United Kingdom VAT & Duties Tribunals Decisions

 


18718

ASSESSMENT – whether made to best judgment – Commissioners acting under time constraint – assessment issued for the whole output tax on the basis that it could be adjusted downwards at a later date, if specific information about inputs received – appeal dismissed - VATA 1994 s.25(2), s.73 (1), (6), (9) and 77; article 17(2) EC Sixth Directive; Reg 29(3) of VAT Regs 1995

LONDON TRIBUNAL CENTRE

	LA FITNESS (1998) LIMITED	Appellant
	And
	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

Tribunal : Rodney P Huggins FCI Arb, FRSA(Chairman)

Roy L Jennings FCA FTII

Sitting in public in London on 22 and 23 October 2003 and 19 May 2004

Paul Lasok QC for the Appellant.

Kenneth Parker QC instructed by the Solicitor for Customs and Excise for the Respondents

© CROWN COPYRIGHT 2004

DECISION

The appeal

1. This is an appeal by LA Fitness (1998) Limited ("the Appellant") from a Notice of Assessment dated 20 April 2001 ("the Assessment") for a total amount of £1,188,797 plus £195,412.14 by way of interest. The Assessment is for output tax underdeclared on the taxable supplies of services to the members of certain fitness clubs in the London area. The periods in question were 04/98 to 01/00, that is, the calendar period 1 February 1998 to 31 January 2000 ("the relevant period"). The Assessment was confirmed by a review decision contained in a letter from the Commissioners dated 27 May 2002.

   The legislation

   The assessment

2. The legislation relating to the assessment is contained in section 73 of the Value Added Tax Act ("the 1994 Act") Section 73(1) provides :

   "(1) Where a person has failed to make any returns required 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."

3. Section 73(6) of the 1994 Act reads as follows :

   "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 in section 77 and shall not be made after the

   later of the following -

   (a) two 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 made be made under that subsection in addition to any earlier assessment."

4. Section 77 in the context of this case, provides that an assessment under section 73 may not be made more than three years after the end of the accounting period…"

5. Section 73(9) states :

   "Where an amount has been assessed and notified to any person under subsection (1) … 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 been withdrawn or reduced."

   Input tax

6. Article 17(2) of the EC Sixth Council Directive (77/388/EEC) provides that a taxable person is entitled to deduct VAT paid by him on goods or services only "in so far as the goods or services are used for the purpose of his taxable transactions."

7. Section 25(2) of the 1994 Act provides that a taxable person is entitled to credit for so much of his input tax as is allowable.

8. Regulation 29(3) of the Value Added Tax Regulations 1995 (the 1995 Regulations) states :

   "Where the Commissioners are satisfied that a person is not able to claim the exact amount of input tax to be deducted by him in any period, he may estimate a part of his input tax for that period provided that any such estimated amount shall be adjusted and exactly accounted for as VAT deductible in the next prescribed accounting period or, if the exact amount is still not known and the Commissioners are satisfied that it could not with due diligence be ascertained in the next but one prescribed accounting period."

   The issue

9. There are two issues left by the parties to the tribunal to consider. First, whether or not, in the circumstances arising, a non-final "output tax only" assessment is capable of being a best judgment assessment falling within section 73(1) of the 1994 Act. If so, then the tribunal has to determine whether it was a "best judgment" assessment.

   The evidence

10. We had an agreed bundle of documents together with a quantity of additional documents both produced by the Appellant but the latter were not shown to the Commissioners before the hearing. We heard evidence from the following employees of KPMG on behalf of the Appellant.

    Miss Amanda Claire Brown (Miss Brown), an indirect tax director ;

    Mr Christopher Paul Angus (Mr Angus), an assistant indirect tax manager and ;

    Mr Gervaint Harman Lewis (Mr Lewis) a senior indirect tax manager.

11. For the Commissioners, we heard Mr James Marshall Wilson (Mr Wilson), an officer of Customs and Excise employed on VAT Assurance duties in London and Mr Julian Perring (Mr Perring) who was a VAT Avoidance Specialist Officer of Customs and Excise at the relevant time.

    The facts

12. From the evidence before us, we find the following facts :-

    The Appellant's business activities

13. Prior to April 1998 there were seven health and fitness clubs in the Greater London area operating independently but having a working relationship with a company called CS Leisure Limited which subsequently changed its name to LA Leisure Limited.

14. The seven businesses were transferred in the first half of 1998 as going concerns for a nominal consideration to the Appellant which was formed for that purpose as a company limited by guarantee.

15. The Appellant is controlled by LA Fitness PLC with whom its accounts are consolidated. This PLC is the controlling company of the LA Leisure Company whose business is the commercial ownership and operation of many health and fitness centres. LA Leisure Limited is another of its subsidiaries. The inter-companies structure in the LA Leisure Group is complicated and names of companies changed throughout the relevant period

16. Between 1 April and 1 August 1998 the Appellant signed non-exclusive turnover agreements with other group companies formalizing earlier oral agreements under which these group companies provided the premises and equipment required to operate the various clubs. These were treated by the participants for VAT purposes as mixed supplies of land (exempt from VAT) and equipment (VAT standard-rated).

17. On 1 August 1998 various group companies transferred their trade and assets to LA Leisure Limited with the result that the Appellant was obligated to make payments to that company in respect of all non-exclusive turnover licence agreements.

18. The Appellant has always taken the view that it is a non-profit making body. Therefore, it assumes it was an eligible partially exempt trader; its supplies of membership services being exempt whereas for example supplies of catering, hire of sun beds, sale of sporting goods, entry charges to non-members were treated as being taxable. Therefore it considered itself partly exempt for VAT purposes.

19. This VAT position was maintained by the Appellant until 1 January 2000 when Item 3, Group 10 of Schedule 9 of the 1994 Act was amended to exclude exemption in the Appellant's circumstances. Since 1 January 2000 the Appellant has treated all subscription payments made by the members of their clubs as taxable at the standard rate.

20. A review by the Appellant's Accountants KPMG for the VAT periods 1998 to April 2000 of the Appellant's partial exemption position indicated that approximately 90% of its income was treated as exempt. Throughout this period the Appellant calculated its recoverable input tax by reference to the partial exemption standard method.

    Investigation by Customs and Excise

21. On 21 July 1999 Mr Wilson visited 60 Commercial Road, London E1 which was the administrative headquarters of LA Leisure Limited. The purpose of his routine visit was to examine business records of the various companies under the umbrella of LA Leisure Limited including the Appellant to see whether the VAT liability had been properly accounted for.

22. On examining the Appellant's VAT records (amongst others) it was not clear to Mr Wilson that the appropriate figures for calculating the percentages of input tax to be recovered had been used. He also could not understand at that stage why the supplies of membership services made by the seven clubs operated by the Appellant were considered to be exempt from VAT whereas identical supplies made by the other LA Fitness companies were taxable at the standard rate.

23. Mr Wilson returned on 5 October 1999 with Mr Perring by arrangement to 60 Commercial Road to discuss the position in more detail. Mr Stewart Wemborne, the Company Secretary of LA Leisure Limited and Mr Lewis of KPMG were present. Mr Lewis gave a detailed description of the complicated structure of the LA Fitness group of companies their management and administration. Mr Wilson formed a view at the meeting that the LA Fitness group might have constructed a tax avoidance scheme on advice. The object of the scheme appearing to be that the seven clubs did not pay VAT output tax on membership subscriptions by placing them under the control of the Appellant which was purported to be a non-profit making body. At the interview, Mr Lewis made no comment on this assertion.

24. Following the meeting, Mr Wilson by letter dated 13 October 1999 asked the Appellant to supply a considerable amount of documentation. Eventually, the required documents were provided to Customs, mainly in January 2000.

25. In May 2000 Mr Wilson requested a meeting to discuss their review of the documentation provided and this took place again at 60 Commercial Road on 6 June 2000 when the same persons who attended the previous meeting were present together with Mr Richard Taylor of LA Fitness and Mr Angus of KPMG.

26. Although a number of matters were discussed, a considerable proportion of the meeting was taken up with a review of the implications of a tribunal decision in the case of Tall Pines Golf & Leisure Co Limited v the Commissioners of Customs and Excise VTD 16538 which had been released on 3 March 2000 ("the Tall Pines case").

27. In the Tall Pines case, a company (TPGC) which owned a golf club had registered for VAT and in 1998 it undertook a transaction, devised by a tax consultancy firm, whereby it transferred part of its business to a new non-profit making body (NPMB). The transfer was treated as the transfer of a going concern, and was intended to take advantage of the exemption in the 1994 Act Schedule 9, Group 10, Item 3 so that NPMB would not be required to account for output tax although TPGC would reclaim input tax. Following the transfer, TPGC submitted a VAT return claiming a repayment of input tax. The Commissioners rejected the claim and issued a ruling that TPGC had granted NPMB a licence to occupy the land which was exempt under Schedule 9 Group 1 of the 1994 Act. NPMB appealed contending that the effect of the transfer agreement was that there had been separate supplies of the use of land and of the use of the sporting equipment. The tribunal rejected this contention and dismissed the appeal holding that there had been a single supply of "a licence to occupy a fully equipped golf course" and that this supply was exempt under Schedule 9 Group 1.

28. Mr Wilson and Mr Perring discussed with those present representing the LA Fitness group of companies the various contracts recording the supply of services and related goods by CS Leisure Limited to LA Fitness (1998) Limited. CS Leisure Limited treated the licence fees it received from the Appellant under these contracts as consideration for an exempt supply of land and a taxable supply of equipment.

29. Mr Perring explained to Mr Lewis that he thought the recent Tall Pines case decision would have an impact on the scheme entered into between CS Leisure Limited and the Appellant. The Customs Officers asked those from KPMG to undertake a review of the Appellant's business activities and those of other companies in the LA Fitness Group to identify the VAT adjustments that would be necessary if the Tall Pines case decision were applicable.

30. This request was confirmed by Mr Wilson in a letter of 13 June 2000 addressed to LA Fitness PLC. Under the heading "TOGC and Non-exclusive Turnover Licence Agreements" he stated :

    "We discussed the above agreements entered into between April and July 1998 under which LA Fitness (1998) PLC acquired as a TOGC a number of businesses of operating premises as Health Clubs and also the right to occupy the premises. Following the recent VAT and Duties tribunal ruling in the case of Tall Pines Golf and Leisure Co Ltd (LON/99/266) the Commissioners consider that these arrangements represent single supplies of services and that the supplies are exempt from VAT under Item 1, Group 9, Schedule 5, the VAT Act 1994.

    I would be grateful if you would send me a schedule of the adjustments that must now be made to the appropriate VAT accounts, identifying the output tax incorrectly charged by the supplier, the input tax incurred but not recovered by LA Fitness (1998) Ltd and the input tax recovered by the supplier that must now be attributed to exempt supplies and repaid. We agreed that at this stage you should only prepare figures in respect of supplies made by LA Fitness Limited and that we would consider any further action on the basis of these. However, would you please identify all refurbishments and other supplies that have given rise to Capital Goods Scheme adjustments by any parties and let me know the corrections that should now be made."

31. In the same letter, Mr Wilson asked secondly for evidence to establish which of the two companies, LA Leisure PLC and the Appellant should be regarded as making the supply of membership benefits to the subscription paying members, indicating the Commissioners thought that the Appellant was not the supplier of the membership services in respect of the health clubs; and thirdly, a number of additional points including the calculation of the licence fee in the year to 31 July 1999 charged by CS Leisure Limited (then called LA Fitness Limited) to the Appellant.

    Finally, he added that he agreed that if "in the course of researching the above issues, you discover any errors not directly related to the subject of sporting services supplied by non-profit making bodies, these may be declared as Voluntary Disclosure, without risk of penalty".

32. Mr Lewis of KPMG replied initially by letter dated 25 August 2000 with a lengthy schedule of 14 pages of calculations. Pages 2 and 3 summarised the effect of Tall Pines case decision on CS Leisure Ltd and the Appellant; pages 4 to 7 described on the contents page as "Voluntary Disclosure – non Tall Pines Errors" – contained partial exemption calculations, non-attributable input tax and annual adjustment to year ending 30 April 1999 for "LA Fitness"; pages 8 to 15 contained further Tall Pines adjustments in the case of CS Leisure Ltd and the Appellant.

    The letter of 25 August 2000 also contained at Annex A a Partial Exemption Annual Adjustment calculation in respect of the Appellant and CS Leisure Ltd for the year ending 30 April 2000, the figures in respect of the Appellant being extracted from pages 5 and 6 of the Tall Pines Schedule.

33. At the hearing, Mr Lewis admitted that there was an error on page 6 of the schedule. The figure of £71,094.30 for VAT period 10/98 should have read £29,000 for the VAT due excluding the Tall Pines case supply.

34. Mr Lewis replied to the second and third requests in a further letter dated 20 November 2000. Among other points he stated that the licence fee charged by CS Leisure Ltd (the LA Fitness Ltd) to the Appellant in the year to 31 July 1999, which was shown in the audited accounts of both companies as £1,831,444 had actually totalled £2,488,899. The letter stated that the error would be corrected by credit note and contained at Appendix A a voluntary disclosure for the VAT overcharged.

35. After considering the implications of all the documentation supplied by KPMG, Mr Wilson wrote to LA Fitness PLC for the attention of Mr Wembourne on 1 February 2001 explaining that the Commissioners' view of the VAT position of that Company (formerly known as CS Leisure Limited) in the light of the Tall Pines case. He indicated that the assessment/voluntary disclosure would total £80,374 plus any interest and would be separately sent by post which occurred on 14 February 2001. [That assessment was subsequently withdrawn by a letter from the Commissioners dated 31 May 2002] Mr Wilson indicated in his letter of 1 February 2001 that he would be writing "separately about the VAT position of the other two companies".

36. He raised again the question of the liability to VAT of the subscriptions charged by the Appellant to its members in a further letter to LA Fitness PLC dated 12 March 2001. In that letter he said :

    "I would like to address the liability of the subscriptions charged by LA Fitness (1998) Ltd to the members of the clubs it operates. In VAT periods up to 31 December 1999 LA Fitness (1998) Ltd has treated these subscriptions as consideration of exempt supplies. I understand that you have done so relying on Item 3, Group 10, Schedule 9, the VAT Act 1994 which in the relevant periods exempted :

    "The supply by a non-profit making body to an individual, except, where

    the body operates a membership scheme, an individual who is not a

    member, of services closely linked with and essential to sport or

    physical education in which the individual is taking part."

    From the information available to me I am not satisfied that LA Fitness (1998) Ltd should be regarded as a non-profit making body for the purposes of the Item and thereby not entitled to treat these supplies as exempt. It also appears to me that there is real doubt whether the company itself made the supply when the contracting party to the grant of membership appears to have been LA Leisure Ltd. If this is so, then LA Leisure Ltd (VAT No 681-5866-94) should have accounted for output tax on these supplies.

    In order to resolve these points I must ask you to provide the following information and documents …"

    He then set out in detail what was required including a copy of the credit note correcting the overcharge of licence fees by CS Leisure Limited (LA Fitness Limited) referred to in the letter from Mr Lewis of 20 November 2000.

    The final paragraph of Mr Wilson's letter of 12 March 2001 read as follows :-

    "I am anxious to resolve the outstanding issues as soon as possible. I would therefore be grateful for a reply by 12^th April 2001. Would you please let me know if there is likely to be a delay. I shall be happy to visit you to discuss and assist in assembling the information if this will be helpful. If I have not received the information by the 12^th April, I must raise an assessment to protect the interests of the Commissioners. Whether this is assessed on LA Fitness (1998) Ltd or on LA Leisure Ltd., it will be in the sum of £1,188,797 and will reflect the output tax due on supplies of services declared by LA Fitness (1998) Ltd. A schedule of the calculations is attached."

37. If the assessment had been raised after April 2001, then part of it would be over three years old and therefore time-barred.

38. On 19 March 2001, Mr Wilson had a telephone conversation with Mr Lewis who stated that his client would appeal against the Tall Pines case assessment raised against LA Fitness PLC. He also said he would send to Mr Wilson corrections to some of the figures he had previously provided. Mr Lewis expressed surprise that the Commissioners were challenging the non-profit making status of the Appellant. Mr Wilson acquainted Mr Perring of the content of his telephone conversation with Mr Lewis the same day by E mail.

39. Mr Lewis wrote to Mr Wilson on 26 March 2001 referring to the telephone conversation on 19 March. He enclosed a copy of the appeal in respect of the assessment dated 14 February 2001 against LA Fitness PLC. He dealt with several issues arising from the assessment and then commented at the end of the letter under the heading '5. Matters raised in the Commissioners' letter of 12 March 2001' –

    "We are currently in the process of reviewing the matters raised in your letter of 12 March 2001, and we will be contacting you shortly with our comments. Given the complexity of the issues raised we are uncertain if we will be in a position to reply in full prior to 12 April 2001, however, we appreciate the deadlines under which you are operating and we will contact you within the next week with an update."

    The letter did not mention the matter of the tax totals of the assessment (the subject of this decision) having input tax amounts offset against them.

40. As nothing further was heard from Mr Lewis by 12 April, Mr Wilson waited another five days and then raised the assessment for a total sum of £1,188,797 plus £195,412.14 by way of interest. The total amount represented the aggregate VAT allegedly due from the Appellant for the relevant period. At the same time another duplicate assessment was issued to LA Leisure PLC on the basis that it was making the relevant supplies not the Appellant. This second assessment was withdrawn by the Commissioners by letter dated 27 May 2002 without giving any explanation of their reasons for doing so.

41. Mr Wilson wrote the assessment amounts manually on a form VAT 641 and sent it to be processed, This resulted in a printed assessment on form VAT 655 being issued to the Appellant on 20 April 2001. he did not offset any input tax against the amounts of output tax assessed because he assumed the "non-exclusive turnover licences" would account for a substantial part of that input tax and he believed this would have been corrected by the issue of a VAT only credit note. Also, he did not know the exact amount of input tax reclaimable by the Appellant, or the periods in which such claims would arise.

42. On 17 April 2001 Mr Wilson wrote to Mr Lewis acknowledging his letter of 26 March and stating :

    "With reference to your paragraph 5, you will appreciate that the Commissioners are bound by time constraints within which they must raise assessments for VAT. As I explained in my letter of 12 March 2001 it appears to me that there are grounds for the view that LA Fitness (1998) Ltd should not be regarded as a non-profit making body for the supply of membership benefits before 1 January 2000 or, alternatively that it was LA Leisure Ltd (now LA Fitness PLC). These assessments will not be enforced at this stage. When I have received the information I requested in my letter of 12 March 2001 I shall contact you again."

43. Meanwhile, Mr Lewis wrote to Mr Wilson on the same day, namely 17 April 2001, and informed the tribunal he also sent a copy by fax the same day. For some unknown reason, Mr Wilson did not receive this letter until 25 April 2001. The letter is franked "Received in Post – 25 APR 2001 – CITY LVO". This letter opens as follows :

    "Further to your letter dated 12 March 2001, our client has asked us to respond to the issues raised in your correspondence. However, as previously advised in our letter of 26 March 2001, given the complexities of the issues raised and the time constraints imposed by The Commissioners, we are not in a position to respond fully to all of the issues which you have raised. Nevertheless, we have attempted to address as many issues as possible, we have indicated areas where further clarification is still being sought."

    It contains on page 3 under the heading "6. Quantum of Custom's Proposed Assessment"

    "In your letter, you have stated that an assessment to the sum of £1,188,797 may be required in order to 'protect the revenue', although it is not yet clear whether this will be raised against LA Leisure Limited or LAF 1998. Although we have not undertaken any review of your calculations, we are concerned about the basis on which you have calculated the potential VAT liability (i.e. the output tax due on the membership fees paid to LAF 1998). It is our opinion that such a value would not be in the best judgment of The Commissioners, as such an assessment would not take into consideration any input tax that had historically been restricted, as a result of the exempt supplies of membership made by LAF 1998".

    As far as the Commissioners were concerned this was the first time that the Appellant through KPMG had raised the point about offsetting input tax.

44. On 21 May 2001, LA Leisure PLC and the Appellant both served notices of appeal against the protective assessments raised on 17 April 2001. In both cases, the grounds for appeal included the suggestion that the assessments were not made to best judgment.

45. On 22 May 2001 Mr Wilson wrote asking for a schedule of such input tax. If such a schedule had been forthcoming timeously he could have checked it and, if satisfied with the amounts, reduced the quantum of the assessment.

46. On the same day, Mr Perring send an internal E mail to Mr Wilson in the following terms :

    "I think it would be a good idea to met(sic) with the trader to iron out any outstanding problems, particularly regarding the assessments. I suspect that the input tax adjustment GL suggests we should make in respect of the assessment on LA Leisure Ltd can be calculated from the schedules he sent us for the Tall Pines assessment for periods from 07/98. We may therefore have to reissue them before the endo(sic) of July. I do not think that this invalidates the period 04/98 assessment since we do not have the necessary information on input tax recovery."

47. During May and June 2001 the question of quantum of the assessments was the subject of considerable discussion between the representatives of KPMG and the Customs' Officers.

48. On 9 July 2001 Mr Wilson and Mr Perring met Mr Lewis, Mrs Brown and Mr Angus at the offices of KPMG at Puddle Dock, London. The meeting lasted approximately one hour. The grounds of appeal for each assessment were discussed in some detail and particularly the quantum of the Appellant's assessment since no input tax had been offset against the output tax. Mr Agus said that the information sufficient to give credit for restricted input tax was contained in the long Schedule to the letter from Mr Lewis dated 25 August 2000 referred to in paragraph 29 of this decision but agreed there were errors and he would have to allocate the restricted input tax to relevant periods. Mr Lewis indicated his firm was unwilling to commit the Appellant to the costs involved in this work unless the Commissioners were prepared to take the figures into account. Mr Perring and Mr Wilson stated they would offset the amount of the input tax if KPMG would fully identify those figures relating to the various periods. Neither party was prepared to give way on their stance in this connection.

49. On 27 May 2002 Mr Perring wrote to KPMG for the attention of Mr Lewis when he referred to the three outstanding assessments against the three companies in the LA Fitness Group.

    With reference to the assessment notified to the Appellant on 20 April 2001 he said, "I have reviewed the assessment and the circumstances surrounding it, particularly our meeting on 9 July 2001 and the earlier correspondence and I now confirm the assessment."

    Mr Perring formally withdrew the assessment issued to LA Leisure PLC also on 20 April 2001 for the same amount as the Appellant's assessment.

    There was another assessment issued to CS Leisure Limited which was confirmed by Mr Perring as being made to best judgment. However, it was also withdrawn on 31 May 2002 after further consideration by the Commissioners.

50. During the course of the preliminary proceedings prior to the hearing of this appeal, the Commissioners applied to the tribunal for a direction that the Appellant should file further and better particulars. The Commissioners indicated they sought the following information :

    " 1. According to the Appellant, what is the amount of input tax that

    should have been credited for each prescribed accounting period ;

2. The method used by the Appellant to calculate …. The amount of

   input tax…."

51. By letter dated 3 October 2003 Mr Lewis for KPMG replied and supplied a schedule referred to as Appendix A setting out the amount of input tax the Commissioners should, in his opinion, have included within the assessment. The total for the seven VAT periods from 07/98 to 01/00 was £220,857.28.

    As to the method of calculation, Mr Lewis attached an Appendix B stating that it was "a summary of how the input tax that the Appellant believes should have been taken into account by the Commissioners when issuing their assessment of 20 April 2001, can be calculated from the schedules provided with our further and better particulars, i.e. the appendix to our correspondence of 25 August 2000) "The Schedules". As you will note, these figures are calculated by simply subtracting the "VAT recovered" column from the "Total VAT" column on page 6 of the Schedule.

    The total of the summary in Appendix B was the same total figure as in Appendix A.

    Mr Lewis further commented in this letter :

    "Please note that page 6 of The Schedules, unfortunately includes an error for period 10/98 which in turn reflects an accounting error in The Appellant's books of account, on which the Schedules were based. This error was notified to the Commissioners by my colleague Chris Angus, during Jim Wilson visit to The Appellant premises in July to review The Appellants VAT return for the period ending 30 April 2001."

    The following cases are referred to in this decision

52. De Vere Golf and Leisure Limited and De Vere Group PLC v Commissioners of Customs and Excise [2002] VTD 18078 (De Vere)

    Halifax Plc (and related appeals) v Customs and Excise Commissioners [2002] VATDR 117 (Halifax)

    Customs and Excise Commissioners v Pegasus Birds Ltd [2003] STC 262 (Pegasus)

    Rahman (t/a Khayam Restaurant) v Customs and Excise Commissioners [1998] STC 826 (Rahman No.1.)

    Rahman (t/a Khayam Restaurant) v Customs and Excise Commissioners (No.2.) [2002] STC 150 (Rahman No.2.)

    The Tall Pines Case (see para 26 of this decision for reference)

    Van Boeckel v Commissioners of Customs and Excise [1981] STC 290 (Van Boeckel)

    The principles of best Judgment

53. Before we consider the submission of the parties in this appeal, we would first identify, from the authorities cited to us by the representatives, the principles which Mr Lasok and Mr Parker agreed should apply to this appeal.

54. The meaning of the phrase "to the best of their judgment" within the context of section 73(1) of the 1994 Act was considered in Van Boeckel where Woolf J said at page 292f :

    "Therefore, it is important to come to a conclusion as to what are the obligations placed on the commissioners in order properly to come to a view as to the amount of tax due, to the best of their judgment. As to this, the very use of the word "judgment" makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them. Clearly they must perform that function honestly and bona fide. It would be a misuse of that power if the commissioners were to decide on a figure which they knew was, or thought was, in excess of the amount which could possibly be payable, and then leave it to the taxpayer to seek, on appeal, to reduce that assessment.

    Secondly, clearly there must be some material before the commissioners on which they can base their judgment. If there is no material at all it would be impossible to form a judgment as to what tax is due.

    Thirdly, it should be recognized, particularly bearing in mind the primary obligation … of the taxpayer to make a return himself, that the commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to the best of their judgment, is due. In the very nature of things frequently the relevant information will be readily available to the taxpayer, but it will be very difficult for the commissioners to obtain that information without carrying out exhaustive investigations. In my view, the use of the words "best of their judgment" does not envisage the burden being placed on the commissioners of carrying out exhaustive investigations. What the words "best of their judgment" envisage, in my view, is that the Commissioners will fairly consider all material placed before them and, on that material come to a decision which is one that is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the Commissioners can reasonably act then they are not required to carry out investigations which may or may not result in further material being placed before them."

55. In Rahman No.1. Carnwath J considered these passages in detail and said, at page 835b :

    "I have referred to the judgment in some detail because there are dangers in taking Woolf J's analysis of the concept of 'best judgment' out of context.

    …the tribunal should not treat an assessment as invalid merely because it disagrees as to how the judgment should have been exercised. A much stronger finding is required; for example, that the assessment has been reached 'dishonestly or vindictively or capriciously; or is a 'spurious estimate or guess in which all elements of judgment are missing'; or is 'wholly unreasonable' …. Short of such a finding, there is no justification for setting aside the assessment."

56. Later, at page 836d, he added :

    "Once the grounds for making an assessment are established, then the tribunal's primary function is to examine the amount. Since the assessment is the starting point for that exercise, the tribunal will need to consider whether the judgment made by the commissioners was sound or not. If it is shown to be wholly unreasonable or not bona fide there would be sufficient grounds for setting the assessment aside, because it would not be fair for the taxable person to be required to answer a case which has been formulated in that way. However, that kind of case is likely to be extremely rare. In the normal case it should be assumed that the commissioners have made an honest and genuine attempt to reach a fair assessment. The debate before the tribunal should be concentrated on seeing whether the amount of the assessment should be sustained in the light of the material then available."

57. Subsequently, after the appeal in Rahman No.1. had been set aside and re-heard before a differently constituted tribunal there was another appeal to the High Court and then the Court of Appeal finally dismissed the Appellant's appeal. At para [42] Chadwick L J in Rahman No.2. said in setting out the approach which tribunals should adopt on appeals under s 83(p) of the 1994 Act :

    "It is inherent in the structure of the legislation that a taxpayer can challenge, on an appeal under s 83(p) of the 1994 Act, both the fact that an assessment under s 73(1) of the 1994 Act has been made and the amount of the assessment. There will be cases where the power to make an assessment ought not to have been exercised; because the pre-conditions to the exercise of the power (failure to make returns; failure to keep documents or afford facilities for verification; incomplete or inaccurate returns) were not satisfied. I suspect that those cases will be rare; but the tribunal can address them if and when they arise. There will also be cases where it is apparent on the face of the material before the tribunal that the power to assess has not been exercised in accordance with the 'best judgment' requirement; for example, where the commissioners have not taken into account information which was made available to them by the taxpayer before the assessment was made, or can put forward no basis upon which the assessment can be supported. Again, I suspect that those cases will be rare".

58. Chadwick LJ also differentiated between (among other things) "cases where it is apparent on the face of the material before the tribunal that the power to assess has not been exercised in accordance with the 'best judgment' requirement; for example, where the commissioners have not take into account information which was made available to them by the taxpayer before the assessment was made, or can out forward no basis upon which the assessment can be supported" and "the usual case" (see paragraphs 43-44 of the judgment).

59. In relation to "the usual case", he said that :

    "the tribunal will have the material before it from which it can see why the commissioners made the assessment which they did; and may have further material which was not available to the commissioners when the assessment was made. In such cases, as it seems to me, a tribunal would be well advised to concentrate on the question "what amount of tax is properly due from the taxpayer?" taking the material before it as a whole and applying its own judgment. If that leads to the conclusion that the amount of tax properly due is close to the amount of the assessment, the tribunal may well take the view that it would be a sterile exercise to consider whether the commissioners exercised best judgment in making their assessment" (paragraph 44)

60. Mr Parker and Mr Lasok in their submissions to the tribunal referred to the recent case of Pegasus where Patten J in his judgment considered all the leading authorities on best judgment comprehensively. The appeal by the Commissioners related to the import by Pegasus of birds into the UK where they were sold for cash. The company failed to keep proper or compete records of the purchases and subsequent sales and failed to account for VAT that became due. The Commissioners exercised their power under s 73(11) of the 1994 Act and made an assessment to the best of their judgment.

61. Patten J summarized the circumstances in which the power to assess falls to be exercised. He stated in paragraph [23] as follows :

    "The s73(1) power only arises and can only be exercised when the person chargeable to VAT has failed to make the necessary returns or to keep the records required under the Act, or where those returns appear to be incomplete or incorrect. The degree of non-compliance may therefore vary from cases of deliberate and outright evasion to cases where returns are made but on an incorrect or inadequate basis. The material and information available to the commissioners in making their own assessment will therefore vary according to the circumstances, but in every case, to a greater or lesser degree, they will have to deal with a trader whose records or returns are incomplete. This necessarily requires the commissioners, as s73(1) makes clear, to exercise judgment in making their own assessment of the amount of VAT actually due. The second point is that it is the commissioners who are required to make the assessment to the best of their judgment. This is not intended to be, and cannot by its very nature be, a guarantee of accuracy. The commissioners can do no more than bring to bear their own best assessment of what tax is due, on the basis of the information which exists and is available to them. If the trader is dissatisfied with the assessment, he can appeal to the independent tribunal and put before it any arguments in favour of a reduction in the assessment which he has. The right to appeal on quantum is therefore a recognition by Parliament that the assessment may, by its very nature, be inaccurate or flawed, and the tribunal is given power to adjust it accordingly."

62. We accept that outline is the correct approach in this appeal. We also adopt the other principles laid down in the higher courts as binding us.

    The arguments for the Appellant

63. For the Appellant, Mr Lasok argued that the assessment had not been made to the best judgment of the Commissioners. He suggested that the tribunal had two points to determine. First, whether the Commissioners were entitled to proceed on the basis that they needed to have "complete and reliable information" before they could exercise their best judgment (they considered they did not have such evidence). He said the Respondents contended that the input tax position was left out of account solely for that reason. Secondly, what judgment (if any) did the Respondents apply to the information available to them ?

64. On the first point, Mr Lasok asserted that the evidence of Mr Wilson was quite clear, He said in cross-examination that "it was Custom's intention to include an input tax credit at a later date." (i.e. after the assessment had been issued). Mr Wilson had accepted it was not in best judgment to have issued an assessment against the Appellant with nil input tax in it. At the time of issue, the assessment, the subject of the appeal, was regarded by the Commissioners as being in excess of the tax properly due and, further, as being some kind of a provisional or non-final assessment whose function was to protect the Commissioners' position because of time constraints.

65. Mr Lasok maintained the issue of an assessment that is known or believed to exceed the amount which could be payable was, however, precisely the situation characterised by Woolf J (as he was then) in Van Boeckel as not being a best judgment assessment. He held "it would be a misuse of that power if the Commissioners were to decide on a figure which they knew was, or thought was, in excess of the amount which could be payable, and then leave it to the taxpayer to seek an appeal to reduce that assessment" That was the position in this case.

66. It was asserted by Mr Lasok that when the letter dated 12 March 2001 was sent to Mr Wilson, both Mr Perring and himself were well aware that input tax had been incurred.

67. For this reason, an assessment of the amount of tax actually payable to the Commissioners without taking into account known input tax was invalid and therefore ultra vires and void. Mr Lasok relied upon paragraph 26 from Halsbury's Laws of England, vol 1/1D (2001 reissue), the relevant portion of which reads :

    "26. Validity. If an act or decision, or an order or other instrument is invalid, it should, in principle, be null and void for all purposes and it has been said that there are no degrees of nullity. However, an act, decision, order or other instrument which is impugned in proceedings will be presumed to be valid until it is pronounced to be unlawful at which time it is recognized as never having had any legal effect. An invalid act may be impeached in the course of collateral proceedings. The invalidity of an ultra vires act cannot generally be cured by waiver or acquiescence. Recourse to appeal against an invalid act may cure the invalidity."

68. Mr Lasok then submitted in the alternative that if the tribunal was against him on the first point then it would be necessary for the tribunal to consider what judgment (if any) did the Respondents exercise in relation to the material before them.

69. There were several factors in the case which he drew to the attention to support his assertion that the Commissioners did have sufficient material to exercise best judgment. He put forward the following major points :

    (1) the Commissioners' case was apparently founded only on alleged deficiencies in the material supplied in and attached to the 25 August 2000 letter from the Appellant's representative KPMG. In fact the Respondents had additional information about the Appellant's input tax position at an earlier date. In addition, Mr Wilson had access to the Appellant's VAT returns and had recorded information about the input tax position in his notebook.

    (2) the information supplied in and with the 25 August 2000 letter was sufficient to asses the input tax position. Mr Wilson had not appreciated the significance of the contents.

    (3) Mr Wilson could have taken into account all available figures on imports in the 25 August 2000 letter in order to correct inconsistencies and errors.

    (4) the letter from Mr Wilson dated 12 March 2001 does not invite the Appellant to provide exact input figures and does not refer to unreliability of the information available.

    (5) the only function of the assessment was to stop the clock running in respect of the Vat Period 04/98 and to protect the Respondents.

    (6) the evidence indicated that the input tax was entirely left out of account because of the problem posed by attempting to deal with input tax in connection with LA Leisure Limited.

    (7) the explanations given by the Commissioners did not demonstrate that the assessment was made in best judgment.

70. We were referred by Mr Lasok to another extract from the Pegasus judgment of Patten J in para 32 which states :

    "… But the first issue to determine is whether the tribunal did in fact apply the right test. It seems to me that I am bound to apply the law as set out by the Court of Appeal in Rahman (No.2), which explains the earlier authorities and lays down as the standard for the exercise of best judgment the test of whether the commissioners, through their officers, made a genuine and honest attempt to calculate the tax due. For the reasons set out in the judgment of Chadwick LJ quoted above, the fact that the assessment is wrong and appears to the tribunal to be objectively unreasonable is only the starting point, Conclusions to that effect do not justify finding that the assessment was not made to best judgment, unless the only explanation for the errors is that they were produced as part of something other than a genuine and honest attempt to calculate the amount of VAT .."

71. In support of his submission Mr Lasok referred specifically to the passages from the judgment of Chadwick LJ in Rahman No.2. quoted at paragraphs 58 and 59 of this decision. He argued the appeal was not "the usual case" because as admitted by the Respondents no credit was given for input tax.

    The arguments for the Respondents

72. For the Commissioners Mr Parker argued that although the Appellant relied upon the attachments to their representatives' letter of 25 August 2000 as showing that the Commissioners had complete and accurate information at the material time as to the correct input tax position, that was not the case. He gave various reasons for this conclusion which can be summarised as follows :

    (1) The letter from KPMG of 25 August 2000 was principally directed to the adjustments made necessary by the application of The Tall Pines Case to the LA Fitness group of companies.

    (2) the basis of the calculations in the attachment to the letter of 25 August 2000 was obscure.

    (3) the figure of "total VAT" for the period 10/98 was incorrect.

    (4) the relevant tale at page 6 of the attachment gave no figure for the period 04/98.

    (5) for the period 07/98 the Appellant had already deducted the full amount of input tax to which it was entitled and the relevant part of the assessment was therefore correct.

    (6) Mr Wilson in his letter of 12 March gave the Appellant an opportunity to respond to his proposal to assess only for output tax. At that juncture, the Appellant could have put forward details of the input tax it claimed should be taken into account. It did not do so before the assessment was issued.

    (7) Mr Wilson's mind was never closed to allow any relevant inputs.

    (8) There will be cases such as this when estimates of VAT are made by the Commissioners.

73. To support his argument that the Respondents used their best judgment in raising the assessment Mr Parker quoted extensively from Pegasus and particularly paragraphs 23, 28, 32, 36, 50, 51 and 52.

    Reasons

    The Tall Pines case factor

74. Reference has been made by the Commissioners in the appeal that it concerns a tax avoidance scheme whereby the Corporate group sought to avoid the charge to VAT on its supplies of services to members of some seven fitness clubs by arranging its affairs so that the supplies were made by the Appellant which has been created as a non-profit making body. If this were correct, the supplies would be exempt.

    75. The Tall Pines case decision was released on 3 March 2000 and has not been appealed further. The impact of this decision was to cause the Respondents to take the view that the agreements by which the Appellant acquired the clubs (which had been regarded by the Appellant and its related companies as giving rise to taxable supplies) were exempt supplies.

76. As a result, Mr Wilson formed the opinion that the non-exclusive turnover licence constituted a single composite exempt supply of land and in his letter dated 13 June 2000 requested a schedule of adjustments that would need to be made to the VAT account of CS leisure Ltd and the appellant as a result. KPMG replied on behalf of the Appellant on 25 August 2000.

77. The Appellant argued that the letter of 13 June 2000 from Mr Wilson focuses on both the output and input tax position of the Appellant.

78. We do not agree with this simplistic assertion. We find that the main purposes of the letter of 25 August 2000 were first to obtain a schedule of adjustments that should be made to the appropriate VAT accounts in respect of supplies made by LA Fitness Limited and also to identify all refurbishments and other supplies that gave rise to Capital Goods Scheme adjustments by any parties. Secondly, Mr Wilson sought for evidence to establish which of the two companies (LA Leisure Plc and the Appellant) should be regarded as making the supply of membership benefits to the subscription paying members.

79. Mr Wilson's enquiries were broadly aimed at obtaining information in respect of all issues arising out of the Appellant's trading activities identified as a result of the Tall Pines Case.

80. The Appellant in its appeal dated 20 May 2001 gave two grounds as follows :

    (1) it is a non-profit making body and accordingly its supplies of sports club membership in the period 1 February 1998 to 31 December 1999 were exempt (the De Vere issue)

    (2) the assessment was not made to the Commissioners' best judgment.

81. The first ground has been stood over pending the outcome in De Vere ...the appeal to the High Court has subsequently been withdrawn) and we are only concerned with the second ground.

82. Mr Lasok in his submission referred to what he described as "the Halifax approach to tax avoidance schemes.. The Halifax case related to a tax avoidance scheme involving transactions carried out by associated companies in contracting call centres in an endeavour to enable recovery of input tax on costs incurred, We have not addressed that particular subject because we consider it is outside the matter before us.

    The input tax element

83. Under Section 25(2) of the 1994 Act a person is entitled to credit for so much of his input tax as is allowable. He can estimate in any period a part of his input tax where it is not ascertainable. This is subject to the Commissioners being satisfied such a course can be undertaken. The onus is on the person to whom the supply was made to claim for input tax. We consider as a general principle that the Commissioners are not bound to calculate input tax claims for anybody; nor do they have to estimate any amount of input tax where an exact sum is not ascertainable. There is no statutory responsibility on the Commissioners to undertake this work.

84. Therefore, it is necessary for us to consider whether the Appellant discharged its statutory responsibility to identify the input tax that undoubtedly it is able to deduct against the output tax assessed which, except under the remaining ground of appeal still outstanding, was not challenged at the hearing by the Appellant.

    85. The Appellant has the right to recover the input tax largely within the same periods as those covered by the Commissioners' assessment. The only two exceptions being the tax periods 30 April 1998 and 31 September 1998 for which there was no resulting additional input tax recovery.

86. On the evidence before us, we agree with Mr Parker that the letter from Mr Wilson of 13 June 2000 focused on the adjustments made necessary by the application of the Tall Pines case to the corporate group rather than the partial annual adjustments for CS Leisure Limited and the Appellant as set out at Appendix A to the CPMG letter of 25 August 2000.

87. Mr Parker described the basis of the calculations in the attachment to the 25 August letter as obscure. The letter says : "… these adjustments do not take into account the possible impact of the [Tall Pines ] decision."

88. We also found the contents of the attachment confusing to say the least. The calculations were not clear cut and therefore indecisive.

89. An example is the figure at Appendix A in the 25 August letter for "total non-attributable input tax." If the statement referred to in paragraph 87 above was correct, that figure would represent all input tax incurred by the Appellant for the relevant period. However, the figures at appendix A for the periods 07/99 to 01/00 inclusive, correspond with the figures at page 6 of the main "LA Fitness – Tall Pines Review." We agree with Mr Parker that this indicates to the reader that the heading "total VAT" did mean all input tax deducted by the Appellant. On that basis, the "total VAT" would include the input tax attributable to the supplies made by CS Leisure Limited to the Appellant, and would not disclose the amounts of input tax incurred by the Appellant on supplies from outside the Corporate group.

90. As we have found, the figure of "total VAT" for the period 10/98 was wholly incorrect, The figure of £71,094.30 should have read £29,000 and was not corrected by the Appellant until after the assessment was issued.

    If the Commissioners had relied on the erroneous figure for period 10/98 provided by the Appellant, the assessment for that period would have been substantially understated and, because of time limits, could not have been increased by amendment.

91. In the August letter, the relevant table at page 6 gives no figure for the period 04/98. Subsequently much later with his letter of 3 October 2003 Mr Lewis of KPMG in his schedule setting out the amounts of input tax he considers the Commissioners should have included within the assessment gives a figure of £6,287.69 for input tax for 04/98 without any explanation.

92. We find the Appellant entirely relies upon the August 2000 letter and its attachments in the Appendix as being all the information required for the Commissioners to calculate the quantum of the input tax. This is stated in grounds 6 and 7 in the further and better particulars filed by the Appellant on 30 January 2003 in the proceedings leading to this appeal.

93. As we have already found (at paragraphs 50 and 51) in October 2003 at last Mr Lewis supplied the schedules setting out he amount of input tax the Commissioners should, in his opinion, have included within the assessment. No such information had been supplied in such a format earlier. The responsibility for identifying the exact amounts of input tax claimed remained throughout with the Appellant.

    The invalid assessment issue

94. It is readily admitted by the Commissioners that Mr Wilson was acting under time constraints to issue the assessment before the first assessable period (04/98) was time barred. In their amended statement of case at paragraph 19.4. the Commissioners state "in the absence of a response from the Appellant's representative to his letter of 12 March in which he set out the quantum of the proposed assessment and the basis of its calculation (wholly output tax) he (Mr Wilson) exercised his judgment to issue an assessment in that amount in the knowledge that it could be adjusted downwards, at a later date, if necessary."

95. At that time when taking the decision to issue an assessment without giving any credit for input tax Mr Wilson was of the view (later proved to be mistaken) that the majority of the input tax incurred by the Appellant was in respect of the non-exclusive turnover licence. If that had been the case, the credit note raised by CS Leisure would have taken account of this and any additional input tax would have been minimal.

96. Mr Lasok contended that there is no basis in law for the supposition that assessments issued under section 73(1) of the 1994 Act can be provisional or non-final. He asserted that they are intended to be final subject to an appeal to the tribunal. What he is arguing is that there is no exercise whatsoever of best judgment in the circumstances as in this case where the Commissioners do not include some amount of input tax in the assessment, even if they do not show the correct amount to be included. He relied upon the judgment of Woolf J in Van Boeckel particularly when he said;

    "…….It would be a misuse of that power if the Commissioners were to decide on a figure which they knew was, or thought was, in excess of the amount which could possibly be payable and then leave it to the taxpayer to seek, on appeal, to reduce that assessment."

    In the context, Woolf J was referring to a case where the Commissioners had complete and reliable information on, say, the correct amount of input tax, and perversely failed to allow any credit in the assessment. However, a situation can arise where the Commissioners have insufficient or no information relating to input tax and, in our view, they cannot then be required to make a guess and estimate the correct amount due. Making such a guess would not be an exercise of best judgment. The onus is on the taxpayer to supply details of the input tax element. If he does not do so for whatever reason the Commissioners have no alternative but to issue an assessment based on the output tax only.

97. Most of the reported cases on "best judgment" including the leading authorities concern the mark up assessments where, in the absence of reliable records, the true figure can never be know. Often there is input tax which could be deducted but the details are not forthcoming until after the assessment is issued. The does not make the assessment invalid.

    We found Mr Wilson a truthful witness and it is entirely reasonable for him to issue an assessment which he knows could be reduced when the quantum of the input tax is known. He readily admitted that factor and it was in his mind when he issued the assessment.

98. Mr Lasok argued that the assessment relates to "non-final output tax only". He relies upon an interpretation of the words from section 73(1) of the 1994 Act whereby the Respondents have a power to "assess the amount of VAT from [a person] to the best of their judgment" where, among other matters, the person concerned has submitted incorrect returns. He maintains this must be a "final" assessment because the tax becomes due.

    We consider that the VAT due when an assessment is issued is that sum which at that time is assessed by the Commissioners to be found to be ascertainable from the information in their possession. It can never be described as "final". There are many factors which can vary the sum assessed at a later date, one of which is the input tax element, In many cases of this nature, it will be based on the output tax global figure. Mr Wilson quite properly took the figures for the periods from the relevant VAT Returns (details which were in his possession).

    We do not find the assessment is invalid for these reasons.

    The best judgment issue

99. We have already in paragraphs 53 to 62 inclusive of this decision considered the principles of best judgment.

    In Rahman (No.1.) Carnwarth J said :

    "… the tribunal should not treat an assessment as invalid merely because it disagrees as to how the judgment should have been exercised. A much stronger finding is required; for example, that the assessment has been reached "dishonestly or vindictively or capriciously"; or is a spurious guess in which all elements of judgment are missing "or is "wholly unreasonable"… short of such a finding, there is no jurisdiction for setting aside the assessment". We adopt that rationale.

100. We have already considered in the input tax element the contents of the letter of 25 August 2000. Basically, should the Respondents have taken into account the input tax figures put forward at that time ? We have already found that the contents of the attachment were confusing, indecisive and not clear cut.

101. In these circumstances, in our view, it was entirely reasonable that in March 2001 Mr Wilson acted as he did. In his letter of 12 March he proposed as assessment of output tax which, in his judgment, the Appellants had wrongfully failed to declare for the relevant periods. The Appellant was given a reasonable period in which to respond to this proposal. Such response could have sought to challenge both the substantive basis of the assessment but also, and more importantly for present purposes, the exact amounts of the assessment, either in terms of excessive output tax and/or failure to give due credit for input tax properly deductible. If the amount of input tax was precisely and reliably known, there was no good reason why the Appellant should not immediately have declared its position. Nothing in Mr Wilson's demeanour or attitude in giving evidence to the tribunal would suggest that we would not have taken into account any figure for deductible input tax which the Appellant might put forward and which they could substantiate by reference to appropriate records.

102. Notwithstanding ample opportunity, no substantive response was forthcoming until Mr Lewis' letter of 17 April 2001. The letter was not received until 25 April after the assessment had been made and coincidentally on the day of the notification of the assessment. In any event, the letter was sent after the expiry of the period Mr Wilson had reasonably, and for good cause in the light of the impending time limits, laid down for reply by the Appellant. The Appellant knew that the Commissioners were up against a strict deadline and also knew, through their advisers KPMG that an assessment could not be amended to increase the amount of tax recoverable.

103. We accept Mr Wilson appreciated that the Appellant had paid an amount of input tax to CS Leisure Limited in respect of the supplies made under the licence agreement. However, these supplies had been made the subject of the earlier assessment in accordance with the application of the Tall Pines ruling. It was open to the Appellant to recover this input tax from CS Leisure Limited by the standard procedure of issuing a credit note, and Mr Wilson had no reason to believe that such a procedure would not be followed, particularly between members of the same Corporate group.

     Conclusion

104. For these reasons we find the assessment was made by the Commissioners in the exercise of best judgment and the appeal therefore fails. Input tax is nevertheless deductible and this is to be agreed between the parties subject to Direction (2).

     Directions

105. There are three further matters arising as a result of the appeal relating to the input tax and the outstanding ground in the appeal

     We therefore direct as follows :

     (1) The Appellant shall pay to the Respondents the costs of the

     Respondents of and incidental to and consequent upon the hearing of

     this appeal, the amount of such costs to be agreed

     between the parties but failing agreement to be taxed on the standard

     basis;

     (2) In the event of the parties not being able to resolve the calculation of

     the input tax to be deducted from the assessment, either party can

     apply to the tribunal for further hearing to resolve the matter within

     three months after the date of release of this decision.

     (3) Within twenty-eight days after the date of release of this decision the

     Appellant shall inform the London tribunal centre and the Respondents

     whether it intends to proceed with the remaining issue in the appeal

     which has been stood over. If the Appellant decides to proceed with

     the outstanding ground, then a pre-trial review will be necessary.

     Rodney P Huggins

     Chairman

     RELEASED 05/08/2004

     LON/2001/0529