies in the United Kingdom. In the memorandum Mr Knight said that he had misgivings about whether premium and investment income should be combined in the outputs calculation; he accepted that investment income was not incidental but did not think that it automatically followed that investment outputs values had to be used in a special method and he was doubtful whether an outputs based method was fair and reasonable. As an alternative to an outputs based method he suggested looking at the numbers of staff employed on different activities. In response to his memorandum Mr Knight received a holding letter with requests for more information. On 25 July 1997 Messrs PricewaterhouseCoopers asked about progress of the agreement for a special method but received no immediate reply.

October 1997 – the voluntary disclosure claiming repayment 

42.	While negotiations for a new special method were under way, and for the three accounting periods ending in December 1996, March 1997 and June 1997, the Appellant accounted for value added tax on the basis that only 1% of its residual input tax was deductible However, the negotiations did not result in an agreed special method and on 1 October 1997 the Appellant made a voluntary disclosure and claimed a repayment from Customs and Excise because it had re-calculated its input tax for the accounting periods ending in December 1996, March 1997 and June 1997. In calculating the claim the Appellant re-worked its partial exemption calculation and included the value of specified supplies in the amount of both the value of taxable supplies (the numerator) and the value of total supplies (the denominator). In other words, the Appellant included the value of the specified supplies as if they were taxable supplies in a single calculation. The total claim was £809,688.32. On 3 November 1997 Mr Bailey notified Mr Knight that the return for the accounting period ending in September 1997 had been calculated on the same basis as that mentioned in the letter of 1 October 1997 and this methodology would be used for subsequent returns.  

November 1997 – the proposal and the claim for repayment refused

43.	On 13 November 1997 Mr Knight received, from the partial exemption branch at Customs and Excise’s headquarters, a reply to his memorandum of 23 July 1997 which contained no comment on his staff-based proposal. He was provided with a draft letter to send to Mr Bailey and he sent it on 21 November 1997. The letter stated that the voluntary disclosure was rejected in full as the calculations had not been done using the standard method but had been done under the Appellant’s proposed special method which had not been approved by Customs and Excise. The letter of 21 November 1997 contained the following paragraphs:

”For any values-based fraction to secure a fair and reasonable attribution there has to be a relationship between the use of the (residual input tax bearing) goods and services in making deductible supplies and the values of such supplies in the partial exemption fraction. The proposed fraction would imply that the relevant goods and services used in making deductible and exempt supplies of securities (including interest) etc, is in the same ratio that the values of supplies of securities bear to the values of all supplies. In other words, the fraction would imply that a substantial proportion of (residual input tax bearing) goods and services are used in making supplies of securities when, in reality, only a small proportion of the expenses are used for this purpose. …

In instances where a substantial proportion of supplies of securities are to counterparties belonging outside the European Union, the values-based calculation would be to Customs’ detriment. But in instances where all, or almost all, of the supplies are to counterparties belonging inside the European Union then the result will be to the [Appellant’s] detriment. It follows that we would only approve a values-based calculation provided the values of supplies of securities were excluded from it.  

Clearly the Appellant is entitled to recover that proportion of residual input tax  which is attributable to those transactions in securities which carry the right to deduct. We are therefore prepared to consider alternative means of identifying the recoverable input tax relating to such transactions provided that a fair and reasonable attribution of input tax to deductible supplies can be achieved.”  

44.	The letter of 21 November 1997 also stated the view that the value of the specified supplies should have entered into a separate calculation and should not have entered into the standard partial exemption calculation. On 26 November 1997 Mr Knight wrote to Mr Bailey in reply to his letter of 3 November 1997 saying that he was of the view that the input tax recovered in the accounting period ending in 30 September 1997 had been overstated and that he would be in touch in due course so that the amount of the tax involved could be quantified and assessed if appropriate. He confirmed that he had decided not to make the repayment requested on 1 October 1997. 

1998 – The High Court judgment in Liverpool Institute for Performing Arts  

45.	On 30 January 1998 the High Court gave judgment in Customs and Excise Commissioners v Liverpool Institute for Performing Arts [1998] STC 274. The High Court held that that regulations 101 and 103 should be read together as part of a single code and that specified supplies were to be treated in precisely the same way as taxable supplies. Thus a single partial exemption calculation should include both taxable and specified supplies.  

46.	On 20 February 1998 Customs and Excise wrote to the Appellant saying that they were going to appeal from the judgment of the High Court to the Court of Appeal. However, if the Appellant wished to rely on the High Court decision then the repayment requested on 1 October 1997 would be made but on the proviso that, if Customs and Excise were ultimately successful in Liverpool Institute for Performing Arts, the Appellant would repay the money to Customs and Excise and at that time it would be necessary to resolve the issue with regard to regulation 103 and the determination of use.   

47.	On 27 February the Appellant replied to say that it was of the view that the claim made on 1 October 1997 fully accorded with the partial exemption regulations irrespective of the outcome of Liverpool Institute for Performing Arts. However, as there was an area of dispute the Appellant requested Customs and Excise to proceed on the basis proposed, namely, that the claim it had been made be paid in full. If Customs and Excise succeeded in Liverpool Institute for Performing Arts then the parties could turn to consider how to determine the amount of input tax on supplies used to make specified supplies .

48.	On 13 March 1998 Customs and Excise published Business Brief 8/98 which publicised its policy of making payments pending the judgment of the Court of Appeal in Liverpool Institute for Performing Arts. On 22 April 1998 Customs and Excise made a repayment to the Appellant of £809,690 as claimed on 1 October 1997. The covering letter stated that if Customs and Excise were to succeed in Liverpool Institute for Performing Arts the Appellant might be asked to repay the money with interest. Also at that time it would become necessary to resolve the outstanding matter with regard to regulation 103 and the determination of use. (We accept the evidence of Mr Knight that both parties realised that the outcome of the litigation with Liverpool Institute for Performing Arts might not give a full answer to the question of how to resolve the Appellant’s position.)  

49.	On 11 May 1998 Mr Knight wrote to Mr Bailey to say that any future agreed special method would not be retrospective to 1 October 1996 and on 26 June 1998 he confirmed that any future special method would only be retrospective to the start of the tax year in which the finally approved proposal was received by Customs and Excise. In fact no special method was approved. 

1999 – The Court of Appeal’s  judgment in  Liverpool Institute for Performing Arts  

50.	On 17 March 1999 the Court of Appeal reversed the decision of the High Court in Liverpool Institute for Performing Arts [1999] STC 424 and it then became apparent that Customs and Excise had repaid amounts to the Appellant which should not have been repaid. 

51.     On 9 June 1999 and again on 29 June 1999 Mr Knight wrote to a colleague recording the policy set out in Business Brief 8/99 that Customs and Excise would now assess traders who had applied the High Court decision in Liverpool Institute for Performing Arts and asking whether that should apply to the Appellant. If so, he assumed that he should also assess for periods not covered by the claim, namely the periods from September 1997 onwards. Mr Knight also asked for advice on how to  recover the £809,690 which had been repaid to the Appellant. 

52.	On 30 June 1999 Mr Knight received a reply from his colleague to his memorandum of 9 June 1999 saying that he should assess for the later periods for which he was in time. On 19 October 1999 there was an internal exchange of emails in Customs and Excise, copied to Mr Knight, which said that the Court of Appeal’s judgment in Liverpool Institute for Performing Arts should be applied, presumably by assessment action. On 2 November 1999 Mr Knight received advice on how to recover the tax and interest in respect of the accounting periods ending in December 1996, March 1997 and June 1997. 

1999 – 2000 – the provision of information to Mr Knight

53.	However, Mr Knight was of the view that a simple total recovery of the £809,690, which Customs and Excise had paid to the Appellant on 22 April 1998, was not appropriate because the Appellant’s entitlement to input tax in respect of specified supplies needed to be addressed when calculating the amount to be recovered. The same applied to the assessments to be made for the accounting periods ending from September 1997 to December 1999. In order to make these assessments Mr Knight was of the view that he needed to know the exact amount of the residual input tax for apportionment and the values of the various supplies used in the apportionment formula. He was of the view that if he had issued the assessments required after Liverpool Institute for Performing Arts they would have been subject to  amendment when other information became available.

54.	Accordingly, between June 1999 and the date of the first assessment (14 July 2000) a considerable amount of information was supplied by the Appellant to Mr Knight. Mr Knight gave evidence that in his view five pieces of this information were necessary before he could make the first and second assessments. These five pieces of information were: information about National Provident Institution Asset Management; information about transfers of going concerns; information about additional input tax claimed by the Appellant in respect of a contract to purchase certain services from a supplier in India; information about the annual adjustments for 1997/98 and 1998/99; and information about National Provident Institution Investment Managers.

June 1999 - Information about National Provident Institution Asset Management

55.	On 29 June 1999 the information relating to National Provident Institution Asset Management was provided when the Appellant wrote to Mr Knight to say that the sum of £118,368,59 (an amount of untaxed interest) had been omitted in the accounting period ending in March 1998 and should have been declared as an exempt output. Thus this information concerned the omission of some United Kingdom exempt interest in turnover figures. However, Mr Knight was of the view that these figures affected the assessments the subject of this appeal because it affected the value of total supplies in the standard partial exemption calculation under regulation 101. The information only related to the accounting period ending in  March 1998.  

December 1999 - Information about transfers of going concerns

56.	Mr Knight wanted information about certain transfers of going concerns of property where there had been an election to waive exemption. The Appellant had treated the input tax as directly attributable to taxable supplies whereas Mr Knight was of the view that the input tax was residual. On 9 December 1999 Mr Bailey provided the information and said that, if a separate assessment were raised to deal with these matters, then the Appellant would appeal and would seek to have that appeal stood over pending the decision of the Court of Justice in Abbey National Plc v The Commissioners of Customs and Excise (Case C-408/98.) On 24 December 1999 separate assessments were issued which related to the recovery of input tax on the transfers of going concerns. The assessments related to the accounting periods ending in December 1996, March 1997 and June 1997 and between December 1997 and June 1999. The Appellant appealed against those assessments separately. However, Mr Knight was of the view that this information was also necessary for the assessments the subject of this appeal because it affected the amount of residual input tax used in step 1 of the calculations which led to the assessments. 

57.	It is relevant that on 27 July 2001 Customs and Excise wrote to the Appellant to say that as a result of the judgment in Abbey National Plc v Customs and Excise Commissioners (Case C-408/98) [2001] STC 297 the separate assessments relating to the transfers of going concerns would be withdrawn. Thus that issue was resolved in favour of the Appellant. 

December 1999 - Information about the reverse charge 

58.	On 9 December 1999 Mr Bailey wrote to Mr Knight about additional input tax claimed by the Appellant in respect of a contract to purchase certain services from a supplier in India. Output tax had not been declared under the reverse charge mechanism on those services so a separate assessment had been raised for output tax. However, Mr Bailey argued that credit should be given for the input tax element of the reverse charge and the assessment should be reduced by £7,477 being £2,072 for the accounting period ending in September 1996, £4,196 for the accounting period ending in December 1996, and £1,209 for the accounting period ending in March 1997. Mr Knight agreed that input tax should be allowed and the reverse charge assessment was accordingly reduced. However, Mr Knight was of the view that the figures also affected the assessments the subject of this appeal because they affected the figures for residual input tax used in the calculations leading to those assessments.

December 1999 - Information about the annual adjustments 

59.	On 28 July 1999 Mr Knight wrote to the Appellant asking for information about the partial exemption annual adjustment for 1997/1998. Mr Knight queried the arithmetic of the Appellant’s calculations in its returns without accepting the basis of the calculations. On 9 December 1999 Mr Bailey wrote to Mr Knight and stated that in his view the annual adjustment understated the tax recoverable by £4,415. On 21 December 1999 Mr Knight wrote to Mr Bailey and accepted Mr Bailey’s figures and agreed that a repayment of £4,415 would be arranged. This information only affected the accounting period ending in June 1998, which was the accounting period in which the annual adjustments were made. However, Mr Knight was of the view that this amount was relevant to the assessments because it affected the figure for residual input tax.

February 2000 - Information about National Provident Institution Investment Managers

60.	On 21 December 1999 Mr Knight wrote to Mr Bailey asking for further information about the use by National Provident Institution Investment Managers of the margin on the sale of units as its measure of the value of exempt outputs. National Provident Institution Investment Managers had accounted for some exempt supplies on the margin rather than a full values basis in connection with the activity of buying and selling units in the United Kingdom. Mr Knight pointed out that the margin could only be used instead of the full value if that had been approved as part of a special method. A request was made for full values and also for margin values for the purposes of comparison. 

61.	On 4 February 2000 Mr Bailey wrote to Mr Knight. Part of his letter stated that Mr Bailey had reviewed the value added tax accounting treatment in relation to National Provident Institution Investment Managers and confirmed that the Appellant had been accounting for value added tax on the margin achieved rather than the full selling price. In the partial exemption year 1997/1998 the difference between the margin and the selling price was £105,914,411. A revised annual adjustment for the year had been carried out and Mr Bailey had concluded that the inclusion of this income would not reduce the overall partial exemption recovery percentage for the year as a whole and so no action was required with regard to 1997/1998 (covering the accounting periods ending in June 1997, September 1997, December 1997 and March 1998). However, for the year 1998/99 (which included the accounting period ending in June 1998) there was a slight reduction in the partial exemption recovery rate and a revised calculation of the input tax reclaimable in the partial exemption annual adjustment was sent. 

62.	 On 2 March 2000 Messrs PricewaterhouseCoopers wrote to Mr Knight about outstanding issues and said that the information requested about National Provident Institution Investment Managers was that sales values for the accounting period ending in March 1997 were £14,650,855 and margin values were £663,236. On 5 May 2000 Mr Knight wrote to Mr Bailey asking for further information and on 22 May 2000 Mr Bailey replied to say that the figure for sales by National Provident Institution Investment Managers in the accounting period ending in December 1996 was £14,146,124.85 and the margin was £775,967.16. 

14 July 2000 - the first assessment  – periods 03/97 and 06/97 

63.	On 19 April 2000 Mr Knight signed an officer’s assessment on form VAT 641. In making that assessment Mr Knight followed some internal guidance issued in August 1999. The form VAT 641 was countersigned by the check officer on 5 May 2000 and date stamped April 2000. The lines of the assessment read:

Period ref	Due to Customs and Excise

03.97	£138, 092
06.97		£227,216 
	00.00		£  17,400

64.	The third line was in respect of the recovery of interest which had previously been paid by Customs and Excise to the Appellant. The assessment of tax was made under the provisions of section 73(2) of the 1994 Act and the assessment of interest was made under the provisions of section 78A(2) of the 1994 Act.   

65.	On 14 July 2000 Mr Knight also wrote two letters to the Appellant, a long and a short letter. 
 
The short letter of 14 July 2000

66.	The short letter of 14 July 2000 followed the form of a specimen letter attached to the internal guidance issued by Customs and Excise in August 1999. The short letter stated that assessments had been made for the total sum of £433,142. Part of the assessment related to VAT credits and part to statutory interest. The letter continued:

“The assessment relating to the VAT credits is for the period 12/97 for the following amounts:

Original periods

	03/97	£139,092		Due to C&E
	06/97	£227,216		Due to C&E
		-----------
		£366,308		Total due to C&E”

67.	To this was added an amount of £17,400 for recovery of interest repaid and an amount of £49,434 of default interest making a total amount assessed of £433,142. Mr Knight explained in evidence that the statement that the assessment was for the period 12/97 was because that was the accounting period when the claim in the voluntary disclosure of 1 October 1997 was made.
 
The long letter of 14 July 2000

68.	The long letter of 14 July 2000 stated that the money which had been paid to the Appellant (on 22 April 1998) should be repaid but also accepted that the Appellant’s entitlement to input tax in respect of specified supplies had to be addressed when calculating the amount to be recovered. The letter recorded that the main areas of contention were the means by which the amount of the recoverable input tax relating to specified supplies should be determined and whether the value of specified supplies should be included in the partial exemption standard method calculation. The letter went on to say that the Court of Appeal in Liverpool Institute for Performing Arts had indicated that specified supplies should not be included in the partial exemption standard method calculation but that input tax attributable to specified supplies should be determined separately on the basis of use. Customs and Excise did not accept that use should be determined by including the value of the specified supplies in a single outputs based calculation and so the proposal was made that use should be determined based on staff numbers. The letter went on to say that the Appellant had about 2,000 staff at three locations, namely:

Location		Activity					Number of staff	Percentage
 
Tunbridge Wells	Head Office and premium administration	1,300		65%
London		Dealing and investments			   200		10%
Cardiff		Group and executive pensions		   500		25%

69.	         This letter then stated that it was reasonable to accept that the residual input tax on the Appellant’s overhead costs would be incurred by each location in approximately the same proportion as staff numbers. Since supplies of securities were administered through the London office it would follow that 10% of total residual input tax was used in making these supplies. If all these supplies were specified supplies the 10% of residual input tax incurred on London office costs would be recoverable as relating to specified supplies on the basis of use. However, as the majority of supplies of securities were made within the member states the recovery percentage would be less than 10%. However, it was accepted that other staff at Tunbridge Wells and Cardiff would contribute to the dealing and investment activity in London by undertaking, for example, management controls and elements of customer service. As their numbers were unlikely to exceed one to one then assuming all supplies were specified supplies, the percentage would increase to 20%.  

70.	This letter concluded that, on this basis, the amount of input tax recoverable for specified supplies had first been calculated by Customs and Excise and then a separate calculation had been made to give the amount recoverable under the standard partial exemption calculation. The amount of input tax calculated by Customs and Excise as due to the Appellant for specified supplies had been deducted from the amount previously paid to the Appellant and an assessment made for the difference. For the two accounting periods ending in March 1997 and June 1997 the total amount of tax assessed was £366,308. 

The methodology of the assessments

71.	Attached to the long letter of 14 July 2000 was a schedule entitled “Assessment Methodology”. This described the 17 steps taken to calculate the assessment. We describe these steps giving, for the purposes of illustration, the actual figures later used for the accounting period ending in 30 June 1997. At step 1 the total input tax was determined as £2,435,305. At step 2 the input tax directly attributable to either taxable or exempt supplies was determined at £2,120,659. At step 3 the amount at step 2 was deducted from the amount at step 1 to give the total amount of residual input tax of £314,646. Step 4 determined the total amount of residual input tax as adjusted after previous assessments and this gave a figure of £1,323,849. Steps 1 to 4 were agreed by the Appellant. 

72.	Steps 5 to 9 dealt with recovery of input tax relating to specified supplies under regulation 103 and it was steps 5 to 9 which are in issue in these appeals. Step 5 estimated the average number of all employees directly involved with dealing and investment activities (both within the United Kingdom and within and outside the member states) as a proportion of total employees; this was taken to be 200 employees out of a total of 2,000 namely 10%. Step 6 doubled this proportion to allow for any work done in respect of dealing or investment in securities by other employees and a ratio of one to one was taken making the proportion 20%. Step 7 was to apply the 20% produced at step 6 to the residual input tax produced at step 4 (1,323,849) to produce the amount of residual input tax used in all dealing and investments of securities, namely £264,770. Step 8 determined which part of the total supplies of dealing and investment in securities related to supplies outside the member states (specified supplies); this was done by reference to values which gave a percentage of 28.38%. Step 9 was to apply the step 8 percentage (28.38%) to the amount of residual input tax found at step 7 (£264,770) to calculate the proportion of residual input tax which related to specified supplies, namely £75,142. 

73.	Steps 10 to 15 then went on to deal with the recovery under the standard partial exemption method in regulation 101. Step 10 calculated the value of dealing and investment activity in the member states but outside the United Kingdom as a proportion of total [investment] supplies and this was 7.5%. Step 11 applied the step 10 percentage (7.5%) to the residual input tax related to investments found at step 7 (£264,770) to give £19,858 and that amount was not recoverable. At step 12 the input tax relating to specified supplies at step 9 (£75,142), and at step 13 the non-recoverable input tax at step 11 (£19,858), was deducted from the residual input tax at step 4 (£1,323,849) to give a total of remaining residual input tax of £1,228,850. At step 14 the standard partial exemption calculation (the value of taxable supplies over the value of total supplies) was carried out to give a recovery rate of 1%. At step 15 the 1% was applied to the residual input tax at step 13 (£1,228,850) to give £12,288 recoverable input tax under the standard partial exemption calculation. 

74.	At step 16 the recoverable input tax at step 15 (£12,288) and that at step 9 (£75,142) were added and the result was £87,430. That figure was then deducted from the claim made by the Appellant and the remaining amount was the subject of the assessment. The same methodology was used for all the periods of the first and second assessments. 

75.	The Appellant appealed against the assessment of 14 July 2000 and that is the first assessment which is the subject of this appeal.  

19 September 2000 - the second assessment – periods from 09/97 to 12/99 

76.	On 15 September 2000 Mr Knight signed another officer’s assessment and on 19 September 2000 Customs and Excise wrote to the Appellant in terms very similar to those of their long letter of 14 July 2000 and sent another assessment for £3,819,964 (being tax of £3,597,408 and interest of £222,556). This assessment related to input tax recovered in respect of the accounting periods from September 1997 to December 1999. It was made under section 73(2) of the 1994 Act. That is the second assessment against which the Appellant appeals. 

13 March 2001 – the third assessment – period 12/96

77.	On 9 March 2001 Mr Knight signed another officer’s assessment and on 13 March 2001 Customs and Excise issued a further assessment in the sum of £218,267 comprising £202,830 tax and £15,437 in respect of interest previously paid by Customs and Excise to the Appellant. This assessment related to the accounting period ending in December 1996 and sought to recover the balance of the 1 October 1997 claim which had not been previously assessed in the first assessment (which dealt only with the accounting periods ending in March 1997 and June 1997). Mr Knight gave evidence that the accounting period ending in December 1996 had not been dealt with in the first assessment because he had been advised to use a different procedure. 

78.	The Appellant appealed against the third assessment and, at the date of the hearing of the appeal, only the amount of £15,437 in respect of interest overpaid remained in dispute. That amount had been assessed under section 78A(2) of the 1994 Act.   

Subsequent events

79.	On 23 May 2001 the House of Lords gave judgment in Customs and Excise Commissioners v Liverpool Institute for Performing Arts [2001] STC 891. The House of Lords upheld the judgment of the Court of Appeal and decided that the standard partial exemption calculation under regulation 101 and the calculation for foreign supplies under regulation 103 had to be undertaken separately. The standard method dealt with the deduction in respect of input tax attributable to taxable and exempt supplies made in the United Kingdom and a separate calculation for input tax attributable to foreign supplies had to be made on the basis of use. 

80.       	On 17 November 2004 the judgment of the Court of Appeal in Courts Plc v Commissioners of Customs and Excise [2004] EWCA Civ 1527 was given. That was one day after the conclusion of the hearing of these appeals. On 22 November 2004 the Solicitor for the Customs and Excise sent a copy of the judgment to the Tribunal and on 8 December 2004 both parties sent written submissions. These are considered  below within the context of issue (2).

81.	We now consider separately each of the issues for determination in the appeal

Reasons for decision – issue (1) – the regulation 103 calculation 

82.	The first issue in the appeal is whether the input tax on goods or services used in part in making specified supplies was to be attributed to specified supplies under regulation 103(1) by first estimating the percentage of employees engaged in dealings with all securities; then applying that percentage to the amount of residual input tax; and then reducing that amount by a further percentage which was calculated by reference to the values of specified supplies in relation to the value of total supplies of dealing in securities (as argued by Customs and Excise) or whether it should be calculated by reference to the proportion of the value of specified supplies to total supplies (as argued by the Appellant); the parties requested a decision in principle on this issue, leaving the amounts of the assessments to be determined at a later date.   

The arguments

83.	For the Appellant Mr Cordara argued that input tax had been incurred by the Appellant in part in making specified supplies and so that input tax should be attributed to specified supplies to the extent that the input tax had been used to make specified supplies. The Appellant had considered a number of methodologies and none were satisfactory so it had used the values-based method. About 20% of the Appellant’s total turnover consisted of specified supplies. Customs and Excise had no power to direct a special method under regulation 103 and so it was a matter for the taxpayer to adopt any methodology which was appropriate to achieve the proper calculation. The methodology of the assessments relied too heavily upon unreliable assumptions. 

84.	For Customs and Excise Mr Mantle relied upon the judgment of the House of Lords in Liverpool Institute for Performing Arts at [32] to [39] for the principle that regulation 103 required an apportionment on the basis of use. He accepted that in some circumstances an attribution under regulation 103 could be based at least in part on values. However, he pointed out that foreign supplies and specified supplies were singled out in regulation 103 for having a different treatment from the values-based treatment in regulation 101. Mr Mantle went on to argue that the real question was whether the approach of the assessment captured the extent of use and so complied with regulation 103. He argued that there was no single right answer and that distinguished regulation 103 from regulation 101 which did provide a formula for the calculation. Under regulation 103 there could be a range of acceptable methods but each would need to be cross-checked at the end to see if the result complied with regulation 103. It was his argument that in this appeal values were not the best proxy for use because common sense indicated that inputs could not be equally used in making a supply of life assurance of a certain amount and in making specified supplies of the same amount. The Appellant made supplies to customers of pension plans and the sales staff were more closely related to those supplies; those customers did not receive supplies of investments or specified supplies. If a large proportion of staff were customer-facing then sales staff would generate income for investment but would only minimally be involved in investment. He argued that Mr Knight had used a common sense approach to see how the goods and services supplied to the Appellant had been used in the business.

85.	In considering the arguments of the parties we first consider the framework of the legislation. We then go on to consider the authorities cited to us to see what principles they establish.  We then apply those principles to the assessments under appeal and reach a view as to whether the assessments captured the concept of use in regulation 103. Finally, we consider the values-based approach put forward by the Appellant before reaching our conclusion on this issue.   

86.	In considering the framework of the legislation we start with  the Sixth Directive (77/388/EEC). 

The Sixth Directive

87.	Article 17 of the Sixth Directive describes the origin and scope of the right to deduct input tax. Article 17.2 states the general rule and provides that, in so far as goods or services are used for the purposes of his taxable transactions, the taxable person is entitled to deduct, from the tax which he is liable to pay, tax due or paid in respect of goods or services supplied to him by another taxable person. Thus the concept of use is brought in at a very early stage and applies to all claims for input tax. Article 17.3(c) goes on to provide that there is also a right to deduct input tax in so far as goods or services are used for the purposes of any exempt transactions relating to finance when the customer is established outside the Community. This is the authority for the right to deduct input tax relating to specified supplies. The first sub-paragraph of Article 17.5 provides that where goods or services are used by a taxable person, both for transactions mentioned in Articles 17.2 (taxable supplies) and Article 17.3 (specified supplies) and for transactions in respect of which input tax is not deductible (exempt supplies), only such proportion of the tax shall be deductible as is attributable to the former transactions (taxable and specified supplies); the proportion is to be determined in accordance with Article 19. Thus the first sub-paragraph of Article 17.5 treats taxable supplies and specified supplies in the same way. 

88.	        Article 19 contains the provisions for the calculation of the deductible proportion under the first sub-paragraph of Article 17.5 (that is where goods or services are used to make taxable, specified and exempt supplies). Article 19.1 provides that the deductible proportion shall be made up of a fraction having as its numerator the total amount of turnover each year attributable to transactions in respect of which tax is deductible under Article 17.2 and 17.3 (taxable and specified supplies) and having as its denominator the total amount of turnover each year attributable to transactions included in the numerator and to transactions in respect of which tax is not deductible (taxable, specified and exempt supplies). Thus Article 19 establishes that where goods or services are used to make taxable and exempt supplies, or taxable, specified and exempt supplies, the normal method of attribution is by way of a fraction of which the numerator is the value of taxable supplies (and specified supplies if applicable) and the denominator is the value of all supplies (taxable and exempt and specified if applicable). As the concept of use has already been established in Article 17.2 the Directive thus indicates that, in the words used by Counsel at the hearing, values can be a good proxy for use both for the normal purposes of partial exemption (attributing input tax between taxable and exempt supplies) and for the purposes of attributing input tax between taxable, exempt and specified supplies.  

89.	However, Article 17.5 continues by providing that member states may, among other things, “(c) authorise or compel the taxable person to make the deduction on the basis of the use of all or part of the goods or services”. Thus the later part of Article 17.5 permits member states to depart from the values-based fraction mentioned in Article 19 and to compel a taxable person to make the deduction on another basis including that mentioned in Article 17.5(c), namely on the basis of the use of all or part of the goods or services.      

The 1994 Act and the regulations

90.	Turning now to the national legislation we begin with section 24 of the 1994 Act. That section defines input tax as tax on the supply to a taxable person of goods or services used for the purposes of his business. So again the concept of use is introduced at a very early stage. Section 26 provides that a taxable person is entitled to credit for so much of his input tax as is attributable to taxable and specified supplies and that Customs and Excise shall make regulations for securing a fair and reasonable attribution of input tax to these supplies. So the over-riding principle underlying the regulations is that the attribution must be fair and reasonable. Regulation 101 applies only to attribution between taxable and exempt supplies and enacts the standard method set out in Article 19, namely the values-based method. However, in cases where a values-based method does not give a good proxy for use, regulation 102 enacts the later provisions of Article 17.5 and provides that Customs and Excise can agree or direct a special method to attribute input tax between taxable and exempt supplies. 

91.	As far as these appeals are concerned, regulation 103 deals with specified supplies and provides that where input tax is incurred on goods or services used in part to make specified supplies the input tax is recoverable to the extent that the goods or services are used to make specified supplies expressed as a proportion of the whole use. The whole use must be of those goods or services, that is the goods and services used in part to make specified supplies. Thus whereas the calculation of the fraction for residual input tax in regulation 101 is based on the value of the supplies made, the calculation of the fraction in regulation 103 is based on the use of supplies received. There is no equivalent of regulation 102 for specified supplies.  

92.	With that framework of the legislation in mind we turn to consider the authorities cited to us to see what principles they establish. 

The authorities 

93.	The most relevant authority is the judgment of the House of Lords in Liverpool Institute for Performing Arts. The facts in that appeal were slightly different from the facts in this appeal as there the appellant made taxable and exempt supplies but did not make specified supplies although it did make supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom (foreign supplies). Thus it made supplies under section 26(2)(b) and regulation 103(1)(a) whereas the supplies at issue in this appeal are specified supplies under section 26(2)(c) and regulation 103(1)(b). However, in our view that difference does not affect the applicability of the judgment to the facts of this appeal. The issue in Liverpool Institute for Performing Arts concerned the way in which input tax was to be attributed to the foreign supplies. The Tribunal and the High Court decided that what is now regulation 103 should first be applied to determine the proportion of residual input tax attributable to the foreign supplies and after that the value of the foreign supplies should be treated as taxable supplies and included in both the numerator and the denominator of the regulation 101 partial exemption calculation. That fraction was then applied to all the residual input tax after the deduction of the amount determined under regulation 103. 

94.	The Court of Appeal and the House of Lords, however, decided that regulation 103 was a separate regime for foreign (and specified) supplies. Article 17.5 and Article 19 of the Sixth Directive did not insist on a values-based approach to the apportionment of residual input tax but permitted member states to institute a regime under which the deduction was made on the basis of use. Also, a use-based apportionment could be prescribed in respect of the input tax on some goods or services leaving the input tax on other goods or services to be apportioned on the values-based method. Foreign supplies should not appear in the regulation 101 partial exemption calculation because they were to be dealt with separately under regulation 103. However, there was no discussion in the House of Lords of the meaning of use in regulation 103 nor did the House of Lords say that a values-based calculation could not be made under regulation 103.    

95.	From that authority we derive the principles that there have to be separate calculations under regulations 101 and 103 and that it is permissible to have a values-based apportionment under regulation 101 and a use-based apportionment under regulation 103. In the present appeal it was accepted that there had to be separate calculations under regulation 101 and 103 and the main area of dispute was how to undertake the use-based apportionment in the regulation 103 calculation.   

96.	We have also been assisted by the decision of the Tribunal in an earlier Decision, that of Merchant Navy Officers Pension Fund Trustees Limited v The Commissioners of Customs and Excise (1996) VAT Decision No. 14262. That appeal concerned attribution as between taxable and exempt supplies under regulation 101 and did not concern specified supplies under regulation 103. Further, it concerned a direction by Customs and Excise that the appellant should cease to use a special method under regulation 102 and so the issue before the Tribunal was whether the special method had achieved a fair and reasonable result and whether the standard method would achieve a fair and reasonable result. Nevertheless, in spite of those differences, the Decision is of assistance to us because paragraphs 20 to 27 contain a careful analysis, which we adopt, of the principles of attribution between different categories of supplies. It records the basic rule that all attribution is on the basis of use; it states that there is no problem with inputs used directly for a particular supply; but goes on to say that there are problems with mixed inputs (used for more than one type of supply) and especially for indirect costs, for example, telephone calls, where attribution could be burdensome or difficult to check. In some circumstances attribution on the basis of actual use could be impossible or impractical. In such a case any other method of attribution can only be approximate to actual use and must be estimated or assumed. The standard (values-based) method was rough and ready but had the important merit of simplicity. Any method must be fair and reasonable meaning that it must be reasonable for the trader to operate; it must not involve disproportionate or unreasonable resources; and it should be capable of being checked by Customs and Excise without unreasonable effort. What was fair and reasonable was not an absolute concept and would frequently depend upon the alternatives.  

97.	From that Decision we derive the principles that the attribution of inputs to different types of supply on the basis of actual use can, in some circumstances, be impossible or impractical in which case any other method will only approximate to actual use and has to be estimated or assumed. The method used must be fair and reasonable; should have the merit of simplicity; must be reasonable for the trader to operate; must not involve disproportionate or unreasonable resources; and should be capable of being checked by Customs and Excise without unreasonable effort.  

The assumptions of the  assessments 

98.	With those principles in mind we turn to consider whether the method used by Mr Knight in the methodology of the assessments accords with the requirements of a use-based apportionment.	

99.	We first note that the methodology of the assessment proceeded on the basis that “it was reasonable to expect that the residual input tax would be incurred by each of the Appellant’s locations in approximately the same proportion as staff numbers” but there was no evidence to support this assertion. We accept the evidence of Mr Bailey that a method of attribution based on staffing levels would be inaccurate. We also accept the evidence of Mr Bailey that the head count method was theoretical in nature because it was difficult to quantify which employees were concerned with  specified supplies and which with other (taxable or exempt) supplies. It was not possible to find out the precise amount of input tax incurred in each location and there was no information available to quantify the time spent by staff on the various activities which resulted in exempt, taxable or specified supplies. Further, in the Appellant’s case all the costs incurred were general business overheads and none were people-driven. In theory, Mr Bailey said, it might be possible to rely upon management accounts or reporting that would allow an attribution to be based on costs (rather than staff numbers). However, that would require adequate time sheet recording and that information was not available. 

100.	We have already found that the residual input tax at issue related to supplies to the Appellant of advertising and marketing; audit, accountancy and actuarial fees; consultants’ fees; data processing (including hardware rental); printing, photocopying and stationery; and telephone and communications charges. The single biggest cost for the year ending on 31 December 1999 was consultants’ fees. None of these supplies seems to us to be directly related to staff levels. Salary and rental payments would be directly related to staff levels but they are either outside the scope of the tax or exempt. There was no evidence before us that the use of the supplies which bore the residual input tax had any relation to staff numbers.

101.	We also regard it as relevant that Mr Knight’s colleagues who responded to his memorandum of 9 May 1997 were of the view that a values-based calculation for specified supplies would be fair and reasonable. The partial exemption branch at headquarters who replied to Mr Knight’s memorandum of 23 July 1997 made no comment on his staff-based proposal.

102.	We therefore conclude that the assumption upon which the methodology of the assessment was based was unsustainable. In our view it was not reasonable to expect that the residual input tax would be incurred by each of the Appellant’s locations in approximately the same proportion as staff numbers.

The methodology of the assessments

103.	Turning now to the methodology of the assessments the relevant steps for the regulation 103 calculation were steps 5 to 9. Step 5 determined the average number of employees directly involved with all dealing and investment activities (both within and outside the member states) as a proportion of total employees; this was taken as 200 employees out of a total of 2,000 namely 10%. The figure of 200 was based on the number of employees in the London Office compared with the total number of employees and both figures were approximations.  Step 6 doubled the 10% proportion to allow for any work done in respect of all dealing or investment in securities by other employees and a ratio of one to one was taken making the proportion 20%. This doubling was no more than a guess as there was no evidence to support it.  Step 7 was to apply the 20% produced at step 6 to the residual input tax produced at step 4 to produce a figure for the amount of residual input tax used in all dealing and investment of securities both within and outside the member states. 

104.	Pausing there, it is relevant that that same information was not fed into the subsequent regulation 101 calculation as far as the sale of securities inside the United Kingdom was concerned thus creating a distortion between the treatment of the sale of securities which were exempt supplies with no right to recovery of input tax on the one hand (which were not reduced to 20%) and the treatment of the sale of securities which were specified supplies with a right to recovery of input tax on the other (which were reduced to 20%). Step 8 determined which part of the total supplies of dealing and investment in securities related to supplies outside the member states (specified supplies) as a proportion of total supplies of dealing and investment in securities expressed as a percentage. Thus step 8 reverted to a values-based proportion.  We do not understand why this proportion used the denominator of the value of all supplies of securities rather than the value of all supplies.  The proportion in regulation 103 is the proportion of the use of all supplies giving rise to residual input tax. Step 9 was to apply the step 8 percentage to the amount of residual input tax found at step 7 to calculate the proportion of residual input tax relating to specified supplies.  

105.	Thus we regard the methodology of the assessment as flawed. The calculation of the number of employees at step 5 was approximate; the calculation at step 6 was a guess; and we think that the wrong proportion was used at step 8. Further, a distortion was created by reducing the value of specified supplies of securities (which had a right to recovery of input tax) to 20% but not reducing the value of exempt supplies of securities in the United Kingdom (which had no right of recovery). This does not reflect the evidence that the costs of managing an overseas fund are higher than the costs of managing a United Kingdom fund. 

106.	As we have already concluded that the assumption upon which the methodology of the assessment was based was unsustainable, and as we also regard the methodology of the assessment as flawed, we conclude that the method used by Mr Knight did not accord with the requirements of a use-based apportionment. It was not in fact based on use and it did not result in a fair and reasonable attribution.

The values-based approach. 

107.	Apart from the values-based approach no other method of making a use-based attribution was suggested to us and there was no evidence before us which would enable us to conclude that a use-based attribution using any other method could be made; indeed such evidence as we had indicated that no other method was available.  We are, therefore, of the view that, as the Sixth Directive assumes that a values-based attribution is a good proxy for use unless a member state directs otherwise, and as it appears to be impossible for the deduction to be made otherwise on the basis of use, a values-based attribution seems the only solution.   

108.	In our view this is a case where the attribution of inputs to different types of supply on the basis of actual use is impossible or impractical and we have to accept that any other method will only be approximate to actual use and has to be estimated or assumed. The values-based method is as good as any. It is fair and reasonable; it has the merit of simplicity; it is reasonable for the Appellant to operate; it does not involve disproportionate or unreasonable resources; and it is capable of being checked by Customs and Excise without unreasonable effort.  

109.	We do not think that in this appeal a values-based approach will unduly favour the Appellant. The letter written by Mr Knight on 21 November 1997 pointed out that where a substantial proportion of the supplies of securities are made outside the member states (specified supplies) a values based apportionment favours the Appellant but where a substantial proportion of supplies of securities are made in the United Kingdom or in other member states a values-based apportionment favours Customs and Excise. From the facts we have found it appears that most of the supplies of securities are made in the United Kingdom or in other member states. 

The effect of our conclusion

110.	It will be recalled that the methodology of the assessments resulted in the calculation of what Customs and Excise considered was the Appellant’s recoverable input tax. This figure was then deducted from the claims for input tax originally made by the Appellant (first in the voluntary disclosure of 1 October 1997 for the accounting periods ending in December 1996, March 1997 and June 1997 and then in the returns for the accounting periods from September 1997 to December 1999). It was the remaining input tax claimed that was assessed. Thus our finding that the amount of recoverable input tax as calculated by Customs and Excise is incorrect does not dispose of the assessments. The reason is that the Appellant’s original claims were based on the erroneous assumption that a single calculation could be used for regulations 101 and 103 whereas it is now accepted that that assumption was incorrect. As a result of our decision the Appellant’s recoverable input tax will need to be re-calculated separately for regulations 101 and 103. That amount will then have to be deducted from the claims originally made and the assessments reduced to the remaining amount.   

111.	The parties requested a decision in principle on this issue in the appeal, leaving the amounts of the assessments to be determined at a later date. 

Conclusion on the first issue

112.	Our conclusion on the first issue in the appeal is that the input tax on goods or services used in part in making specified supplies should be calculated by reference to the proportion of the value of specified supplies to total supplies

Reasons for Decision – Issue (2)  - the validity of the first assessment

113.	The second issue in the appeal is whether the first assessment was made for the accounting periods ending in March 1997 and June 1997 (as argued by the Appellant) or for the accounting period ending in December 1997 (as argued by Customs and Excise). Customs and Excise accepted that if the first assessment was made for the accounting periods ending in March 1997 and June 1997 then, as it was made on 14 July 2000, it was made outside the three-year time limit in section 77(1)(a).   The Appellant also put forward an alternative argument which was that the assessment was invalid because it had been made for the wrong accounting period; the correct period was that when the repayment was made, namely the accounting period ending in June 1998. 

114.	Thus as argued this issue raised the following questions:

(a)	For what accounting period or periods was the assessment made?

(b)	Was the assessment made for the correct accounting period or periods?

(a)	The accounting periods for which the assessment was made

115.	For the Appellant Mr Cordara argued that the form VAT 641 of April 2000 was the relevant document because that was the first assessment made by Mr Knight. It referred to the accounting periods ending in March 1997 and June 1997 and those were the periods for which the first assessment was made. The short letter of 14 July 2000 was only the notice of the assessment and not the assessment itself. He relied upon Courts Plc v Commissioners of Customs and Excise [2005] STC 27 at [10] and [97]-[119] as authority for the principle that form VAT 641 was the critical document because it was the document by which, from an objective point of view, the assessment was made or conclusively evidenced.

116.	For Customs and Excise Mr Mantle relied upon the short letter of 14 July 2000  which stated that the assessment relating to the VAT credits was for the period 12/97. The short letter of 14 July 2000 was the notice of assessment and was the crucial document as it was the only document sent to the Appellant. He accepted that the short letter then made reference to the two original periods. He also accepted that the form VAT 641 of April 2000 referred to the two original accounting periods. However, he relied upon Customs and Excise’s internal guidance of August 1999 which stated that the assessment was not made for the original periods but for the period in which the voluntary disclosure was made. The voluntary disclosure had been made on 1 October 1997 and so the assessment was made for the accounting period ending in December 1997. Mr Mantle also relied upon Courts for the principle that there had to be an objective analysis of the assessment. The internal guidance was a objective fact about what had actually been done.

117.	In considering this question it is relevant that Mr Knight gave evidence that he thought that the short letter of 14 July 2000 was an assessment for the accounting period ending in December 1997. He also followed the internal guidance issued by Customs and Excise and thought that he was making an assessment for the accounting period ending in December 1997. 

The internal guidance of August 1999

118.	The internal guidance given by Customs and Excise was dated August 1999 and related to the making of assessments to recover refunds of VAT or statutory interest previously credited or paid to businesses. The guidance was stated to be about how to assess for recovery of amounts paid to traders who had submitted voluntary disclosure claims or recovered tax inappropriately on their returns. It contained the following paragraphs:

“Annexe B Processing and notification of assessments to recover VAT credits obtained via voluntary disclosure … and any associated statutory interest … section 73 and 78A VAT Act 1994 …

Prepare Form VAT 641 as normal. Assessed amount(s) should be allocated to the original period(s) covered by the incorrect claim, be it via VAT 100 or voluntary disclosure. Note: Where the credit had arisen via a voluntary disclosure (rather than via a return) this is an accounting mechanism only  and serves to update/restore the trader’s accounting main file record. You are not making an assessment for the “original periods””. 

119.	Later the guidance referred to Croydon Hotel and Leisure Company Limited v Customs and Excise Commissioners [1996] STC 1106 and then stated:

“This means that the period “for” which the assessment is made needs to be considered in the context of the particular system through which the credit had been recovered. In practice this means that if, for example, input tax had been erroneously claimed on a return later than that in which it became chargeable, then the assessment would be for that later return. If this has happened normal assessment rules apply. … However if it was claimed via a voluntary disclosure, your assessment would be for the period in which the disclosure was made.”

120.	In Courts the assessing officer completed a form VAT 641 in December 1999 but did not process it; he retained it on his file and so no formal notification of the assessment was sent to the appellant. However, the assessing officer wrote to the appellant informing it that the assessment had been made and giving details of the amounts. The appellant argued that the form VAT 641 completed in December 1999 did not constitute an assessment. The Court of Appeal held that the form VAT 641 was an assessment. However, if, on an objective analysis, what the assessing officer had done in December 1999 had not amounted to the making of an assessment, his state of mind could not affect that fact. The making of an assessment was an internal matter for Customs and Excise. It was important that in relation to any particular assessment the process which had been followed should be readily verified by contemporary documentary evidence.     

121.	Although the issue in Courts concerned the time when the assessment was made, and not, as in this appeal, the accounting periods for which the assessment was made, nevertheless the principles established by the Court of Appeal can be applied in this appeal. We first look at the form VAT 641 which clearly identified the accounting periods ending in March 1997 and June 1997. On an objective analysis the form VAT 641 was the assessment and those were the accounting periods for which the assessment was made. Mr Knight followed the internal guidance which told him that the assessed amounts should be allocated to the original periods covered by the incorrect claim and he did this. Although the guidance went on to say that, where the credit had arisen via a voluntary disclosure rather than via a return, the assessing officer was not making an assessment for the original periods, that appears to be inconsistent with the earlier guidance to allocate the assessed amounts to the original periods. We accept that, in the light of the guidance, Mr Knight was of the view that the assessment was for the accounting period ending in December 1997. However, on an objective analysis, what Mr Knight did was to assess for the two accounting periods ending in March 1997 and June 1997 and his state of mind could not affect that fact.

122.	We therefore conclude that the first assessment was made for the two accounting periods ending in March 1997 and June 1997. Customs and Excise accepted that if the first assessment was made for the accounting periods ending in March 1997 and June 1997 then, as it was made on 14 July 2000, it was made outside the three-year time limit in section 77(1)(a).   

(b)	Was the assessment made for the wrong period?
 
123.	It was the Appellant’s alternative argument that the first assessment was invalid because had been made for the wrong accounting period as the correct period was that when the repayment was made, namely the accounting period ending in June 1998. Mr Mantle argued that the accounting period ending in December 1997 was the correct accounting period. 

124. In considering the arguments of the parties we first recall the legislation we have to apply; we then refer to the authorities which were cited to us to see what principles they establish; and finally we apply those principles to the facts we have found.

125.	The legislation which is relevant to this issue is section 77 of the 1994 Act which provides a three year time limit for the making of an assessment. The relevant part provides:

“77(1)	 subject to the following provisions of this section an assessment under section 73 …shall not be made -

(a)	more than three years after the end of the prescribed accounting period  … .”

126.	The words “the prescribed accounting period” also occur in section 73(2) which provides:

“(2)	In any case where, for any prescribed accounting period, there has been paid or credited to any person-
(a)	as being a repayment or refund of VAT; or
(b)	as being due to him as a VAT credit
an amount which ought not to have been so paid or credited, … the Commissioners may assess that amount as being VAT due from him for that period and notify it to him accordingly.
127.	In Croydon Hotel (1996) the appellant was entitled to credit for input tax in the accounting period ending in March 1991 but could not claim it because of the lack of an invoice. In the event, Customs and Excise permitted the deduction to be claimed in the return for the accounting period ending in September 1991. In June 1993 Customs and Excise assessed the amount of the input tax claimed and the question arose as to whether the assessment was in time. The relevant legislation was the predecessor to 73(6)(a) and so the assessment had to be made not later than two years after the end of the prescribed accounting period. If the prescribed accounting period was that in which the right to deduct first arose the assessment would be out of time but if the prescribed accounting period was the accounting period in which the claim was made the assessment would be in time. The Court of Appeal held at 1009 that as a matter of practicality any limitation period running against Customs and Excise would not naturally run earlier than the date upon which they first received notice by way of account. In this case such notice had been given in the return in which the deduction was claimed. Later the Court of Appeal held that it was the exercise of the right to claim rather than the bare right to repayment that provided the essential commencement for limitation periods. Thus the assessment was in time.  

128.	Thus in Croydon Hotel the Court of Appeal identified the prescribed accounting period as the period in which the claim was made in a return and not any earlier period in which a claim arose. In relation to the first assessment in this appeal the claim was not made on a return but by means of a voluntary disclosure and so Croydon Hotel is not of direct assistance to us. 

129.	We note that the internal guidance of Customs and Excise, referred to above, was issued in 1999 and relied upon Croydon Hotel. We were not informed whether it had been revised in the light of the subsequent authorities. 

130.	In Laura Ashley (2003) the appellant was of the view that it had over-estimated its output tax and in a letter dated 20 October 1999 sought repayment in respect of the accounting periods from October 1996 to July 1999. In two of those accounting periods, namely October 1996 and October 1997, the appellant’s claim for input tax had exceeded its declared output tax. In March 2000 Customs and Excise paid the appellant the sums it had claimed. On 12 October 2000 Customs and Excise assessed the appellant for the sums it had repaid. An individual assessment was made for each of the other accounting periods and they were not disputed. However, for the accounting periods ending in October 1996 and October 1997 Customs and Excise said that the assessment was made for the accounting period ending in October 1999 as that was the period in which the claim had been received. The appellant argued that the assessment had been made for the wrong period and should have been made for the accounting periods ending in October 1996 and October 1997 as they were the periods to which the relevant VAT credits related; alternatively the assessment should have been made for the accounting period ending in April 2000 as that was the period when the credits were given. The High Court held that the correct accounting periods were the periods to which the relevant VAT credits related, namely October 1996 and October 1997. The assessment had been made for the incorrect period and so was invalid. At 643 David Richards J referred to Croydon Hotel and distinguished it on the ground that in that case there had been a claim in a return and so there the prescribed accounting period was the one to which the relevant return related. 

131.	Thus Laura Ashley is authority for the principle that the prescribed accounting period when VAT credits are assessed is the period to which the relevant VAT credits related. That would indicate that if, as we have found, the first assessment was made for the accounting periods ending in March 1997 and June 1997 it was made for the correct accounting periods as they were the periods to which the VAT credits related.  

132.	However, in Customs and Excise Commissioners v DFS Furniture Co Plc [2004] STC 559 the Court of Appeal took a different view. That appeal concerned the meaning of section 78A(2) but must also be relevant to the meaning of the very similar provisions in section 73(6)(b). First at [44] the Court of Appeal held that the word “facts” in the phrase “evidence of facts sufficient … to justify the making of the assessment” did not include judicial decisions. That disposed of the appeal but the Court of Appeal went on to deal with a number of other matters. At [52] and [54] the judgment stated that the meaning of the phrase “for any prescribed accounting period” in relation to an assessment under section 73(2) is the prescribed accounting period when the allegedly excessive repayment was made.

133.	Thus DFS is authority for the principle that where an assessment is made to recover a previously excessive repayment the prescribed accounting period is that in which the allegedly excessive repayment was made.

134.	We note that Laura Ashley (which was a decision of the High Court) does not appear to have been cited to the Court of Appeal in DFS. Mr Mantle sought to distinguish DFS on the ground that the words of the Court of Appeal at [52] and [54] were not part of the reasons for the judgment. However, we are of the view that we should follow the clear guidance of the Court of Appeal and conclude that in this appeal the prescribed accounting period was the period in which the allegedly excessive payment was made. That was the accounting period ending in June 1998. From that it follows that the first assessment was not made for the correct accounting period and so was invalid. 
.	
Conclusion on issue (2)

135.	We therefore conclude that the first assessment was out of time because it was made more than three years after the end of the accounting periods in respect of which it was made. Alternatively, it was invalid because it was made for the wrong accounting period.

Reasons for decision - issue (3) – time limits and the second assessment

136.	The third issue in the appeal is whether the second assessment as far as it concerned the four accounting periods ending in September 1997, December 1997, March 1998 and June 1998, had been made after the end of one year after evidence of the facts came to the knowledge of Customs and Excise within the meaning of section 73(6)(b). (This issue would also have been relevant to the first assessment had we not decided that it was invalid for other reasons). 

137.	For the Appellant Mr Cordara argued that after the judgment of the Court of Appeal in Liverpool Institute for Performing Arts on 17 March 1999 Customs and Excise could have made both the first and the second assessments They had  possession of all the relevant information when they wrote their letter of 25 June 1997 and when they made the repayment on 22 April 1998. No new facts were disclosed which went to the erroneous nature of the repayment or to the treatment of specified supplies. The letter of 25 June 1997 had mentioned an attribution of input tax by reference to staff allocation which was the same basis as steps 5 to 9 in the assessment methodology set out in the long letter of 14 July 2000. 

138.	For Customs and Excise Mr Mantle cited Pegasus Birds Limited v Customs and Excise Commissioners [2000] STC 91 at 96c for the principles that it was not possible to read into section 73(6)(b) the qualification that the opinion of Customs and Excise as to the sufficiency of the evidence had to be reasonable; the person whose opinion was relevant was the person making the assessment.  He went on to argue that although the information provided to Mr Knight between June 1999 and the date of the second assessment did not have a direct effect on the value of specified supplies the information was used in the calculation of the assessments and so fell within section 73(6)(b). 

139.	In considering the arguments of the parties we start with the legislation. Section 73(6) provides that an assessment under section 73(2) shall not be made one year after evidence of the facts, sufficient in the opinion of Customs and Excise to justify the making of the assessment, come to their knowledge. Thus the relevant facts must be those which justify the making of the assessment. 

140.	Pegasus Birds at [15] is authority for the principle that an opinion as to what evidence justified an assessment required judgment, and in that sense was subjective, but the existence of the opinion was a fact. From that it was possible to ascertain what was the evidence of facts which was thought to justify the making of the assessment. Once that evidence had been ascertained then the date when the last piece of the puzzle fell into place could be ascertained. In most cases that date would be known to the taxpayer as he would have supplied the information. 

141.	We here recall that as early as 26 November 1997 Mr Knight informed Mr Bailey that the input tax recovered in the accounting period ending in September 1997 had been over-stated and that he would be in touch so that the amount of the tax could be quantified and assessed. Mr Knight knew that the returns rendered for the accounting periods ending in December 1997, March 1998 and June 1998 were prepared on the same basis. The litigation of Liverpool Institute for Performing Arts then intervened but after the judgment of the Court of Appeal in March 1999 the assessment could have been made. On 30 June 1999 Mr Knight’s colleague indicated that he should assess for periods for which he was in time. In our view Mr Knight had at that date all the facts which were sufficient to justify the making of the assessment. 

142.	Mr Knight gave evidence that five pieces of information were necessary before he could make the assessments. These were: information about National Provident Institution Asset Management; information about transfers of going concerns; information about the reverse charge; information about the annual adjustments for 1997/98 and 1998/99; and information about National Provident Institution Investment Managers. The first and last pieces of information affected the values of supplies and so, Mr Knight claimed, were essential elements of the partial exemption calculations in the assessment. The second, third and fourth pieces of information affected the amount of residual input tax which was also a crucial part in the steps of the calculation. We therefore consider each of the five items of information which Mr Knight said were facts he required to make the assessment. 

National Provident Institution Assets Management

143.	The information about National Provident Institution Assets Management only dealt with exempt interest within the United Kingdom and it only related to the accounting period ending in March 1998. In the calculations of the assessment for that period the additional amount was included in the denominator (total supplies) of the regulation 101 calculation. However, the information was supplied on 29 June 1999 and the assessment was made on 15 September 2000 which was more than one year after the date on which this information was supplied. 

144.	We accordingly conclude that, as far as this information is concerned, it was supplied to Mr Knight more than a year before the date of the assessment. In any event it related only to the accounting period ending in March 1998 and not to the other three disputed accounting periods.

Transfers of going concerns

145.	This information was provided on 9 December 1999 and, so far as concerns this issue, related to the accounting periods ending on December 1997, March 1998 and June 1998. Mr Knight was of the view that the information was relevant because the input tax on these transactions had been treated by the Appellant as wholly recoverable and Customs and Excise were of the view that the input tax was residual. That meant that the input tax had to be re-allocated from directly attributable to residual. Mr Knight gave evidence that for the purposes of both the regulation 103 and 101 calculations leading to the assessments he needed to have a precise figure for residual input tax.   

146.	In our view this information was not of sufficient weight to justify the making of the second assessment. Separate assessments were made to recover the input tax on the transfers of the going concerns and ultimately those assessments were withdrawn. If the information had affected the regulation 101 and 103 calculations then the adjustments could have been dealt with by a later assessment.

The reverse charge

147.	The reverse charge information was provided on 9 December 1999 and gave an addition to residual input tax for the accounting periods ending in September 1996, December 1996 and March 1997. 

148.	Thus the accounting periods affected by this information are not the accounting periods with which this issue is concerned. Also, in our view this information was not of sufficient weight to justify the making of the second assessment as this matter was dealt with by the reduction of another assessment. If the information had been relevant to the regulation 101 and 103 calculations then the adjustments could have been dealt with by a later assessment.

The annual adjustments

149.	The annual adjustment information was supplied on 9 December 1996 but only affected the accounting period ending in June 1998 and was settled by a separate agreement that a repayment would be made. In Mr Knight’s view the amount was relevant because it affected the amount of residual input tax in the calculation of the assessment 

150.	In our view this information was not of sufficient weight to justify the making of the second assessment as this matter was dealt with by a separate repayment. If the information had been relevant to the regulation 101 and 103 calculations then the adjustments could have been dealt with by a later assessment.

National Provident Institution Investment Managers

151.	This information was received by Mr Knight on 4 February 2000 and 2 March 2000. It revised the margin figures to the full values and related to accounting periods from December 1996 to December 1999. In the assessment calculations the information was included in the denominator of the regulation 101 calculations as part of total supplies but not in the regulation 103 calculations.  

152.	Also, when the margin values were originally used the proportion of attributable input tax was 1.03% and when the full values were used the proportion was 1.003%. In calculating the assessments Mr Knight rounded both figures up to 2% and so the difference did not have any practical impact on the amount of the assessments. The information related to the period ending on 30 June 1998 because that was the annual adjustment period following the year end. 

153.	In our view this information was not of sufficient weight to justify the making of the second assessment as it did not concern specified supplies. If the information was relevant to the regulation 101 calculation then an adjustment could have been dealt with by a later assessment.

Our views on the relevance of the information provided

154.	Pegasus Birds at [13] is authority for the principle that not every fact is relevant but only facts of sufficient weight to justify the making of the assessment and that the Tribunal can only interfere with the decision of the assessing officer if there was sufficient material to show that his failure to make an earlier assessment was perverse.  

155.	Having considered the five pieces of information we conclude that none was sufficient to justify the making of the second assessment. The second assessment was made to recover what were perceived to be excessive claims for input tax in relation to specified supplies. The calculations of the claims had been included in the voluntary disclosure of October 1997 and in the returns for the four relevant accounting periods  ending in September 1997, December 1997, March 1998 and June 1998. All the information about specified supplies was then available. Of course, any information about the value of supplies or the amount of residual input tax which comes to light after a taxable person’s partial exemption calculation under either regulation 101 or 103 has been made may lead to adjustments to such calculations but such adjustments can always be made by separate assessments.    

Conclusion on issue (3)

156.	Our conclusion on the third issue in the appeal is that the second assessment as far as it concerned the four accounting periods ending in September 1997, December 1997, March 1998 and  June 1998, was made after the end of one year after evidence of the facts sufficient to justify the making of the assessment came to the knowledge of Customs and Excise. 

Reasons for decision - issue (4) – the third assessment – time limits 

157.	The fourth issue in the appeal is whether the third assessment was made after the end of two years after evidence of the facts came to the knowledge of Customs and Excise within the meaning of section 78A(2).  

158.	The third assessment was made on 13 March 2001. It now relates only to the interest overpayment made for the accounting period ending in December 1996. The overpayment had been claimed in the voluntary disclosure of 1 October 1997 and paid to the Appellant on 22 April 1998. We heard very little evidence or argument on this issue. For Customs and Excise to succeed it would have to show that relevant information came to its knowledge after 13 March 1999. It was suggested that the information about National Provident Institution Investment Managers of 22 May 2000 was relevant to this assessment. However, it has to be borne in mind that the assessment to recover interest previously paid did not require any partial exemption calculations. All the facts were in the possession of Customs and Excise from the date they made the payment on 22 April 1998. 

159.	On the evidence and arguments before us we conclude that the third assessment was made after the end of two years after evidence of the facts came to the knowledge of Customs and Excise within the meaning of section 78A(2).  

Decision

160.	Our decisions on the issues for determination in the appeal are:

(1)	that on the facts of this appeal the input tax on goods or services used in part in making specified supplies should be attributed by reference to a proportion of the value of specified supplies to total supplies. This is a decision in principle and does not determine the amounts of the assessments; 

(2)	that the first assessment was out of time because it was made more than three years after the end of the accounting periods in respect of which it was made; alternatively, it was invalid because it was made for the wrong accounting period.

(3)	that the second assessment as far as it concerned the four accounting periods ending in September 1997, December 1997, March 1998 and June 1998, was made after the end of one year after evidence of the facts sufficient to justify the making of the assessment came to the knowledge of Customs and Excise; and 

(4)	that the third assessment was made after the end of two years after evidence of the facts came to the knowledge of Customs and Excise within the meaning of section 78A(2).  

161.	Our decisions mean that the appeals against the first assessment, the second assessment in so far as it concerns the four accounting periods ending in September 1997, December 1997, March 1998 and June 1998, and the third assessment are allowed. The calculations in the second assessment for the accounting periods ending in September 1998 to December 1999 will need to be amended on the lines of our decision. We also recall that an issue relating to the application of R v Customs and Excise Commissioners, ex parte Building Societies Ombudsman Co Ltd [2000] STC 892 to the facts of this appeal was deferred. 

162	WE THEREFORE DIRECT that either party has liberty to apply to the Tribunal before the expiry of three months from the date of the release of this Decision either to determine the amount of the remaining assessments and/or to determine the issue relating to Building Societies Ombudsman.  If no such application is received within three months then this Decision will become the Final Decision and the appeal will be determined accordingly. 

163.	The Appellant has liberty to make an application for costs.

Authorities cited at the hearing

164.	The following authorities were also cited at the hearing: 

BLP Group Plc v Customs and Excise Commissioners [1995] STC 424 at 430 paragraphs 31, 34 and 35 

Customs and Excise Commissioners v University of Wales College Cardiff [1995] STC 611 at 615d 

Dial-a-Phone limited v Customs and Excise Commissioners  [2004] STC 987 at [19] and [28]

Parekh and another v Customs and Excise Commissioners [1984] STC 284 at 288 

Victoria and Albert Museum Trustees v Customs and Excise Commissioners [1996] STC 1016

DR A N BRICE

CHAIRMAN
RELEASE DATE: 18 February 2005

LON/2000/0879
LON/2000/1112
LON//2001/0381
17.02.05