COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
MR JUSTICE PATTEN
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE CHADWICK
LORD JUSTICE CARNWATH
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Alison Foster QC and Eamon Mc Nicholas (instructed by The Solicitor for Customs and Excise) for the Respondent
Crown Copyright ©
Lord Justice Carnwath:
The proceedings so far – summary
Grounds of appeal
i) Mr Justice Patten erred in law in holding that the requirement to make an assessment to the "best of their judgment" is wholly subjective and that it is not possible to mount a "best judgment" challenge even if the assessment is wholly unreasonable or disproportionate;
ii) Even if he was correct in concluding that the Tribunal applied the wrong test, he was wrong to conclude that the assessments were made to best judgment. He should either have dismissed the appeal or remitted it to the Tribunal to reconsider whether the assessments were made to best judgment;
iii) Even if he was correct in concluding that the Tribunal applied the wrong test, he acted unreasonably in remitting the six assessments for the periods ending before September 1994 to the Tribunal. The Tribunal has already made a clear and adequately reasoned finding of fact that no tax is due in relation to this period. Remitting those six assessments merely results in unnecessary costs being incurred and is not consistent with the CPR overriding objectives.
iv) Even if he was correct in allowing the appeal, he was wrong to make an award of 80% of the Tribunal costs and all the High Court costs in favour of the Commissioners.
"Best of their judgment"
"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." (emphasis added)
It should be noted that the shorthand "best judgment", as used in some of the cases, may be misleading, if it is taken to imply a higher standard than usual. The statutory words "to the best of their judgment" are used in a context where the taxpayers' records may be incomplete, so that a fully informed assessment is unlikely to be possible. Thus the word "best", rather than implying a higher than normal standard, is a recognition that the result may necessarily involve an element of guesswork. It means simply "to the best of (their) judgment on the information available" (Argosy Co v IRC  1 WLR 514, 517 per Lord Donovan).
"Subject to section 84, an appeal shall lie to a tribunal with respect to any of the following matters..."
There is then set out a series of actions, decisions, and other matters arising under the Act listed under paragraphs (a) to (z). Paragraph (p) is as follows:
"An assessment -
(i) under section 73(1) or (2) in respect of a period for which the appellant has made a return under this Act....
… or the amount of such an assessment."
"The element of guess-work and the almost unavoidable inaccuracy in a properly made best of judgment assessment, as the cases have established, do not serve to displace the validity of the assessments, which are prima facie right and remain right until the taxpayer shows that they are wrong and also shows positively what corrections should be made in order to make the assessments right or more nearly right." (Bi-Flex Caribbean Ltd v Board of Inland Revenue (1990) 63 TC 515, 522-3 PC, per Lord Lowry).
Rahman (No 1)
"The passages I have underlined show that the Tribunal should not treat an assessment as invalid merely because they disagree 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 vindictively or capriciously'; or is a 'spurious estimate or guess in which all elements of judgment are missing'; or is 'wholly unreasonable'. In substance those tests are indistinguishable from the familiar Wednesbury principles ( 1 KB 223). Short of such a finding, there is no justification for setting aside the assessment." (p 835)
"… the practice is to consider these cases in two stages: (1) consideration whether the assessment was made according to the "best judgment of the Commissioners"; if not, the assessment fails, and stage (2) does not arise; (2) if the assessment survives stage (1), consideration whether the amount of the assessment should be reduced by reference to further evidence or further argument available to the Tribunal…" (p 476)
"I accept the importance of the discipline, and I also acknowledge the desirability of not upsetting established practice without good reason. In principle there is nothing wrong in the Tribunal considering the validity of the assessment as a separate and preliminary issue, when that is raised expressly or implicitly by the appeal, and, as part of that exercise, applying the Van Boeckel test. There is a risk, however, that the emphasis of the debate before the Tribunal will be distorted. If I am right in my interpretation of Van Boeckel, it is only in a very exceptional case that an assessment will be upset because of a failure by the Commissioners to exercise best judgment. In the normal case the important issue will be the amount of the assessment. The danger of the two-stage approach is that it reverses the emphasis…" (p 836, emphasis added)
"This case illustrates the dangers of an over-rigid adherence to the two-stage approach. I do not wish to diminish in any way from the importance of guidance given by Woolf J to inspectors as to how to exercise their best judgment when making assessments. However, when the matter comes to the Tribunal, it will be rare that the assessment can justifiably be rejected altogether on the ground of a failure to follow that guidance. The principal concern of the Tribunal should be to ensure that the amount of the assessment is fair, taking into account not only the Commissioners' judgment but any other points that are raised before them by the appellant." (p 840)
Rahman (No 2)
"First, whether the assessment has been made under the power conferred under that section; and, second, whether the amount of the assessment is the correct amount for which the taxpayer is accountable."
Having referred with approval (para 31) to my judgment in Rahman (1) and that of Dyson J to like effect in McNicholas Construction Co v Customs & Excise  STC 553, he addressed the taxpayer's submission that because the tax due had been found to be less than half the amount of the assessment, the assessment could not have been to "best judgment" (para 32). He regarded that as a "non-sequitur":
"The explanation may be that the tribunal, applying its own judgment to the same underlying material at the second, or 'quantum', stage of the appeal, has made different assumptions - say, as to food/drink ratios, wastage or pilferage - from those made by the commissioners. As Woolf J pointed out in Van Boeckel ( STC 290 at 297), that does not lead to the conclusion that the assumptions made by the commissioners were unreasonable; nor that they were outside the margin of discretion inherent in the exercise of judgment in these cases. Or the explanation may be that the tribunal is satisfied that the commissioners have made a mistake - that they have misunderstood or misinterpreted the material which was before them, adopted a wrong methodology or, more simply, made a miscalculation in computing the amount of VAT payable from their own figures. In such cases - of which the present is one - the relevant question is whether the mistake is consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or is of such a nature that it compels the conclusion that no officer seeking to exercise best judgment could have made it. Or there may be no explanation; in which case the proper inference may be that the assessment was indeed arbitrary." (emphasis added)
That formulation of the "relevant question" was part of the ratio of the decision in that case; it is binding on us, and on the Tribunal in future cases.
Consequences of breach
"… The tribunal may take the view, in such cases, that the proper course is to discharge the assessment. But even in cases of that nature, as it seems to me, the tribunal could choose to give a direction specifying the correct amount – with the consequence that the assessment would have effect pursuant to section 84(5) of the 1994 Act. It could not be criticised for doing so. The underlying purpose of the legislative provisions is to ensure that the taxable person accounts for the correct amount of tax." (para 45)
"… verify whether the relevant procedural rules have been complied with, whether the facts on which the choice is based have been accurately stated and whether there has been a manifest error of appraisal or misuse of powers…" (p I-5203)
"It is settled case-law that an irregularity of the type found above may lead to annulment of the decision in question if it is established that the content of that decision would have differed if that irregularity had not occurred." (para 283)
The plea was rejected because the irregularity had made no difference to the result.
"… the tribunal found as a fact that the commissioners had reviewed the assessments to the best of their judgment. Accordingly, the applicants cannot claim to be a "victim" of a violation of the convention with the meaning of art 34 in this respect." (p 90)
Miss Sharpston sought to persuade us that the ECHR must be taken as having impliedly adopted the summary of the law relating to "best judgment" given in that case by Sir Louis Blom-Cooper QC in the High Court ( STC 1101, 1116; a summary "provisionally" accepted by this Court as "an accurate and working summary of the law":  STC 463, 475j). That submission echoed part of the present Tribunal's reasoning; it said
"… The judgment must meet some minimum standard in order to satisfy the balance between the end and the means which is necessary to satisfy Article 1 of the First Protocol, see Sporrong and Lön v Sweden (1982) 5 EHRR 35 at para 61; it must not be arbitrary, cf. Aston Cantlow PCC. In reaching its decision in Georgiou the European Court specifically referred to the fact that the tribunal considered that the assessments were to the best of the commissioners' judgment, see  STC at page 90e." (Decision para 86)"
With respect to both, I do not think the European Convention and cases under it add anything to the effect of the English cases. As to Georgiou, the Strasbourg Court made no reference to the High Court's summary, and had no reason to do so, nor to concern itself with the detail of the test.
Guidance to the Tribunal
i) The Tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material properly available to it, the burden resting on the taxpayer. In all but very exceptional cases, that should be the focus of the hearing, and the Tribunal should not allow it to be diverted into an attack on the Commissioners' exercise of judgment at the time of the assessment.
ii) Where the taxpayer seeks to challenge the assessment as a whole on "best of their judgment" grounds, it is essential that the grounds are clearly and fully stated before the hearing begins.
iii) In particular the Tribunal should insist at the outset that any allegation of dishonesty or other wrongdoing against those acting for the Commissioners should be stated unequivocally; that the allegation and the basis for it should be fully particularised; and that it is responded to in writing by the Commissioners. The Tribunal should not in any circumstances allow cross-examination of the Customs officers concerned, until that is done.
iv) There may be a few cases where a "best of their judgment" challenge can be dealt with shortly as a preliminary issue. However, unless it is clear that time will be saved thereby, the better course is likely to be to allow the hearing to proceed on the issue of amount, and leave any submissions on failure of best of their judgment, and its consequences, to be dealt with at the end of the hearing.
The present case
The course of the Tribunal hearing
"Since there were probably in excess of 10,000 pages of documents, many of which were duplicated under different references, this caused great difficulty at the hearing and also contributed to its length." (para 38).
The notebooks of the relevant officers, including Mr Bakewell, were not produced until the hearing. The Tribunal commented:
"… they should have been listed since without them the officers would have quite been unable to give evidence of the detailed events up to eight years ago which were recorded in them." (para 40)
"…On most of the initial 17 days in May and June the Tribunal sat at 10.00am and did not rise until 5.00pm in an attempt to keep to the timetable agreed. Given the ambit of the dispute and the difficulty both sides experienced in selecting relevant material, this proved impossible. Mr McNicholas complained that Mr Freeman kept raising new matters. To a considerable extent this was due to the Respondents withholding material until such a late stage." (para 40)
"This difference between the evidence on best judgment and that on quantum caused considerable problems during the hearing and undoubtedly was a major factor in its length. The burden of proof is of course on the appellant. However neither member of the Tribunal can remember another case when the Commissioners have not produced in evidence important parts of the material on which the assessment was based." (para 63)
"During the course of the hearing before the Tribunal Mr Freeman did… seek to impugn the honesty of Mr Bakewell and the good faith of the investigation and the subsequent assessments…. But those allegations of dishonesty or bad faith were dropped and replaced by the argument that Mr Bakewell was guilty of what was variously described as intellectual dishonesty or capriciousness…. Intellectual dishonesty is not a term used in any case on best judgment that I know of and has no certain meaning. I assume that Mr Freeman's contrast of that term with dishonesty in the sense of mala fides indicates that it was intended to denote a lack of reasoning on Mr Bakewell's part. But that could have a number of possible causes." (para 29)
Patten J clearly understood, on the basis of Miss Sharpston's submissions, that no allegation of dishonesty or bad faith was being sustained before him.
The appeal to this Court
"Best of their judgment" – the present case
"We are unable to accept that the test of best judgment is wholly subjective. Of course bad faith or vindictiveness are subjective being dependent on the state of mind of the assessing officer. However the question whether an assessment is capricious or a spurious estimate or guess or wholly unreasonable does not depend on the officer's state of mind although it may or may not result from it…. Although the Commissioners are required to 'fairly consider all material placed before them and, on that material, come to a decision which is reasonable' (see Van Boeckel), the Rahman (1) approach is that (the) standard of what is reasonable is anything which is not wholly unreasonable.
That however is not the whole picture. If the only question apart from bad faith is whether the result is wholly unreasonable, the requirement fairly to consider all material before them would be nothing but empty words. Such an approach would be difficult to square with the proportionality necessary under Article 1 of the First Protocol to the European Convention on Human Rights. Having collected a vast amount of material in the present case and having been presented with more by Mr Freeman, Mr Bakewell was under a duty to consider it all fairly and with an open mind. He was not in any sense obliged to accept everything put to him. He was however obliged to consider whether in the light of all the material the assessment made sense. In deciding whether he came to a credible conclusion the Tribunal must be entitled to consider his judgment in the light of the material before him…." (para 84-6)
"232. In considering whether the Appellant has shown that the assessments were not made to best judgment we consider first the method of calculation and then consider whether the result is credible in the light of the material before the Commissioners and in particular Mr Bakewell. We consider this objectively. It is not however enough for the Appellant to show that the assessments did not reach the standard required of a reasonably competent officer, it must satisfy the Tribunal that the assessments were wholly unreasonable. We take this to mean that the assessments were outside the parameters of what could have been reasonable if all the material before the Commissioners had been fairly considered."
"… there was no coincidence at all since on at least four occasions Customs officers knew that Pegasus was involved in advance which was the very reason why they followed…"
It mentioned other occasions when Mr Bakewell "kept observation outside Pegasus' premises without success…", commenting –
"We are driven to the view that Mr Bakewell was less than frank on this aspect." (para 240)
It also referred to Mr Foster's diary as "cogent evidence" that Mr Hammond was not involved in seven trips between January and March 1995, adding:
"Whatever Mr Bakewell did consider, we do not accept that he fairly considered Mr Foster's diary." (para 41)
"250. Our conclusion is that far from the other evidence supporting the level of the assessments, every single indication shows the assessments to be wholly excessive. We conclude that the assessments were wholly unreasonable, being outside the parameters of the reasonable. All of the matters to which we have referred in the last five paragraphs were there for Mr Bakewell to consider. He either failed to consider them at all or failed to consider them fairly; he therefore failed to consider fairly all the material before him. We are driven to the conclusion that far from making any assumptions in favour of the trader (paragraph 194), Mr Bakewell closed his mind to any material which did not fit his case. The Appellant has satisfied us that the assessments were not to best judgment; there is no logical basis to uphold the assessment for any individual period."
"… For the reasons set out in the judgment of Chadwick LJ quoted above, the fact that the assessment is wrong and appears to the Tribunal to be objectively unreasonable is only the starting point. Conclusions to that effect do not justify finding that the assessment was not made to best judgment, unless the only explanation for the errors is that they were produced as part of something other than a genuine and honest attempt to calculate the amount of VAT. The principal difficulty about the Tribunal's decision is that at no point did they ask themselves whether Mr Bakewell did his honest best. Instead they seem to have inferred that he (to use the words in paragraph 250) 'closed his mind to any material which did not fit his case' from the fact that he reached conclusions which they considered to be wholly unreasonable. Bearing in mind that Mr Freeman had by then abandoned his earlier allegations of dishonesty and bad faith, that seems to me to be something of a non sequitur and, on my reading of Rahman (No 2), a misdirection." (judgment para 32)
"In paragraph 240 of its decision the Tribunal said that it accepted Mr Freeman's submissions and that it was driven to the view that Mr Bakewell was less than frank about the randomness of the observed visits. It is not clear what they meant by this, but it cannot be read as a comment on Mr Bakewell's honesty in relying on the alleged randomness of the six trips, because that aspect of the cross-examination was not relied upon by Mr Freeman, and there is in any case no evidence which could support such a finding. It was never put to Mr Bakewell or suggested that the "six out of six theory" was some deliberate concoction which he knew to be deeply flawed. It was simply put to him that the evidence obtained from the six observed trips did not justify the inference which he had made. Similarly in paragraph 241 of its decision the Tribunal records that Mr Bakewell did not fairly consider Mr Foster's diary. But again this cannot mean any more than that he gave it less weight than the Tribunal was itself prepared to do. No allegation of bad faith was put to him about his treatment of the diary, nor on the evidence could it be. He regarded it as unreliable and incomplete, whereas the Tribunal took a different view. The Tribunal was therefore right to confine its conclusion in paragraph 242 quoted above to saying that the assumption that Pegasus was involved in 166 trips was an unreasonable one on the part of Mr Bakewell. The Tribunal was entitled to take a different view of the evidence and to characterise Mr Bakewell's contrary view as unreasonable. But that is not enough to establish a lack of best judgment and it is clear that the Tribunal could not have made such a finding, based on these conclusions, had it applied the Rahman test." (para 64)
" I am satisfied, for the reasons given earlier in this judgment, that the Tribunal misdirected itself and misapplied the law on best judgment. I am also satisfied that its findings about the assessment, properly analysed, amount to no more than an acceptance of Mr Freeman's submission that Mr Bakewell was wrong in the assumptions he made. That is not enough to establish that Mr Bakewell's assessment was not made to best judgment, and insofar as paragraph 250 of the decision appears to suggest that there was some conscious failure by Mr Bakewell to take an honest and genuine look at the evidence, there was no material before the Tribunal, beyond the fact that it disagreed with his conclusions, on which that finding could be based. That is not a proper foundation for such a finding, and the Tribunal's treatment of the evidence or the lack of it amounts to an error of law. There is no evidence that Mr Bakewell did anything but his honest and genuine best, however mistaken he may have been…." (para 76)
Discussion of grounds (1) and (2)
"… it seems to me that it would not be right, and I am not satisfied that I have jurisdiction, in a case where the Tribunal has not assessed or determined the appeal on quantum, either to determine myself or send it back to the Tribunal with some kind of direction which ties the hands of the Tribunal and requires it to abide by what are necessarily provisional findings of fact…." (Second judgment para 11)
He saw no alternative but to remit all the assessments for determination, adding:
"It would then be for the Tribunal to decide whether and to what extent it is necessary on the material before it to reopen each and every aspect of the quantum appeal."
He rejected an application by the Commissioners for the appeals to be remitted to a different tribunal, and there is no appeal against that aspect of the order.
Lord Justice Chadwick :
"What the words 'best of their judgment' envisage . . . 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 the tax which is due."
The Tribunal had in mind, also, the observations of Mr Justice Carnwath (as he then was) in Rahman v Customs and Excise Commissioners  STC 826, at page 835, and of Mr Justice Lawrence Collins in Rahman v Customs and Excise Commissioners (No 2)  STC 73, at paragraph . At paragraph 85 of their judgment the Tribunal directed themselves that:
"Although the Commissioners are required to 'fairly consider all material placed before them and, on that material, come to a decision which is reasonable' (see Van Boeckel), the Rahman approach is that the standard of what is reasonable is anything which is not wholly unreasonable."
The correct approach, as they thought, was to measure the assessment that had been made by the officer against an objective standard of reasonableness; but to accept that the assessment would meet that standard unless it could be said to be "wholly unreasonable".
"We are driven to the conclusion that . . . Mr Bakewell closed his mind to any material which did not fit his case."
"For the reasons set out in the judgment of Chadwick LJ quoted above, the fact that the assessment is wrong and appears to the Tribunal to be objectively unreasonable is only the starting point. Conclusions to that effect do not justify finding that the assessment was not made to best judgment, unless the only explanation for the errors is that they were produced as part of something other than a genuine and honest attempt to calculate the amount of VAT. The principal difficulty about the Tribunal's decision is that at no point did they ask themselves whether Mr Bakewell did his honest best."
Although on a strict analysis of paragraph  of my judgment in Rahman (No 2) it can be seen that I was addressing a submission made in the particular context of that case, the judge was right to treat my observations as having a wider reach. In particular, he was right to derive the proposition stated in the second sentence of the passage which I have just set out from what I had said in that judgment.
" . . . But non sequitur: on a true analysis all that can be said is that the fact that, on considering the same material, the tribunal has reached a figure for the VAT payable which differs from that assessed by the commissioners requires some explanation. The explanation may be that the tribunal, applying its own judgment to the same underlying material at the second, or 'quantum', stage of the appeal, has made different assumptions – say, as to food/drink ratios, wastage or pilferage – from those made by the commissioners. . . . Or the explanation may be that the tribunal is satisfied that the commissioners have made a mistake – that they have misunderstood or misinterpreted the material which was before them, adopted a wrong methodology or, more simply, made a miscalculation in computing the amount of VAT payable from their own figures. In such cases – of which the present is one – the relevant question is whether the mistake is consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or is of such a nature that it compels the conclusion that no officer seeking to exercise best judgment could have made it. Or there may be no explanation; in which case the proper inference may be that the assessment was, indeed, arbitrary."
"As Mr Justice Woolf pointed out in Van Boeckel, that does not lead to the conclusion that the assumptions made by the commissioners were unreasonable; nor that they were outside the margin of discretion inherent in the exercise of judgment in these cases".
Taken out of context, that sentence might appear to suggest that I was accepting that there was an objective standard of reasonableness against which the assumptions made by the Commissioners were to be measured; so that an assessment made on the basis of assumptions which did not meet that standard was not properly made under the power conferred by section 73(1) of the Act. But I am satisfied that that would not be a proper reading of that sentence in the context in which it is set.
"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 the commissioners did not apply best judgment . . ."
" . . . There will be cases where the power to make an assessment ought not to have been exercised; because the pre-conditions to the exercise of the power (failure to make returns; failure to keep documents or afford facilities for verification; incomplete or inaccurate returns) were not satisfied. I suspect that those cases will be rare; but the tribunal can address them if and when they arise. There will also be cases where it is apparent on the face of the material before the tribunal that the power to assess has not been exercised in accordance with the 'best judgment' requirement; for example, where the commissioners have not taken into account information which was made available to them by the taxpayer before the assessment was made, or can put forward no basis upon which the assessment can be supported. Again, I suspect that those cases will be rare.
 In the usual case the tribunal will have the material before it from which it can see why the commissioners made the assessment which they did; and may have further material which was not available to the commissioners when the assessment was made. In such cases, as it seems to me, a tribunal would be well advised to concentrate on the question "what amount of tax is properly due from the taxpayer?"; taking the material before it as a whole and applying its own judgment. . . ."
Lord Justice Waller
ORDER: Appeal dismissed, save there is an allowance of the appeal in relation to costs; the appellants to pay 60% of the respondent's costs of the appeal; no stay in relation to the costs of the appeal, but there will be a stay in relation to all other costs orders pending the decision of the Tribunal; a general stay until mid-September; permission to appeal to the House of Lords refused to both sides.