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Westone Wholesale Ltd v Revenue & Customs [2007] UKVAT V20086 (19 March 2007)

20086

VAT — ASSESSMENTS — making more than one assessment purportedly made to best judgment in respect of same VAT periods — assessments made at different times on different factual bases — both sets of assessments under appeal — determination of preliminary issue as to whether assessments legally valid — effect of having appealed assessments made on one factual basis to the tribunal by the time assessments made on different factual basis — tribunal deciding that assessments legally valid — full hearing with evidence required to determine which if any of competing assessments have been made to best judgment

MANCHESTER TRIBUNAL CENTRE

WESTONE WHOLESALE LTD Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Michael Johnson (Chairman)

John Lapthorne

Susan Stott

Sitting in Birmingham on 19 and 20 February 2007

Michael Patchett-Joyce, counsel instructed by Ernst & Young LLP for the Appellant

James Puzey, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

Background to this Decision

By paragraph 7 of a Direction made by him on 12 June 2006, Colin Bishopp (Chairman) provided for the determination as a preliminary issue in these consolidated appeals of the Appellant's argument that the assessments which are the subject of the appeal to the tribunal initiated under tribunal reference MAN/2005/0497 are invalid in law. As envisaged, we have heard argument from the respective representatives of the parties as to the legal validity of the assessments, without embarking upon the hearing of evidence. This is the decision of the tribunal on the preliminary issue.

As developed by Michael Patchett-Joyce, representing the Appellant, the argument as to invalidity has extended to submitting that none of the assessments under appeal are legally valid. All the assessments, Mr Patchett-Joyce has submitted, are fatally flawed by reason of the manifest incompatibility of one set of assessments with another.

On 25 November 2004, the Commissioners of Customs and Excise, as they were, issued assessments to the taxpayer for value added tax allegedly underpaid in the amount of £892,141.00 plus interest. Those assessments, made pursuant to s 73(1) of the Value Added Tax Act 1994 ("the 1994 Act"), were in respect of the Appellant's VAT accounting periods 04/03 to 09/03, ie six periods, the Appellant having made monthly VAT returns.

It is common ground that the reason for those assessments was that the Commissioners, as we shall call them, had looked at the Appellant's trading activities and had formed the view that certain goods supplied to the Appellant within the UK apparently for onwards removal to Spain had never in fact left the UK. Consequently, the Commissioners believed that the supplies were properly standard-rated for VAT, rather than zero-rated, as contended by the Appellant. More tax was therefore due, the Commissioners thought, than had been accounted for by the Appellant.

The Appellant appealed to the tribunal against the decision to assess, on the ground that the goods were duly sent to Spain and qualified for zero-rating. The appeal was lodged on 21 December 2004 and assigned tribunal reference MAN/2004/0799.

It is then likewise common ground that the Commissioners decided to issue further assessments. By the time of those assessments, notified on 5 July 2005, the appeal against the earlier assessments was nowhere near ready for hearing. The position in the appeal was that the Appellant's application, contained in the notice of appeal, for the appeal to be entertained by the tribunal without the prior payment or deposit of the tax in dispute remained undetermined.

Somewhat confusingly, the communications from the Commissioners dated 5 July 2005 appeared to duplicate in part the assessments already under appeal. The Commissioners notified to the Appellant new assessments in respect of the Appellant's VAT accounting periods 12/02 and 03/03 to 08/03 inclusive, ie six periods, asserting tax underpaid in the total amount of £1,067,787.36. At the same time the Commissioners again notified to the Appellant assessments totalling £892,141.00, exactly as assessed in November 2004.

The Appellant lodged an appeal against the new assessments. That was done on 19 July 2005 and the appeal was assigned tribunal reference MAN/2005/0497. The Appellant did not again seek to appeal the renotified assessments. The ground for the appeal was the inconsistency between the different assessments and the lack of a proper factual basis for exercising best judgment in relation to them.

The previous assessments not having been withdrawn, there is no dispute that the further notification of those assessments operated merely to confirm the assessments. The reason for the inconsistency between the assessments and for the further notification of the earlier assessments becomes apparent when one considers the decision of the Inner House of the Court of Session in University Court of the University of Glasgow v The Commissioners of Customs and Excise [2003] STC 495. As in that case, the Commissioners wished to assess the taxpayer on alternative bases.

One of the letters written by the Commissioners to the Appellant dated 5 July 2005 makes this clear. The Commissioners now had so-called "preferred assessments" and so-called "alternative assessments". The alternative assessments, being those first notified in November 2004, were now said to represent the Commissioners' fall-back contention. Their primary contention was that the Appellant should pay the preferred assessments. As they had done in the University of Glasgow case, the Commissioners informed the Appellant that it would not be liable for both the preferred assessments and the alternative assessments. In their letter, the Commissioners stated:

"Please note that the preferred assessments and the alternative assessments are mutually exclusive. You only have to pay one assessment [sic]. You should pay the preferred assessments. …

"If it transpires that the preferred assessments are wrong, but the alternative assessments are correct, the appropriate adjustments will be made."

The reason for issuing the preferred assessments is central to the Appellant's argument that none of the assessments are legally valid. Just as with the alternative assessments, the preferred assessments were purportedly made to the best judgment of the Commissioners, pursuant to s 73(1) of the 1994 Act. Now, however, the Commissioners had come to believe that the goods apparently due to be sent to Spain had never been supplied in the first place. In that case, the argument would no longer be as between the treatment of the goods as standard-rated or zero-rated as the case might be. If the goods were never supplied – if, as it were, they had never existed – then the Appellant's VAT accounting would be incorrect in that it had claimed input tax in respect of those non-existent supplies to which it was not entitled. Accordingly, there would be a shortfall in output tax due from the Appellant.

The preferred assessments and the alternative assessments were therefore on different factual assumptions. Depending upon whether the goods ever existed, the Appellant's VAT account might need to be adjusted in the manner alleged by the preferred assessments, alternatively in the manner alleged by the alternative assessments. Or, if the goods were duly supplied and duly sent to Spain, no adjustment of accounts might be called for.

The preferred assessments and the alternative assessments were expressed to relate to differing VAT accounting periods solely to reflect the periods in which the allowances for input tax and treatment for zero-rating would take effect respectively. Neither party has argued that this inconsistency is of any moment in relation to the preliminary issue.

The University of Glasgow case

In the University of Glasgow case, the court held that the Commissioners were entitled to assess on alternative footings. In that case, there was no dispute as to the underlying facts. The alternative footings for assessment concerned the correct treatment of the taxpayers' affairs for VAT purposes. The preferred assessments were prepared on the footing that the input tax claimed was not attributable wholly to taxable supplies, but partly to taxable and partly to exempt supplies, and should be recoverable only to the extent allowed by the taxpayers' partial exemption method. The alternative assessments, by contrast, were prepared on the footing that there had been an abuse of law by inserting allegedly artificial parties into the supply chain, so that the input tax claims were unsustainable for that reason.

The court ruled, at [13], that it was implicitly within the powers of the Commissioners to make preferred assessments and alternative assessments in that way, both of which were found at [17] to have been made to best judgment under s 73(1). The court stated, at [16], that it saw no good reason why the use of alternative assessments for VAT should be restricted to circumstances where the charging provisions are wholly distinct. It stated that, as with direct taxes, alternative assessments for VAT provide in appropriate cases a practical and workable machinery for the ultimate recovery of the tax properly due.

Submissions for the Appellant

Mr Patchett-Joyce submitted that there exists a crucial distinction between the situation that we are considering and that confronted by the court in the University of Glasgow case. In that case all the assessments were made and notified contemporaneously, pursuant to a single set of underlying facts, and so the assessments were not independent but were interrelated. In our case, Mr Patchett-Joyce submitted, the preferred assessments and the alternative assessments respectively were made at different times seven months apart, they were not notified contemporaneously, and perhaps most significantly, they were formulated pursuant to fundamentally different factual assumptions. They could not therefore be said to be interrelated.

Mr Patchett-Joyce submitted, with some force, that the Commissioners could not have acted to best judgment by making assessments on two such different bases. He submitted that the Commissioners had been faced with a choice: either to assess on the basis that the goods existed, or else on the basis that they did not. If they had initially thought that the goods did exist, the assessments of November 2004 were manifestly premature and bad, because by July of the following year the Commissioners were of the view that the goods never existed. At that stage, if they wished to maintain that the preferred assessments were to best judgment, they should have withdrawn the earlier assessments. The contradictory nature of the preferred assessments and the alternative assessments respectively fatally undermined the position of the Commissioners that any of the assessments could be to best judgment. Accordingly none of the assessments, he submitted, were legally valid.

Mr Patchett-Joyce pointed out that the court in the University of Glasgow case had been careful to confine its decision to the scenario with which it was dealing. We accept that as correct. However it remains a question whether the approach of the court in that case can properly be extended to the distinct situation that we are considering. Mr Patchett-Joyce argued that s 73 does not contemplate assessments made on contradictory footings. He placed reliance on s 73(9), whereunder the amount of an assessment is recoverable as VAT unless the assessment is withdrawn or reduced. He submitted that it could not be right that the 1994 Act contemplated competing assessments in existence at the same time, as that would mean that the Crown would have a double entitlement to recover tax.

He also submitted that the situation in the present case offended against European law principles of legal certainty and effectiveness, and that it was disproportionate and oppressive.

The principle of legal certainty was infringed, he submitted, having regard to the inconsistent bases of assessment, which meant that the taxpayer could not know his true position. He submitted that this was oppressive, and he referred us in that regard to Garage Molenheide BVBA and Others v Belgium [1998] STC 126 (European Court of Justice) at [46] – [47] of the judgment of the court.

Moreover, Mr Patchett-Joyce submitted, the principle of effectiveness was infringed where the exercise of the taxpayer's rights has been made impossible in practice or excessively difficult. He referred us to Weber's Wine World Handels-GmbH Case C-147/01 (ECJ) at [117] in the judgment of the court. He submitted that the issuing of mutually irreconcilable assessments by the Commissioners is a practice contravening the European law principle of effectiveness.

He also referred us to article 17 of the Sixth EC Council Directive with regard to the right to deduct input tax, and the jurisprudence of the ECJ dealing with the legal requirement for taxable persons to be able to exercise forthwith the right of deduction, subject to any derogations. He reminded the tribunal that the right to deduct is a provision of the Directive that is of direct effect. He submitted that the right to deduct was frustrated by the assessments in this case.

Submissions for the Commissioners

James Puzey, appearing for the Commissioners, whilst accepting that this case is not identical to the University of Glasgow case, invited us to follow that case and uphold the principle of preferred assessments and alternative assessments in the situation we are considering.

He pointed out that the first appeal, against the alternative assessments, had proceeded to us for decision without an amendment to the ground of appeal to assert the legal invalidity of those assessments. Nor had a particularized challenge to the exercise of best judgment in relation to the alternative assessments been forthcoming from the Appellant.

Mr Puzey submitted that, in order for the tribunal to determine the matter of best judgment in relation to any of the assessments, a full hearing with evidence was required. He submitted that the preferred assessments and alternative assessments respectively were justified having regard to the requirement of the Commissioners to be satisfied as to the correct VAT treatment of the alleged supplies. He submitted that nothing in the 1994 Act, in particular s 73(9), precluded the course of competing assessments adopted in this instance.

Mr Puzey submitted that the Commissioners had acted fairly. It was clear that the Appellant was not required to pay both the preferred assessments and the alternative assessments. He submitted that all the assessments would be found to have been to best judgment, applying the principle of the University of Glasgow case. He cited a number of direct tax authorities supportive of the outcome of that case, by way of confirming the analysis made of those cases in the University of Glasgow case. He also mentioned the need for distinct assessments where different foundations of the charge to tax are relied upon: see Ridgeons Bulk Ltd v The Commissioners of Customs and Excise [1994] STC 427.

In contrast to Mr Patchett-Joyce, Mr Puzey submitted that there was no infringement of European law principles evident in this case. He submitted that there was nothing uncertain about the requirement to pay the preferred assessments, or else the alternative assessments if that was the correct basis of assessment, as the case might be. The principle of effectiveness was not infringed provided that the Appellant's rights could be exercised immediately. That required only the resolution of the basis of assessment. Mr Puzey questioned how it could be oppressive or disproportionate for the Appellant to have to answer two cases rather than just one.

Other submissions

Both advocates referred us to Customs and Excise Commisioners v Pegasus Birds Ltd [2004] STC 1509 in the Court of Appeal. Mr Puzey referred to that case in support of his argument that only after a full hearing can the tribunal be expected to reach any conclusion as to the exercise of best judgment by the Commissioners, and he submitted that the tribunal must follow the well-trodden path referred to by Carnwath LJ at [16] – [22]. Mr Patchett-Joyce referred to that case in the context of the presence of good faith, or lack of it, on the part of the Commissioners. He submitted that, where that was irrelevant, as in the present case, the situation was distinct.

It is understandable that both advocates will also have submissions that they would wish to make as to the validity of the disputed assessments arising from the eventual outcome of the case of Teleos plc v The Commissioners of Customs and Excise Case C-409/04 in the ECJ. The current position with respect to that case is that the opinion of Advocate General Kokott was issued on 11 January 2007. Her opinion may or may not be followed by the court when it comes to give judgment in due course. Both parties are anxious that their submissions should be regarded as made without prejudice to the potential impact on the disputed assessments of the judgment of the court in the Teleos case, which may or may not follow the lead given by the Advocate General. It was accordingly agreed that any submissions that it might be necessary to make as to the impact of the judgment in that case on the present appeal should be reserved to a later date.

Decision of the tribunal

We find the central submission of Mr Patchett-Joyce to be unattractive.

Firstly if, as he suggests, the Commissioners are legally required to choose between competing factual assumptions in making assessments to best judgment, there is a real danger that in some cases assessments issued on the basis of the wrong set of factual assumptions may be found by a tribunal to be invalid as not being to best judgment, largely or entirely because they do not fit the facts. It may then be too late to issue an assessment on the correct factual basis. It is potentially damaging to the revenue functions of the Commissioners for them to have to elect at the outset as to a definitive factual basis for assessments, rather than to have the ability to issue assessments on alternative factual bases.

Secondly the legal challenge to the competing assessments is a technical one. It proceeds on the basis that it is incorrect to extend the principle of the University of Glasgow case to a case such as the present, even though that may be desirable.

In this case, the Commissioners might have withdrawn the alternative assessments before issuing the preferred assessments. It appears that, consonant with the University of Glasgow case, they might then have issued contemporaneous competing assessments, made and notified at the same time, that would be interrelated. True, the competing assessments would not be arising from the same underlying facts. However that does not seem to us to be essential to the application of the University of Glasgow principle. So long as the assessments are interrelated, it is nowhere apparent from the judgment in that case that the underlying factual basis for the alternative assessments must be the same.

Counsel for the Commissioners in that case, at [12], opened his submissions by saying that the Commissioners had under s 73(1) power to make and notify two or more assessments, a power which could be exercised to ensure, where there was some uncertainty of law and/or of facts, that the correct tax was in the end collected. Counsel's submission in that regard was not expressly rejected by the court. So long as the assessments are interrelated, the judgment of the court does not appear to us to require that the assessments should all arise from the same view of the facts.

According to Mr Patchett-Joyce, the competing assessments might all be invalid because, rather than withdraw the alternative assessments and reissue them contemporaneously with the preferred assessments, the Commissioners chose to renotify them as alternative assessments interrelated with the preferred assessments, following the practice established in the University of Glasgow case. In our judgment, the legal position should not, and does not, depend upon such a distinction.

As we see it, the principles of legal certainty and effectiveness to which we were referred are fulfilled, rather than frustrated, by having the tribunal decide, at one and the same time, which if any of competing assessments should stand, and which fall, in particular where as here the assessments are not contemporaneous. That simultaneous determination is achieved in this instance by the direction for consolidation given by Mr Bishopp on 12 June 2006.

In our judgment it is moreover decisive of the preliminary issue that, by the time of the preferred assessments, an appeal against the alternative assessments was already on foot. Section 73(9) states that that sub-section is subject to the provisions of the 1994 Act as to appeals. In Bennett v The Commissioners of Customs and Excise (No 2) [2001] STC 137, Patten J decided inter alia that a decision on an appeal to a tribunal that an earlier assessment had not been made to the best judgment of the Commissioners, which was thus withdrawn as invalid, did not preclude the making of a later assessment that was to best judgment. In so deciding, the judge considered the construction of s 73, and he dealt with a submission by counsel for the taxpayer in that case that it would be ultra vires for the Commissioners to issue a second assessment in relation to the same period(s), in view of the invalidity of the first assessment.

In the Bennett case, the earlier assessment had been adjudicated upon by the tribunal. However the reasoning adopted by the learned judge seems to us to be equally applicable where the validity of an assessment has been surrendered to the tribunal for adjudication, ie where the adjudication is in train. Patten J said this, at [30]:

" … It seems to me that s 73(9) is designed to restrict the taxpayer's right to challenge the amount of any assessment to the appeal process set out under ss 83 and 84 of the 1994 Act. Once that process is complete, or alternatively if no appeal is made, then the amount specified in the assessment is deemed by s 73(9) to be the amount of VAT due and may be recovered accordingly. The taxpayer is not entitled to relitigate the issue of liability or quantum in subsequent enforcement proceedings in the ordinary courts. Those are matters reserved to the specialist tribunals appointed to determine appeals under s 83.

"[31.] The words 'subject to the provisions of this Act as to appeals' cannot in my judgment be read as qualifying anything but the deeming provision I have just described. No amount of ingenious or purposive construction whether generally or under s 3 of the [Human Rights Act 1998] can make it possible to construe s 73(9) as prohibiting the making of a new assessment under s 73(1) following an adjudication of an earlier assessment which is subsequently withdrawn. That would require a specific and detailed provision which simply does not exist."

We have italicised the words "once that process is complete" for emphasis. By analogy with the reasoning of the court in the Bennett case, if this tribunal decides that the alternative assessments were not made to best judgment, and so should be withdrawn, that does not preclude our holding that the preferred assessments were made to best judgment. It should make no difference that the preferred assessments were issued before our adjudication. The case before us is not one in which the alternative assessments have become final and recoverable before the issue of the preferred assessments.

Similarly, if we decide that the preferred assessments were not made to best judgment, it is open to us to decide that the alternative assessments were made to best judgment. Any difficulty in having the two appeals in train at one and the same time has been overcome, as we say above, by the direction for consolidation.

By the same token, the decision of the tribunal in due course may be that neither the preferred assessments nor the alternative assessments were made to best judgment.

As we see it, the distinction drawn by Mr Patchett-Joyce between the factual position in the University of Glasgow case and that in the present case, whilst an undoubted distinction, does not lead to the result for which he argues.

He is clearly right that the preferred assessments and the alternative assessments cannot both be sound. That is accepted by the Commissioners. Further it may be the case, as Mr Patchett-Joyce has submitted, that for the Commissioners to have adopted alternative stances as to the facts at different times suggests that either the preferred assessments, or the alternative assessments, or both, may not have been made to best judgment. As Mr Puzey submits, those are matters that remain for decision once the tribunal has heard evidence.

We reject Mr Patchett-Joyce's submission that it is legally untenable ipso facto for the Commissioners to have issued inconsistent assessments on conflicting facts. In relation to the same facts, it would be improper to duplicate assessments, unless it is made clear, as in the University of Glasgow case, that the assessments are issued on an "either/or" basis, depending upon the correct analysis of the tax liability arising from those facts. It would likewise be improper for the Commissioners to duplicate assessments on conflicting factual assumptions if that is done unreasonably in such a way as to demonstrate lack of best judgment. But save perhaps where, in a very clear case, lack of best judgment is obvious, that cannot be determined without a full hearing. This is because the burden of proof of lack of best judgment is upon the Appellant.

In the present case, the issuing of duplicate assessments is both understandable and reasonable. There is nothing in s 73 or elsewhere in the 1994 Act to preclude alternative assessments made at different times, both allegedly to best judgment, on different appreciations of the facts which the Commissioners hold at those times respectively. As their Lordships stated in the University of Glasgow case, it would be untenable for the Commissioners to maintain by implication that alternative assessments should both be enforceable, and the law would not allow that. Fairness to the taxpayer is ensured by the Commissioners making it clear to him that he is not expected to pay them both. That was the course adopted both in the University of Glasgow case and in the present case.

Accordingly so long as neither the preferred assessments nor the alternative assessments have become enforceable, which is the position pending the final decision of the tribunal in these consolidated appeals, there appears to us to be no valid ground on which to regard any of the assessments under appeal as legally invalid. We therefore decide the preliminary issue against the Appellant.

This decision is, of course, without prejudice to the potential future impact on this case of the forthcoming decision of the ECJ in Teleos plc v The Commissioners of Customs and Excise Case C-409/04. By the terms of the Direction we made following the preliminary hearing on 20 February 2007, the further hearing of this appeal currently stands adjourned until after the release of the decision of the ECJ in that case.

Costs

We reserve the costs of and concerning the preliminary issue for determination at a later date.

MICHAEL JOHNSON

CHAIRMAN
Release Date: 19 March 2007

MAN/2004/0799