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Alliance & Leicester plc v Revenue & Customs [2007] UKVAT V20094 (28 March 2007)

20094

VALUE ADDED TAX — repayment supplement — VATA 1994, s 79 — period between submission of return and repayment exceeding 30 days — whether supplement due — whether Commissioners' inquiries of a kind to "stop the clock" — yes, but only for short time — misgivings about partial exemption special method — not sufficient to amount to "inquiry" within s 79 — whether interim payment should have been made — not a relevant consideration — repayment supplement due

MANCHESTER TRIBUNAL CENTRE

ALLIANCE & LEICESTER PLC Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Colin Bishopp

Sitting in public in Manchester on 8 & 9 January 2007

David Scorey, counsel, for the Appellant

Shaheen Rahman, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2007

DECISION

This is an appeal by Alliance & Leicester plc ("A & L") against the Respondents' refusal to pay to it a repayment supplement due, A & L says, on the amount claimed by it in its return for the three months ended 31 March 2004. By that return A & L claimed a repayment of £2,343,905.64. The Respondents first agreed to repay £2,208,670.35, but later accepted that the correct sum was £2,276,548.53, a net reduction from the amount claimed of £67,357.11. It was common ground that the return was received by the Respondents on Friday, 7 May 2004 and that the repayment was authorised on Wednesday 16 June 2004. A & L, by including both the first and the last days of that period, reckons that 41 days passed between submission of the return and authorisation of payment.

The circumstances in which a repayment supplement is due are prescribed by section 79 of the Value Added Tax Act 1994. So far as material, that section, as amended and in force at the time, is in these terms:

"(1) In any case where —

(a) a person is entitled to a VAT credit, …

and the conditions mentioned in subsection (2) below are satisfied, the amount which, apart from this section, would be due by way of that payment or refund shall be increased by the addition of a supplement equal to 5 per cent of that amount or £50, whichever is the greater.

(2) The said conditions are—

(a) that the requisite return or claim is received by the Commissioners not later than the last day on which it is required to be furnished or made, and

(b) that a written instruction directing the making of the payment or refund is not issued by the Commissioners within the relevant period, and

(c) that the amount shown on that return or claim as due by way of payment or refund does not exceed the payment or refund which was in fact due by more than 5 per cent of that payment or refund or £250, whichever is the greater.

(2A) The relevant period in relation to a return or claim is the period of 30 days beginning with the later of—

(a) the day after the last day of the prescribed accounting period to which the return or claim relates, and

(b) the date of the receipt by the Commissioners of the return or claim.

(3) Regulations may provide that, in computing the period of 30 days referred to in subsection (2A) above, there shall be left out of account periods determined in accordance with the regulations and referable to—

(a) the raising and answering of any reasonable inquiry relating to the requisite return or claim, …

(4) In determining for the purposes of regulations under subsection (3) above whether any period is referable to the raising and answering of such an inquiry as mentioned in that subsection, there shall be taken to be so referable any period which—

(a) begins with the date on which the Commissioners first consider it necessary to make such an inquiry, and

(b) ends with the date on which the Commissioners—

(i) satisfy themselves that they have received a complete answer to the inquiry, or

(ii) determine not to make the inquiry or, if they have made it, not to pursue it further,

but excluding so much of that period as may be prescribed; and it is immaterial whether any inquiry is in fact made or whether it is or might have been made of the person or body making the requisite return or claim or of an authorised person or of some other person."

It was common ground that two of the three conditions imposed by subsection 79(2) were satisfied: the repayment was not authorised until after the expiry of the "relevant period"; and although the amount repaid was less than the amount claimed, the difference between the two sums (after reconsideration and adjustment of the amount paid) was not such as to offend paragraph (c). I add, parenthetically since it was not disputed, that the wording of the section does indicate that the period, when (as here) it is linked to the day of receipt of the return, starts on and includes that day. At first, the Commissioners resisted the claim for repayment supplement on the grounds that the return had been rendered late: the due date was 30 April 2004, but the return was received only on 7 May. However, they have abandoned that defence, and the sole issue before me is whether subsection (3) operates to extend the "relevant period" of 30 days.

The regulations referred to in subsection (3) are regulations 198 and 199 of the Value Added Tax Regulations 1995 (SI 1995/2518). So far as presently material, those regulations are as follows:

"198. In computing the period of 30 days referred to in section 79(2)(b) of the Act, periods referable to the following matters shall be left out of account—

(a) the raising and answering of any reasonable inquiry relating to the requisite return or claim …

199. For the purpose of determining the duration of the periods referred to in regulation 198, the following rules shall apply —

(a) in the case of a period mentioned in regulation 198(a), it shall be taken to have begun on the date when the Commissioners first raised the inquiry and it shall be taken to have ended on the date when they received a complete answer to their inquiry …"

The Commissioners' position is that an inquiry within the meaning of those regulations was raised on 18 May 2004, when officers visited A & L, in order to investigate the accuracy of the claim, and that they, in the person of the officer then conducting the inquiry, did not become satisfied of the amount to be repaid until 14 June 2004 (although authorisation of the repayment followed two days later). Thus, they say, the period of 28 days from 18 May to 14 June, again counting both the first and the last days, is to be left out of account, with the consequence that, in net terms, only 13 days elapsed between the rendering of the return and the authorisation of the payment. If that is the correct view, no repayment supplement is due. A & L's case, in short, is that the Respondents' true concerns about the accuracy of the claim were minor, that their inquiries were answered immediately, and that the period of delay properly attributable to inquiries into the return was negligible. In reality, they say, the Respondents were concerned about A & L's partial exemption special method and were using delays in the processing of the return as a lever by which to obtain information from A & L about its method.

Before me, A & L was represented by David Scorey and the Commissioners by Shaheen Rahman, both of counsel. I had the oral evidence of Charlotte Owen, A & L's VAT accountant, Norah Dwyer, its group VAT manager, Paul Boshell, the officer who authorised the repayment and Trevor Humphreys, the officer who had undertaken the bulk of the inquiries and who indicated to Mr Boshell that the adjusted repayment was in order. I deal first with the facts, and in particular the chronology, before returning to the law. The dispute between the parties related less to the essential facts than to their interpretation and I shall not, therefore, set out the evidence in any detail. What follows should be taken as my findings, including of those few facts which were the subject of any dispute.

A & L is a large organisation, and is the representative member of a VAT group which includes a number of its subsidiaries. Between them, the group members make both exempt and taxable supplies and the group is, therefore, a partially exempt trader. In 1999, it agreed upon a special method for the calculation of the recoverable proportion of its residual input tax. From January 2003, another recently acquired subsidiary, then renamed Alliance and Leicester Commercial Finance ("ALCF"), joined the VAT group. ALCF had, previously, had its own, rather different, agreed special method. In March 2003, Mr Boshell wrote to A & L indicating that, once ALCF had joined the VAT group, its own special method expired and that the standard method should be used. Mrs Dwyer's evidence was that she understood the letter to indicate that ALCF only should use the standard method, while the remainder of the group should continue to use the agreed special method. However, that was not what Mr Boshell had intended: he meant to indicate that ALCF's recoverable residual input tax should be determined by reference to the business of the entire VAT group. It is not necessary for the purposes of this decision to determine whether Mr Boshell expressed himself badly or Mrs Dwyer misunderstood his letter, nor, indeed by what method ALCF should have undertaken the apportionment. It is sufficient to record that A & L used what it understood to be the correct method; it would not have been willing to use the method which Mr Boshell had intended since, as Mrs Dwyer concluded once Mr Boshell's intention became clear, it would lead to an unacceptably low recovery rate, much lower than that achieved by ALCF before it joined the VAT group.

On 13 April 2004 Mr Humphreys and another officer, David Spittle (who is a partial exemption officer), began a routine visit to A & L. Its partial exemption calculations were an important, though no by means the only, topic, but it is clear that, because of the difference of view to which I have referred, the partial exemption method and the calculations were somewhat contentious. The meeting continued into 14 April, but was not concluded and was resumed on 18 May. Mr Humphreys then remained at A & L's premises from 18 to 21 May, undertaking a routine VAT audit of all A & L's returns from 1 January 2003, and also examining the appropriateness of the partial exemption method. In the meantime, the relevant VAT return was rendered, as I have said, on 7 May. It was rendered at Mr Humphreys' request, since he wished to be in a position to consider the return when he resumed his audit later that month.

Mrs Owen, who was responsible for the preparation and submission of A & L's returns, said that there was a passing reference to the March 2004 return when Mr Humphreys arrived on 18 May since he asked her to provide him in electronic format with the supporting summaries for that return and its two predecessors, which she did on the same day. The same material was available to Mr Humphreys in paper form, in ring binders which had already been prepared in anticipation of his visit, and Mr Humphreys, after some hesitation, accepted when he gave evidence that he did already have on paper the information he had requested electronically. Mrs Owen did not read anything into the request and certainly did not, she said, take it from that request that the March 2004 return had been singled out for any particular kind of investigation. That is not surprising since Mr Humphreys, too, was not aware that the March 2004 return had been selected for particular scrutiny until 25 May, when he received a telephone call to that effect from a colleague. The selection was made by another of the Commissioners' departments, and it was for what Mr Humphreys described as a "pre-payment credibility query". Until 25 May, as I find, Mr Humphreys did not view the March 2004 return as a special case, but as merely one of a series.

Nevertheless, even though he had no specific concern about the March 2004 return, in isolation, until he received the telephone call on 25 May, it is clear that from the beginning of his resumed visit Mr Humphreys was deeply troubled about A & L's use of the special method, not only in its March 2004 return, but from 1 January 2003, when ALCF had joined the VAT group. He told Mrs Owen on 19 May that he was likely to issue assessments going back to that date, which, I understand, he eventually did. On several occasions during and after his visit he asked Mrs Owen to provide additional information. I am satisfied that on each occasion she did so promptly, and in most cases on the same day, and that sometimes she was doing no more than to provide information Mr Humphreys already had in a different format, or in greater detail. Despite her doing so, Mr Humphreys told me—and the documentary evidence amply bears it out—that he was not satisfied that the March 2004 return was correct, in that the calculation of the recoverable residual input tax achieved a fair and reasonable result. He was particularly concerned by the effect of the decision of the tribunal in University of Sussex v Customs and Excise Commissioners (1999, Decision 16221); there, as (so Mr Humphreys perceived it) here, there was a lacuna in the special method and he was anxious to ensure that the calculation used did not lead to a distortive result. He was also concerned, he said, about the arithmetic of the calculations, which he wished to relate back to the source information. His evidence was that, irrespective of the specific request he was to receive later by telephone, he had decided to make inquiries into the March 2004 return by the time his resumed visit started on 18 May, and his requests for information were all part of the process of verifying the return.

On 26 May Mr Humphreys spent the day meeting Mr Spittle in order to discuss A & L's special method, and on analysing the information he had received from Mrs Owen. He was still not satisfied and on 27 May he sent her an email in which he asked for more detail; it was provided by Mrs Owen later on the same day. At the same time Mr Humphreys wrote to Mrs Dwyer, who had by this time become involved as she was concerned about the delay in processing the repayment claim, explaining his view that the special method not only dealt incorrectly (or inadequately) with the inclusion of ALCF in the VAT group, but failed, irrespective of ALCF's inclusion, to achieve a fair and reasonable result, and inviting her to enter into discussions about a new method, to take effect from 1 January 2003. The letter contains the first indication to A & L that the March 2004 return had been selected for particular scrutiny. Mr Humphreys' letter included this passage:

"This brings me to the question of your claim for repayment in the sum of £2,343,905.64 in tax period 03/04. This claim is subject to a pre-payment enquiry. In view of the disagreement as to the correct claim for input tax for ALCF I shall not be able to recommend its repayment until I have the figures referred to above to hand and have agreed or assessed an adjustment to the amount of input tax claimed."

The "figures referred to above" were those for which Mr Humphreys had asked in his email of the same day to Mrs Owen, and which she had provided almost immediately. He indicated in a further email of 28 May that they appeared to be the figures he required, though he had not examined them in detail—on the contrary, he did not propose to do so until 7 June, since he would be on leave in the meantime. He did further work on A & L's return on 7, 8 and 9 June. On the last of those days, having heard nothing more, Mrs Owen spoke to Mr Humphreys, who told her that he remained concerned about the application of the special method, and in particular the manner in which annual adjustments were effected (the failure of the method to deal with annual adjustments in a manner which Mr Humphreys considered correct was one of his principal concerns), and that he intended to make some further calculations in order to determine, to his own satisfaction, whether the return was correct or adjustment to it was necessary. On 10 June Mr Humphreys underwent hospital treatment and on 11 June (a Friday) he was on leave, convalescing, though he spoke to Mr Boshell about A & L during the course of the day.

Mr Boshell too had some contact with Mrs Dwyer and Mrs Owen at that time, but he was reluctant to deal with the detail of the calculations during Mr Humphreys' absence; it would, he thought, take longer to process the repayment if another officer had to take over the case than it would if it were concluded by Mr Humphreys on his return. In fact Mr Humphreys did reach a conclusion about the amount due to be repaid on Monday 14 June, and so informed Mr Boshell who, on the same day, wrote to A & L indicating that £2,208,670.35 would be repaid. Nothing turns on the later adjustment to that figure, save that the adjustment brings the difference between the claim and the repayment to an amount below the 5 per cent threshold imposed by section 79(4)(c).

There are three points which need to be considered: what, as a matter of law, is meant by the phrase "reasonable inquiry"; whether, as a matter of fact, the questions raised by Mr Humphreys fall within that definition; and, to the extent that they do, how much of the 41 days which elapsed between submission of the return and authorisation of payment is to be left out of account because of them. In doing so it is worth bearing in mind the purpose behind section 79, which was described by Auld J in Rowland & Co (Retail) Limited v Commissioners of Customs and Excise [1992] STC 647 at 655 as a "spur to efficiency". It mirrors the imposition on the taxpayer of surcharges if his VAT returns and any requisite payments are late and, as the Commissioners' own internal guidance (V1-27 Section 14, paragraph 1.4) puts it, the repayment supplement "is designed to encourage prompt and efficient responses at the various stages of the return processing, from receipt through to payment".

In Rowland & Co Auld J also said (at p 655):

"In my judgment, the protection to the taxpayer, such as it is, and the spur to efficiency on the part of the commissioners are not to be found in giving the word 'inquiry' in this context the broad meaning contended for by the commissioners and then seeking to qualify it in time, as well as in nature, by the word 'reasonable'. It is to be found in the ordinary and natural meaning of the word 'inquiry' in its context, namely 'periods … referable to … the raising and answering of any reasonable inquiry relating to the requisite return or claim' … The inquiry contemplated by these words is not a general one in the sense of a general investigation. It is an inquiry relating to a particular return in respect of which a supplement may be payable if the claim in it for repayment is not dealt with promptly. The combination of the words 'the raising and answering of any … inquiry' also indicates that the word 'inquiry' is used in the sense of a question or questions put to the taxpayer for him to answer, not an inquiry in the sense of an investigation concluded by a report. The word 'raising' itself in this context is clearly used in its ordinary and natural meaning of putting an inquiry or question to, or making an inquiry of, the taxpayer about his claim for repayment."

In Cellular Solutions (T Wells) Limited v Customs and Excise Commissioners (2006, Decision 19903) the tribunal, after considering Rowland & Co, said (at paragraph 14), "… we interpret 'inquiry' as meaning a question".

If that conclusion is right—and in my view it is—then the inquiries relevant in this case must be limited to Mr Humphreys' requests for additional information. A request that material already provided should be furnished in a different format—whether electronic rather than paper, or laid out in one way rather than another—is not of that class. If information is available to the Commissioners, in a comprehensible form, its presentation in a different form adds nothing but convenience. It is also clear from what was said in Rowland & Co that a general investigation is not within the contemplation of section 79. In my judgment, Mr Humphreys' concerns about the special method come within that category; they did not give rise to an inquiry specific to the March 2004 return, but were of much wider import and were "in the sense of an investigation concluded by a report".

The inquiry must also be reasonable: so much is clear from section 79 itself. I take "reasonable" to mean reasonably necessary for the making of a decision, proportionate and not prompted by an ulterior motive, that is one of no immediate relevance to the verification of the claim. Although Mr Scorey suggested that the true reason for the Commissioners' delay was their desire to obtain additional information about the special method itself, I am not persuaded that Mr Humphreys was so motivated, despite the concerns to which I have referred. He was, plainly, anxious to ensure that the special method achieved a fair result, but for that he deserves no criticism: it is no more nor less than the law requires, and I detect no request which could be thought ostensibly relevant to the verification of the return but in reality directed at a wider purpose. However, it was apparent to me, as he gave his evidence, that Mr Humphreys is meticulous and cautious to a fault. He was intensely concerned that he might authorise a payment in excess of that properly due (or, it should be said, less than that due), and it is, I think, this approach which has led the Commissioners to take too wide a view of the meaning of "reasonable inquiry".

In Refrigeration Spares (Manchester) Limited v Customs and Excise Commissioners (2002, Decision 17603), the President pointed out the difference between regulation 199, which provides that the clock is deemed to have stopped when the Commissioners "first raised the inquiry", and section 79(4)(a), which provides that it stops on "the date on which the Commissioners first consider it necessary to make such an inquiry". The difference arises from the timing of the enactments: regulation 199 is a re-enactment without material amendment of regulation 5 of the Value Added Tax (Repayment Supplement) Regulations 1988 (SI 1988/1343), while the current wording of section 79 derives from provisions added to its own predecessor, the 1983 Act, by section 20 of the Finance Act 1985 and amended in 1988 and 1992, on the latter occasion because the Commissioners considered that the decision in Rowland & Co (Retail) Limited was too generous to taxpayers. The need to bring the regulations into line with the Act was apparently overlooked. So far as it is necessary to do so, I intend to do as the tribunal did in Refrigeration Spares, that is to construe regulation 199 in a manner which is consistent with the enabling primary legislation, namely section 79.

Later in Refrigeration Spares, at paragraph 32, the President said:

"… Parliament gave the Commissioners only 30 days in which to process repayment claims. In limited circumstances the period is extended; but any extension must be within the spirit of section 79 which demands expedition on the Commissioners' part."

It is important also to bear in mind both the purpose of section 79, and the words actually used. The section allows the Commissioners 30 days in order to process repayment claims, before any penalty (in the shape of a supplement) becomes due. The suspension of the running of time afforded by subsection (4) relates to the raising and answering of an inquiry; the section states clearly that the suspension ends when the Commissioners have received a complete answer to the inquiry, and not when they are satisfied that the return is correct. I echo the comment of Auld J in Rowland & Co that an inquiry is a "question or questions put to the taxpayer for him to answer" and does not warrant any wider construction. Thus the suspension does not extend to the consideration of the material provided in answer to the inquiry—that is to be accomplished within the 30 day period. In other words, a distinction must be drawn between the inquiry itself, the raising and answering of a question or questions, and the examination of the answer or answers. It follows that in the period between Mr Humphreys' email of 28 May, when he expressed the view that Mrs Owen had provided what he required, and the authorisation on 16 June the clock was running. I reject the Commissioners' contention that the inquiry continued during that period; they were examining the result of the inquiry, but not pursuing the inquiry itself. That period—19 days if one excludes 28 May and includes 16 June—when added to the period from 7 May to 18 May—11 days if 18 May is excluded—exactly matches the permitted 30 days. It might be argued that either 28 May or 18 May should be included, but in my view the appeal must succeed even if they are excluded.

The Commissioners' case is that the inquiry began when Mr Humphreys arrived on 18 May. In my judgment that argument cannot succeed. He did not go in order to make an inquiry—in the sense of asking a question—but in order to undertake a routine audit, to include but not limited to the March 2004 return. He did make a request on that day but that request is, in my view, to be left out of account altogether, however one views the matter, since it was a request for nothing more than information he had already been offered in a different form. He did not ask a question in the sense meant by Auld J in Rowland & Co on his arrival. There were, later, several requests for additional information. Mrs Owen's evidence that she provided what was requested, and promptly, was not challenged. Mr Humphreys does not appear, save on the last occasion (his email of 28 May), to have stated that he was satisfied with what was provided, but the absence of adverse comment must lead to the conclusion that he was indeed satisfied with each batch of information Mrs Owen sent to him even if, on reflection, he decided he needed more.

I see no difficulty in construing section 79 in a manner which permits the stopping and restarting of the clock on more than one occasion. That approach is consistent with the segregation of inquiry time and processing time. In this case, the evidence was not sufficiently detailed to enable me to determine precisely how much time elapsed between Mr Humphreys' making a request and Mrs Owen's answering it. What is clear, however, is that in the aggregate, the times which elapsed between request and answer fell far short of 11 days. Although the section indicates that the date re-starts when the Commissioners "satisfy themselves that they have received a complete answer to the inquiry" in my view that means no more than that they are given sufficient time to ensure that what has been provided is that which was requested. It would be wholly contrary to the spirit of section 79 if the Commissioners were allowed the entire period from deciding that it would be desirable to ask a question, through the putting of the question, perhaps a week later, the receipt of the answer and the consideration of the answer, at leisure, some time later. The Commissioners' position is worse rather than better if one takes as the starting date of the inquiry 25 May, when Mr Humphreys first became aware that the March 2004 return had been selected for verification, since (if I am right in my other conclusions) no more than four days (25 to 28 May inclusive) are to be left out of account. I should add, however, that I am not persuaded that the mere selection of a return for pre-payment verification amounts to an inquiry in the sense meant by section 79.

Miss Rahman argued that it is unrealistic to expect an HMRC officer to work 24 hours a day, seven days a week, and that time off for other purposes must be allowed. I entirely agree; but the argument misses the point. The obligation of processing a return within 30 days is not imposed on an individual officer, but on the Commissioners. If they are to avoid being required to pay repayment supplement, they must devote sufficient resources to the processing of returns in that timescale. It is no more than they demand of taxpayers in the context of the default surcharge regime.

I have already observed that I cannot determine the time for which the clock was stopped, save that it was for less than the critical period of 11 days. The payment was, therefore, made more than 30 net days after the return was submitted, and repayment supplement is due. The appeal is allowed. I give the Appellant permission to seek a direction in respect of costs if it wishes to do so.

I should conclude, for completeness, with a brief observation about A & L's complaint that no interim payment was made even though, as the Commissioners, I think, accept, the amount in dispute could not have exceeded £200,000. Both Mr Boshell and Mr Humphreys told me, to my surprise, that they were not aware that the Commissioners could make an interim payment. To my knowledge they do so, and quite often. It would have been the obvious course to adopt in this case and, had it been adopted, I think it unlikely that A & L would have sought (or have been eligible to receive) repayment supplement. However, the failure to make an interim payment does not affect my conclusions.

COLIN BISHOPP

CHAIRMAN
Release Date: 28 March 2007

MAN/06/0039