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Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> APPEALS UNDER SECTION 13 OF THE TRIBUNALS, COURTS AND ENFORCEMENT ACT 2007 BY DCM (HOLDINGS) LTD AND THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS [2020] ScotCS CSIH_60 (08 September 2020)
URL: http://www.bailii.org/scot/cases/ScotCS/2020/2020_CSIH_60.html
Cite as: 2020 SLT 1131, [2020] CSIH 60, [2020] BVC 19, 2020 GWD 30-394, [2020] ScotCS CSIH_60, [2020] STC 2125, 2021 SC 123
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FIRST DIVISION, INNER HOUSE, COURT OF SESSION
Lord President
Lord Malcolm
Lord Doherty
[2020] CSIH 60
XA18/19, XA83/19 & XA85/19
OPINION OF THE COURT
delivered by LORD DOHERTY
in the appeals under section 13 of the Tribunals, Courts and Enforcement Act 2007
by
DCM (OPTICAL HOLDINGS) LIMITED
Appellant
against
THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS
Respondents
against
a decision of the Upper Tribunal (Tax and Chancery Chamber)
and by
THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS
Appellants
against
DCM (OPTICAL HOLDINGS) LIMITED
Respondent
against
a decision of the Upper Tribunal (Tax and Chancery Chamber)
Page 2 ⇓
2
Appellant and Respondent (DCM (Optical Holdings) Limited): Ghosh QC, Welsh; Harper
Macleod LLP
Respondent and Appellant (HMRC): D M Thomson QC, R G Anderson; Office of the Advocate
General
______________
8 September 2020
Introduction
[1] The main part of the business of DCM (Optical Holdings) Limited (“DCM”) is the
sale of spectacles. The supply of spectacle frames and lenses is standard rated for the
purposes of Value Added Tax (“VAT”), but the provision of eye tests and dispensing
services is an exempt supply.
[2] Between 26 and 30 September 2016 the First-tier Tribunal (Tax Chamber) (“the FTT”)
(Judge Scott and Ms Sumpter) heard six appeals by DCM against decisions and assessments
of the Commissioners for Her Majesty’s Revenue and Customs (“HMRC”). Appeal 1 related
to assessments issued to DCM on 20 October 2005 for the prescribed quarterly accounting
periods 10/02 to 04/05. Appeals 2 to 5 related to repayment returns (ie where input tax
claimed exceeded output tax due) which DCM submitted for the periods 07/05, 01/06, 04/06,
and 07/06. HMRC had rejected parts of DCM’s claims and had “amended” the returns to
reflect that. Appeal 6 related to a decision by HMRC on 3 June 2013 to reduce VAT credits
payable to DCM for specified periods between 07/05 and 12/08.
[3] On 23 March 2017 the FTT issued its decision, and on 30 October 2017 the decision
was amended pursuant to rule 41 of the Tribunal Procedure (First-tier Tribunal) (Tax
Chamber) Rules (SI 2009/273) (DCM (Optical Holdings) Ltd v Revenue and Customs
Commissioners [2017] UKFTT 785 (TC), [2018] SFTD 333). The FTT refused all six appeals.
For present purposes it is sufficient to note three of the issues which it decided. In relation
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3
to appeals 2 to 6 it determined that HMRC had been entitled to reduce the sums which DCM
had claimed as input tax in the relevant repayment returns and to “amend” those returns
accordingly (“the amendment issue”). In relation to appeals 2, 3, 5 and 6 it accepted
HMRC’s allocation of discounts on DCM’s charges between chargeable supplies and exempt
supplies (“the discounts issue”). In relation to appeal 1 it held that HMRC’s assessments of
20 October 2005 were not timebarred (“the timebar issue”).
[4] An appeal from the FTT to the Upper Tribunal (“the UT”) requires the permission of
the FTT or the UT and is only on a point of law (Tribunals, Courts and Enforcement Act
2007, s 11(1) to s 11(4)). On 13 February 2018 the FTT granted DCM permission to appeal to
the UT.
[5] DCM appealed to the UT (Lord Tyre and Judge Dean). On 8 - 10 October 2019 the
UT heard the appeal, and on 5 December 2018 it issued its decision (DCM (Optical Holdings)
refused the appeal on the amendment issue and the discounts issue. However, it allowed
the appeal on the timebar issue.
[6] An appeal from the UT to the Court of Session requires the permission of the UT or
of the Court of Session and is only on a point of law (Tribunals, Courts and Enforcement Act
2007, s 13(1) to s 13(4)). The UT refused DCM permission to appeal on the amendment issue
and the discounts issue and it granted HMRC permission to appeal on one aspect of timebar
issue (the interpretation issue) but refused it permission on another aspect (the evidence of
facts issue). However, the Court of Session granted DCM permission to appeal and it
granted HMRC permission on the evidence of facts issue (Commissioners for Her Majesty’s
Revenue and Customs v DCM Optical Holdings) Limited [2019] CSIH 38, 2019 SLT 1369).
Page 4 ⇓
4
Relevant statutory provisions
[7] The Value Added Tax Act 1994 (“VATA”) provides:
“PART 1
THE CHARGE TO TAX
…
19. — Value of supply of goods or services
…
(4) Where a supply of any goods or services is not the only matter to which a
consideration in money relates, the supply shall be deemed to be for such part of the
consideration as is properly attributable to it.
…
25. — Payment by reference to accounting periods and credit for input tax against
output tax.
(1) A taxable person shall—
(a) in respect of supplies made by him, and
(b) in respect of the acquisition by him from other member States of any
goods,
account for and pay VAT by reference to such periods (in this Act referred to as
‘prescribed accounting periods’) at such time and in such manner as may be
determined by or under regulations and regulations may make different provision
for different circumstances.
(2) Subject to the provisions of this section, he is entitled at the end of each
prescribed accounting period to credit for so much of his input tax as is allowable
under section 26, and then to deduct that amount from any output tax that is due
from him.
(3) If either no output tax is due at the end of the period, or the amount of the
credit exceeds that of the output tax then, subject to subsections (4) and (5) below, the
amount of the credit or, as the case may be, the amount of the excess shall be paid to
the taxable person by the Commissioners; and an amount which is due under this
subsection is referred to in this Act as a ‘VAT credit’.
…
26. — Input tax allowable under section 25.
(1) The amount of input tax for which a taxable person is entitled to credit at the
end of any period shall be so much of the input tax for the period (that is input tax on
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5
supplies, acquisitions and importations in the period) as is allowable by or under
regulations as being attributable to supplies within subsection (2) below.
(2) The supplies within this subsection are the following supplies made or to be
made by the taxable person in the course or furtherance of his business—
(a) taxable supplies;
(b) supplies outside the United Kingdom which would be taxable
supplies if made in the United Kingdom;
(c) such other supplies outside the United Kingdom and such exempt
supplies as the Treasury may by order specify for the purposes of this
subsection.
…
PART IV
ADMINISTRATION, COLLECTION AND ENFORCEMENT
…
73. — Failure to make returns etc.
(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.
(2) In any case where, for any prescribed accounting period, there has been paid
or credited to any person—
(a) as being a repayment or refund of VAT, or
(b) as being due to him as a VAT credit,
an amount which ought not to have been so paid or credited, or which would not
have been so paid or credited had the facts been known or been as they later turn out
to be, the Commissioners may assess that amount as being VAT due from him for
that period and notify it to him accordingly.
…
(4) Where a person is assessed under subsections (1) and (2) above in respect of
the same prescribed accounting period the assessments may be combined and
notified to him as one assessment.
…
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6
(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.
…
77. — Assessments: time limits and supplementary assessments.
(1) Subject to the following provisions of this section, an assessment under
section 73, 75 or 76, shall not be made—
(a) more than 4 years after the end of the prescribed accounting period or
importation or acquisition concerned. …
…
PART V
REVIEWS AND APPEALS
…
83. - Appeals.
(1) Subject to sections 83G and 84, an appeal shall lie to the tribunal with respect
to any of the following matters—
…
(b) the VAT chargeable on the supply of any goods or services. …
(c) the amount of any input tax which may be credited to a person;
…
Schedule 11
ADMINISTRATION, COLLECTION AND ENFORCEMENT
1. - The Commissioners for Her Majesty's Revenue and Customs shall be responsible
for the collection and management of VAT;
…
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7
4. —(1) The Commissioners may, as a condition of allowing or repaying input tax to
any person, require the production of such evidence relating to VAT as they may
specify.
...”
[8] The Value Added Tax Regulations 1995 (“VATR”) provide:
“34. — (1) Subject to paragraph (1A) below, this regulation applies where a taxable
person has made a return, or returns, to the Controller which overstated or
understated his liability to VAT or his entitlement to a payment under section 25(3)
of the Act.
(1A) Subject to paragraph (1B) and (1C) below, any overstatement or
understatement in a return where—
(a) a period of 4 years has elapsed since the end of the prescribed
accounting period for which the return was made; and
(b) the taxable person has not (in relation to that overstatement or
understatement) corrected his VAT account in accordance with this
regulation before the end of the prescribed accounting period during which
that period of 4 years has elapsed,
shall be disregarded for the purposes of this regulation; and in paragraphs (2) to (6)
of this regulation “overstatement” , “understatement” and related expressions shall
be construed accordingly.
…
(1C) Where paragraph (1B) above does not apply, any overstatement or
understatement in a return shall be disregarded for the purposes of this regulation
where the prescribed accounting period for which the return was made or required
to be made ended on or before 31st March 2006.
(2) In this regulation—
(a) ‘under-declarations of liability’ means the aggregate of—
(i) the amount (if any) by which credit for input tax was
overstated in any return, and
(ii) the amount (if any) by which output tax was understated in
any return;
(b) ‘over-declarations of liability’ means the aggregate of—
(i) the amount (if any) by which credit for input tax was
understated in any return, and
(ii) the amount (if any) by which output tax was overstated in any
return.
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8
(3) Where, in relation to all such overstatements or understatements discovered
by the taxable person during a prescribed accounting period, the difference
between—
(a) under-declarations of liability, and
(b) over-declarations of liability,
does not exceed £50,000, the taxable person may correct his VAT account in
accordance with this regulation. But if Box 6 of the taxable person's return for the
prescribed accounting period must contain a total less than £5,000,000, the difference
must not for these purposes exceed 1% of that total unless the difference is £10,000 or
less. (Box 6 must contain the total value of sales and all other outputs excluding any
VAT - see regulations 25 and 25A and the relevant forms specified in a notice
published by the Commissioners.)
(4) In the VAT payable portion—
(a) where the amount of any overstatements of output tax is greater than
the amount of any understatements of output tax a negative entry shall be
made for the amount of the excess; or
(b) where the amount of any understatements of output tax is greater
than the amount of any overstatements of output tax a positive entry shall be
made for the amount of the excess.
(5) In the VAT allowable portion—
(a) where the amount of any overstatements of credit for input tax is
greater than the amount of any understatements of credit for input tax a
negative entry shall be made for the amount of the excess; or
(b) where the amount of any understatements of credit for input tax is
greater than the amount of any overstatements of credit for input tax a
positive entry shall be made for the amount of the excess.
(6) Every entry required by this regulation shall—
(a) be made in that part of the VAT account which relates to the
prescribed accounting period in which the overstatements or
understatements in any earlier returns were discovered,
(b) make reference to the returns to which it applies, and
(c) make reference to any documentation relating to the overstatements
or understatements.
(7) Where the conditions referred to in paragraph (3) above do not apply, the
VAT account may not be corrected by virtue of this regulation.
35. - Where a taxable person has made an error—
(a) in accounting for VAT, or
(b) in any return made by him,
then, unless he corrects that error in accordance with regulation 34, he shall correct it
in such manner and within such time as the Commissioners may require. ”
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9
HMRC’s appeal: the timebar issue
Introduction
[9] We find it convenient to consider HMRC’s appeal first. The timebar issue concerns
appeal 1. It relates to the assessments made on 20 October 2005. DCM maintains that the
assessments were not made until more than one year after HMRC had knowledge of facts
which were sufficient in their opinion to justify the making of the assessments
(VATA, s 73(6)(b)).
[10] The assessments assessed DCM as being liable to pay more VAT than it had declared
in the relevant returns. The under-declaration of liability arose because there had been
understatement of output tax due and overstatement of allowable input tax. The
understated output tax arose because HMRC considered that DCM had incorrectly
apportioned the charges it had received between the chargeable supplies and the exempt
supplies. The overstated input tax arose because HMRC considered that DCM had
incorrectly apportioned residual input tax between chargeable and exempt supplies.
Output tax
[11] HMRC’s VAT Information Sheet 08/99 contained consolidated guidance on the
apportionment of charges for supplies of spectacles and dispensing by opticians. It set out
two methods of apportionment which were open to opticians, namely Full Cost
Apportionment (“FCA”) and Separately Disclosed Charges (“SDC”).
[12] Between 1998 and 2003 DCM and HMRC had been in negotiation with a view to
reaching agreement on the apportionment of charges. In 2003 a settlement was reached
(“the 2003 Settlement”). For the VAT quarters between April 1998 and January 2001 36% of
charges was attributed to chargeable supplies and 64% was attributed to exempt supplies. It
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10
was agreed that for the VAT quarters between January 2001 and April 2003 DCM would
voluntarily disclose any output tax under-declared having regard to the agreed
apportionment. HMRC made it clear that for periods after April 2003 “a fairer and more
reasonable method to calculate the dispensing costs for the optometrist” was expected.
Notwithstanding DCM’s undertaking to make voluntary disclosure of output tax under-
declared no such disclosures were made.
[13] The parties reached agreement in relation to an SDC method of apportionment with
effect from 1 February 2004. However DCM and HMRC disagreed as to whether DCM had
put in place an acceptable SDC method before that date.
Residual input tax
[14] Where VAT on an input is clearly attributable to a taxable supply or an exempt
supply there is no difficulty in deciding whether or not the input is recoverable. However,
where VAT on inputs cannot be directly attributed to either type of supply it is known as
residual input tax and the standard method is to apportion it between taxable and exempt
supplies in proportion to their respective values (VATR, reg 101). Reg 102 provides that
HMRC may approve an alternative method. DCM did not use the standard method for
apportioning residual input tax. It used an alternative method of apportionment which
HMRC had not approved. That alternative method apportioned a larger proportion of
residual input tax to chargeable supplies than the standard method would have, which gave
rise, in HMRC’s view, to the overstatement of input tax.
The FTT’s findings
[15] So far as the apportionment of residual input tax is concerned, the FTT found ([65],
[72] , [73]) that DCM and its tax advisors, PricewaterhouseCoopers (“PwC”), told HMRC that
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DCM was using the standard method. The FTT found ([81]) that it was not until HMRC
examined DCM’s records on 31 August 2005 that they discovered that the standard method
was not being used.
[16] In relation to output tax the FTT found ([77]) that on 29 January 2004 HMRC’s
Officers O’Pray and Boyle met with DCM to discuss SDC, and that the meeting ended in
“deadlock” because HMRC stated that DCM required to have FCA in place from 1 May 2003
(ie for the quarter ending 07/03) until SDC could be agreed. DCM's stance was that there
was an SDC method in place and that HMRC were only proposing minor changes. At a
further meeting on 31 August 2005 the officers were given copies of DCM’s VAT account for
the periods 07/02 to 01/04 from which it became evident that the percentage of charges
which had been attributed to chargeable supplies had been 31% in 07/02, 38% in 10/02, 30%
in the following five periods and 28% for all the periods thereafter ([82]). The FTT
continued:
“191. Officer Boyle was very clear that it was the information uncovered at the visit
[on 31 August 2005] which enabled, and caused, her to calculate the figures
underpinning the assessment. We accept that.
192. It was argued that at the time of the 2003 Settlement, and going forward,
HMRC must have been aware that DCM were not using a percentage split agreed by
them. Certainly HMRC expected, and got, further discussion on percentages until
2008 but, in our view, they would reasonably have been expected to assume that
there would be adherence to the 2003 Settlement. In the period thereafter DCM were
repeatedly told that, in the absence of an agreed SDC, FCA would have to be in
place. It was not and we do not accept that HMRC could have known what DCM
were doing without seeing their records.
193. We do not accept the argument that the fact that no voluntary disclosures
were made by DCM should have led HMRC to decide that the appellant had resiled
from the 2003 Settlement. We agree with HMRC that a far more obvious conclusion
would be that there was no under-declaration of output tax. …
…
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12
199. We are wholly unable to see any material fact which was known to HMRC
prior to 31 August 2005 which would have justified making the assessment earlier.
Accordingly, we find that Officer Boyle acted appropriately and quickly and HMRC
certainly were not perverse in not raising an assessment earlier, not least because of
the recent PwC letters. The assessment is in time. ”
The UT’s decision
[17] The UT decided ([79]) that the assessments were not timebarred in so far as they
assessed DCM to take account of the fact that input tax had been overstated, but that they
were timebarred in so far as they assessed DCM to take account of the fact that output tax
had been understated. DCM had discovered material facts relating to the overstated input
tax on 31 August 2005, but it had known all material facts relating to the understated output
tax since 29 January 2004. The UT continued:
“[79] … The argument for HMRC was founded upon the proposition that an
assessment is a unitary demand for tax, so that the reference in section 73(6) to ‘the
assessment’ is to the particular total or net amount brought out at the end of the
calculation as due by the taxpayer. In our opinion this proposition is unsound. It is
inconsistent with the terms of section 73(4) which states as follows:
‘Where a person is assessed under subsections (1) and (2) above in respect of
the same prescribed accounting period the assessments may be combined and
notified to him as one assessment.’
It is apparent from this provision that the word ‘assessment’ can be used, according
to context, to mean either a component part of an overall assessment or,
alternatively, the aggregation which produces the total or net amount due for a
particular period. In any event, it could not, in our view, be said as a matter of
ordinary language that evidence of facts coming to the knowledge of the
Commissioners in relation to one matter can be utilised to justify the whole of an
assessment that also seeks to recover VAT due as a consequence of another or other
matters to which those facts have no relevance. Indeed, we would regard it as a
somewhat startling proposition.
80. Senior counsel for HMRC sought to derive support from the analysis by
Arden LJ in BUPA Purchasing Ltd v C&E Commrs … of the meaning of the term
‘assessment’. That judgment is, however, concerned with different matters,
including in particular whether an assessment must be for an amount of VAT due,
and whether an assessment includes the underlying reasoning. It does not provide
relevant guidance in relation to the point arising in the present proceedings.
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13
81. We therefore conclude that the FTT erred in law in treating facts coming to
HMRC's knowledge in relation to input tax as relevant to the question whether the
assessment in so far as relating to underdeclared output tax was out of time. We
turn therefore to consider whether the FTT's findings relating to output tax entitled it
to conclude that the assessment was in time. Again it is helpful to draw together the
findings in fact made by the tribunal:
• No voluntary disclosures were ever made in relation to output tax (70).
• HMRC considered that SDC was not in operation as at 27 October 2003
(75)
• At the meeting on 31 August 2005, Officers Boyle and O'Pray were given
copies of the VAT account which disclosed the output tax percentages
used for all periods from 7/02 onwards. For the four periods subject to
the assessments under appeal, the percentages were 38, 30, 30 and 30
respectively (82).
• DCM was immediately told that as approval for SDC had not been in
place, periods 7/03 to 1/04 would have to be recalculated (83).
• The following day the officers noted that the 2003 settlement had not been
honoured (84).
• It was the information uncovered at the August visit that enabled and
caused Officer Boyle to calculate the figures underpinning the assessment
(191).
• After 2003 DCM was repeatedly told that in the absence of an agreed
SDC, FCA would have to be in place. It was not, but HMRC could not
have known what DCM was doing without seeing their records (192).
82. The fact that DCM was not operating a FCA method did not come as news to
the officers at the August 2005 meeting. DCM had never represented that it was in
use and HMRC had never proceeded on the basis that it was. As at January 2004,
Officer O'Pray had been aware that DCM was not operating a FCA method. He was
further aware that DCM was not yet operating a SDC method that was acceptable to
HMRC, and that the method that DCM was operating went back prior to period
07/03. The only new information obtained in August 2005 was the percentage splits
used by DCM to calculate taxable outputs for the periods from 10/02 onwards.
83. What, then, was the last piece of the puzzle that rendered the evidence
sufficient, in the opinion of the Commissioners, to justify the making of the
assessment? The FTT found in fact that it was the information uncovered at the
August 2005 visit that enabled, and caused, Officer Boyle to calculate the figures
underpinning the assessment. That, however, is not a conclusive answer to the
statutory question. We have already noted that, in our view, the FTT erred in
regarding information obtained in relation to input tax as relevant to whether the
assessment was in time as regards output tax. The FTT's finding in fact does not
distinguish between the two. It is clear, moreover, that calculation of the output tax
underdeclaration did not depend upon figures obtained at the August 2005 meeting.
This calculation consisted of the difference between (a) the amounts which had been
declared by DCM in its VAT returns, and (b) the amount of output tax due on the
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14
basis of the 64/36 percentage split which Officer Boyle applied, in exercise of best
judgment, because that had been the split agreed for earlier periods. The fact that
different percentages had in fact been used by DCM was not therefore material to the
calculation of the amount of output tax due.
84. The contemporaneous correspondence (Officer Boyle's letter of 7 September
2005 and the reconsideration letter of 25 January 2006) indicates unequivocally that
what prompted the assessment so far as output tax was concerned was the fact that
HMRC had never accepted that SDC was being correctly operated prior to
1 February 2004. That fact was known to HMRC by at least January 2004. The
assessment made by Officer Boyle in October 2005 could have been made at any time
thereafter; on the basis of the correspondence and the FTT's findings, no further
evidence of relevant facts came to the Commissioners’ knowledge. It follows, in our
opinion, that the last piece of the puzzle which was thought to justify the assessment
as regards output tax was in place more than one year before October 2005. The
assessment was therefore out of time in relation to the periods in issue. ”
Counsel’s submissions
[18] Senior counsel for HMRC submitted that the UT erred in law. What a trader had to
account to HMRC for was VAT on outputs less VAT on inputs. An assessment was a
unitary demand for tax. It could involve a reassessment of both input tax and output tax.
Where HMRC became aware within a year of an assessment of material facts sufficient in
HMRC’s opinion to make an assessment to recover overstated input tax, it was also open to
them to use the assessment to recover additional VAT where output tax had been
understated for the same prescribed accounting period. The UT had fallen into the error
which the Court of Appeal had had to correct in BUPA Purchasing Ltd v Customs & Excise
Comrs (No 2) [2008] STC 101, Arden LJ at [62]-[63].
[19] In any case, the UT had not been entitled to reach a different conclusion to the FTT as
to when in Officer Boyle’s opinion there were sufficient facts to justify the making of an
assessment to recover the additional output tax which ought to have been declared. The UT
had been wrong to find that calculation of the output tax due did not depend upon figures
obtained at the meeting on 31 August 2005. The calculation was based on the VAT account
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15
figures obtained at that time. The UT’s description of how the output tax due had been
calculated was also wrong. It was not the difference between (a) the amounts which had
been declared by DCM in its VAT returns, and (b) the amount of output tax due on the basis
of the 64/36 percentage split. DCM was the representative member of a VAT group of 10
corporate members (FTT, [3]). Mixed supplies of spectacles and dispensing services were
not the only supplies which DCM made (FTT, [187]). In those circumstances an assessment
based on the figures in the VAT returns would not have been to best judgment. It was not
possible to tell from the figures in the returns how DCM had apportioned consideration
between chargeable and exempt supplies. In fact the figures used in the assessment differed
from the figures used in the returns. The aggregate of the outputs in the returns for the
periods 10/02, 01/03, 04/03, 07/03, 10/03 and 01/04 was £9,378,145.62 higher than the
aggregate of the outputs which had been obtained from DCM’s records and which had been
used in the assessments.
[20] It was the subjective opinion of the officer making the assessment which was
important. As Dyson J put it in Pegasus Birds Ltd v Commissioners of Customs and Excise
[1999] STC 95, at p 101-2:
“4. The correct approach for a Tribunal to adopt is (i) to decide what were the
facts which, in the opinion of the officer making the assessment on behalf of the
Commissioners, justified the making of the assessment, and (ii) to determine when
the last piece of evidence of these facts of sufficient weight to justify making the
assessment was communicated to the Commissioners. The period of one year runs
from the date in (ii): …”
An officer's decision that the evidence of which he had knowledge was insufficient to justify
making an assessment, and accordingly, his failure to make an earlier assessment, could
only be challenged if it was perverse or wholly unreasonable (Pegasus Birds Ltd v
Commissioners of Customs and Excise, supra, pp 101-2, 104; Rasul v Revenue and Customs
Page 16 ⇓
16
Commissioners of Customs and Excise was upheld on appeal (Pegasus Birds Ltd v Commissioners
of Customs and Excise [2000] STC 91), the Court of Appeal agreeing with his decision and
with his reasons ([23] - [25]).
[21] In the present case Officers O’Pray and Boyle had been entitled to hold the view that,
notwithstanding the discussion at the meeting on 29 January 2004, further information
should be obtained before assessments were made. The FTT accepted that. The UT was not
entitled to decide otherwise.
[22] Senior counsel for DCM submitted that the UT had been entitled to decide the
timebar issue in the way it had. He defended its decision and its reasoning. He submitted
that HMRC’s appeal should be refused. Section 73(6) required to be read in light of the
observations of Aldous LJ in the Court of Appeal in Pegasus Birds Ltd v Commissioners of
Customs and Excise [2000] STC 91, at [15]:
“15. … An opinion as to what evidence justifies an assessment requires judgment
and in that sense is subjective; but the existence of the opinion is a fact. From that it
is possible to ascertain what was the evidence of facts which was thought to justify
the making of the assessment. Once that evidence has been ascertained, then the
date when the last piece of the puzzle fell into place can be ascertained. …”
It was for the FTT and the UT to look at the content of the assessments and determine, in
light of that content, when the last piece of material information came to the attention of
HMRC.
[23] The UT had been right to conclude that new information relating to overstated input
tax could justify an assessment. However, it had also been right to decide that that new
information could not justify making an assessment for under-declared output tax where all
the material facts necessary to make an assessment for that output tax had been known by
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17
HMRC for more than a year. If that were not so the time limits in s 73(6) could easily be
elided. That could not have been Parliament’s intention.
[24] Here, all the material facts concerning under-declared output tax were known by the
time of the meeting on 29 January 2004. No new material facts relating to that issue came to
light thereafter. At the end of the meeting Officers O’Pray and Boyle could have made best
judgment assessments for the additional output tax due. As Arden LJ observed in BUPA
Purchasing Ltd v Customs and Excise Comrs (No 2), supra, at [58], it is implicit in s 73(1) that an
assessment to best judgment ought to be made as soon as is reasonably practicable. If there
was any inconsistency between that observation and the reasoning of Dyson J in Pegasus
Birds Ltd v Commissioners of Customs and Excise, Arden LJ’s view ought to prevail.
HMRC’s appeal: decision and reasons
[25] In our opinion the FTT found that during the year before 20 October 2005 (i) HMRC
obtained knowledge of material facts relating to under-declared output tax; and (ii) HMRC
obtained knowledge of material facts relating to overstated input tax.
[26] The FTT accepted that it was the information uncovered during the visit on
31 August 2005 which enabled and caused Officer Boyle to calculate the figures
underpinning the assessments ([191]). For the reasons which it explained at [192] the FTT
did not accept that HMRC could have known whether DCM was using FCA or not without
seeing the VAT records. There had been no voluntary disclosures of under-declared output
tax. The FTT did not think that HMRC ought to have inferred from that that DCM was not
adhering to the 2003 Settlement. It considered that a far more obvious conclusion was that
there was no under-declaration of output tax. It concluded ([199]) that it was wholly unable
to see any material fact which was known to HMRC prior to 31 August 2005 which would
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18
have justified making the assessments earlier. It found that Officer Boyle acted
appropriately and quickly and that HMRC certainly were not perverse in not raising
assessments earlier.
[27] In our view it is not possible to reconcile those findings with the contention that
HMRC had all the facts required to make assessments for the output tax under-declarations
more than a year before 20 October 2005. We turn then to examine the basis upon which the
UT upheld that contention.
[28] The UT considered whether the FTT’s findings in relation to output tax supported
the FTT’s conclusion that the assessments to recover additional output tax were in time. It
discussed that issue at [81] - [84]. In our opinion it is clear that, rather than considering
whether the FTT’s findings were findings which the FTT was entitled to make, the UT was
swayed by its own assessment and evaluation of the evidence. In particular, it drew
conclusions from the discussions at the meeting on 29 January 2004 which Officer Boyle had
not drawn and which the FTT did not draw. In our view those conclusions are not
compatible with the FTT’s findings. Contrary to the suggestion at [83] of the UT’s judgment,
it is clear from the FTT’s findings that the information uncovered on 31 August 2005 related
to both output tax and input tax, and that both items of information enabled and caused
Officer Boyle to calculate the figures underpinning the assessment. The UT’s suggestion
that HMRC’s calculation of the output tax under-declaration did not depend on figures
obtained at that meeting is contradicted by the FTT’s findings. Moreover, it is also clear that
the explanation which the UT gave as the basis for that suggestion proceeded on the
erroneous assumption that Officer Boyle’s calculation used the outputs which had been
declared by DCM in its VAT returns. It did not. It used figures from DCM’s records.
Page 19 ⇓
19
[29] In our view the UT was not entitled to conclude that more than a year before
20 October 2005 HMRC had knowledge of all the material facts sufficient in their opinion to
justify making assessments for the additional output tax which was due. The FTT was the
fact finder, and on the evidence it was entitled to make the findings which it did. It was not
open to the UT to make findings in relation to output tax which were at odds with the FTT’s
findings. In making such findings the UT erred in law. Accordingly, in our opinion
HMRC’s appeal is well founded.
[30] Since it was not until 31 August 2005 that HMRC had knowledge of all the material
facts sufficient in their opinion to justify making assessments to recover additional output
tax which was due, it would be academic to opine on the question whether the time limits in
s 73(6) and s 77 ought to be applied separately to the elements of the assessments
attributable to recovery of (i) additional output tax; and (ii) VAT due because of the
overstatement of input tax. In those circumstances we prefer to reserve our opinion on the
question of construction which lies at the heart of that issue until a case arises where its
determination is necessary.
DCM’s appeal: the amendment issue
Introduction
[31] The amendment issue relates to repayment returns which DCM submitted for the
periods 07/05 to 12/08 (under exception of the period 10/05). HMRC did not pay the returns
when they were submitted because they were not satisfied that the amounts of output tax
shown were correct. They placed “an inhibit” on DCM’s account which prevented
repayments being made. On 1 February 2013 HMRC issued decisions in relation to the
returns (there was earlier procedure but it is common ground that that procedure was
Page 20 ⇓
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superseded by the decisions of 1 February 2013). In all but one case the decision reduced the
sum repayable but left a balance payable to DCM. In one case the repayment claim was
reduced to nil. The parties referred to this aspect of their dispute as the “amendment” issue
because in addition to adjudicating upon the repayment claims HMRC amended the sums
claimed in the repayment returns to reflect their decisions on the claims.
The FTT’s decision
[32] The UT provided a convenient summary of the FTT’s decision on this ground:
“20. The FTT accepted that when a repayment return was submitted, HMRC had
the right to refuse it in whole or in part. HMRC were under a duty to conduct a
reasonable and proportionate investigation into the validity of claims for repayment,
and to take a reasonable time to do so. What was reasonable depended upon the
the present case the delays were in very large part attributable to DCM’s failure to
respond to requests for information. The remedy lay in DCM’s hands: it could
provide information or, alternatively, seek judicial review of HMRC’s decision to
inhibit repayment. The officers concerned had acted proportionately against the
background of DCM’s lack of co-operation.
21. The FTT further accepted HMRC’s submission that there was no need to raise
an assessment where no tax was due. The time limits in section 73(6) could only start
to run where an error in a return gave rise to a debt due by the taxpayer. The officers
had acted correctly in intimating their decisions as to the amount repayable. Those
decisions were appealable, as had occurred. As there were no assessments, no issue
of time bar arose. ”
We also draw attention to para [209] of the FTT’s judgment:
“[209] [Counsel for HMRC] agued very persuasively that Officers Boyle and Little in
making their decisions were simply acting, as they should have done, in accordance
with their statutory obligation to ensure that returns are correct. That obligation
which is both a power and a duty to investigate and consider repayment claims is
implicit in s 25 VATA. There is no explicit power to do so but, of course, HMRC
have that power. ”
The UT’s decision
[33] On appeal to the UT DCM submitted:
“[24] The correct statutory analysis was as follows:
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21
• The VAT return evidenced a prima facie entitlement to be credited by way
of repayment.
• Whilst HMRC could dispute and investigate the sum claimed, there was
no authority for the proposition that they could do so for an unlimited
period of time: they were obliged to act proportionately and to respect
relevant statutory time limits.
• If HMRC found some aspect of a return objectionable, they had to follow
the statutory requirements, ie make an assessment under section 73 or
require the taxpayer to make a correction pursuant to reg 35 of the VAT
Regulations 1995, SI 1995/2518. Both of these powers were subject to time
limits.
• There was no statutory power to amend a taxpayer’s VAT return and
accordingly no legal basis for “reducing” a VAT credit. ”
[34] The UT noted ([31]) that it was common ground that HMRC were not bound to make
immediate repayment of a sum claimed in a repayment return without taking reasonable
and proportionate measures to verify that the sum was properly due. It observed that
neither party took issue with any of the observations of Lightman J at paras [18], [24] and
[25] of R (Tradecorp Ltd) v Customs and Excise Comrs, supra. It acknowledged ([33]) that the
question whether HMRC had acted reasonably and proportionately in delaying and
ultimately refusing to meet the repayment claims in full was not the issue before it; and that,
in any case, the FTT had made a finding in fact that HMRC had acted proportionately and
that there was no basis upon which it was entitled to disturb that finding. The UT
continued:
“[34] … We accept HMRC’s submission that the power to refuse to pay a sum
claimed in a repayment return in full is implicit in the taxpayer’s entitlement, in
section 25(3) of the 1994 Act, to payment of a ‘VAT credit’, ie to the excess of
allowable input tax over output tax due from him, which calculation assumes that
each component has been correctly calculated, and in HMRC’s care and management
powers in para 1 of Sch 11 to the 1994 Act. It is true that there is no statutory power
to amend a return, but there is undoubtedly, in our view, a power to decide to refuse
to pay a sum claimed in full, and to pay a lesser sum (or nil) instead. Reduction of
the net sum reclaimed in the return is merely the arithmetical means of giving effect
to the operative decision. If the taxpayer disagrees with the decision to pay a lesser
sum, a right of appeal to the FTT is available. ”
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22
The UT held (at [35]) that the assessment provisions in s 73 VATA apply where an amount is
due by the taxpayer to HMRC but that there is no provision for assessment where a net
balance is due to the taxpayer (BUPA Purchasing Ltd v Customs and Excise Comrs (No 2),
Arden LJ at [38]). The UT concluded (at [37]) that the FTT had been correct to hold that the
timebar provisions in s 73(6) had no application to the decisions to reduce the amounts of
the repayments claimed. It added:
“[37] … It follows that no formal time limits apply to the power to investigate and
decide whether a repayment claim falls to be paid in full. We see no unfairness or
absurdity in this. Parliament could have chosen to impose a time limit in
circumstances other than assessment but has not done so. Instead, it is settled by the
case law to which we have referred that the power to investigate the validity of a
repayment return and, consequently, to decline to make immediate payment of the
sum claimed, must be exercised reasonably and proportionately, and that it is subject
to judicial control. It would be unsatisfactory if, hypothetically, a taxpayer who had
made an excessive repayment claim could shield it from investigation by refusing to
respond to requests for information, with a view to asserting eventually that it was
protected by time bar. ”
Counsel’s submissions
[35] Senior counsel for DCM submitted that the FTT and the UT had erred in law. He
accepted that HMRC had been entitled to investigate the repayment claims proportionately.
However, if HMRC wanted to refuse to pay or to reduce a sum claimed they could only do
that by exercising a statutory power. Neither s 25(3) nor Sched 11, para 1 of VATA expressly
empowered HMRC to amend repayment returns. Nor, on a proper construction, was it
necessary to imply such a power in either provision. Reference was made to R (Morgan
implied power would be contrary to the principle that tax authorities ought not to
differentiate between the treatment of payment traders and repayment traders (Marks and
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23
of Arden LJ in BUPA Purchasing Ltd v Customs and Excise Comrs (No 2), supra, and of the First
Division in University Court of the University of Glasgow v Commissioners of Customs and Excise
2003 SC 355 were of no assistance to HMRC. In each of those cases the issue had concerned
the proper construction of s 73(1) of VATA.
[36] HMRC were not without statutory remedies. Where as a consequence of an incorrect
repayment claim there was a sum due by the taxpayer HMRC could issue an assessment
(s 73(1), (2)) within time limits (s 73(6), s 77). Where the error resulted in a reduced
repayment being due to the taxpayer HMRC could use the power in reg 35 of VATR to
direct the taxpayer to correct the VAT return and the VAT account, again within time limits
[37] and [42] - [46]; R (Capital Accommodation (London) Ltd (in liquidation)) v HMRC
[2012] UKUT 276 (TCC)). Whether a taxable person had made “an error” within the meaning of
reg 35 involved an objective test (R (Capital Accommodation (London) Ltd (in liquidation)) v
HMRC, supra, at [30]). If HMRC established that the input tax in the returns was overstated
then that would be such an error. In such circumstances HMRC had a discretion whether to
exercise the reg 35 power (provided the exercise would be within the time limits set out in
VAT Notice 700/45). If (as here) they chose not to do so that would not be a decision which
was appealable - the only redress would be judicial review (R (Capital Accommodation
(London) Ltd (in liquidation)) v HMRC, supra, at [17]). However, if HMRC made a reg 35
direction to reduce the input tax claimed in a return that would be an appealable decision
because it would be a decision on “the amount of any input tax which may be credited to a
person” (VATA, s 83(1)(c); Benridge Care Homes Ltd v HMRC [2012] STC 1920, at [27]-[28]).
[37] Senior counsel for HMRC submitted that HMRC had been entitled to verify a
repayment return before deciding whether to accept it. There was no statutory time limit
Page 24 ⇓
24
within which verification required to be completed, but HMRC had to act reasonably and
proportionately. The power to verify would be pointless if, irrespective of the conclusion
reached, the return required to be accepted. Accordingly, it must be implicit in s 25(3) and
in the care and management provisions in Sched 11, paras 1 and 4, that HMRC are
empowered to reject any claim for input tax in whole or in part. Such empowerment was
necessary if the verification process was to work, just as it had been necessary in BUPA
Purchasing Ltd v Customs and Excise Comrs (No 2), supra, ([33]-[34]) and Court of the University
of Glasgow v Commissioners of Customs and Excise, supra, ([13]-[17]) to construe s 73(1) of
VATA as including certain powers in order to make VATA work. It was clear from BUPA
that the power to make an assessment included power to alter both the output tax and the
input tax elements of a return. In the University of Glasgow the power to make an assessment
was held to include the power to make alternative assessments. It would be incongruous if
although HMRC had power to alter both the output tax and the input tax elements of a
return when making an assessment, they had no such power where no assessment was
necessary because no sum was due by the taxpayer (Benridge Care Homes Ltd v HMRC, supra,
[27] , [39]-[40]).
[38] The principle of construction which Lord Hobhouse outlined in R (Morgan Grenfell) v
Special Commissioners, supra, at [45] had been modified in R (Black) v Secretary of State for
Justice [2018] AC 215, Lady Hale at [36](3) and (4). Statutory provisions had to be construed
having regard to their purpose as well as their context. The principal statutory purpose here
was that the trader paid the correct amount of VAT (BUPA Purchasing Ltd v Customs and
Excise Comrs (No 2), supra, [64] ).
[39] It was not accepted that making an assessment or using the reg 35 power were the
only ways for HMRC to challenge the output tax or input tax amounts stated in a return. As
Page 25 ⇓
25
for the availability of the reg 35 remedy, it was not conceded that the present case had been
one of a “taxable person making an error”. On the contrary, DCM’s position was that it was
entitled to the repayments which it claimed. Since reg 35 was only available where the
taxable person had made an error it was perhaps unsurprising that a decision by HMRC to
exercise the reg 35 power was not appealable (s 83; R (Capital Accommodation (London) Ltd (in
liquidation)) v HMRC, supra, [17] ). The only means of redress was judicial review. In
contrast, the decision to exercise the implied power was appealable under s 83(1)(b) or (c)
(Benridge Care Homes Ltd v HMRC, supra, at [27]). Reg 35 was available in the case of a
taxpayer error whether VAT was due by the taxpayer to HMRC or whether a repayment to
the taxpayer was due by HMRC. However, in the former case the pragmatic course for
HMRC would usually be to collect the VAT tendered with a return even though the return
was incorrect and then issue an assessment to deal with the error.
Decision and reasons: amendment
[40] We think it only fair to observe at the outset that the focus of the argument before us
differed from the focus of the argument before each of the tribunals. The thrust of DCM’s
submissions before the FTT and the UT was that HMRC ought to have made an assessment.
There is no indication that reg 35 featured at all in the appeal to the FTT, and only passing
mention seems to have been made of it in the appeal to the UT. It comes as no surprise
therefore that the FTT and the UT do not discuss reg 35.
[41] It is common ground that HMRC are not bound to accept and give credit for a claim
for input tax (R (Tradecorp Ltd) v Customs and Excise Comrs, supra, Lightman J at [18], [24] and
[25] ). Before deciding whether to accept a claim HMRC are entitled to scrutinise it and to
Page 26 ⇓
26
subject it to a process of verification, notwithstanding the fact that s 25(2) and (3) and Sched
11, paras 1 and 4 do not make express provision to that effect.
[42] As we understand DCM’s position, it is that s 73 of VATA and reg 35 of VATR
provide ways of giving effect to a decision not to accept an input tax claim. If as a result of
such a decision VAT is due by the taxpayer, HMRC can make an assessment in terms of
s 73(1). On the other hand if the upshot is that a VAT repayment is due to the taxpayer
HMRC’s remedy would be to make a reg 35 direction requiring the taxpayer to correct the
errors in the return and in the VAT account. Since the power of assessment or the reg 35
power (as the case may be) may be used where an input tax claim is not accepted (or not
accepted in full), DCM maintain that it is not necessary in order to make s 25 and Sched 11
paras 1 and 4 work that any of those provisions be construed as including power to reject a
claim in whole or in part and to amend the return and VAT account accordingly.
[43] While DCM stressed that the only power which HMRC could use to direct the formal
amendment of returns was that contained in reg 35, in our opinion formal amendment of the
returns is not the critical issue. Rather, the crux is whether HMRC have the power to refuse
to accept (in whole or in part) a sum claimed as input tax. We agree with the FTT and the
UT that it is clear that HMRC do have that power. In our opinion, just as it is implicit in
s 25(2) and (3) and Sched 11, paras 1 and 4 that the allowance of an input tax claim is
conditional upon the claim’s verification, it is also implicit in those provisions that HMRC
may accept or reject the claim in whole or in part. The fact that the input tax which is
claimed and the input tax which is in fact allowable may differ is self-evident - that is why
the process of verification and adjudication is necessary. The fact that the input tax claimed
and the input tax allowed may differ is also recognised elsewhere in VATA (eg in s 79(2)(c)).
Page 27 ⇓
27
[44] In our opinion HMRC duly exercised their power to adjudicate upon the input tax
claims in the returns. They did not accept them in full. They were entitled to do that. The
FTT and the UT were right to hold that the input tax claims in the returns had been rejected
to the extent indicated in the decision of 1 February 2013, and that DCM is not entitled to
repayment of those parts of the claims which HMRC did not accept.
[45] That is sufficient to dispose of this ground of appeal. While we heard submissions
relating to the construction and scope of reg 35, we do not think it is necessary to express a
view on those matters. In our judgment their resolution is not essential to the determination
of this ground of appeal. Moreover, we are conscious that, because of the very different way
in which DCM argued this aspect of the case before the tribunals, we do not have the benefit
of the tribunals’ views on those issues. Once again, in the whole circumstances we prefer to
reserve our opinion on the issues until a case arises where it is necessary to adjudicate upon
them.
DCM’s appeal: the discounts issue
The appeal to the FTT
[46] The evidence before the FTT ([107]-[108]) was that HMRC had repeatedly asked
DCM for data relating to the allocation of its charges to customers and the allocation of
discounts, but that it was not until 11 December 2008 that DCM supplied four bundles of
raw data relating to the period 10/05. Despite repeated requests no data was ever supplied
by DCM for the periods 01/06, 04/06, or 07/06. The 10/05 data suggested to HMRC that
output tax had been under-declared by 50%.
[47] Very shortly before the FTT appeal hearing commenced DCM produced for the first
time twelve copy order confirmations dated between August 2003 and February 2004 and
Page 28 ⇓
28
two further copy order confirmation documents dated February and December 2004. Some
of the copy order confirmations bore to show that three separate discounts amounting to
£46.50 in total were applied to a supply of spectacles and dispensing services. Those
discounts were allocated in the VAT analysis to the taxable supply of goods. They were
described collectively as a “discount (on goods)”. At [169] of its judgment the FTT observed:
“[169] DCM certainly have a problem with the discounts before the implementation
of SDC [in February 2004] in that, as we can see from the receipts, the customer
certainly thought that the transaction involved free eye tests, albeit if the customer
analysed the VAT part of the receipt that was not reflected there. We have no
information as to the detail of the transactions thereafter other than in regard to
DCM’s VAT treatment of discounts. ”
[48] The FTT accepted evidence from DCM’s company secretary, Mr Murdoch, that there
were seasonal variations with different promotions, but there was no evidence that the
period 10/05 had more or less discounts than other periods. The FTT did not regard
Mr Murdoch’s assertion that discounted healthcare was not an attractive marketing message
as a sufficient basis for attributing all discounts to goods, especially as DCM offered
discounted sight tests.
[49] Using the 10/05 data HMRC made a best judgment assessment for VAT due for the
period from 01/06. The assessment proceeded on a pro rata apportionment, applying the
data for the period 10/05 and the percentages which had been used in the 2003 Settlement.
At [170] to [173] the FTT concluded:
“170. We agree with Officer Boyle’s point that if DCM establish that a discount is
wholly attributable to goods then that should be the VAT treatment. That has not
happened historically.
171. Unfortunately, the only information available is that furnished for 10/05.
That may not be a typical period, if there is such a thing, but it is the only
information that DCM have chosen to provide.
Page 29 ⇓
29
172. In our view, the words ‘properly attributable’ in s 19(4) VATA imply an
objective test which is appropriate, fair and reasonable. We do not think that the
attribution of all discounts to goods, particularly goods intrinsically linked to the
dispensing services and sight tests, is appropriate. It is arbitrary and falls clearly into
the circumstances envisaged in C R Smith [CR Smith Glaziers (Dunfermline) Limited v
free sight test is just that, as is a 2 for 1 offer.
173. We find therefore that the approach adopted by HMRC following the
submission of the 10/05 data is a proper attribution in terms of the legislation and is
to best judgment. ”
The appeal to the UT
[50] Before the UT DCM argued that it had been free to allocate discounts as it saw fit.
per Lord Walker at [18] - [23]. The order confirmations were clear evidence of the allocation.
The FTT had erred in law in applying an objective test rather than a subjective test when it
considered the allocation of discounts.
[51] The UT refused the appeal on the discounts ground. It reasoned as follows:
“62. The only reference in the FTT's reasoning to the order confirmations now
relied upon by DCM is in paragraph 169, quoted above. The FTT stated that it had
no information as to the detail of transactions thereafter (ie after implementation of
SDC in February 2004) other than in regard to DCM's VAT treatment of discounts.
We understand the FTT to mean by this that although the order confirmations
showed how discounts had been treated by DCM for VAT purposes, they did not of
themselves constitute evidence that that treatment had been correct.
63. The FTT did not assemble in one place its findings in fact in relation to
discounts. We can however identify the following relevant findings (references are
to paragraph numbers in the FTT decision):
• DCM always had ongoing promotions on its optical products, eg 2 for 1
spectacles and money-off vouchers, but not all sales would have been
discounted (90).
• DCM's computer systems were not set up to identify discount
information (90).
• In the earliest example of a receipt, dated 2 August 2003, there is no
indication of the allocation of the discount from the pre-promotion price
(95).
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30
• A customer who had a sight test would have thought that that had been
discounted (100).
• HMRC eventually received data for period 10/05 on 11 December 2008.
Despite repeated requests no data were provided for any other periods
since 04/04 (107, 108).
• DCM offered discounted sight tests (165).
• The customer thought the transaction involved free eye tests (169).
• A free eye test is just that (172).
64. We consider that there is force in some of the criticisms made by DCM of the
discussion in the FTT's decision. At paragraph 164, the FTT stated that it had
difficulty with the argument that if an allocation was agreed with a customer then
that dictated the VAT treatment. On one reading, paragraph 172, set out above,
might suggest that the FTT considered that an objective test should be applied
generally in attributing discounts in a fair and reasonable manner. Such an approach
would, in the light of the authorities, constitute an error of law.
65. In the end, however, it does not appear to us that the FTT reached the
conclusion it did because it misunderstood the law in relation to use of the parties'
subjective apportionment for VAT purposes. The tribunal expressly agreed (at
paragraph 170) with Officer Boyle's acceptance that if DCM established that a
discount was wholly attributable to goods then that should be the VAT treatment.
But the tribunal clearly did not accept that the order confirmations produced during
the hearing afforded persuasive evidence of the terms of the parties' agreement. We
have noted the express findings of fact that, contrary to what the order confirmations
might suggest, VAT- exempt eye tests were free and must therefore have been
discounted. It was noted that in the August 2003 documents, no allocation was made
of the discount from full price. In short, the FTT concluded that DCM had failed to
prove that throughout the period at issue in appeals 1 to 6, the contractual
arrangements which it entered into with its customers provided for all of the
discounts to be applied only to goods. Having so concluded, the FTT did not, in our
view, err in law in holding that HMRC had been entitled to proceed on the basis that
a pro rata apportionment, applying the data supplied for period 10/05 and the
percentages used in the settlement agreement for earlier periods of account,
constituted a proper attribution for the purposes of s 19(4). We accordingly find no
reason to interfere with the decision of the FTT on this ground of appeal. ”
Counsel’s submissions
[52] Senior counsel for DCM submitted that the UT had erred in law. In having regard to
some form of “appropriate objectivity” (FTT [168], [171], 172]) the FTT had applied the
wrong test. The consideration for a supply was a subjective matter (Staatssecretaris van
Page 31 ⇓
31
The appropriate value was the value agreed by the parties to the contract in the course of
their dealings (Lex Services Plc v Customs and Excise Commissioners, supra, at [19]). The FTT
wrongly substituted some form of objective test instead of looking to what the parties had
agreed. That was a fundamental error of law. In finding ([102] and [170]) that Officer Boyle
would have respected DCM’s discount allocation had DCM “established” that allocation,
the FTT had clearly used the term “establish” as meaning establish for the purposes of
section 19(4) having regard to some sort of objective criterion. Had it adopted the correct
approach the FTT ought to have found on the basis of the order confirmations that the
contracting parties agreed that the whole discount was to be applied to the chargeable
supply. Having identified the FTT’s erroneous objective approach the UT ought to have
held that the finding made in para [170] could not stand. It ought to have remade the
decision and found on the basis of the order confirmations that the contracting parties
agreed that the whole discount was to be applied to the chargeable supply; failing which it
ought to have remitted the case to the FTT to permit it to make further findings in light of
the correct test.
[53] Senior counsel for HMRC accepted that the allocation of discounts was a matter
which the contracting parties had been entitled to agree. Had such an agreement been
proved it would have been determinative. In so far as the FTT suggested otherwise that had
been an error. However it had not been an error which had affected the outcome. Officer
Boyle and the FTT had approached the issue on the basis that if the parties had in fact
agreed to allocate discounts to goods that would have been decisive. The fact of the matter
was that the FTT had not been satisfied that the evidence demonstrated that there had been
any such agreement. It was not persuaded that the order confirmations showed that there
had been such agreement between DCM and its customers during the periods with which
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the appeals were concerned (which periods post-dated the order confirmations). The FTT
made several findings which were inconsistent with the suggested agreement. The UT had
been right to conclude that on the evidence the FTT was entitled to decide as it had, and that
the FTT’s error in suggesting that the approach was objective rather than subjective had not
in fact been material to its decision.
Decision and reasons: discounts
[54] In our opinion the UT did not err in law. It recognised, correctly, that the FTT had
erred in law in so far as it had suggested that some form of objective approach was
appropriate. However, we agree with the UT that that error did not in fact have a material
bearing on the FTT’s decision.
[55] Evaluation of the evidence was a matter for the FTT. The FTT was not satisfied that
DCM had proved that during the relevant periods DCM and its customers had agreed that
discounts should be allocated only to the goods which were supplied. Indeed, the FTT
made (and they had been entitled to make) a number of findings which suggested that
exempt services were discounted.
[56] In our judgment in the whole circumstances the FTT was entitled to accept HMRC’s
approach to the discounts - which was a best judgment assessment using the data supplied
for period 10/05 and the percentages used in the Settlement Agreement. In our opinion the
UT did not err in law in refusing this ground of appeal.
Disposal
[57] We shall allow HMRC’s appeal on the evidence of facts issue. The effect is to
reinstate the assessments of 20 October 2005. We have found it unnecessary to determine
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HMRC’s appeal on the interpretation issue. We shall refuse DCM’s appeal. We shall reserve
meantime all questions of expenses.