20295

VAT – Assessment – Effect of time limit in section 73(6)(b) VATA 1994 – Were HMRC out of time – Held on the facts – No 

LONDON TRIBUNAL CENTRE

SAYED HOQUE SIDDIQUEE	           Appellant

-	and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

Tribunal:	CHARLES HELLIER (Chairman)
RICHARD CORKE

Sitting in public in Bristol on 3 July 2007

Nigel Ferrington of Abbey Tax Protection for the Appellant 

Pauline Crinnion, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Introduction

1.	The issue before us in this appeal was the meaning and effect of the 12 month limit in section 73(6)(b) VATA 1994.  Section 73(6) provides:-

“An assessment … must be made within the time limits provided for in section 77 and shall not be made after the later of the following – 

(a)	2 years after the end of the prescribed accounting period; or
(b)	one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to this knowledge …”.

2.	HMRC’s officers conducted some test purchases and made some observations at the Appellant’s restaurant.  Later they examined the records of the restaurant and concluded that these and other purchases were not reflected in them.  They deduced that the Appellant had not declared all his sales in his VAT return.  They performed some calculations to estimate the unpaid VAT.  They assumed that what happened in the period when they visited had also happened in other periods.  They estimated the unpaid VAT for the quarterly periods 05/02 (ending 31 May 2002) to 02/05 (ending 28 February 2005) and wrote to the Appellant with their concerns.  In the later half of 2005 and in early 2005 they made assessments on the Appellant on the basis of their estimates for the periods from 05/02 to 02/03 but they did not then make assessments for the periods 11/03, 02/04, 05/04 and 08/04.

3.	After a while the Appellant appointed a VAT adviser with expertise and experience. This was Mr Ferrington who appeared for the Appellant before us.  He looked at HMRC’s figures, investigated the business records and did some calculations of his own based on purchase prices, selling prices and an exercise to determine the level of wastage. HMRC’s assessments had been based on an underdeclaration of 21.46% of sales; Mr Ferrington’s figures suggested an underdeclaration rate of no more than 12.28%.  On 14 November 2005 he wrote to the Respondents setting out his calculations and reasoning and the factual basis for his conclusions.

4.	The Respondents looked at Mr Ferrington’s information and figures.  Correspondence ensued between them.  There was a meeting in February 2006 and further correspondence.  Then in September 2006 the Respondents issued assessments inter alia for the periods 11/03, 02/04. 05/04 and 08/04 on the basis of a 12.28% error rate.

5.	There followed further correspondence and discussion which culminated in an agreement between the Appellant and the Respondents just before the hearing.  They agreed the quantum of all the relevant assessments.

6.	That agreement disposed of one of the two grounds of the appeal before us, but it left in respect of the periods 11/03, 02/04, 05/04 and 08/04 the Appellant’s second ground of appeal – that these assessments were out of time under the 12 month rule in section 73(6)(b).  That was therefore the only issue before us in the appeal.

7.	In summary the Appellant submits that by June 2005 HMRC had adequate information to raise assessments for these periods: it had used the information it then had to raise the assessments for the periods 05/03 and before.  The assessments raised in September 2006 were made more than 12 months after June 2005 and the effect of section 73(6) was that they were out of time.

8.	The Respondents say that the assessments made in September 2006 were made on the basis of the information received by them in November 2005, a mere 8 months previously, and so were not out of time.

9.	In the remainder of this decision we discuss first the proper construction of section 73(6) and then make findings of fact relevant to that construction before reaching our conclusion on the appeal.

The proper construction of section 73(6)

10.	Section 73(1) provides that where it appears that VAT returns are incorrect the Commissioners “may assess the amount of the VAT due … to the best of their judgment …”.  In Van Boeckel v Commissioners of Customs and Excise [1981] STC 290 Woolf J indicated that as long as there was some material on which the Commissioners could reasonably act they could assess to the best of their judgment on that material without having to carry out further investigations.  The question is to our minds whether on the material available to them the Commissioners could make an honest and genuine attempt to make a reasoned assessment of the VAT payable (see para 21 Pegasus Birds Ltd [2004] STC 1509).  If there is such material they may make an assessment.

11.	It is helpful at this stage to set section 73(6) out in full:-

“An assessment under subsection (1), (2) or (3) above of an amount of VAT due for any prescribed accounting period must be made within the limits provided for in section 77 and shall not be made after the later of the following – 

(a)	2 years after the end of the prescribed accounting period; or
(b)	one year after evidence of facts, sufficient in the opinion of 	the Commissioners to justify the making of the assessment, 	comes to their knowledge,

but (subject to that section) where such further evidence comes to the Commissioners’ knowledge after the making of an assessment under section (1), (2) or (3) above, and the assessment may be made under that subsection, in addition to any earlier assessment.”

12.	Mr Ferrington took us to the tribunal decision in Lazard Brothers & Co Ltd (VAT Decision 13476 of 19 January 1995).  The decision he said was authority for the proposition that if the Commissioners had information on one date (the “first date”) on which they could have made an assessment, then even if they received new evidence after that date, the time limit for the making of any assessment was 12 months from the first date.

13.	In Lazard the sole issue for the tribunal was whether an assessment for about £199k had been made within the 12 month time limit in paragraph 4 schedule 7 VATA 1994.  The statutory language was the same as that in section 73(6) VATA 1994.

14.	As a result of a visit to Lazards by a Customs officer in August 1992 it appeared to the Commissioners’ officers that input tax of £199k had been wrongly claimed for periods in 1991 and 1992.  After correspondence between Lazards and the Commissioners, the Commissioners made assessments on Lazards for those periods.  The assessments were made for a total of £199k on 11 May 1994, which was some 21 months after the visit at which they gathered the relevant information.

15.	Between August 1992 and May 1994 the only additional information received by the Respondents from Lazards were schedules which split the £199k quarter by quarter.  Those schedules were based on factual information which was by September 1992 in the Respondents’ hands.

16.	The tribunal held that the assessments were out of time.  It held:-

(i)	the Commissioners had in September 1992 knowledge of 	evidence of facts which was sufficient in the opinion of the 	Commissioners’ officers (and thus the Commissioners) to make 	the assessment;

(ii)	the subsequent calculations provided to the Commissioners 	were not evidence of facts;

and therefore that the time limit imposed was 12 months after September 1992 and not 12 months after the calculations were received.  As a result the assessments were out of time.  The tribunal said:

“The Tribunal does not consider that the making of calculations upon facts in the possession of the Commissioners comes within the terms of evidence of facts sufficient to justify the making of the assessment.”

17.	This to our mind was the crucial determination: because it found that the manipulation in the calculations of evidence was not new evidence of fact so that the later receipt of the calculations did not affect the time limit which started to run when that evidence was first received.

18.	Seen in that light, the decision is not authority for the proposition for which Mr Ferrington relies upon it.  But the tribunal also helpfully reviewed other decision on the 12 month limit.  We note with agreement the following propositions drawn from those decisions:-

(i)	the provision deals with “An assessment … of an amount of 	tax” not a decision as to whether tax is payable;

(ii)	whether the assessment is out of time depends upon when the 	evidence of facts came to the knowledge of the Commissioners;

(iii)	the “evidence of facts” is evidence of “basic facts” not 	inferences of fact;

(iv)	the question is whether the Commissioners thought the 	evidence of those facts was sufficient, not whether it was in the 	tribunal’s view sufficient;

(v)	the knowledge referred to is the actual knowledge of the 	Commissioners, not what they could have known if reasonable 	enquiries or inspections had been made; and

(vi)	the tribunal must decide what were the facts (or evidence 	thereof) which justified the Commissioners’ opinion and then 	decide when the last of those facts (or evidence thereof) came 	to the knowledge of the Commissioners.

19.	We turn to the words of section 73(6).  Sub-paragraph (b) speaks of “evidence of facts sufficient … to justify the making of the assessment” [our emphasis].  The use of the definite article indicates to our mind that the test is to be applied by reference to an actual assessment which has been made and that the question to be answered is whether that assessment was made within the 12 month time limit. The question is whether the Commissioners had the evidence to justify that assessment more than 12 months before it was made, not whether they could have made a different assessment at an earlier stage.  Some of the decisions quoted in Lazard suggest that other tribunals also took this to be the case:-

(i)	in Merryn Conn Organisation 1990 LON 89/6//Z the tribunal 	said:

“The relevant evidence … is therefore evidence of facts that has come to the Commissioners’ knowledge and is sufficient in their opinion to justify the making of the particular assessment for the particular amount in question.” (our emphasis);

(ii)	in British Telecom plc LON 94/573A the tribunal said:

“I am not satisfied … that Customs and Excise did have sufficient evidence to justify the making of this assessment before …” (our emphasis);

(iii)	in Strollmore Ltd LON 94/632, although the tribunal said (with 	our emphasis):

“The relevant question is whether Customs and Excise had sufficient evidence to justify the making of an assessment …”,

	it continued shortly afterwards to say:

“The evidence must be sufficient … to justify the making of the assessment”; and

(iv)	in Lazard itself the tribunal concludes that (again with our 	emphasis):-

“Having decided that on 22 March 1993 the Commissioners had formed the opinion that evidence of facts sufficient to justify the making of the assessment had come to their knowledge, it follows that the assessment was … out of time.”.

It is plain that the assessment referred to is the one under appeal.

20.	We therefore find nothing in the available decisions to suggest that the enquiry is not limited solely to whether the actual assessment appealed against was made more than 12 months after sufficient evidence was available to the Commissioners.

21.	We considered whether the statutory purpose or context required a different construction.  The Tribunal has to do its best to make sense of the legislation, not only making grammatical sense of the text but also finding a rational scheme in the legislation.  If there is a choice between two interpretations, one of which would fail to achieve the purpose of the legislation or reduce it to futility or anomaly, it should accept a bolder construction based on the view that Parliament could legislate only for the purpose of an effective result.  If in order to avoid imputing to Parliament an unreasonable result some violence may have to be done to the words we are, as Lord Reid said in Luke v IRC [1963] AC 557, “entitled and indeed bound to discard the ordinary meaning and adopt some possible meaning which will produce a reasonable result.”

22.	What is the purpose of the 12 month rule?  It is, in our judgment, first to provide the taxpayer with some certainty that if he has provided information to the Commissioners and after 12 months he has not been assessed on it, then he can safely assume that he has no further liability; he can put “nil” in the relevant place in his balance sheet and move on, and second to provide some incentive to speed and efficiency in the Commissioners’ actions.

23.	But if we are correct  in our interpretation of the words and a taxpayer goes to the Commissioners and says “it looks to me as if my turnover was £100 more than I declared” and for 12 months the Commissioners do nothing, and then he realises he was a bit wrong and goes back to them and says “actually it was £99”, then his honesty gives the Commissioners a chance to assess within 12 months of his later statement, because now they have evidence of facts sufficient for an assessment by reference to a £99 underdeclaration.  And if his new figure is £101 notifying it puts him at risk of a £101 assessment and not just the extra £1.

24.	It seems to us that this is not a result which makes a mockery of the statutory purpose.  It creates some discomfort at the margin but when seen on the context of a régime where the onus is on the taxpayer to make full and accurate disclosure it is not an anomalous or absurd result.

25.	It might also be said however that our interpretation means that the section discourages open and constructive dialogue between the taxpayer and the Commissioners: if each little new piece of information – whether in a taxpayer’s favour or against it – starts a new 12 months running if that piece of information is relevant to an assessment, why should the taxpayer discuss anything?  Much better keep silent and let time take its course.

26.	We do not find this argument compelling.  It would, (supposing always that they had some information) always be open to the Commissioners to make an assessment at an early stage on the basis of that information if they acted honestly and genuinely.  Then if the taxpayer wanted to have that assessment reduced he could provide further information.  Assessment (or re-assessment) on the basis of that new information would be no worse (and indeed better) than saying nothing and then appealing against the assessment and getting the tribunal to reduce the assessment.  The fact that the Commissioners, rather than making a formal assessment on the basis of their information as a first step, instead initiate negotiations with the taxpayer with the aim of moving to a more fair or accurate assessment does not mean that the free exchange of information in those negotiations is truly inhibited: all that can be said is that on our interpretation the taxpayer loses the possibility of a windfall gain arising by virtue of the failure of the Commissioners to assess at the earliest opportunity (or within 12 months thereafter).

27.	We therefore find no anomaly, absurdity or contravention of statutory purpose in our construction of section 73(6)(b).

28.	We find therefore that the test imposed by that provision requires the following approach:

(i)	we must consider the actual assessment made; 

(ii)	we must find the facts which were in the Commissioners’ opinion sufficient to make that assessment;

(iii)	we must find the time when the latest of those facts became known to the Commissioners;

(iv)	if that time is more than 12 months before the making of that assessment, then the limit in section 73(6)(b) is failed.

Relevant findings of fact

29.	We had before us copies of the correspondence between the parties.  We heard from Mr Ferrington and from Mr Burke, HMRC’s indirect tax officer involved in the assessments.  We find as follows:-

(i)	the actual assessments under appeal – those for 11/03, 02/04, 05/04 and 08/04 could not have been made in the amounts they were made before November 2005;

(ii)	before November 2005 the Commissioners did not have the opinion that they could make these assessments in those amounts;

(iii)	the information received by the Commissioners in November 2005 from the Appellants was evidence of facts;

(iv)	that and possibly later evidence of facts were in the opinion of the Commissioners sufficient to make the assessments in those amounts.

30.	We conclude that these assessments were not proscribed by section 73(6): they were made before the later of:

(i)	2 years after the relevant, prescribed period; and

(ii)	12 months after the Commissioners had evidence of facts which in their opinion justified the making of the assessments.

31.	We therefore dismiss the appeal in relation to the ground of appeal relating to section 73(1).

32.	So far as the quantum of the assessments is concerned that is covered by the agreement reached between the parties prior to the hearing.  That agreement was that the relevant underdeclarations should be determined as 7.05% of the declared turnover.  

33.	That agreement (subject to the formalities of section 85 VATA 1994) disposes of the appeals in respect of the assessments other than for 11/03, 02/04, 05/04 and 08/04, and, in relation to those periods when coupled with our decision on the 12 month limit determines also the assessments for them.

34.	No application was made for costs.  We have decided to make no order as to costs.

35.	Our decision was unanimous.

CHARLES HELLIER
CHAIRMAN

RELEASED: 10 August 2007

LON 2006/1025