England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MR JUSTICE HART

ON APPEAL FROM THE VAT AND DUTIES TRIBUNAL
[2006] EWHC 23 (Ch)

		Royal Courts of Justice Strand, London, WC2A 2LL
		24 November 2006

Lord Justice Lloyd:

1. This appeal concerns the means available to the Commissioners for Her Majesty's Revenue and Customs (the Commissioners) for the enforcement of the obligations of traders in respect of value added tax, in particular the civil evasion penalty, introduced by the Finance Act 1985 and now governed by section 60 and other provisions in Part 4 of the Value Added Tax Act 1994 ("the Act").
2. In his judgment given on 23 January 2006, Hart J held that a civil evasion penalty could not validly be imposed in respect of VAT which the taxpayer is not liable to pay. The question is whether this is correct. It is a point of sufficient general importance for Chadwick LJ to have granted permission to appeal.
3. Mr Ali, the Respondent in this appeal (having been the appellant before Hart J), himself applied for permission to appeal on some of the many points which Hart J decided against him. Such permission was refused by Chadwick LJ both on paper and at a hearing. Miss Lonsdale attempted to reopen that question before us, but she is not entitled to do so. Accordingly the only question is whether the judge was right on the one point which he decided in favour of Mr Ali.
4. A civil evasion penalty may be imposed in any case where a person does any act or omits to take any action, for the purpose of evading VAT, and his conduct involves dishonesty, whether or not it is such as to give rise to criminal liability. As Hart J said in an earlier case, Khan v. Customs and Excise Commissioners [2005] EWHC (Ch) 653 at paragraph 43:

"The genesis of the code is to be found in the 1983 Keith Report. That had reported on the desirability of introducing into the VAT enforcement regime a civil penalty system akin to that available to the Inland Revenue in respect of other taxes. Attention was drawn inter alia to the difficulties and expense of obtaining proof of VAT offences to a criminal standard. It also gave support to the desirability of encouraging the co-operation of the taxpayer in the investigative process."

5. The present case is a good example of circumstances in which the civil evasion penalty is a valuable sanction to discourage evasion of VAT, in this instance by failure to register and by concealment of the true level of turnover. The facts can be summarised shortly.
6. Mr Ali was the sole proprietor of an Indian restaurant in Halesowen, West Midlands. He started trading before August 1996 and now accepts that by 1 August 1996 his turnover was such that he was obliged to register for VAT. He did not in fact apply for registration until August 1997, following a visit by a Customs officer to the premises in July. He first registered as of August 1997, but following further visits he was notified that he should have registered as of August 1996, and he was required to submit a VAT return for the 12 months from 1 August 1996. He did not do so.
7. On 18 May 1999 he was assessed for arrears of VAT for that 12 month period in the sum of £6,971.95, based on turnover figures which he had disclosed. On 18 June 1999 the Commissioners purported to amend that assessment by increasing it to £14,284 to take account of business takings which were considered to have been concealed dishonestly by Mr Ali. Other assessments were raised in respect of later periods, but they are irrelevant to this appeal.
8. On 2 November 1999 a civil evasion penalty assessment for dishonest evasion of VAT for the period from August 1996 to July 1997 was notified in the sum of £14,284, less 10% mitigation for co-operation during the investigation.
9. Mr Ali appealed against the tax assessments and against the penalty assessment. At the hearing before the VAT and Duties Tribunal, the Commissioners accepted that the amended tax assessment in the sum of £14,284 was invalid, and withdrew that assessment. There is no power to amend an assessment. The right way to proceed would have been to issue either a supplementary assessment or, more likely, an additional assessment of the additional amount. By the time of the hearing it was too late to take either of these steps. Thus, the Commissioners accept that Mr Ali's liability for VAT in respect of the period of 12 months from 1 August 1996 is defined by the original assessment at £6,971.95. But they contend that, for the purposes of the civil evasion penalty regime, the tax evaded was the higher sum.
10. The Tribunal dismissed Mr Ali's appeals. It had been accepted on behalf of Mr Ali that he had acted dishonestly by suppressing evidence of sales. The Tribunal held that he should have been registered from 1 August 1996, and upheld the amount of the assessment. They also held that, although for technical reasons the amended assessment was ineffective, the Commissioners had proved that Mr Ali had suppressed sales dishonestly from 1 August 1996 and that the amount of the invalid assessment did properly represent the actual level of sales. In relation to the civil evasion penalty assessment, they held that Mr Ali's suppression of sales amounted to a dishonest evasion of VAT, and that the amount of tax evaded was the higher amount of £14,284, not merely the lower amount assessed to tax of £6,971. They held that, on that basis, the civil evasion penalty could and should reflect the higher sum even though there was no valid assessment to tax for that sum.
11. On the appeal to Hart J, Miss Lonsdale (who had not appeared before the Tribunal) took a new point, namely that which is at issue on this appeal. She contended that Mr Ali could not be said to have evaded tax which was not due from him, and that therefore the penalty could not be imposed by reference to a higher amount of tax evaded than £6,971. The judge accepted that submission.
12. The Commissioners' power to assess to tax is contained in section 73(1) of the 1994 Act:

"(1) 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.

…

(6) 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 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 their knowledge,

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

…

(9) Where an amount has been assessed and notified to any person under subsection (1), (2), (3), (7), (7A) or (7B) above it shall, subject to the provisions of this Act as to appeals, be deemed to be an amount of VAT due from him and may be recovered accordingly, unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced."

13. Civil evasion penalties are provided for, first, by section 60 of the 1994 Act which is headed "VAT evasion: conduct involving dishonesty". It provides, so far as material:

"(1) In any case where

(a) for the purpose of evading VAT, a person does any act or omits to take any action, and

(b) his conduct involves dishonesty (whether or not it is such as to give rise to criminal liability),

he shall be liable, subject to subsection (6) below, to a penalty equal to the amount of VAT evaded or, as the case may be, sought to be evaded, by his conduct …

…

(3) The reference in subsection (1) above to the amount of the VAT evaded or sought to be evaded by a person's conduct shall be construed—

(a) in relation to VAT itself or a VAT credit as a reference to the aggregate of the amount (if any) falsely claimed by way of credit for input tax and the amount (if any) by which output tax was falsely understated; ...

…

(7) On an appeal against an assessment to a penalty under this section, the burden of proof as to the matters specified in subsection (1)(a) and (b) above shall lie upon the Commissioners."

14. The imposition of a civil evasion penalty is governed by section 76, which provides for the penalty to be imposed by an assessment, and for the accounting period to which the penalty is to relate, and also provides that the amount so assessed is recoverable as if it were VAT due. The relevant parts of the section are as follows:

"(1) Where any person is liable

(a) to a surcharge under section 59 or 59A, or

(b) to a penalty under any of sections 60 to 69B, or

(c) for interest under section 74,

the Commissioners may, subject to subsection (2) below, assess the amount due by way of penalty, interest or surcharge, as the case may be, and notify it to him accordingly.

…

(3) In the case of the penalties, interest and surcharge referred to in the following paragraphs, the assessment under this section shall be of an amount due in respect of the prescribed accounting period which in the paragraph concerned is referred to as "the relevant period":

…

(b) in the case of a penalty under section 60 relating to the evasion of VAT, the relevant period is the prescribed accounting period for which the VAT evaded was due;

(c) in the case of a penalty under section 60 relating to the obtaining of the payment of a VAT credit, the relevant period is the prescribed accounting period in respect of which the payment was obtained;

…

(5) Where a person is assessed under this section to an amount by way of any penalty, interest or surcharge falling within subsection (3) above and is also assessed under section 73(1), (2), (7), (7A) or (7B) for the prescribed accounting period which is the relevant period under subsection (3) above, the assessments may be combined and notified to him as one assessment, but the amount of the penalty, interest or surcharge shall be separately identified in the notice.

…

(9) If an amount is assessed and notified to any person under this section, then unless, or except to the extent that, the assessment is withdrawn or reduced, that amount shall be recoverable as if it were VAT due from him."

15. Section 77 deals with time limits for assessments, including penalty assessments. Section 77(2) has been amended since the date material to the present case, but the relevant part of the sub-section, set out below, is unaffected by the amendment. (In relation to tax assessments, section 73(6) also has to be considered.)

"(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

(b) in the case of an assessment under section 76 of an amount due by way of a penalty which is not among those referred to in subsection (3) of that section, 3 years after the event giving rise to the penalty.

(2) Subject to subsection (5) below, an assessment under section 76 of an amount due by way of any penalty, interest or surcharge referred to in subsection (3) of that section may be made at any time before the expiry of the period of 2 years beginning … with the time when the amount of VAT due for the prescribed accounting period concerned has been finally determined.

…

(4) Subject to subsection (5) below, if VAT has been lost

(a) as a result of conduct falling within section 60(1) or for which a person has been convicted of fraud, or

(b) in circumstances giving rise to liability to a penalty under section 67,

an assessment may be made as if, in subsection (1) above, each reference to 3 years were a reference to 20 years."

Subsection (5) is irrelevant for present purposes.

16. Part 4 of the Act also provides for penalties in other circumstances, not involving dishonesty, and sections 76 and 77 apply to those provisions as well, but nothing turns on those provisions for present purposes.
17. A civil evasion penalty is a sanction for dishonest conduct, rather than for failure to pay tax which is due. Hence, a penalty may be imposed even if no tax has been lost. This is clear from section 60(3)(a) with the words "(if any)", and from section 70(4)(b) which deals with mitigation, and has the effect that it is not relevant by way of mitigation that no or no substantial amount of tax has been lost, and indeed from section 60(1) itself with its words "or sought to be evaded".
18. Except in a most unusual situation in which the taxpayer has put in a timely return which the Commissioners are prepared to accept as accurate, there is likely to be a tax assessment, to secure payment of what the Commissioners consider to be the right amount of tax. In any case in which there is a penalty assessment it is, in practical terms, certain that there will be a tax assessment as well. That is true of the present case and of all other relevant cases to which our attention was drawn. What is untypical about this case is that there was, first, one tax assessment and then another, but the latter was invalid.
19. Tax assessments and penalty assessments alike are subject to appeal under section 83 of the Act: the long list of matters set out in that section on which an appeal lies to a tribunal includes at (n) liability to a penalty, at (p) an assessment to tax under section 73, and at (q) the amount of any penalty. On appeal the tribunal has power to increase a tax assessment, under section 84(5), but it cannot increase a penalty, and cannot vary it except to reduce it to the amount which is appropriate under section 60 (see section 84(6)), or to apply the provisions as to mitigation in section 70.
20. The essence of Miss Lonsdale's contention is that liability to penalty is dependent on liability to tax, and that, if the taxpayer's liability to tax for a particular accounting period has been fixed as a result of an assessment, whether or not that assessment has been appealed, then the maximum amount of the penalty is the amount of tax so fixed. It is no answer to that contention that tax need not have been lost as a result of the conduct in question. She did not contend that the issue of an assessment to tax was a precondition to the issue of a penalty assessment. Such an argument could not be based on any express provision in the Act, and it would not be a convenient or sensible result. In practice, often a penalty assessment is issued at the same time as, or even (as in Khan v. Commissioners, referred to above) before, a tax assessment. Section 76(5) expressly contemplates the issue of tax and penalty assessments in a single document.
21. She did, however, contend that it is not open to the Commissioners to prove the amount of tax due (and therefore the amount of tax evaded, or sought to be evaded) by way of the penalty procedure, rather than by way of the tax assessment procedure. It would follow that, unless the amount of tax due for a particular accounting period is not in dispute, a tax assessment would have to be made, and appealed if the taxpayer wishes to appeal and acts in time, in order that the amount of tax due can be fixed for the purposes of tax liability as well as for the purposes of quantifying any civil evasion penalty.
22. Mr Puzey on the other hand argued that liability to a penalty was not dependent on the person in question being liable to pay tax at the time when the penalty was imposed, or at any later time, though it was necessary for HMRC to show that tax had been evaded, or sought to be evaded, and therefore that the taxpayer had been, or would have been, liable to tax at some time in the past, even if not so liable presently. In support of this he emphasised the function of a penalty as a sanction for dishonest conduct, not for non-payment of tax as such. He contended that the assessment procedure under section 73 did not define what was due by way of tax, but rather provided the procedure for recovery of tax, the amount being determined by reference to other substantive provisions in the Act. He argued that even if an assessment to tax had not been made, and could not be made because of the lapse of time, there was no reason why the Commissioners should not impose a penalty (for which different time limits apply) and seek to demonstrate on any appeal from the penalty assessment the amount of tax which had been due, or, more accurately, the amount by which output tax had been falsely understated – see section 60(3)(a) - and which therefore had been evaded or sought to be evaded.
23. In the light of the different contentions on the point, and of the terms of the judge's decision, some attention was given to the provisions as to time limits during the hearing of the appeal. These are not altogether straightforward.
24. As regards a tax assessment, first, this is subject to the time limits in section 77 and those in section 73(6), the latter, as it seems to me, overriding the former if there is any conflict. Under section 73(6) the time expires on the later of two dates: two years after the end of the relevant accounting period, and one year after the Commissioners acquire knowledge of evidence of facts sufficient to justify the making of the assessment. In the present instance it was possible to make a tax assessment within the two year period, but that might not be so in some cases of dishonest evasion.
25. Under section 77, the basic provision is in subsection (1), which applies to any assessment under section 73 or section 76. So far as relevant to this case, it precludes an assessment being made more than three years after the end of the relevant accounting period. This is subject to the later provisions of the same section. Two of these are relevant for present purposes. Subsection (2), which applies to an assessment of a civil evasion penalty, not to an assessment of tax, allows a longer period, namely up to two years from the time when the amount of VAT due for the relevant accounting period "has been finally determined". Counsel offered rival versions of what is meant by that phrase, which appears nowhere else in the Act. In addition, subsection (4), which applies to both penalty and tax assessments, allows a period of 20 years after the end of the relevant accounting period, if VAT has been lost as a result of conduct falling within section 60(1) or for which a person has been convicted of fraud, or in another case not now relevant.
26. Thus, as regards tax, if an assessment is not made within 2 years after the end of the accounting period in question, it has to be made within one year of the Commissioners becoming aware of evidence sufficient in their opinion to justify the assessment, but that one year period is subject to the overall limit of three years from the end of the accounting period, unless tax has been lost by reason of dishonesty, in which case the three years is extended to 20 years. In practice, in a case of dishonest concealment, the effective limits are likely to be those laid down by section 73(6): either two years from the end of the accounting period, or (if later) one year from the date when the Commissioners had sufficient knowledge to make the assessment.
27. In the case of a civil evasion penalty, section 73(6) does not apply, and it is necessary to form a view as to the effect of section 77(2). The basic rule is that set out in section 77(1)(a), already described. This is subject to section 77(4), also described above, if VAT has been lost by reason of dishonest conduct. It is also subject to subsection (2) which, so far as relevant, imposes a different time limit of two years after the amount of VAT due for the particular period has been finally determined. No question arose in the present case as to the application of the time limits: both tax and penalty assessments were well within time on any basis.
28. The judge attached importance to section 77(2). He said this at paragraph 45:

"I have not found the point an easy one but have concluded that Mr Puzey's submission is not correct. In my judgment, and contrary to my initial impression, the answer lies in section 77(2). That sub-section deals with the time within which a civil penalty assessment may be raised, and allows such an assessment at any time before the expiry of the 2 years from the time when the VAT due in respect of an accounting period has been "finally determined". The process of final determination will include (but not necessarily be confined to) an assessment. The premise of the sub-section is, therefore, that there will have been an assessment. If a civil penalty assessment can be raised without there having been any determination of the VAT due in accordance with the statutory machinery there would, it would seem, be no time limit applicable to it. I do not think that can have been the Parliamentary intention."

29. Mr Puzey took issue with that on the basis that "finally determined" did not mean determined by assessment and, if applicable, an appeal or appeals. He also pointed out that even if section 77(2) did not apply, section 77(1)(a) would apply to an assessment to a civil evasion penalty, as would section 77(4) if tax had been lost. He contended that "finally determined" meant determined by the Commissioners, either by a tax assessment or, if no assessment was possible, for example if the time limit for a tax assessment had expired, by a decision as to what the amount of tax had been, which would have been the subject of a tax assessment if it were not too late to make one.
30. Miss Lonsdale submitted to the contrary that "finally determined" must mean something more formal than merely an internal decision by the Commissioners, and that the only proper interpretation of the phrase was that it referred to the amount of tax due becoming fixed (to use a neutral word) as between the parties, either by a return by the taxpayer which is accepted by the Commissioners, or by an assessment by the Commissioners which is not appealed by the taxpayer, or (more commonly) by an assessment followed by an appeal by the taxpayer which is either decided by the tribunal (subject, as the case may be, to one or more further appeals) or settled by the parties by agreement. Only in whichever is relevant of those various possible events can it be said, she argued, that the tax due has been finally determined.
31. She also submitted that section 77(2) applied to cases where the amount of tax due was in dispute, whereas sections 77(1) and (4) applied to other cases. I do not understand the basis for that argument, and I cannot accept it.
32. The interpretation of subsection (2) for which she contends would have the effect that the taxpayer might be exposed for a long time to the risk of a penalty assessment. If a tax assessment is made within the time relevant under section 73(6), and is then appealed first to the tribunal and then to the High Court, several years might elapse before the two year period under section 77(2) even started to run. To take the facts of the present case by way of illustration, the relevant accounting period ended on 31 July 1997, so the basic three year period for the penalty assessment under section 77(1) expired on 31 July 2000. The tax assessment was well within time. The appeal to the Tribunal appears to have been launched in June 2000. The hearing extended over 5 days from May 2004 to January 2005. The Tribunal gave its decision on 8 March 2005. In May 2005 Mr Ali appealed to the High Court. The hearing of that appeal took place in October 2005, judgment being given on 23 January 2006. Mr Ali sought permission to appeal against those parts of the judge's order that were against him (including the judge's refusal to set aside the assessment to tax of £6,971 and to remit that to the Tribunal). That was only finally refused at an oral hearing by Chadwick LJ on 20 July 2006. On those facts, the earliest date on which, on Miss Lonsdale's argument, the tax due could be said to be finally determined was 8 March 2005, and the latest was 20 July 2006. Thus, according to her, the Commissioners would have a further two years from one or other of those dates to make a penalty assessment, if they had not done so already.
33. Mr Puzey submitted that such an interpretation would be disadvantageous to the taxpayer, because he would or could be held in suspense, as regards a civil evasion penalty, for a very long time, and the question of liability to such a penalty might not arise for decision until years after the relevant events. That is a fair comment, though since the burden of proof of dishonesty is on the Commissioners, it is their task that might become significantly the more difficult by reason of the lapse of time.
34. Despite this feature, it seems to me that Miss Lonsdale's reading of section 77(2) is correct. I cannot accept that "finally determined" is capable of referring to an event as informal as Mr Puzey suggests, namely the Commissioners forming a view as to the tax that would have been due, if only they had been in time to issue an assessment for it. In my judgment the reason for the provision is to allow the Commissioners a further period of 2 years after a final decision as to the amount of tax due, for example in case the process of determining that amount due gives reason, for the first time, to suppose that there has been dishonesty. I would also reject Mr Puzey's contention that "the amount of VAT due" for the relevant accounting period means anything other than the amount of tax which the taxpayer is obliged to pay, as fixed by the eventual determination, whether by way of an assessment or on appeal, or otherwise. It may be that not all of the tax liability is in dispute, and even that some tax has been paid. It seems to me that "the amount of VAT due" means the whole amount due for the particular accounting period, even if not all of it is in dispute and even if some (or all) has already been paid. Factors of that kind may have a bearing on how much tax was evaded or sought to be evaded, and therefore on the maximum amount of the civil evasion penalty. They do not affect the amount of VAT due, for this purpose.
35. Section 77(2) does not, however, provide that a civil evasion penalty assessment cannot be made before the beginning of the two year period mentioned in the sub-section, nor would that make sense, since the basic provision is that set out in section 77(1)(a), three years from the end of the relevant accounting period. Clearly such an assessment cannot be made until after the end of the relevant accounting period, because not until then will the tax due for that period be ascertainable. Whatever is meant by section 77(2), it does not cast doubt on the current practice of making penalty assessments either at the same time as, or even before, corresponding tax assessments. As already noted, simultaneous tax and penalty assessments are expressly allowed for by section 76(5).
36. In his paragraph 45, Hart J observed that section 77(2) proceeds on the basis that there will have been an assessment. I agree that, in a case to which that sub-section applies there will, almost always, have been an assessment. (As noted at paragraphs [18] and [30] above, a taxpayer's liability can be finally determined without an assessment, but in practice, in a case where the Commissioners suspect dishonest concealment, it is certain that there will have been an assessment to tax.) It is not clear to me that, in saying what he did at the end of paragraph 45, the judge meant that there must be a tax assessment before any penalty assessment. If he did, I would respectfully disagree with him.
37. If Mr Puzey's argument is correct, the Commissioners can make a penalty assessment on the basis that tax was evaded, or sought to be evaded, even though the relevant amount of tax is not, and cannot be shown to be or to have been, due from the taxpayer because no tax assessment can be made in respect of it. In order to test that proposition it is useful to consider in what circumstances that might arise. Three different possible types of situation have occurred to me.
38. One is exemplified by the facts of the present case. This is where the Commissioners have the necessary information to make a tax assessment for the amount said to have been evaded or sought to be evaded (which for short I will call hereafter the evaded tax) in due time, but they did not do so. It matters not whether, as in this case, they tried to do so, but did so by an invalid method, or they failed to act at all in due time.
39. A different kind of situation might occur along these lines. The Commissioners, having made a valid tax assessment, acquire further information sufficient in their opinion to justify making an additional tax assessment under section 73(6), but they do not do so within a year so that they fail to take advantage of section 73(6)(b). Later, they acquire yet further information which enables them to assert that the taxpayer's conduct was dishonest, but does not otherwise add to the information relevant to the making of the tax assessment. Thus, a new period does not start to run under section 73(6)(b), but there is for the first time an adequate basis for making an assessment to a civil evasion penalty under section 60 and section 76, and the period for the latter has not expired because of section 77(4). I will consider that type of situation further below.
40. A third and quite different situation in which, in theory, the Commissioners could seek to issue a penalty assessment for a greater amount of evaded tax than is due on a tax assessment is this. Suppose that the Commissioners have issued a tax assessment which has been successfully appealed, against their opposition, so that, on the facts known, the tax has been finally determined, but not as contended for by the Commissioners. It matters not what sort of tax assessment led to the successful appeal. Under section 77(2) the Commissioners then have a further period of 2 years in which to make an assessment to a civil evasion penalty (if they have not already done so). On Mr Puzey's submission it would be open to the Commissioners to make a penalty assessment in respect of an amount of evaded tax on the basis that that amount was the higher figure for which the Commissioners had unsuccessfully argued on the appeal against the tax assessment, even without any additional information which could found an additional tax assessment under section 73(6)(b).
41. I dare say that the Commissioners would not, in practice, make a penalty assessment for the higher sum in such circumstances, and that, even if they were to do so, the result of the appeal against the penalty assessment would be the same (as regards the amount of evaded tax) as had been the result of the appeal against the tax assessment. However, Mr Puzey's submission seems to leave it open to the Commissioners to make the penalty assessment on the basis of the higher figure, and to try to persuade the Tribunal on an appeal against that assessment that the earlier decision of the Tribunal on the tax assessment had been wrong.
42. I find it difficult to suppose that Parliament intended that course to be open to the Commissioners in those circumstances. The question is whether the legislation should be read as leaving it open to the Commissioners to make a penalty assessment for a higher amount of evaded tax in either of the other cases postulated in paragraphs [38] and [39] above, and if so whether any distinction can be drawn on the wording of the Act between the various types of case, so that it can be interpreted as allowing a penalty assessment on the basis of a higher amount of evaded tax in one or two of the three types of case but not in all such cases.
43. The judgments in the Court of Appeal in Khan v. Commissioners of Customs and Excise [2006] EWCA Civ 89 were cited to us, in which some reference was made to the relationship between the provisions as to assessments to tax and to civil evasion penalties. In the course of paragraph 74 Carnwath LJ said this:

"(iv) In relation to the calculation of tax due the subject-matter of the assessment and penalty appeals is identical. This link is given specific recognition by section 76(5) (allowing combination in one assessment). It would be surprising if the Act required different rules to be applied in each case.

(v) Section 73(9) provides that the assessed amount, subject to any appeal, is "deemed to be an amount of VAT due…" In a case where either there was no appeal against the assessment, or the penalty proceedings followed the conclusion of any such appeal, this provision would appear to preclude any attempt to reopen the assessment for the purpose of assessing the penalty. The subsection does not apply directly where, as here, the penalty appeal is combined with an appeal against the assessment, and the assessment has not therefore become final, but it indicates another link between the two procedures. (I do not see the provision as necessarily confined to enforcement, as Mr Young argues. Nor in the present context do I need to spend time on his argument that this interpretation could cause unfairness in proceedings against a third party under section 61, although I note that under that provision there appears to be a general power to mitigate the penalty.)"

44. The point now at issue did not arise in that case, and what Carnwath LJ said is not in any sense decisive of the point which we have to determine. In that case the question under discussion concerned the burden of proof: see paragraph 63, and note also paragraph 68 as to the context of the discussion.
45. On this appeal the question of the relationship between the two sets of provisions is directly in point. Clearly, as Carnwath LJ said, there are links. Equally clearly a tax assessment cannot be "reopened", in the sense of liability for tax being put again in issue, just because a penalty assessment is made, unless circumstances such as those mentioned in section 73(6)(b) exist in which an additional assessment to tax can be made. It is also clear that, although tax and penalty assessments may be made simultaneously, or at much the same time, and may be appealed together, they can also be made separately and successively, being the subject of quite different time limits, and may be appealed separately and in succession.
46. Another point which is clear from section 60 is that the dishonest conduct which can give rise to liability to a civil evasion penalty may occur at any time or times. It may be continuous over a long period, or sporadic. It may often (as here) arise day by day in the course of trading, by way of a deliberate failure to record transactions in the course of the business. It could occur later, with the dishonest suppression or destruction of records originally kept properly. It may occur during appeal proceedings, with perjured evidence given before the Tribunal. It may even occur later, in the course of further investigations by the Commissioners with a view to discovering whether there is additional evidence which could justify an additional assessment to tax. Sometimes, perhaps often, the dishonest conduct is not successful, in that the Commissioners' officers, and in turn the Tribunal, find that the true amount of tax due is higher than that which the taxpayer admits to, despite dishonest concealment, and a tax assessment for the full amount of tax is made and upheld. On the other hand, one cannot exclude the possibility of cases where the dishonest conduct is successful, either by concealing the facts from the Commissioners, or by persuading the Tribunal that the facts are as the taxpayer contends rather than those asserted by the Commissioners.
47. After the determination of an appeal against a tax assessment, the Commissioners have two years under section 77(2) to make a penalty assessment on the basis of dishonesty in any event, and they may have a longer period by virtue of section 77(4). If they discover further evidence within that period which enables them to show that the outcome of the taxpayer's successful appeal was procured by dishonest evidence, it might be too late for them to make a new tax assessment under section 73(6). But I do not see why they should not be able to raise a civil evasion penalty assessment relying on the dishonest conduct of the appeal, in respect of tax which, on this hypothesis, will have been successfully evaded. That is a situation in which it seems to me to be reasonable to suppose that Parliament would have intended that the Commissioners could raise a civil evasion penalty assessment, even though they could no longer make a tax assessment for the higher amount of tax.
48. Therefore, going back to the three types of situation described in paragraphs [38] to [40], the last is one in which it would be surprising to find that the Commissioners could reopen the question of the amount of tax due under the heading of the amount of evaded tax, but the opposite is true of the second of them. As regards the first, which is the present case, it may not be the most attractive proposition for the Commissioners to say that they should be able to make a penalty assessment for a higher amount of evaded tax when they could have, but did not by error, even by incompetent error, raise a tax assessment for the corresponding amount. On the other hand, if it is a case of error, and if the Commissioners can satisfy the burden of proof on them of showing that the taxpayer's conduct was dishonest, it is not obvious that the taxpayer should escape not only liability for the amount of tax which was really due from him, but also the separate sanction for his dishonest conduct. The taxpayer is protected by a number of provisions of the Act, and by the consideration that, in terms of the European Convention on Human Rights, penalty proceedings are categorised as criminal: see Customs and Excise Commissioners v Han [2004] EWCA Civ 1040.
49. An indication in favour of Mr Puzey's argument may also be found in the fact that section 60 speaks of tax evaded, as well as of tax sought to be evaded. This shows that a penalty may be levied even if the taxpayer has succeeded in evading liability for the tax which should have been due. Evasion in this context no doubt includes temporary evasion, in a case where the full liability is established in the end, but it also includes successful permanent evasion, such that it is no longer open to the Commissioners to raise a further assessment to tax. It would include such a case even if the Commissioners might, by greater diligence, have been able to make a further tax assessment so that the correct amount of tax could have been recovered.
50. Like the judge, I have not found this point easy, and my opinion has changed more than once during my consideration of the case. The type of case mentioned in paragraph [40] above is one in which it seems to me unlikely that Parliament envisaged the Commissioners being able to reopen the question. However, I cannot see the basis for a legitimate reading of the sections which precludes the possibility in that type of case while leaving it open in the other cases. As noted at paragraph [41], it may be unlikely to arise in practice.
51. There is no express provision in the 1994 Act which links the amount of tax evaded, for the purposes of section 60, to the amount of tax found to be due, upon a return (if any), an assessment and (if there is one) an appeal. For the reasons given above, it seems to me that the respective implications of the rival readings of the Act put before us are such that the construction for which Miss Lonsdale contends ought not to be preferred. It would prevent the Commissioners from making a civil evasion penalty assessment in a type of case in which that would not be consistent with the intention of the Act. Thereby, it would limit significantly the scope for using the civil evasion penalty as a sanction for dishonest conduct in relation to VAT. The fact that it would also allow the possibility of a civil evasion penalty assessment for a higher amount in a case where one would not suppose that it was intended by Parliament does not, in this instance, seem to me to be a sufficient counter-argument to lead to Miss Lonsdale's contention being preferred. I therefore respectfully differ from the judge, before whom it seems that the point was argued rather differently, and I would allow the Commissioners' appeal. In my judgment, on the Tribunal's findings, it was open to the Commissioners to make a civil evasion penalty assessment on the basis of tax evaded of £14,284, subject to the 10% deduction for mitigation. I would therefore reinstate the Tribunal's decision on this point.

Lady Justice Arden

Introduction and summary

52. I am most grateful to Lloyd LJ for setting out the history of this case and the arguments. I have also come to the same conclusion, and this judgment sets out my reasons. In summary, in my judgment, there are sufficient indications in sections 60 and 76 of the Value Added Tax Act 1994 (as amended) ("the 1994 Act") to make it clear that the correct interpretation of section 60 is that a penalty may be assessed on the basis that a larger amount of VAT was due than that finally determined as between the taxpayer and the Commissioners. We are not called upon to determine whether there is any principle of law which would displace this result, and accordingly I express no view thereon. The respondent, Mr Liaqat Ali, has not relied on any such principle of the general law in this case.
53. I reach my conclusion as to the true interpretation of section 60 by a series of deductions from sections 60 and 76, which I explain below, and by testing my conclusion as a result of that process by asking whether my interpretation is absurd or unfair to the taxpayer. I conclude for the reasons given below that it is not absurd, or unfair to the taxpayer.

Summary of the statutory scheme

54. To recap:

i) Section 60 of the 1994 Act (set out in para. 13 of the judgment of Lloyd LJ) makes a person who has evaded VAT liable to a penalty "equal to the amount of VAT evaded or as the case may be sought to be evaded by his conduct".

ii) Where VAT itself is evaded, the amount of VAT evaded is to be construed as a reference to the aggregate of the amount (if any) falsely claimed by way of credit for input tax and the amount (if any) by which output tax was falsely understated (sec 60(3)).

iii) Sec 77 (2) (set out in para. 15 of the judgment of Lloyd LJ) deals with the last date by which a penalty assessment can be made in respect of any penalty referred to in section 76(3) (set out in para.14 of the judgment of Lloyd LJ). That last date is two years from the final determination of the VAT due.

Interpretation of section 60

55. I agree with the rejection by Lloyd LJ of the appellants' argument as to the meaning of "finally determined" for the reasons he gives. I agree with him that it refers to the final determination of the VAT due whether by assessment and the expiration of the time for appeal against that assessment or by appeal so far as an appeal lies. That approach to final determination leads Ms Lonsdale, on behalf of Mr Ali, to submit as her core proposition that the amount of the penalty must be fixed by reference to the amount of VAT as finally determined. There is unlikely to be an issue about this if the evasion is detected before the amount of VAT due is finally determined. In that situation, the Commissioners would take steps to ensure that the VAT as finally determined reflects the adjustments necessary to correct this evasion. However, even once the VAT due is finally determined, the Commissioners still have two years in which to raise a penalty assessment (sec 77 (2)). This is a comparatively long period if the amount of the liability to the penalty must always be calculated by reference to the amount due by way of VAT as finally determined. There would seem to be little point in such a lengthy period on the respondent's approach, and that consideration throws doubt upon the respondent's core proposition.
56. That takes me back to examine sec 60(1) more closely. In my judgment, there are clear indications in sec 60 that Parliament provided that the Commissioners should be able to issue penalty assessments even if they had made an error and it was no longer open to them to serve an assessment or further assessment for the proper amount of VAT. I say this because of the language used in sec 60(1). Under sec 60(1), the evasion can occur at any time, and thus it can occur or continue to occur at any time up to the expiration of the two-year period from the final determination of the VAT due. Evasion need not of course be a continuous course of conduct. The taxpayer's false claim may well be detected, as it was in this case, long before the matter is referred to the VAT tribunal. Moreover, it need not be a course of conduct that actually results in the evasion of VAT, because liability to a penalty assessment can also arise where VAT is "sought to be evaded." (Sec 60 (1)).
57. On the other hand sec 60(1) clearly contemplates that a situation may arise in which VAT is actually evaded. This can obviously arise if the taxpayer makes a false claim whose falsity is not detected before the VAT due is determined, but in such a case it is to be expected that the Commissioners would reopen the matter. However actual evasion can also occur if a person has failed to make a return or made an incorrect return, and the Commissioners acquired sufficient knowledge of that fact to raise an assessment in accordance with the requirements of the 1994 Act but failed to do so within the period allowed for this by sec 73(6) (set out in para 12 of the judgment of Lloyd LJ). There is nothing in sec 60 to limit the circumstances in which evasion arise to those in which no error on the part of the Commissioners occurred.
58. This interpretation does not lead to an absurd or unfair result. It would not be absurd for Parliament to have concluded as a matter of policy that penalty assessments should be disconnected from the final determination of the VAT due for the relative period for the following reasons:

i) The taxpayer is protected by the process requirements for a penalty assessment (sec.60, 76);

ii) The taxpayer also has the benefit of a relatively short limitation period (sec 77(2));

iii) The Commissioners may have sufficient information to know that a return was incorrect or incomplete for the purposes of sec 73 but they may not know that the error was the result of dishonesty as required by sec 60(1);

iv) Errors on the part of the officials of the Commissioners can occur, particularly where the business (as here) may involve cash receipts or the failure to keep proper accounting records. It may be seen as unfair that taxpayers should have the benefit of these errors where there has been dishonesty.

59. There are other indications that sec 60(1) enables the determination of the penalty by reference to VAT shown actually to have been evaded for the purposes of sec 60(3) even if the evidence of that was not admissible or available in the determination of the VAT due:

i) The fact that sec 77(2) allows a period as long as two years after the final determination of the VAT due for raising a penalty assessment (see above) is significant. Although the Commissioners may not discover until after the date of the final determination of the VAT due date the factors making prior conduct of the taxpayer dishonest, there is nothing to restrict the circumstances in which the Commissioners can rely when raising a penalty assessment to those of which they were aware before the final determination of the VAT due in the relevant period. This is an indication that the Commissioners are to be able to raise a penalty assessment for other reasons and subsequently to the date of the final determination of the VAT due for the relative period.

ii) The fact that sec 60 makes no reference to the final or other determination of the VAT due is also significant. That would have been the obvious course as a matter of drafting if the two processes were interdependent.

iii) The fact that sec 60(1) does not contain any words limiting the time at which evasion or attempted evasion must have occurred means that the evasion can occur after final determination. There would be no logic in confining liability to a penalty to evasion of VAT occurring prior to the final determination of VAT due.

60. In the circumstances, in my judgment, there is no basis for reading into sec 60 a requirement that the amount of the penalty be fixed only by reference to the amount of the VAT finally determined to be due.

Disposition of this appeal

61. I would allow the appeal.

Other issues

62. Lloyd LJ raises the possibility that the Commissioners fail to establish before the VAT tribunal that the amount of VAT due exceeds the amount finally determined but thereafter, without any new evidence, seek to impose a penalty on the basis that the VAT due was the amount which they unsuccessfully sought to establish before the VAT tribunal. Counsel did not address this possibility in their submissions, and I therefore express no view on the situation. It may be possible for the taxpayer in that situation to assert an issue estoppel or to establish an abuse of power by the Commissioners.
63. Lloyd LJ has set out para. 45 of the judge's judgment (para. 28 above). I agree with what Lloyd LJ has said about this paragraph, and would add that I also consider that the judge was in error in so far as he concluded that sec 77(2) had any greater effect than that described in para. 54(iii) above.

Lord Justice Tuckey

64. For the reasons given in both judgments I agree that this appeal should be allowed.