United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2007] UKVAT V20002

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JAG Communications (Plymouth) Ltd v Revenue & Customs [2007] UKVAT V20002 (06 February 2007)

20002

SUPPLY – cash-back payment relating to mobile phone – whether supplier's output tax should be adjusted on the Elida Gibbs principle – no

ASSESSMENT – statement of case claiming it to have been made under s 73(2) and reason code that it related to liability errors – was made under s 73(1) and the reason was clear to the Appellant from the correspondence – whether valid – yes

LONDON TRIBUNAL CENTRE

JAG COMMUNICATIONS (PLYMOUTH) LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: DR JOHN F AVERY JONES CBE (Chairman)

ROY JENNINGS FCA FTII

Sitting in public in London on 22 and 23 January 2007

Richard Barlow, counsel, instructed by Alan Hinton and Associates, for the Appellant

Rupert Baldry, counsel, instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

This is an appeal by JAG Communications (Plymouth) Limited against an assessment to VAT dated 16 January 2003 for £356,038. The Appellant was represented by Mr Richard Barlow, and Customs by Mr Rupert Baldry.

The appeal raises two issues: the VAT treatment of a cash-back paid in connection with a mobile phone supply, and the validity of the assessment.

The cash-back issue

There was an agreed statement of facts as follows:

(1) The appellant, at all material times, has traded as a vendor of mobile phones to the public.

(2) In addition to its sales of mobile phones to the public, the appellant entered into arrangements with its customers under which they would enter into contracts with service providers. The contracts between the customers and the service providers were for the provision of telecommunications services consisting of the right to make calls on mobile phones and related services; usually for a minimum period of time and on terms that the service would thereafter continue until cancelled.

(3) The appellant received commission from the service providers in respect of contracts entered into between customers and service providers.

(4) The commission received by the appellant usually consisted of a payment that became payable only if the customer continued to contract with the service provider for at least a period of time agreed between the appellant and the service provider (i.e. no commission was payable if the customer cancelled the contract sooner than the specified time).

(5) In addition to payment of commission for individual contracts between customers and service providers the appellant received commission payments when certain targets for the total number of contracts had been met.

(6) The appellant bought mobile phones from suppliers and sold them to customers accounting for output tax on the sale price and claiming deduction of input tax on the price charged by the suppliers.

(7) In many cases the sale price of a phone to the customer was reduced to below the cost price to the appellant.

(8) In addition, the appellant offered some of the customers "cash back" terms in respect of the contracts with the service providers. Typically the terms were that the cash back payment to the customer was only payable after the customer had continued the contract with the service provider for the necessary length of time required to secure the commission payment from the service provider to the appellant. The appellant paid the cash back amount to the customer.

(9) The appellant refers to three example transactions.

(10) The first is a sale to Mr C Johnson. The schedule relating to that transaction shows that the appellant bought a phone from Unique Distribution for £76.50 plus VAT (£13.39). The appellant claimed £13.39 as input tax in the ordinary way.

(11) The appellant sold that phone to Mr Johnson for £17.02 plus VAT (£2.98). The appellant accounted for output tax of £2.98 in the ordinary way.

(12) The appellant had therefore made a loss on the sale of that phone.

(13) However, commission was paid to the appellant by 4U Limited under three heads of commission namely £140.00, £85.00 and £25.00 making a total of £250.00 and output tax was accounted for on those sums totalling £43.76.

(14) The appellant agreed to pay Mr Johnson a cash back payment of £120.00 payable once the contract had continued for the necessary length of time.

(15) The appellant treated that cash back payment as consisting of £102.12 plus VAT of £17.87 (rounding accounting for the difference of 1p between those amounts and £120.00).

(16) The appellant deducted £17.87 as input tax on its VAT return.

(17) Overall the appellant had received the following amounts in respect of the Johnson transaction or transactions: commission £293.76, sale of phone £20.00 total £313.76. Of that the appellant had accounted for £46.74 as output tax. Net receipts £267.02.

(18) However, in order to make those sales the appellant had incurred expenses of £89.89 less input tax of £13.39 i.e. £76.50 and £120.00 paid as cashback which on the commissioners' case did not include any input tax; total £196.50.

(19) Because the appellant had claimed input tax as if the cash back amount included deductible input tax the respondents assessed the appellant for those amounts. The calculation is not in dispute but the appellant contends that it has overpaid output tax in the same amount.

(20) The other two examples relate to Mr S Al-Hasani and Mr B Searle. The principles are the same although the precise details differ and in both those cases the customers also paid for line rentals on which output tax was accounted for and the phones were sold for more than they had cost the appellant so that the output tax accounted for in respect of the sale of the phone exceeded the input tax claimed on its purchase.

We heard evidence from Mr John George, director and majority shareholder of the Appellant. We find the following additional facts:

(1) The agreement between Mr Johnston and Singlepoint 4U Limited ("4U") provides that "this agreement is for a minimum period of 12 months which reflects the subsidised price of the equipment."

(2) It is common ground that the Appellant's agreement with 4U does not contain any terms about the cash-back to be given to customers, although 4U are no doubt aware that such payments occur. The cash-back arrangement is accordingly one between the Appellant and its customer although related to the terms of the Appellant's agreement with 4U in that if the customer defaults in his agreement with 4U during a certain period 4U will claw back the commission paid to the Appellant.

We summarise the relevant facts of the transaction with Mr Johnston, which we take to be a typical example that is applicable to the totality of the Appellant's transactions, as follows. The transaction comprised two elements that are linked in the sense that both elements are necessary to the pricing of the transaction. The first is that the Appellant purchased the phone from Unique Distribution for £76.50 plus VAT and sold it at a direct loss to Mr Johnston for £17.02 plus VAT. The second is that the Appellant induced Mr Johnston to contract with 4U for phone line supplies at £24.99 per month for which 4U paid the Appellant commissions totalling £250 (part is straightforward commission in respect of the contract with Mr Johnston, part reflects the number of such contracts entered into in that month, and part is referable to marketing). As part of the total transaction the Appellant promised to pay £120 to Mr Johnston conditionally on his remaining on the same tariff with 4U and making a minimum number of monthly payments to 4U, which we infer was three (assuming that the payments are in arrears) since the cash-back was paid a few days after the end of the first three months. On the invoice for the phone the cash-back deal is recorded as "1 Jag/4U Cashback Deal @£120.00." The terms of the cash-back were either communicated orally to Mr Johnston or were contained in some promotional material that we have not seen. Since the agreement with 4U was for a minimum of 12 months there is no need for a further agreement between Mr Johnston and the Appellant to carry it out for three months. We regard the effect of the cash-back arrangement to be that payment of the £120 was conditional on Mr Johnston actually fulfilling the terms of his agreement with 4U for three months, on the basis that it was presumably not worth 4U trying to enforce the contract if Mr Johnston did not. If the customer does not make this minimum number of payments 4U will also claw-back the commissions paid to the Appellant. We understand the position to be that if Mr Johnston did not continue the contract with 4U for three months there is no adjustment to the discounted price of the phone.

The cash-back was treated as being £102.12 plus VAT (£17.87) which totals £119.99 and the notional input tax was credited by the Appellant in its VAT returns. It is conceded that this was wrong. The Appellant now claims that the amount of the cash-back reduces the Appellant's outputs on the sale of the phone and receipt of the commission.

Article 11 of the Sixth Directive provides:

A1. The taxable amount shall be:

(a) in respect of supplies of goods and services other than those referred to in (b), (c) and (d) below, everything which constitutes the consideration which has been or is to be obtained by the supplier from the purchaser, the customer or a third party for such supplies including subsidies directly linked to the price of such supplies;…

…

C1. In the case of cancellation, refusal or total or partial non-payment, or where the price is reduced after the supply takes place, the taxable amount shall be reduced accordingly under conditions which shall be determined by the Member States.

Mr Barlow, for the Appellant, contends:

(1) VAT is payable on the consideration, meaning the consideration as reduced by any reduction in the price. Since consideration includes consideration paid by a third party (art 11A(1)(a)), a reduction in the consideration can include a payment to the customer made by a third party.

(2) Elida Gibbs Ltd v Customs and Excise Commissioners, Case C-317/94, [1996] STC 1387, EC Commission v Germany [2003] STC 301 in the European Court of Justice and Total UK Limited v HMRC (High Court 3 November 2006, not yet reported) are all examples where the consideration for a supply was reduced by a payment by a third party. The reasoning in those cases was all that if no reduction in the taxpayer's output tax were made the total VAT collected in the chain of transactions would exceed VAT on the price paid by the final consumer. That principle is applicable here. If the Appellant's output tax is not reduced the total VAT exceeds VAT on the price paid by Mr Johnston as reduced by the cash-back.

Mr Baldry, for Customs, contends:

(1) The cash-back was not a reduction in the consideration for any of the supplies. It was not expressed to be a reduction in price. It was an inducement to encourage Mr Johnston to enter into the contract with 4U, which was in the Appellant's interest since it earned commission from 4U. The cash-back cannot be a reduction in the price of the phone since this would result in a negative consideration.

(2) Elida Gibbs concerned the VAT treatment of a payment by a person who was not in any contractual relationship with the recipient. That is not the case here since the payment is between the Appellant and its customer Mr Johnston.

We start by analysing the facts in the cases relied on by Mr Barlow. In Elida Gibbs there is a chain of transactions in particular goods: from Elida Gibbs ("the manufacturer") to the wholesaler, to the retailer, to the customer. There are two possible scenarios. In the first the manufacturer distributes coupons in newspapers and magazines entitling the customer to a discount of a particular amount on the purchase pf particular goods. The retailer gives the discount to the customer and then collects the amount of the voucher from the manufacturer. As a variation on this scenario the manufacturer arranges with the retailer that the retailer will distribute coupons to potential customers but the end result is the same. In the second, the manufacturer pays a cash-back to the customer who has sent in a voucher attached to the goods. In EC Commission v Germany essentially the transactions are the same because this was an action by the Commission for a declaration that Germany had not complied with the Sixth Directive which enabled the full court to review and confirm its decision in Elida Gibbs. In Total UK Limited petrol is sold either by Total in one of its own petrol stations or by a service station not owned by Total but using the Total brand to the customer who collects points for each purchase. After purchasing 1,000 litres the points entitle the customer to receive a £5 voucher redeemable at a retailer such as Boots. Total buy the vouchers from the retailer for £4.50 and give the voucher to the customer. In all these cases a person in the chain of supply of the goods puts value (whether in the form of a coupon, a cash payment, or a voucher it has bought from a retailer) into the hands of the customer with whom that person has no contractual relationship, which is intended to reduce the price paid by the customer for the goods.

The decision of the European Court of Justice in the first two cases and of Sir Andrew Park in Total was that the taxpayer is allowed to reduce his outputs by the amount paid to the customer. The reason is that if such reduction is not allowed the total transactions fail to give effect to the fundamental principle that:

"…the taxable amount serving as a basis for the VAT to be collected by the tax authorities cannot exceed the consideration actually paid by the final consumer which is the basis for calculating the VAT ultimately borne by him." (Elida Gibbs, judgment at [19]).

The Court went on to say in Elida Gibbs:

"31. It is true that that provision [art 11C(1) of the Sixth Directive] refers to the normal case of contractual relations entered into directly between two contracting parties, which are modified subsequently. The fact remains, however, that the provision is an expression of the principle, emphasised above, that the position of taxable persons must be neutral. It follows therefore from that provision that, in order to ensure observance of the principle of neutrality, account should be taken, when calculating the taxable amount for VAT, of situations where a taxable person who, having no contractual relationship with the final consumer but being the first link in a chain of transactions which ends with the final consumer, grants the consumer a reduction through retailers or by direct repayment of the value of the coupons. Otherwise, the tax authorities would receive by way of VAT a sum greater than that actually paid by the final consumer, at the expense of the taxable person."

The Court examined the same situation in more detail in EC Commission v Germany dealing with possible objections, such as giving a reduction to the person in the position of Elida Gibbs meant that the wholesaler to which it sold was given a greater input tax credit than the tax ultimately paid by its supplier, but the court followed the approach in Elida Gibbs. The Advocate General gives numerical examples to illustrate the position.

Total (which we understand is under appeal) was decided on the same principle. Sir Andrew Park considered that the European Court was not deciding a point on the interpretation of art 11C(1) but was intending:

"…rather to lay down a wider principle that, where a trader supplies goods or (no doubt) services for a stated consideration, but under a sales promotion scheme is obliged to pay an amount away to the ultimate consumer of to an intermediary in the chain of supply, the consideration upon which the trader should be finally liable to VAT is to be reduced by the amount so paid away."

It seems to us that the only difference between Total and the cases in the European Court was that rather than providing a coupon or cash to the final consumer Total bought a gift voucher at a discount from a retailer (as Sir Andrew Park said at [6(6)] "They appear to me to be the standard forms of gift vouchers which the retailing groups sell to customers generally") and gave it to the customer, thus indirectly (rather than directly in the European Court cases) reducing the price of the supply in question by giving the customer an equivalent price reduction on goods bought from the retailer.

We regard these cases as authority for the proposition that in a chain of transactions where there is a payment made between parties not in a direct contractual relationship, the same adjustment to the payer's outputs must be made as if it were a reduction in price made between two parties to a contract. It is important that the reason for this apparent extension of the terms of art 11C(1) is the fundamental principle of that if such adjustment is not made the total tax collected at each stage in the chain exceeds the tax on the consideration paid by the final consumer. Such a principle can be tested only if there is a self-contained chain of transactions.

The facts of this appeal are more complicated than those in the authorities and involve a triangular situation in one part (Mr Johnston makes monthly payments for phone services to 4U; 4U pays a commission to the Appellant for introducing Mr Johnston; the Appellant pays a cash-back to Mr Johnston as an inducement to enter into the contract with 4U), and part of a chain in another part (Unique Distribution sells a phone to the Appellant who sells it at a discount to Mr Johnston; the Appellant pays a cash-back to Mr Johnston). The first part has more factual similarity in that Mr Barlow contends that the cash-back is a reduction in price of the supply of phone services by 4U to Mr Johnston which is paid by a person (the Appellant) who has no direct contractual relationship in relation to that supply but who is a participant in the chain (if the triangle can be regarded as a chain). There is no factual similarity in the second part since the Appellant is in a direct contractual relationship with Mr Johnston in relation to the sale of the phone and if there is in fact a reduction in price in that sale one can give effect to it directly under art 11C(1) of the Sixth Directive (reg 38 of the VAT Regulations 1995 in domestic law). In both cases the question is whether there has been a reduction in price of the supply in question (Mr Johnston's monthly payments to 4U, or the cost of the phone). We do not think this is the effect of the cash-back. The only record of the cash-back deal seems to be the entry on the invoice for the sale of the phone ("1 Jag/4U Cashback Deal @£120.00") but in no sense can the conditional promise of £120 be a reduction in the cost of the phone from £20 (including VAT) to minus £100. Nor do we regard it as a reduction in the price of Mr Johnston's monthly payments to 4U. While the cash-back arises because Mr Johnston entered into the contract to make monthly payments to 4U, the Appellant did not specify that it was making any reduction in such payments. The promise of the cash-back was a generalised inducement to enter into the two contracts (to buy the phone from the Appellant, and to contract for phone services with 4U) and not a reduction in the price of either or both of them. We regard the requirement for there to be a reduction in the price of a particular supply (or in Total series of supplies of similar goods) as necessary to the application of the principle in the authorities which are based on an extension of art 11C(1) beyond a two party situation in order to preserve the neutrality of VAT.

The second difference from the authorities is that here there is no chain of transactions relating to the same goods (or in Total, fuel) so that one cannot add the input and output tax of all parties and see if this is the same as tax on the consideration paid by the final consumer. Here within the triangle of the Appellant, 4U and Mr Johnston each party is supplying something different. Also there is separate chain of the sale of the phone which comprises a further party, Unique Distribution, not present in the triangular transactions. There is a deliberate loss on the phone in the separate chain which the Appellant recoups from it commission on the triangular transactions, so that chain cannot be looked at on its own. In the totality of the transactions with which we are concerned there are four parties each supplying something different, including the Appellant making two different supplies, comprising both goods (the phone to Mr Johnston) and services (introducing Mr Johnston to 4U). In our view, this makes it much more difficult to undertake this test, which is the basis for the decision in the authorities, and to be sure that we have included all the relevant input and output tax.

The second difference from the facts in the authorities is that even if, contrary to our view, the cash-back could be regarded as a price reduction it is not solely related to the supply whose price is reduced. The cash-back was paid on satisfactory completion of three months' of the contract between Mr Johnston and 4U. While we do not regard this as a separate promise by Mr Johnston to the Appellant to carry out the terms of his contract with 4U, Mr Johnston's satisfaction of the terms of that contract for three months was required before the cash-back became payable (see paragraph 5 above). We regard such satisfaction as the consideration for the payment of the cash-back. Accordingly the cash-back is a payment for Mr Johnston satisfying the terms of the contract with 4U for three months and not merely a reduction in the price of that contract (assuming that it is such a reduction). In none of the authorities was anything done in addition to the transaction (or series of transactions) with the final consumer, and we do not consider that the principle can be enlarged to cover this situation.

We must also consider the possibility of a reduction in the price of the phone to nil as an adjustment between the parties under art 11C(1) of the Sixth Directive (or reg 38 of the VAT Regulations 1995) unrelated to the Elida Gibbs principle. We cannot find any factual support for this. Nowhere is the £120 cash-back allocated between the two supplies made to Mr Johnston of the phone and the services of 4U. Indeed, the Appellant is at risk over the reduced price of the phone if Mr Johnston does not keep up the contract with 4U for three months with the result that 4U claw-back the commission from the Appellant. If there were to be an adjustment in the price of the phone one would expect it to deal with an increase in the price of the phone in this event, as well as a decrease to nil if Mr Johnston did keep up the contract. But there is no suggestion that the arrangement dealt with either of these eventualities.

Accordingly on this issue we do not consider that the Appellant is entitled to reduce the amount of its outputs on account of the cash-back.

The assessment issue

In relation to the assessment issue we find the following facts:

(1) On 2 August 2002 Customs wrote to the Appellant saying that if their customers were VAT registered the cash-back would be consideration for a taxable supply but "It follows that if the customer is not VAT registered then [the Appellant] have no input tax to reclaim." The letter asked for details of all such input tax claimed for the last 12 VAT periods.

(2) The Appellant provided the figures by letter of 11 December 2002.

(3) On 10 January 2003 Customs wrote attaching an assessment with the letter detailing the tax owing in the last 11 periods which were in time for assessment, a total of £356,038. The assessment itself which is stamped 16 January 2003 (and may therefore have been sent later than the letter) specifies the Reason Code as 02. According to a list on the back of the assessment this code refers to "Liability errors."

(4) Customs' statement of case says that the appeal lies under s 83(b) of the VAT Act 1994 ("the VAT chargeable on the supply of any goods or services…."). The amended statement of case, made after the Appellant had been allowed to amend its grounds of appeal to contend that what it had previously claimed as input tax was overpaid output tax, states "In any event, it is the amounts of input tax over-claimed that the Commissioners are entitled to assess 'as being VAT due': section 73(2). If the Appellant had wished to claim it had overpaid output tax it should have made a repayment claim under section 80 VATA."

(5) At the hearing Mr Baldry initially contended that the assessment was made under s 73(2) and on Mr Barlow contending that in that case it was invalid as not being within that provision, took instructions and then contended that it was made under s 73(1).

Section 73 provides:

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…."

Section 25(3) and (4) provide:

"(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'.

(4) The whole or any part of the credit may, subject to and in accordance with regulations, be held over to be credited in and for a subsequent period; and the regulations may allow for it to be so held over either on the taxable person's own application or in accordance with general or special directions given by the Commissioners from time to time."

Mr Barlow contends:

(1) On the basis that he is successful on the cash-back issue, and on the assumption that a return is incorrect if it states the correct amount of tax but overclaims input tax rather than reducing output tax, an assessment under s 73(1) must be for "the amount of VAT due from him." That amount is nil and so the assessment should be discharged.

(2) If that is not accepted, Rahman v Customs and Excise Commissioners (No.2) [2003] STC 150 decided that if the taxpayer's returns are found to be inaccurate the Tribunal's task is to determine the correct amount of tax due without being concerned about whether the error arises from incorrect input tax or output tax or both: "The underlying purpose of the legislative provisions is to ensure that the taxable person accounts for the correct amount of tax." (at [45]). See also Customs and Excise Commissioners v Pegasus Birds Ltd [2004] STC 1509 "The tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material properly available to it, the burden resting on the taxpayer." (Carnwath LJ at [38(i)]). In Brian Stewart v Customs and Excise Commissioners (1985) VAT Decision 1960 Lord Granchester amended an assessment to include not only undeclared outputs but also credit for unclaimed input tax.

(3) During the hearing he added the contention that if, as stated in Customs' statement of case, the assessment had been made under s 73(2) it was invalid because it was not within the terms of that provision.

Mr Baldry contends:

(1) The assessment was made under s 73(2) to recover input tax that it is now common ground should not have been claimed. The assessment therefore succeeds. If the Appellant has overpaid output tax it should have made a claim under s 80.

(2) However, if, which is not conceded, the assessment was made to correct an output error because of its being stated to be made under Reason code 02 the Tribunal is entitled to determine the correct amount of the assessment.

In view of our decision on the cash-back issue, Mr Barlow's first two contentions do not arise. However, we can state that we agree with his contention that, if we had agreed on the main point, "the amount of VAT due from him [the Appellant]" would be nil. We consider that it would be over-technical to say that because the assessment was for overclaimed input tax Customs must succeed even though the Appellant had shown that it had overpaid output tax of the same amount for which it was now out of time to claim under s 80.

On Mr Barlow's third contention that the assessment is invalid, it is clear from the facts we have found that the assessment was to reverse the amount of input tax claimed on cash-backs and that it is in the amount for which the Appellant had provided figures of such input tax claimed. There can be no doubt that the Appellant knew that this was the reason for the assessment. On that basis, was the assessment made under s 73(2)? We do not consider that there was paid or credited to the Appellant an amount "as being a repayment or refund of VAT" which ought not to have been so paid or credited within s 73(2)(a). Nothing was repaid or refunded to the Appellant; it is merely that in making its returns the Appellant claimed as input tax something that it should not have claimed. Section 73(2)(b) is also inapplicable because the assessment does not relate to an amount paid or credited as a "VAT credit" (as defined) since it is common ground that the Appellant's input tax for the periods in question did not exceed its output tax. Section 73(2) deals with the case that a payment has been made to the taxpayer which should not have been paid (or such excess input tax has been held over under s 25(4) for credit in a subsequent period). In any case, if the assessment had been made under s 73(2) the appeal would not, as claimed in the statement of case, lie under s 83(b), but under s 83(p) ("an assessment under section 73(1) or (2)…").

We consider that the statutory authority for the assessment was s 73(1) and the assessment was made on the basis that the returns were incorrect. Does the fact that the statement of case says that it was made under s 73(2) or that the Reason code is stated to be 02 invalidate the assessment? Whether the Reason Code should have been 02 or another, such as 22 ("Input tax disallowed—other") even though what was claimed was not in fact input tax, does not seem to us to be critical to the validity of the assessment. The purpose of the Reason Code is to inform the taxpayer of the reason for the assessment. The Appellant cannot have been in doubt about the reason for the assessment in the light of the correspondence. Nor do we consider that Customs should be bound by the statutory authority quoted in their statement of case, particularly as there is no requirement to state the authority for making an assessment in a statement of case, so long as there was a statutory basis for the assessment. To do so would be to give statements of case more formality than is warranted. The purpose of the statement of case is to enable the taxpayer to know the nature of Customs' case. The Appellant has not been misled about the reason for the assessment. Even if the Appellant had been misled by the statement of case we would as a matter of case management have given an adjournment to enable it to deal with the point. Here Mr Barlow came prepared to deal with the technicalities of the assessment since his skeleton dealt with the point that even if the assessment was made to recover input tax overclaimed he could still argue that the "the amount of VAT due from him" was nil on the basis that the Appellant had overpaid output tax of the same figure. His contention that the assessment was invalid as being stated to have been made under s 73(2) was made at the hearing. He was not misled by the statement of case and was fully able to deal with this point. Accordingly we do not consider that the assessment was invalid on this ground.

Our decision is that:

(1) The Appellant is not entitled to reduce its outputs by reason of having paid the cash-backs, and

(2) The assessment is valid.

Accordingly we dismiss the appeal.

JOHN F AVERY JONES

CHAIRMAN

RELEASE DATE: 6 February 2007

LON/03/175