19580
	ASSESSMENT — whether the annual adjustment of an assessment under the Tour Operators’ Management Scheme was caught by the three year cap — yes — appeal allowed — assessment out of time

MANCHESTER TRIBUNAL CENTRE

 
 	
	DUNWOOD TRAVEL LIMITED	Appellant

	- and -

THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	David S Porter (Chairman)
						Marjorie Kostick

Sitting in public in Manchester on 23 March 2006

Miss Isabel Hitching of counsel for the Appellant 

James Puzey, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2006

DECISION

1.	Dunwood Travel Limited (“the Appellant”) appeals against part of an assessment dated 24 June 2004 as amended by a Notice dated 22 September 2004 in the sum of £17,260, relating to the annual adjustment under the provisions of the Tour Operators’Margin Scheme (“TOMS”), for the  prescribed accounting period 03/01. The Appellant says that as the assessment is based on the year to 03/01, it is out of time and caught by the 3 year cap.

2.	The Commissioners say that the assessment in 06/01, although it was for the year covering the period 04/00 to 03/01 under TOMS, is the annual adjustment under TOMS and, as it is raised in 06/01, falls out side the 3 year cap.

3.	Miss Isabel Hitching of counsel appeared for the Appellant. Mr James Puzey of counsel appeared for HM Revenue and Customs and produced a bundle for the tribunal. The tribunal were referred to the following case:-

•	Customs and Excise Commissioners-v- Croydon Hotel  &Leisure Co Ltd 1996 STC 1105
•	Customs and Excise Commissioners –v- Laura Ashley Ltd 2003 EWCH 2832 (Ch) 
•	S J Grange Ltd v Customs and Excise Commissioners 1979 STC 183

The Facts

4.	The facts are not in dispute and are as follows:- The Appellant carries on  business as a Tour Operator and it is common ground that TOMS applies. In early 2004 an investigation was carried out into the VAT period 04/01 to 09/03. Two errors became apparent:-

•	The margin on coach travel costs had been treated as zero rated rather than standard rated. Supplies of coach travel had to be standard rated from 1 January 1996.
•	No Annual Adjustment had been made at the end any of the financial years.

On 24 June 2004 a notice of assessment was issued in respect of the VAT for the periods 06/01 to 03/03. The schedule, provided by the Commissioners for the assessment, re-worked the TOMS calculation having provided for the annual adjustment for the year 04/00 to 03/01 and subsequent years to 09/03 and corrected the error for the zero rating. The annual adjustment had not been calculated for the years before the year ending 03/01 but as those years were more than 3 years before the assessment in 06/01 they fall out of charge under the 3 year cap provided by section 77 (1) referred to below. (There is no allegation of dishonest, but merely of a mistake on the part of the Appellant).

5.	Following representations on behalf of the Appellant, an amended assessment was issued on 22 September 2004. This provided, inter alia, for an Annual Adjustment for the period 01/04/01 -30/06/01 in an amount of £17,260. In raising the assessment in 06/01 the Commissioners had to re-assess the year to 03/01. This is because TOMS works on provisional figures calculated at the  percentage margin rate for the previous year. The percentage margin used by the Appellant for the year 04/00 to 03/01 was 17.44%. In fact the percentage margin should have been15.24%. There are 30 complex steps which have to be calculated to arrive at the adjusted figure. From the salient figures provided to the tribunal we are advised as follows:-

Step 28	Total Output VAT for annual adjustment based on actual figures
             	= £44,300.65 (originally £46,045.42)
Step 29	Total provisional Output VAT accounted for in financial year 1st April 2000 to 31st March 2001 (This is at the Appellant’s provisional rate of 17.44%)

  06/00		£ 6,679.92
  09/00		£ 6,651.98
  12/00		£ 8,974.10
  03/01		£ 4,733.80
                      		--------------
		          	           £27,039.80
Step 30	Deduct total at 29 from total at 28.This is the annual adjustment to be made on the 06/01 return

                      	        = £44,300.65
                  	   Less £27,039.80
                                  ----------------- 
Due to HMC & E     £17,260.85

The Law

6.	Section 73 (1) of Value Added Tax Act 1994 (VATA) provides as follows:

  73 Failure to make returns etc
a. “Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him”.

       	Section 77 (1) of VATA provides as follows:

	77 Assessments: time limits and supplementary assessments

(1)	Subject to the following provisions of this section, an assessment under section 73, 75 or 76, shall not be made:-

(a)	more than (3 years) after the end of the prescribed accounting period or importation or acquisition concerned or,…..” (Our underlining)

“prescribed accounting period” is defined in section 25 (1) 

25. Payment by reference to accounting periods and credit for input tax against output tax.

(1)	A taxable person shall-

(a)	in respect of supplies made by him, ….
(b)	…
                   account for and pay VAT by reference to such periods (in this Act referred to as “prescribed accounting periods”) at such time and in such manner as may be determined by or under regulations and regulations may make different provisions for different circumstances

It is accepted that the Appellant’s accounting periods are to the quarters ending 06/, 09, /012, / 03 which corresponded with the Appellant’s financial year end.

7.	TOMS is set out in Notice 709/6. Parts of the Notice have force of law. The rules are complex and are set out in detail at Tab 8 in the bundle. The TOMS do not cover every supply made by a Tour Operator (part 2.4), but must be used in relation to certain supplies (parts 2.3, 2.6, 2.9 and 2.14).  Regulation 7 of VAT (Tour Operators) Order 1987 provides that the Commissioners may specify how the value of “designated travel services” is calculated. Parts 8 to 12 of Notice 709/5 set out the mechanism for accounting for VAT on supplies covered by TOMS. Those parts or sections of the Notice have force of law.

8.	As we understand it, the scheme works in arrears. Part 9 of Notice 709/5 sets out how a trader accounts for VAT on the provisional value of the ‘designated’ supplies, which are calculated quarter by quarter.  In simple terms the quarterly VAT liability is calculated on the margin from the preceding year, based on the amount received from their customers, less the amounts paid to their suppliers, expressed as a percentage. For the purposes of this appeal the Appellant’s margin for the whole period is 17.44%. The Appellant has never carried out an annual adjustment so that their margin has been constant and the provisional figures have never been adjusted. The annual adjustment is essential for the correct amount of tax to be ascertained. The annual adjustment substitutes the actual VAT figures for the provisional ones. Section TL5 of part 12 of the Notice makes clear the mandatory  nature of this calculation and paragraphs 3 and 4 provide as follows:

“3.  A Tour Operator shall be required to account for VAT on the provisional value of his supplies of designated travel services, in-house supplies and agency supplies on the VAT return for the prescribed accounting period in which the supplies are made.

8.	The difference between the amount of VAT due on the value of the designated travel services, in-house supplies and agency supplies supplied during a Tour Operator’s financial year, and the amount of VAT paid on the provisional value of those supplies, shall be adjusted by the tour Operator on the VAT return for the first prescribed accounting period ending after the end of the financial year during which the supplies were made.

9.	As a result of that calculation the percentage might change for the following year. The annual adjustment can either give rise to an additional VAT liability or a refund.  Until the annual adjustment has been calculated it is not possible to know if the right amount of VAT has been paid.  

10.	Mr Puzey supplied the tribunal with his skeleton arguments and submitted as follows:-

(a)	It would not have been possible to assess the correct amount of VAT for the periods 04/00 to 03/01 in June 2004 because of the 3 year “cap” imposed by section 77 (1) (a) VATA. However, the disputed part of the assessment relates to the period 06/01 which is within the 3 year limit.

(b) 	The Commissioners do not accept that there is any conflict between the TOMS calculation, which has force of law as tertiary legislation and the “capping” provisions in section 77 (1) VATA. VAT was due for the period 06/01 and should have been accounted for at that time through the normal operation of the TOMS calculation.

(c) 	Section 73 VATA requires that a return should be incomplete or incorrect, which this return is. Further the assessment must not be made more than 3 years after the end of the prescribed accounting period concerned, which this assessment was not, as it was made for the period 06/01.

(d) 	Section TL5 of part 12 of Notice 709/5 makes clear the mandatory nature of the annual adjustment calculation and as a result the tribunal must consider in which period the return has been made which is incomplete or incorrect. The answer to that questions is that the provisional figures in each quarter of a financial year are just that, provisional; they may be proved correct eventually or not, but the period in which the adjustment shall occur is the period following the end of the financial year, in this case 06/01. Thus the point at which the provisional figures of VAT become crystallised in to the final figure due is that post year-end quarter.  If that has not been done, because no annual adjustment has been carried out, then that return is incomplete and/or incorrect.

(e) 	In Customs and Excise Commissioners-v- Croydon Hotel & Leisure Co Ltd, the appellant paid a sum in period 03/91 which was claimed as input tax in 6/91. The Commissioners issued an assessment in June 1993; hence the assessment would be out of time if the prescribed accounting period was 3/91, but in time if the prescribed accounting period was 6/93. In finding for the Commissioners ,Thorpe LJ held that “as a matter of practicality and good sense any limitation period to run against the Commissioners would not naturally  be expected to run  earlier than the date upon which they receive notice by way of account”

(f) 	The Appellant has argued that although the TOMS calculation enables the Commissionerss to assess period 06/01, this actually involves the assessment of the out of time periods 04/00 to 03/01 and therefore is contrary to primary legislation, ie. Section 77 (1) VATA. Consequently it is argued that the tertiary legislation, ie. Part 8 of Notice 709/5, must be construed subject to Section 77 (1) . However, this argument assumes a conflict between the two which does not in fact exist. The period in which this VAT was due is 06/01.

12.	Miss Hitching supplied the tribunal with a skeleton argument and submitted as follows:-

(a)  	The Appellant resists the assessment based on the annual adjustment on the basis that, properly construed, the legislation does not require, indeed does not allow, such an annual adjustment to be made. The Appellant does not dispute that the calculation of the annual adjustment is to be carried out in accordance with Section 8 of Notice 709/5 ‘TOMS’ which has the full force of law. However, Section 8 is tertiary legislation, made under s 53 VATA and the VAT (Tour Operators) Order SI 1987/1806 as amended. It is therefore to be construed in accordance with the rule of primary intention, namely by considering the intention of the legislation as indicated in the enabling act namely VATA.

(b) 	In Bennion on Statutory Interpretation 4th Edition sections 59-61 (pp215-219) state in section 59

“There are various types of delegated legislation, but all are subject to fundamental factors. Underlying the concept of delegated legislation is the basic principle that the legislature delegates because it cannot exert its will in every detail.  All it can in practice do is lay down the outline.  This means that the intention of the legislature, as indicated in outline (that is the enabling Act), must be the prime guide to the meaning of delegated legislation and the extent of the power to make it. In the Code this is referred to as the rule of primary intention…. ‘[Power delegated by an enactment] does not enable the authority by regulations to extend the scope or general operation of the enactment that is strictly ancillary.  It will authorise the provision of subsidiary means of carrying into effect what is enacted in the statute itself and will cover what is incidental to the execution of its specific provisions. But such power will not support attempts to widen the purpose of the Act , to add new and different means of carrying them out or to depart from or vary its ends’ Utah Constructionm and Engineering pty Ltd v Pataky 1966 2WLR 197 at p 202”

(c)	VATA s77 (1) provides that  ‘… an assessment under section 73… shall not be made – (a) more than 3 years after the end of the prescribed accounting period or importation or acquisition concerned…’

(d)	The annual adjustment, whilst made against the VAT period 06/01, was in respect of the prescribed accounting periods in the preceding financial year. The assessment in respect of the annual adjustment is therefore made more than 3 years after the end of the prescribed accounting periods. The Commissioners are therefore , by the annual adjustment, recouping VAT which was mistakenly not paid in that financial year  but which could not directly be recouped by the assessment in June 2004 as more than 3 years had elapsed.

(e)	Properly interpreted section 8 cannot require this approach. It would clearly be contrary to the primary intention as shown by section 77 (1) that no assessment in respect of unpaid VAT is to be made after 3 years from the end of the prescribed accounting period.

(f)	In Customs and Excise Commissioners –v- Laura Ashley Ltd, the appellant submitted a claim for output tax which it considered it had overpaid in periods when it was a repayment trader (i.e. its input tax exceeded its output tax), so that the ensuing assessment was regarded as falling within s 73 (2) VATA rather than s 80(1) VATA. The High Court did not consider itself bound by the Croyden decision, and concluded that the assessment was in respect of the original periods, ie those in which the output tax had originally been accounted for, rather than the period in which the repayment had been claimed. 

The Decision.

13.	We are being asked to decide whether the 3 year cap prevents the Commissioners raising an assessment under the TOMS provisions, where the assessment arises from an adjustment of the prescribed accounting period, because that is the only way the earlier prescribed accounting period assesses the correct amount of VAT. In our judgement the 3 year cap is paramount and as the assessment for the period to 06/01 related to the prescribed accounting period 04/00 to 03/01 must fall.

14.	Section 77(1) (a) effectively prevents the Commissioners from circumnavigating the 3 year period, except in the case of fraud or where the VATA specifically provides for it. This is the primary legislation. In applying the annual adjustment the Commissioners must, of necessity, carry out the calculation in the following quarter and apply the result to the prescribed accounting period immediately preceding that calculation. The legislature has decided that an appellant should be protected from any VAT liability which is more than 3 years old. The ‘prescribed accounting period’ under section 77 (1) (a) for the purposes of this appeal is the period 04/00 to 03/01. That period is outside the 3 year cap. The annual adjustment is no more than a method of re-calculating the ‘prescribed accounting period’. It may be calculated in 06/01 but the Commissioners cannot assess other than for the periods 04/00 to 03/01 and in attempting to assess the period in 06/01 they will ‘widen the purpose of the Act’ (see Bennion above) which they cannot do under the interpretation rule of primary intention. The decision of Customs and Excise Commissioners –v- Laura Ashley Ltd is to be applied to this appeal and results in our allowing the appeal.

15.	Miss Hitching added that in the event that the tribunal found that the 3 year cap did not apply it should note that the Appellant’s representative had re-calculated the annual adjustment based on what should have been declared and not on the original provisional figures. As a result a repayment of £11,479.38 would be due. (See page 7(a) page2/2 in the bundle).  Mr Puzey accepted that if the annual adjustment resulted in a repayment, then the Appellant would be entitled to receive the same, but that it was inappropriate for the annual adjustment to be based on notionally corrected figures. TOMS contains no provision for this. In view of the fact that we have decided that the 3 year cap applies we do not propose to consider the merits or otherwise of the Appellants calculations save to say that if the TOMS calculations results in a repayment because the provisional figures were too high then a repayment should be paid.

16.	We also award costs to the Appellant such costs to be agreed with the Commissioners and failing agreement to be brought back to a tribunal to assess the same.

DAVID S PORTER
CHAIRMAN
Release Date: 19 May 2006
MAN/05/0261
££Dunwood Travel Ltd v  Revenue & Customs [2006] UKVAT V19580 (19 May 2006)