First Class Communications (Sales) Ltd v Revenue & Customs [2006] UKVAT V19950 (16 December 2006)

19950

Value Added Tax – Best judgment – s.73(1) VATA 1994 – Time of supply between associated companies – Whether management charges monthly or yearly – Appeal dismissed

LONDON TRIBUNAL CENTRE

FIRST CLASS COMMUNICATIONS (SALES) LTD	           Appellant

-	and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	DR K KHAN (Chairman)
						MR M M HOSSAIN FCA, FCIB

Sitting in public in London on 19 September 2006

Mr T Brown, Finance Director, for the Appellant 

Ms P Crinnion, Advocate, HMRC for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The Appeal
	
	First Class Communications (Sales) Ltd (“FCC Sales”) appeals against a number of assessments for tax and interest.  The first assessment was issued on 26 February 2004 with subsequent amendments on 21 March 2005 and 12 May 2005.  The Amended Notice of Assessment is for £6,203.00 tax and £808.03 interest, a total of £7,011.03.  The assessment covers periods 12/02 to 09/03 inclusive.  The second assessment was issued on 20 April 2004.  The assessment is for £2,495.00 tax and £35.00 interest, a total of £2,530.00.  The assessment covers period 12/03.  The third assessment was issued on 23 May 2005 for £7,091.0 and £918.37 interest, a total of £8,009.37.  Misdeclaration penalties advised to the Appellant on 23 March 2004 and 7 May 2004 totalling £1,516.00 and £374.00 respectively are also the subject of appeal.

	The Notice of Appeal was served on the VAT and Duties tribunal on 12 October 2005, outside the time limits set out in VAT Tribunal Rules 1986 which states that an appeal shall be served within a period of 30 days after the              disputed decision has been notified.  A Direction hearing on 6 December 2005 granted leave to appeal out of time to the Appellant in respect of the assessment made on 21 March 2005 so far as it relates to management charges and any earlier assessments made on 29 January 2004 or subsequently insofar as they relate to the same issue.

The Issue

	The main issue for determination in this appeal is whether the assessments were issued in best judgment on the material before them and their decision was reasonable and non-arbitrary for the purpose of s.73(1) VATA 1994.

The Evidence

	A bundle of documents was produced in a lever arched file (272 pages) for the Tribunal.  This contained, inter alia, the assessments, notice of misdeclaration penalty, correspondence between the parties, invoices, annual accounts of the Appellant, file notes and VAT returns. In addition a copy of the diary entries and file notes of Mr Lawrence Smith, Higher Officer, HMRC of approximately thirty-two pages were presented in evidence to the Tribunal.  There were two witnesses called by HMRC, both of whom gave sworn evidence, Mrs Geraldine Martin, Officer, HMRC and Mr Smith, as above.  Mr Terrance Brown, Company Secretary, for the Appellant, gave sworn evidence to the Tribunal.

The Facts

	The Appellant is a limited company incorporated on 13 December 2000 (company number 4124792) and registered for VAT under number 788 114 894, with effect from 1 December 2001.  It is a management company for a group of companies involved primarily as a retailer of mobile communication equipment and software from premises at 237 Preston Toad, Wembley, Middlesex, HA9 8PA.  The group of companies, under common ownership, also operates a property and travel business.  There is no group VAT registration.

	During a visit to the Appellant by Laurence Smith (“Mr Smith”), Higher Officer, HMRC and Geraldine Martin (“Mrs Martin”), Officer, HMRC, it became apparent that FCC Sales had claimed input tax against supplies made to First Class Property Company Limited (“FC Property”).  Mr Terrance Brown (“Mr Brown”) bookkeeper for the Appellant had tried to correct this matter by recharging the expenses to FC Property.  The expenses related to supplies of staff, motor expenses and purchases made for FC Property.  The invoice was raised as zero-rated supplies since Mr Brown believed he was unable to charge VAT to a company making exempt supplies. Mrs Martin found that the recharged sales invoices had used incorrect liability which resulted in an underdeclaration of output tax to HMRC.  She requested detailed SAGE VAT summary prints for FCC Sales for all relevant quarters in order to verify that no further input tax proper to the associate had been claimed by onward charges. The Appellant had not submitted returns for the period 12/02 to 09/03 inclusive. The SAGE prints for those and previous periods, showed that at the time of the officers’ visit the Appellant was only making supplies of quarterly management charges to its associated companies.  The SAGE prints revealed that incorrect date parameters had been used. On 10 November 2003, Mrs Martin requested all VAT summaries for sales from the effective date of registration to current date 9 January 04.  These were not provided.

	On 28 January 2004, using declared sales figures on previous returns (relating purely to management charges to associated businesses) HMRC calculated that the output tax due was £3,500 per quarter for each of the missing periods i.e. accounting periods ending 31 December 2002; 31 March 2003 and 30 September 2003.  Centrally raised assessments had already been calculated and issued by the HMRC in the absence of returns and HMRC decided to issue an assessment to take into account the estimated output tax due and the centrally raised assessments.  The assessment issued on 26 February 2004 was for £10,123 tax plus interest (see below).

Accounting Quarter	Best Judgment
Output tax
    liability	Central Assessment
      On File	     Additional
    Assessment
         Due	
December 2002
March 2003
June 2003
September 2003	    £3,500
    £3,500
    £3,500
    £3,500	     £962
     £893
     £994
   £1,028	    £2,538
    £2,607
    £2,506
    £2,472	

The additional assessments, made on top of the existing Central Assessments, made no allowances for input tax as the credibility of input tax claims previously made on submitted returns was in doubt.

	HMRC also queried FCC Sales Invoice No.16 which was used to charge for a supply of staff and recharge of expenses wrongly addressed to FCC Sales but made to FC Property and which was treated as non-standard rated supplies, which was incorrect. An assessment for underdeclaration of output tax of £835.74 was issued.  This meant a total assessment of £10,9958.74.

	On 23 March 2004, a notice of assessment for Misdeclaration Penalty, for periods 12/02 to 09/03 inclusive, was issued for £1,516.00.

	On 25 March 2004, HMRC issued a Notice of Assessment (additional assessment) for the sum of £2,495.00 for failure to submit VAT return for the accounting period ending 31 December 2003.  It was explained that an additional or central assessment cannot be appealed against until missing VAT returns for the relevant accounting period had been submitted.  At that time, the missing and still outstanding VAT returns were for the periods 12/02, 03/03, 06/03 and 12/03.

	On 7 May 2004, a Notice of Assessment of Misdeclaration Penalty, for the period 12/03 was issued for £374.00.

	On 12 November 2004, Debt Management Unit issued a letter to the Appellant in which it was stated that the current debt was £30,075.38 and if the Appellant failed to contact the HMRC by 19 November 2004, legal proceedings petitioning for winding up of  the company would be commenced.

	On 26 November 2004, Debt management Unit issued a further letter to the Appellant stating the debt had increased to £33,721.38 and a revised contact date of 31 December 2004 was given to the Appellant before civil recovery action would be taken.

	On 1 December 2004, HMRC received returns for the periods 12/02 to 12/03 inclusive.  Returns for the periods 12/02, 03/03 and 09/03 were repayment; the return for the period 12/03 as nil sales and purchases.  On 16 February 2005 the Appellant wrote to the Debt management Unit in which the payment of £3.624.40 relating to returns for 12//02 to 12/03 inclusive, were queried.  On 3 March 2005 Mr smith (and another officer) visited the Appellant to verify the declarations for the periods 12/02-13/03 inclusive.  The revised VAT calculations had been prepared on EXCEL not SAGE which may explain some of the delay in reviewing the figures.  Annual accounts (which did not contain an auditor’s opinion as to the state of the accounts or a signature to that effect) for the year ending 31 July 2003 were examined and compared against the declared turnover on the VAT returns of £190,000 and a deficit of £85,000.  Mr Smith advised that an assessment would be issued for the VAT on the £85,000 which had not been declared.  Mr Brown explained that the difference between the declared returns and the Annual Accounts were charges to an associate company, First Class Communication Ltd (“FCC Communication”) for the supply of staff, stationary and other recharges.  He explained that the staff involved were employed under contract to Sales and the charges made to the associate company included stationary and other office costs made on the associate’s behalf.  Mr Smith confirmed to Mrs Martin that the input tax claims appeared credible.  Mrs Martin took the following action in respect of the mismatched returns:

(1)	Period 12/03 – Appellant had not traded in this period and therefore nil return 	was acceptable.  Additional assessment to be withdrawn.

(2)	Period 09/03 – Additional assessment will be reduced from £2,472 to £1,159 	with the new additional assessment figure and central assessment figure to 	equal the new Output tax figure of £2,187.

(3)	Period 06/03 – An additional assessment to be raised to take account of the 	additional output tax due, as identified by Mr Smith, of £3,062.50.  The input 	tax figure of £3,240.15 was allowed.  The Appellant will have a small 	repayment of £177.65.

(4)	Period 12/02 – An additional assessment to be raised to take account of the 	additional output tax due of £3,062.50.  Input tax figure of £3,742.59 was 	allowed.  Final outcome means a repayment to the Appellant of £680.09.

(5)	New assessment will be issued for underdeclared output tax as identified by 	Mr Smith as follows:

period 09/02 -	additional output tax due of £3,062.50
period 06/02 - 	additional output tax due of £3,062.50
period 03/02 - 	additional output tax due of £7,000.00

	HMRC wrote to the Appellant on 17 March 2005 to confirm their findings and actions. New amendments were accepted by the HMRC computer and a letter was sent by HMRC to the Appellant on 9 may 2005 outlining the position. The new figures were as follows:

	Output Tax
      Due	Input Tax
    Due	       Net
Assessment	  Central
Assessment	New Addi-
  tional
Assessment	Comments	
Mar-02	  £1,750.00	 £5,531.89	-£3,781.89	       £0.00	           £0.00	 No change	
Jun-02	  £3,500.00	 £3,477.24	       £22.76	       £0.00	           £0.00	No change	
Sep-02	  £5,250.00	 £2,486.79	  £2,763.21	       £0.00	    £1,750.00	New assessment to be issued	
Dec-02	£10,500.00	  £3,742.59	  £6,757.41	   £962.00	    £4,045.41	New Additional
Assessment	
Mar-03	£10,500.00	£10,232.17	     £267.83	   £893.00	           £0.00	Central Assess-
ment to remain	
Jun-03	£10,500.00	  £3,240.15	  £7,259.85	   £994.00	    £6,265.85	New Additional
Assessment	
Sep-03	  £3,500.00	  £1,237.13	  £2,262.87	£1,028.00	    £1,234.87	New Additional
Assessment	
TOTALS	£35,000.00	£18,452.04	£16,547.96	£3,877.00	  £13,296.13		

	On 16 March 2005, the Appellant in a letter to Mr Smith explained that an invoice had been raised to FCC Communication regarding the management charges.  The invoice would be included in the March 2005 return and FCC Communication would claim the input tax on their return at the same time.  The Appellant advised that as from 31 March 2005, there would be no further trading of the company and its registration cancelled and its status be changed to management company.  On 29 March 2005, the Appellant by letter dated 21 March 2005 disputed Mrs Martin’s statements in her letter of 17 March 2005.  The Appellant requested that £6,322.92 be repaid to them by HMRC.  The Appellant made the point that the sales in the accounts (unaudited) of £80,000 were returned as £50,000 with £10,000 was an accrual made by the auditors, which did not fall in the VAT period September 2002. (The rules on time of supply and invoicing were pointed out to the Appellant by the Tribunal).  The Annual Accounts dated 8 November 2004 declared sales for the year to 31 July 2003 of £190,000.  The Appellant agreed that an invoice which should have been issued in November 2004 was not issued until March 2005.

	In her summary letter of 9 May 2005, Mrs Martin made the following points:

(1)	The total sales for the accounting periods ending 31 March 2002, 30 June 	2002 and 30 September 2002 were £50,000 and £10,000 accrual became due 	to be declared after the period ending 30 September 2002.

(2)	Invoicing cannot be done on an accumulated one-off basis but the charges 	should be raised on a monthly basis and the tax point on the supplies would 	be the month when the salary payment was due to be paid to the staff 	supplied. Therefore, in making a best judgment assessment a monthly 	charging of staff cost would be used in the calculation of the 	underdeclaration.

(3)	In the view of HMRC, the returns submitted by the Appellant were not 	correct and in doing a reworking of figures original central assessments 	cannot be reduced but, allowance for input tax claims can be given.  

(4)	An issue arises with regard to the tax point on management charges.  HMRC 	agreed that a tax point can arise at the end of the financial year or the date 	when the accounts are signed off.  However, HMRC felt that these charges 	were not accruals which were brought into account at year end and hence had 	a tax point at year end, but rather were charged to associate companies on a 	monthly basis and the tax point was properly on a monthly basis when 	invoiced.  

	In their letter of 25 July 2006, HMRC explained that copy invoices supplied to Mr Smith were at variance with those supplied to HMRC Solicitor’s Office and with SAGE prints. The Annual Accounts recorded turnover in 2002 at £60,000 and 02/03 at £190,000, but these amounts were not evident in the SAGE prints. HMRC calculated total sales as £250,000 and VAT as £43,760 i.e. 17.5 x total turnover.  It was accepted that approximately £8,000 was declared on submitted returns which left additional tax for the years 2002 and 2003 at approximately £35,000. Mrs Martin further accepted that input tax due on the returns (submitted but not fully processed) for periods 12/02, 3/03, 06/03 and 09/03 had been verified by another officer and accepted that £18,499.48 input tax (less 44.44 German tax) needed to be credited to the Company’s account. An assessment was issued for £16,547.96 which is net output tax of £35,000 less net input tax due of £18,452.04. The accounts for 2002 and 2003 were completed in late 2004. The Appellant contended that the management charges should be brought to account after the date the annual accounts were completed.  HMRC brought to management charges into account when invoiced and to assess in November 2004 would not be best judgment especially since the Appellant was not able to provide accurate evidence of payment.

Appellant’s Case

	In the Notice of Appeal the grounds of appeal were stated as:

(a)	Refusal by HMRC to change assessments to align to VAT return facts that 	have been verified as correct by another (senior) officer of HMRC.

(b)	Assumptions by HMRC are based on Mrs Martin’s assumption that VAT 	should have been recorded each month on salaries paid to staff.  This was 	declared to the officer after final accounts were finished (Nov-Dec 2003) and 	VAT added; this invoice (reclaiming First Class Communications Ltd) has 	not been allowed to be claimed by First Class Communications Ltd so First 	Class Communications (Sales) Ltd are not liable for this tax until allowed to 	issue and reclaim.

The Appellant, through Mr Brown, made the following further submissions (as taken from letter) on 18 October 2005:

(1)	Assessments appear to be raised by Mrs Martin as a single return was 	claimed not to have been returned and so following returns were invalid.  Our 	claim is that this non-return situation did not occur and that it was submitted 	on time and also that it is sensible to accept submitted correct returns than 	make assessments that are not justifiable against submitted figures that have 	been seen and verified as correct by HMRC.

(2)	A situation of monies due to us, without the Management Charges situation, 	had been checked and verified by HMRC.  It was at this stage that I raised the 	new invoice and Mrs Martin raised her assessments.

(3)	HMRC (Mrs Martin) claims that it is not allowable to allocate Management 	Charges at the end of the financial year, in conjunction to the company 	Accounts.  I am told that this is allowable and a precedent has been set to 	conform this.  The amount to be allocated to each of our companies was not 	made until this date. The decision was to charge all to First Class 	Communications Ltd. An invoice was raised in the month following the 	above situation, (the invoice) was cancelled in that month.  VAT return 	submitted as NIL as this in and out only transaction (verified by HMRC) I 	stated (verbally) that I would re-raise it at a later date.

(4)	It’s reclaim and then subsequent repayment to them, is then brought into 	question.  Do I raise and claim repayment on First Class Communications Ltd 	and then repay on First Class Communications (Sales) Ltd 92 months later) 	or not enter on either as appears to be suggested by Mrs Martin, however if 	this is the case, then the amount should not form part of what were now her 	assessments.  This was the time when I was told not able to raise or claim.  	This is considered incorrect.

(5)	If raised then accounts agree to Company Annual returns in both companies.  	If not raised VAT return will not include and no transfer of funds occur.  	Claim to e able to not accept an invoice that covers the above situation.

(6)	It is believed that whatever the decision, no VAT is underpaid or overpaid if 	the VAT returns of First Class Communications Ltd and First Class 	Communications (Sales) Ltd are combined. Believe that as separate 	companies this is not relevant other than showing that no intent was made to 	make a false claim or declaration.

(7)	It is our request that the Tribunal allows the issue of this 	invoice and that, as 	it is justified, to repay it on the next return.  Then monies due (less what has 	already been verified as owing to First Class Communications (Sales) Ltd) 	will be repaid on receipt.

The Appellant stated that the appeal related to a decision/assessment issued on 9/5/05 and the money in dispute was £18,004.92 plus the Appellant’s claim of unpaid VAT of £6,322.92, total in dispute £24,327.84

The Commissioners’ Case

	The Commissioners contend, as outlined in the statement of case, that the assessments have been issued under best judgment. The Appellant may have been confused by the central assessments, originally for none submission of returns, the additional assessments then issued by the officer based on information at the time, and then the number of amendments carried out when further information came to the knowledge of the Commissioners.  The process was further complicated by the fact that the Appellant then submitted the outstanding returns for periods 12/02, 03/03, 06/03 and 09/03.  The input tax on the returns for 12/02, 03/03, 06/03 and 09/03 were verified by a second officer, Officer Martin, and the Commissioners accept that the monies are due to the Appellant; these amounts have been incorporated in the assessments issued by the Commissioners i.e. allowance has been made for the input tax in the absence of the returns being fully processed.

	The Commissioners have a procedure whereby, in the absence of a return, the computer issues a `centrally issued assessment’ which is a calculated guess on the net tax due; the calculation is based on returns submitted to date.  If further information comes to the attention of the Commissioners that the `centrally issued assessment’ is too low, the Commissioners then issue an assessment for `additional tax’ due.  If and when the actual returns are submitted the returns are not processed when received at Southend if the net tax due showing on the actual returns is lower than the total of the `centrally issued assessment’ and the additional assessment.  The returns are forwarded to the assessing officer of the additional assessment for further investigation.

	In the Appellant’s case the returns for 12/02, 03/03, 06/03 and 09/03 were outstanding and the Commissioners issued a `centrally issued assessment’ for each period.  Officer Martin was not satisfied with the amounts stated as centrally issued assessments as she had visited the associate business and established that FCC Sales was mainly a management company to associated legal entities, and therefore duly issued additional assessments for each period in February 2004.  The Appellant had been requested in November 2003 to submit SAGE prints for the missing periods and also the outstanding returns but the Appellant had failed to submit the documentation to the Commissioners when they issued a letter in late January 2004.  By late March 2004 the return for 12/03 was also outstanding; once again the Commissioners issued a letter to the Appellant advising of the current situation and the issue of an assessment.

	Following the Commissioners advising the Appellant that Civil Recovery Action would be taken in late November 2004, the Appellant approached the Commissioners for duplicate returns for the missing periods.  The outstanding returns were eventually submitted in early December 2004 but again the officers had yet to receive SAGE accounting prints requested over a year previous.

	In March 2005 due to the lack of accounting information from the Appellant, the Commissioners visited the Appellant where the input tax claims as recorded on the unprocessed returns was verified and accepted by the Commissioners.  The Commissioners held out that the output tax declared on the returns was incorrect; Annual Accounts for the Appellant recorded greater sales than had been declared on the corresponding VAT returns.  The officers later communicated in writing with the Appellant and indicated that the submitted returns would not be accepted in respect of the output tax declarations and further assessments would be issued.

	When an assessment is issued by an officer the amounts shown may be either withdrawn in full or amended downwards; the computer will not allow an assessment to be amended upwards in value.  When the original assessment was amended there were still items that had to be covered by the issuing of a new assessment.

	Officer Martin did notify the Appellant accordingly of her actions.  The returns for 12/02 onwards have not been processed but the values shown thereon relating to input tax have been allowed when officer Martin undertook her adjustments and further assessments.

	From information held by the Commissioners it appears that the Appellant has issued a number of invoices relating to management charges during the period of trading of the business and monies received from associated legal entities.  The Commissioners have requested full SAGE accounting prints for each period under assessment (these also include periods not covered by the submitted `outstanding returns’) and the opportunity to verify the SAGE prints period by period to the sales invoices raised by the Appellant.

The Law

Making of Returns

	Under Regulation 25(1) SI 1995/2518

“Every person who is registered or was or is required to be registered shall, in respect of every period of a quarter or in the case of a person who is registered, every period of 3 months ending on the dates notified either in the certificate or registration issued to him or otherwise, not later than the last day of the month following the end of the period to which it relates, make to the Controller a return on the form numbered 4 in schedule 1 to these regulations showing the amount of VAT payable by or to him.”

Under Regulation 40(1) SI 1995/2518

(a)	all output tax must be declared

Furnishing of Information and production of documents

Under Schedule 11 VATA 1994 para 7(2)(3)(5-8)

Power to Assess

Under s73(1)

“Where a person has failed to make any returns required under 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.”

	We outline below our decision and the reasons for that decision.  

	In considering the arguments for the parties we begin with an overview of the law. The tax assessment under appeal has been made to HMRC’s best judgment within the meaning of section 73(1) VATA 1994. Briefly summarised, best judgment means to the best judgment of HMRC on available information. One of the often quoted summaries explaining the meaning of best judgment is by Woolf J (as he then was) in Van Boeckel v CCE [1981] STC 290 at 292 where he said:

“… the very use of the word “Judgment” makes it clear that the Commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them. Clearly they must perform the function honestly and bona fide. It would be a misuse of that power if the Commissioners were to decide on a figure which they knew was, or thought was, in excess of the amount which could possibly be payable and then to leave it to the taxpayer to seek, on appeal, to reduce that assessment.

Secondly, clearly there must be some material before the Commissioners on which they could base their judgment.  If there is no material at all it would be impossible to form a judgment as to what tax is due.

Thirdly, it should be recognised, particularly bearing in mind the primary obligation, to which I have made reference, of the taxpayer to make a return himself, that the Commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to the best of their judgment, is due.  In the very nature of things frequently the relevant information would be readily available to the taxpayer, but it would be very difficult for the Commissioners to obtain that information without carrying out exhaustive investigations. What the words “best of their judgment” envisage, in my view, is that the Commissioners will fairly consider all material placed before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due.  As long as there is some material on which the Commissioners can reasonably act then they are not required to carry out investigations which may or may not result in further material being placed before them.”

The Judge went on to say (at page 296) that:

“unless the situation is one where no material is before the Commissioners on which they can reasonably base an assessment, the Commissioners are not required to make investigations”.

The role of the Tribunal in best judgment cases was explored by Carnwarth J (as he then was) in Rahman v Customs and Excise Commissioners [1998] STC 826 where he sated:

“… the Tribunal should not treat an assessment as invalid merely because it disagrees as to how the judgment should have been exercised.  A much stronger finding is required : for example, that the assessment has been reached dishonestly or indistinctively or capriciously; or is a “spurious estimate or guess in which the elements of judgment are missing; or is “wholly unreasonable.”

The Tribunal should no look to see if it agrees with the judgment but should look at the basis on which the judgment was founded and whether the elements of judgment are present.

The position of the taxpayer in challenging HMRC is to show that best judgment was not exercised.  Dyson J (as he then was) in the case of McNicholas Construction Co Ltd v Customs and Excise Commissioners [2000] STC 553 at 588 said:

“… the words “to the best of their judgment” permit the Commissioners a margin of discretion in making an assessment; a taxpayer may only challenge the assessment if he can show that the Commissioners acted outside the margin of their discretion, by acting in a way that no reasonable body of Commissioners could do.  In order to succeed, the taxpayer must show that the assessment was wrong in a material respect and that if so, the mistake is such that the only fair inference is that the Commissioners did not apply best judgment, as explained by Woolf J in Van Boeckel v Customs & Excise Commissioners”.

The Tribunal has to consider whether, on a balance of probabilities, the Appellant has established that the assessment was not made by HMRC to the best of their judgment.  If it was not so made, the assessment would be set aside or reduced.

	The Tribunal’s role is supervisory which means that it must not engage in a process that seeks to look at the information afresh but rather that the assessment is correct based on available information.  This was explained by Carnwarth LJ in Customs and Excise Commissioners v Pegasus Birds Limited [2004] STC 1509, where he said:

“Although the Tribunal’s powers are not spelt out, it is implicit that it has power either to set aside the assessment or to reduce it to the correct figure … in my view the Tribunal faced with a “best of their judgment” challenge should not automatically treat it as an appeal against the assessment as such, rather than against the amount.  Even if the process of assessment is found defective in some respect … the question remains whether the defect is so serious or fundamental that justice requires the whole assessment to be set aside, or whether justice can be done simply by correcting the amount to what the Tribunal finds to be a fair figure on the evidence before it.  In the latter case, the Tribunal does not require to treat the assessment as a nullity, but should amend it accordingly.”

It is not in disputed that the Appellant did not provide VAT returns at the due date in respect of the periods ending on 30 December 2002, 31 March 2003, 30 June 2003 and 30 September 2003.  Centrally issued assessments were therefore made for those periods.  After a visit from HMRC, the visiting officer was not satisfied that the amounts in the centrally made assessments were accurate given the manner in which the management charges were being charged by FCC Sales to its associated company. The management charges for each associated company were recorded annually and allocated to each of those companies at that time. This meant that the invoices for the management charges were not issued at the time the management services were performed. Consequently, the output tax declared on the VAT returns of FCC Sales were incorrect and assessments were accordingly made to recover the VAT due.  

	It was the Appellant’s understanding that the management charges were to be allocated at the end of the financial year. This was the basis for the Appellant’s misunderstanding.  The Annual Accounts declared sales for the year end 31 July 2003 of £190,000 and for the period ending 31 July 2002 of £60,000. The declared turnover to HMRC for the same combined periods was £50,000 which was £200,000 less than the figures in the Annual Accounts. The part of the turnover not declared to HMRC related to charges made to an associated Company for the provision of staff, stationery and office supplies supplied by FCC Sales to FCC Communication. These supplies would carry a liability to VAT at the standard rate at the time of supply. VAT was therefore payable on the total turnover of £250,000 at the time of supply. HMRC using their best judgment calculated the turnover for each accounting period by dividing the total turnover declared in the Annual Accounts by the number of months in the relevant tax period. This gave total output tax due of £43,750 (250,000 x 17.5%) on payments of £12,500 per month over the 20 month period (March 02-September 03). This was then compared to the amounts of output tax already assessed in relation to those periods (total of £8,750) in calculating the amount of output tax due (£43,750 - £8,750 = £35,000).  Input tax credit (£18,452.04) was given on returns made for the relevant periods which left an outstanding balance of £16,547.96 (£35,000 less £18,452.04).

	The best judgment calculations of a monthly payment of £12,500 between the companies is based on the premise that the management charge to the associated Company relates to monthly salaries of staff supplied and as the staff were paid monthly, the tax point for these supplies would be the month when the salary payment was due to be paid to the staff supplied. The application of monthly expected sales calculations in relation to the underdeclared charges is therefore appropriate when making the best judgment assessment. The invoices between the Companies supports monthly charges being made. HMRC did not accept the Appellant’s argument that the tax point was the end of year. The Tribunal agrees with this position.

	The Tribunal agrees with HMRC that there was no wrongdoing by the Appellant. The Appellant appeared to have misunderstand the rules relating to the supply of services and when the tax point arises with regard to a supply of monthly management services to an associated company. This led to returns being incorrectly submitted with wrong figures and incorrect date parameters. The best judgment assessments were reasonable on the information available to HMRC and the amount of the assessment was correct and can be sustained.

	For the reasons given above, this appeal would be dismissed.

DR K KHAN
CHAIRMAN

RELEASED:  16  December  2006

LON/05/1063