England and Wales High Court (Administrative Court) Decisions

MR DAVID EWART and MR JAMES HENDERSON (instructed by Amery Parkes, London WC2A 1EN) appeared on behalf of the Appellants.

I think that principles 1 to 3 and 6 were common ground. I need to say no more about them.

It is convenient to examine principles 4 and 5 together. In a cogent and sustained argument, Mr Ewart submits that the test to be applied in section 73(6)(b) is objective. The only question to be considered by the Tribunal is when did the Commissioners have knowledge of evidence of facts, which viewed objectively, was sufficient to justify making the assessment. The opinion referred to in the subsection must be the reasonable opinion of the Commissioners. The test must be objective. Otherwise, the section fails in its manifest objective of protecting the taxpayer from tardy assessments: see Parakh v C & E Commissioners [1984] STC 284, 288B. Moreover, asks Mr Ewart rhetorically, if the test is subjective, whose opinion is considered where, as often occurs, there is more than one officer involved in the investigations leading up to the making of an assessment?

In my judgment, as a matter of statutory construction, it is not possible to read into section 73(6)(b) the qualification that the opinion of the Commissioners as to the sufficiency of the evidence must be reasonable. If that had been the intention of Parliament, it would have been simple so to provide. If the test had been objective, there would have been no need to refer to the opinion of the Commissioners at all. Nor is there any problem about identifying the person whose opinion is to be determined. The person whose opinion is imputed to the Commissioners is the person who decided to make the assessment. It does not matter that he or she may not be the person who first acquired knowledge of the evidence of the facts which are considered to be sufficient to justify making the assessment. The knowledge of all officers who are authorised to receive information which is relevant to the decision to make an assessment is imputed to the Commissioners.

Moreover, I do not accept that, if an objective approach is adopted, the protection afforded by the subsection to the taxpayer is illusory. This raises the question of the circumstances in which it is possible to challenge the opinion of the Commissioners. It is common ground that, in forming their opinion of what evidence of facts is sufficient to justify making the assessment, the Commissioners must have regard to their obligations to act to the best of their judgment as explained in Van Boeckel v C&E Commissioners [1981] STC 290. Thus, they must perform their function honestly and bona fide, and fairly consider all the material placed before them, and, on that material, come to a decision which is reasonable. In some cases, the taxpayer may complain that the Commissioners have made an assessment on insufficient material. In other cases, the complaint of the taxpayer may be that, in the light of the evidence of which they were aware, it was wholly unreasonable for the Commissioners to delay making the assessment. In both cases, an appeal will succeed if it is shown that the Commissioners' approach was wholly unreasonable, and fails to pass a test akin to the Wednesbury test. I recognise that this is a high hurdle for the taxpayer to surmount, but Parliament has entrusted these matters to the judgment of the Commissioners, and it is right that challenges to the exercise of judgment should only succeed when something has gone seriously wrong.

At paragraphs 27 and 29 in Classicmoor, His Honour Stephen Oliver Q.C. followed Cumbrae, and said that the Tribunal could only interfere with the decision of the Commissioners not to make an assessment earlier if that decision was perverse. I observe, however, that in Cumbrae at page 805B, Sir Douglas Frank Q.C. was referring to the powers of the court, and not the powers of the Tribunal.

I heard considerable argument as to the scope of any challenge before a Tribunal on the ground of a failure to make an earlier assessment, and the route by which such a challenge may be made. Mr Mc Nicholas accepts that such a challenge can be made, but submits that it is an appeal against an assessment under section 73(1) of VATA, ie a challenge to the exercise of best judgment. He submits that the Tribunal has no jurisdiction to entertain a challenge to the subjective opinion of the Commissioners regarding the sufficiency of the evidence of facts before them: he relies for this proposition on C & E Commissioners v J.H.Corbitt (Numismatics) Ltd [1980] STC 231.

Mr Ewart points out that section 84(10) of VATA was introduced to meet the problem exposed in Corbitt. It provides:

He submits that it is important to keep distinct the time limits point and the best judgment point. He asserts that the opinion of the Commissioners as to the sufficiency of the evidence of facts to justify an assessment can be the subject of challenge before the Tribunal by virtue of section 84(10).

In my judgment, it is unnecessary to identify the jurisdictional basis of the ability to challenge the Commissioners’ failure to make earlier assessments. I incline to the view that the opinion of the Commissioners as to the sufficiency of the evidence is a prior decision within the meaning of section 84(10). Whether or not that is right, it is common ground that these decisions are susceptible to appeal, whether by the route of section 73(1) and section 83(p) of VATA, or via section 84(10). It is also clear that, whichever is the correct route, the test is the same. The appellant has to show that the decision of the Commissioners was perverse or wholly unreasonable. It is clearly established that a Tribunal will not set aside an assessment where there is a challenge to the exercise of best judgment, save on grounds similar to Wednesbury grounds: see, for example, Rahman (t/a Khayam Restaurant) v C & E Commissioners [1998] STC 826, 835-836. If the matter is viewed through the prism of section 84(10), what is under challenge is the opinion of the Commissioners. That seems to me to be closely analogous to a case such as John Dee Ltd v C & E Commissioners [1995] STC 941, 952D-J. That case concerned an appeal against a decision of the Commissioners in relation to the requiring of security. The relevant statutory provision was : “Where it appears to the Commissioners requisite ...... they may require a taxable person ...... to give security...” The Court of Appeal held that, in deciding whether it appeared to the Commissioners requisite to require security, the Tribunal had to consider whether (using shorthand) they had acted unreasonably in the Wednesbury sense.

The question for the Tribunal on an appeal, therefore, is whether the Commissioners' failure to make an earlier assessment was perverse or wholly unreasonable. In some cases, the position will be clear. Suppose that evidence of all the facts which in the opinion of the Commissioners justified the making of the assessment was known to the Commissioners at the beginning of year 1, and the assessment was not made until the beginning of year 3. Suppose further that the reason for the 2 year delay is that the file was lost, or there was a change of staff with the result that the officer who had acquired the evidence did not pass it on to his successor. In those circumstances, the delay in making the assessment would be wholly unreasonable, and an appeal would succeed on the time limits point.

More difficult are cases where the Commissioners delay making the assessment because they consider that they need more evidence. In Lazard Brothers v C & E Commissioners (a decision of the Tribunal dated 24 July 1995), it was held that the Commissioners had knowledge of the evidence of facts sufficient to justify making the assessment, even though the officer wanted the taxpayer to classify that evidence and provide schedules and further calculations on it. The classification and further calculations were not further evidence of facts. The obligations of the Commissioners to exercise the best of their judgment could not be delegated to the taxpayer. On the facts of that case, the Tribunal was able to find that the basic facts were in the hands of the Commissioners by 22 March 1993, by which date they had already formed the opinion that the facts of which they were aware were sufficient to justify an assessment. Although the Tribunal did not expressly state that it was wholly unreasonable or perverse of the Commissioners not to make the assessment within 1 year of 22 March 1993, it seems to me that this is how their decision should be interpreted. Cumbrae was cited to them, and the relevant passage is referred to without demur at page 22 of the decision.

A different conclusion was reached on different facts in Classicmoor. In April 1993, the Commissioners assessed Classicmoor to VAT in a sum on the basis of their view of the true nature of a transaction between Classicmoor and another company, Quarry. At the heart of the problem lay the question of the authenticity and effect of an invoice and an alleged credit note. Classicmoor contended that the relevant information was in the possession of the Commissioners by October 1991 following a visit by an officer. It was said that no new information was obtained thereafter before the assessment was made. The officer of the Commissioners had been given conflicting explanations about the transaction. The facts on which the decision to assess could be based were unsubstantiated and the different assertions were of little evidential value. Neither the explanations nor the assertions changed in any substantial respect between October 1991 and April 1993 when the assessment was made. The officer made the assessment shortly after an interview of a representative of Quarry, which led the officer to believe that there was unlikely to be any change of substance in the positions taken by the parties in relation to the credit note and the invoice. In his decision, the Chairman said that the officer had "to make what appears to me to be an acutely difficult and, so far as protecting the revenue was concerned, precarious exercise of best judgment" (para 28). In the light of these circumstances, he could not “conclude that the evidence of the facts was sufficient, at any time before 20 April 1993, to justify the Commissioners making the assessment" (para 29).

It will be seen, therefore, that in Classicmoor, the Commissioners did not acquire any more knowledge of basic or primary facts than they had known since October 1991. They had to take a view as to the true nature of the transaction, and the position with regard to the invoice and the credit note. They carried out investigations between October 1991 and April 1993 in an attempt to make as accurate an assessment of what had been going on as possible. The meeting of 20 April merely satisfied the Commissioners that it would not be possible to determine more precisely what had been going on. In those circumstances, they decided without more ado to exercise best judgment, and made an assessment.

It seems to me that the central part of the Tribunal's reasoning is to be found in the 5th and 6th paragraphs of the extract that I have quoted earlier in this judgment. The Chairman found that evidence of 2 facts relied on by the Commissioners in forming their opinion was first acquired during the 1 year period ending on 16 April 1997. These were (i) Mr Hammond's plea of guilty, and (ii) the fact that at the meeting held on 30 January 1997, the accountant acting for Mr Foster proposed a mark-up of 150%. The Chairman decided that the failure to make an assessment before acquiring these 2 pieces of evidence was not perverse, and went so far as to suggest that it might have been perverse for the Commissioners to make the assessment before they acquired that evidence.

Mr Ewart criticises this part of the Chairman's reasoning. I start with the guilty plea. The Chairman said that until Mr Hammond pleaded guilty, there was no certainty as to his involvement in the purchase and sale of birds from abroad. As Mr Ewart points out, the amount of evasion admitted by Mr Hammond did not have any influence on the Commissioners, since the assessment that they made is more than 13 times the maximum amount admitted by Mr Hammond. Thus the only way in which it could be said that the guilty plea influenced the Commissioners was that it showed that Mr Hammond admitted some fraudulent underdeclaration of VAT. But the Commissioners must have been satisfied that some fraudulent underdeclaration had taken place before Mr Hammond pleaded guilty, since they decided to prosecute him. A great deal of direct evidence of fraudulent underdeclaration was available to the Commissioners before 16 April 1996. Without such evidence, it would have been improper for the Commissioners to prosecute Mr Hammond. I accept these submissions of Mr Ewart. It seems to me to be fanciful to suggest that the guilty plea was evidence of Mr Hammond's involvement which the Commissioners relied on to justify the assessments. There was no evidence before the Tribunal to the effect that the Commissioners did in fact rely on the guilty plea to justify making the assessments. No doubt, of course, the guilty plea made the Commissioners' case on involvement even stronger than it already was, but that is not material. If the Commissioners had sought to justify deferring the assessments until Mr Hammond pleaded guilty or was found guilty, it seems to me that, on the facts of this case, they would have been acting wholly unreasonably. The reality, however, is that the assessments were delayed not because the Commissioners had any doubts about the fact of Mr Hammond’s involvement. They had doubts as to the extent of his involvement, and, above all, about the amount of VAT that had been evaded.

I turn, therefore, to the second piece of evidence relied on by the Chairman. There is no doubt that, in making the assessments, the Commissioners did rely on the agreement reached at the meeting of 30 January 1997 as evidence of the fact that the mark-up was 150%. That is clear from the face of the Commissioners’ letter dated 16 April 1997. Mr Ewart submits that it was perverse of the Commissioners to treat this as evidence of any fact, let alone a fact which justified making the assessments. He argues that the figure of 150% was merely a proposal to settle the dispute between Mr Foster and the Commissioners, and had no relevance to Mr Hammond. There were material differences between the trading activities of the 2 defendants. In particular, Pegasus sold parrots which had a lower mark-up than birds, whereas E & J only sold birds. That is why Mr Kerr based his settlement offer on Mr Booker's figure of 157%, which was the trade mark-up for birds, rather than the lower figure of 104%, which was Mr Booker's average trade mark-up for both birds and parrots.

These are powerful arguments, but I cannot accept them. As the Chairman pointed out, by the 30 January 1997, the Commissioners were faced with widely varying opinions about the mark-up. I have earlier referred to the calculations of both Mr Booker and Mr Bakewell. Mr Bakewell's figures for Pegasus ranged from 125% to 450%. Mark-up was the aspect of assessment which was causing the Commissioners acute difficulties. These problems had been created by the fraudulent suppression by Pegasus of material from the Commissioners. The enormous range of possible mark-ups carried with them a similarly enormous range of possible figures for VAT, and the sums were very large. In those circumstances, it was entirely responsible of the Commissioners to exercise caution. They could not simply pluck figures out of the air.

It is true that there were differences between the businesses of Pegasus and E & J, and that the mark-up agreed between Mr Kerr and the Commissioners at the meeting did not even bind Mr Foster, let alone Mr Hammond. But the fact is that Mr Kerr, who was an accountant representing the interests of Mr Foster did agree that 150% was a reasonable uplift for E & J. Furthermore, although there were differences between the 2 businesses, there were also many similarities. One of the problems facing the Commissioners was that they dealt with the same suppliers, and it was very difficult to disentangle the affairs of the 2 companies from each other. The Commissioners did not know what the mark-up was. The limited material available to them could be used to support a wide range of figures. The case was, therefore, closer to Classicmoor than to Lazard Brothers . In these circumstances, I consider that the Commissioners were entitled to take the view that the fact that the accountant acting for Mr Foster was prepared to agree a mark-up of 150% in the case of E & J was an important fresh piece of evidence relevant to the assessments against both E & J and Pegasus. It was a matter for their judgment whether the differences between the 2 businesses required a different overall figure for mark-up to be used in the 2 cases. In my judgment, the Commissioners were not wholly unreasonable in regarding the agreement by Mr Kerr to the uplift figure of 150% as evidence that the appropriate figure was indeed 150%, nor were they perverse in not using this figure for mark-up as the basis for their assessments before 16 April 1996. It was not communicated to the Commissioners until the meeting on 30 January 1997.

It follows that I agree with the Chairman that the Commissioners were not perverse in failing to make the assessments before the start of the 1 year period. In fact, the question is not whether I agree with the conclusion of the Chairman, but whether in reaching her conclusion, she erred in law. Although I do not agree with all her reasoning, I am satisfied that, in so far as it is based on the agreement of 30 January 1997, the conclusion that she reached was one which she was entitled to reach and that she committed no error of law in doing so. She took into account the fact that it was common for the Commissioners to take into account mark-ups achieved by other traders (in the same or a similar line of business) in order to arrive at an assessment made to best judgment. No challenge has been made to the truth of this observation. In my view, she was entitled to take this into account in reaching her conclusion on the mark-up point.

As we have seen, she rejected the submission advanced on behalf of the Commissioners that any one fact relied on by them to justify the assessments was sufficient to satisfy the test in section 73(6)(b). She did not explain why she took this course, and in my view she was wrong to do so. I refer to the 4th principle stated earlier in this judgment. Provided that the last piece of evidence of sufficient weight to justify the assessments was acquired within the 1 year period, the test is satisfied. I did not understand this proposition to be controversial. It is quite clear that the Chairman decided (rightly) that evidence of the 150% mark-up of sufficient weight in the opinion of the Commissioners to justify the assessments was not received until 30 January 1997. This was the last piece of relevant evidence to be acquired by the Commissioners. The fact that this piece of evidence was not known by the Commissioners until late in the 1 year period, and that, for the reasons that I have given, they were not perverse in not using the 150% figure as the basis for their assessments before 16 April 1996, was a sufficient reason for deciding the time limits point in favour of the Commissioners. It is quite clear, therefore, that if the Chairman had proceeded on the basis that one fact was sufficient, and had not regarded the guilty plea as a relevant fact, she would still have decided the preliminary issue as she did, because she would have found in favour of the Commissioners on the 150% mark-up point.

Mr Ewart also criticises the way the Chairman approached the question of constructive knowledge. I think that there is substance in his submission that she may have misunderstood what is meant by constructive knowledge. She referred to constructive knowledge in 2 passages. The first concerns the Commissioners' knowledge of Mr Hammond's involvement in the purchase and sale of birds from overseas. The second concerns the Commissioners' knowledge of the nature and extent of Pegasus' purchases from its suppliers. But none of this can avail Pegasus in relation to the 150% mark-up point. There is no doubt that the last piece of evidence of the 150% mark-up acquired by the Commissioners was the acceptance of that figure by Mr Kerr on 30 January 1997. The Commissioners could not have had knowledge of that figure, whether actual or constructive, before that date. Accordingly, if the Chairman did misunderstand the meaning of constructive knowledge, her misunderstanding was immaterial.

In the result, although Mr Ewart has exposed some flaws in the reasoning of the Tribunal, I am satisfied that it would be quite wrong to allow this appeal. A central part of the Chairman's reasoning concerned the 150% uplift point, and I reject the criticisms made of that part of the decision. Her conclusion on that point alone was sufficient to determine the time limit point in favour of the Commissioners. In these circumstances, this is a case in which I should dismiss the appeal in so far as it is based on the time limits point, since I am satisfied that the flaws in the Chairman's reasoning had no effect on her decision in relation to the 150% mark-up, and that accordingly, they did not lead her to a wrong conclusion on the time limits point.