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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
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Lord Nimmo Smith
Lord Reed
Lord Drummond Young
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[2008] CSIH 68
XA68/07
OPINION OF THE COURT
delivered by LORD REED
in
APPEAL
by
THE COMMISSIONERS FOR HER
MAJESTY'S REVENUE AND CUSTOMS
Appellants;
against
A DECISION OF THE V.A.T.
AND DUTIES TRIBUNAL
(THE RAJ RESTAURANT AND
OTHERS)
Respondents:
_______
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For the appellants: Artis; Shepherd & Wedderburn, LLP
For the respondents: Ghosh; Beveridge & Kellas
30 December 2008
Introduction
[1] This appeal
against a decision of the VAT and Duties Tribunal concerns the validity of a
VAT assessment and of a related penalty assessment. The Tribunal held that the assessments were
not referable to any prescribed accounting period or periods and were therefore
invalid. The Commissioners appeal
against the decision.
The factual
circumstances
[2] From 18
September 1995 onwards a succession of companies were registered for VAT purposes as
carrying on the business of the Raj Restaurant in Edinburgh.
Goa 1510 Limited was so registered
between 18 September 1995 and 31 March
1998; The Spice Aroma Limited between 1
April 1998
and 7 January 2001; and On The Shore
Limited from 8 January 2001 onwards. In 2002 the Commissioners came to the view
that those companies were mere shams, and that the business was in reality
being conducted by four members of the Miah family in partnership. That partnership, and the individual
partners, are the respondents to this appeal.
[3] By letter
dated 28 June 2002 the Commissioners informed the respondents that they
had commenced action to register the respondents for VAT with effect from 18
September 1995. The Commissioners also stated
that they had evidence that sales at the premises had been understated. Any VAT paid by the companies would be deemed
to have been met by the new registration, but the Commissioners would transfer
to the new registration any outstanding liabilities of the various companies
and assess the new registration for any VAT calculated as underdeclared. The matter of any penalty would also be dealt
with.
[4] By notice
dated 1 July 2002 the Commissioners notified the respondents that they
had been registered for VAT with effect from 18 September
1995.
[5] By letter
dated 22 July 2002 the Commissioners repeated that all liabilities of the
entities previously registered for VAT, including unpaid tax and penalties,
would be transferred to the new registration.
In relation to such liabilities, the Commissioners maintained that the
true level of sales of the business was not reflected in its records. The letter continued:
"Please
refer to the enclosed schedules and notes in relation to the amounts deemed due
by the new registration ...
...
Please
note that the Commissioners, in exercise of their powers, require that VAT
Returns be rendered on a monthly basis.
The enclosed schedule covers the period 18 September 1995 - 31 May 2002. You will be required to
account for the amounts due for June and July 2002 on your first VAT Return."
The schedule or schedules referred to are not before us, and
no reliance is placed upon them for the purposes of this appeal.
[6] By letter
dated 10 September 2002 the Commissioners wrote to the
respondents in the following terms:
"As
intimated in my previous letter, all liabilities of the entries previously
registered for VAT will be transferred to the new registration. These include
·
Amounts declared
but unpaid by previous entities
·
Further amounts
which the Commissioners consider are properly due following enquiries made.
Since
you have failed to render a VAT return for period 07/02 (18th September
1995 to 31st July 2002) an assessment to VAT has been made under s 73, VAT
Act 1994.
The
assessment encompasses
·
Declarations made
by the businesses of GOA 1501 Ltd, Spice Aroma Ltd and On The Shore Ltd.
·
Amounts which the
Commissioners have previously made assessments for in respect of the businesses
referred to.
·
Amounts which the
Commissioners consider are due as a result of underdeclared sales at the
premises.
The
assessment, which covers the period 18th September 1995 to 31st July 2002, in the sum of £400,217.16 is enclosed
...
Please
refer to Schedules 1 and 2 (enclosed) which detail the method of calculation.
...
Please
note that the Commissioners, in exercise of their powers, require that VAT
returns be rendered on a monthly basis."
Two schedules were enclosed with the letter, but no separate assessment.
[7] Schedule 1
bore to be a calculation of the VAT due by Goa 1510 Ltd, The Spice Aroma Ltd and On
The Shore Ltd. In the case of Goa 1510
Ltd, the VAT due was calculated for that company's first prescribed accounting
period, ending on 31 December 1995, and for the subsequent quarterly periods up
to and including the period ending on 31 December 1997. There was in addition a further figure which
was not attributed to any quarterly period but was, we were informed by counsel
for the Commissioners, a calculation of further VAT liabilities of that company. The resultant total for Goa 1510 Ltd was £174,372.67. In the case of The Spice Aroma Ltd the VAT
due was calculated for that company's first prescribed accounting period,
ending on 30 June 1998, and for the subsequent quarterly
periods up to and including the period ending on 31 December
2000. There was in addition a further figure, as in
the case of Goa 1510 Ltd. The resultant figure for The Spice Aroma Ltd
was £153,371.46. In the case of On The
Shore Ltd, the VAT due was calculated for that company's first prescribed
accounting period, ending on 31 March 2001, and for the subsequent monthly
periods up to and including the period ending on 31 May 2002. The resultant figure for On The Shore Ltd was
£65,333.04. Schedule 1 also stated that
the average net tax calculated as being due by On The Shore Ltd in respect of
the months from February to May 2002 inclusive would be applied to the
respondents for the months of June and July 2002. Schedule 2 carried forward from Schedule 1
the amounts calculated as being due by Goa 1510 Ltd, The Spice Aroma Ltd and On
The Shore Ltd, together with the amount of £7,140.00 calculated as being due by
the respondents for June and July 2002.
The aggregate amount totalled £400,217.16.
[8] By letter
dated 20 December 2002 the Commissioners notified the respondents
that it had been reported
"that
you have failed to account for the full amount of Value Added Tax which was due
on the period from 18 September 1995 to 31 May 2002".
This, it was said, had resulted from "the deliberate
suppression of cash sales from your business leading to an under declaration of
tax on your VAT returns". The
respondents were in consequence liable to a penalty under section 60(1) of the
Value Added Tax Act 1994
"for
an evasion, through dishonesty, of Value Added Tax in the sum of £203,223 ... for
the period from 18 September 1995 to 31 May 2002".
After making a reduction under section 70(1) of the 1994 Act,
to reflect the degree of co-operation received, the Commissioners had decided
to make a penalty assessment in the sum of £40,632.
[9] A table
contained in the letter explained how the penalty assessment had been
calculated. The first line in the table
set out the VAT registration number of Goa 1510 Ltd, the first prescribed
accounting period of that company, a figure beneath the heading "Tax amount
liable to penalty (ie max. penalty)", a percentage reduction for co-operation,
and a figure beneath the heading "Penalty".
The following lines set out the corresponding figures for the subsequent
quarterly periods of Goa 1510 Ltd, with a final line in respect of that company
setting out figures which were not attributed to any specific quarterly
period. The figures under the heading
"Tax amount liable to penalty" corresponded to figures stated for the same
period (or, in the case of the last figure, a figure stated for the
corresponding calculation of further liabilities) in Schedule 1 to the letter
dated 10 September 2002.
The next line in the table set out the VAT registration number of The
Spice Aroma Ltd, and dealt in a similar way with figures relating to that
company's first accounting period. The
following lines set out the corresponding figures for that company's subsequent
quarterly periods up to and including the period ending on 30
June 1999. The next line in the table set out the VAT
registration number of One The Shore Ltd, but the period was stated as the
quarter ending on 30 September 1999 (On the Shore Ltd not being registered for
VAT until 8 January 2001, as explained above), and the figure for tax
corresponded to that attributed to The Spice Aroma Ltd in relation to that
period in Schedule 1 to the earlier letter.
The next line in the table dealt with a period ending on 30 June 2000 -
there was no line relating to the quarters ending on 31 December 1999 and 31
March 2000 - and again gave the registration number of On The Shore Ltd,
although the figure for tax corresponded to a figure attributed to The Spice
Aroma Ltd in relation to that period in the earlier Schedule. The next line in the table dealt with a
period ending on 31 March 2001 - there was no line relating to the
periods ending on 30 June 2000, 30 September
2000 and 31
December 2000
- and again gave the registration number of On The Shore Ltd. The figure for tax corresponded to a figure
attributed to that company's first accounting period in the earlier
Schedule. The remaining lines set out
the corresponding figures for that company's subsequent monthly periods up to
and including the period ending on 31 May 2002.
[10] The
respondents appealed against their registration for VAT, as notified on 1
July 2002; against the VAT assessment notified on 10
September 2002; and against the penalty
assessment notified on 20 December 2002.
The appeal against registration was refused by the Tribunal on 21
February 2006. The respondents did not appeal against that
decision. The appeals against the VAT
and penalty assessments were heard together by a differently constituted
Tribunal. The Tribunal considered, as a
preliminary issue, the question whether the assessments had been competently
made in accordance with the relevant legislation, in respect that they were not
referable to any prescribed accounting period or periods. On 22 March 2007 the Tribunal issued their decision
determining that question in favour of the respondents.
[11] It is
necessary to mention one further factual circumstance. Shortly before the hearing before the
Tribunal of the appeals against the assessments, in February 2007, the
accountant acting on behalf of the respondents requested a copy of the
respondents' statutory certificate of registration, the respondents' position
being that they had never received one.
The solicitor acting on behalf of the Commissioners then sent the
respondents' accountant a copy certificate, stating:
"I
also attach the VAT registration certificate and corresponding Record of
Traders Particulars as requested (VAT 3 and VAT 4). Please note that the date of issue is given
as 30
January 2007 for the VAT 4
and 31 January 2007 for
the VAT 3. By way of explanation, the system
is set up in such a way that when a VAT certificate is instructed to be
printed, it automatically inserts the current date. The relevant date is the effective date which
is 18
September 1995."
The attached certificate bore the words:
"EFFECTIVE
DATE 18 SEPTEMBER 1995
CERTIFICATE
ISSUED ON 30 JANUARY 2007
RETURNS
TO BE MADE IN RESPECT OF PERIOD ENDING 28 FEBRUARY 2007 AND MONTHLY THEREAFTER".
Before this court, counsel for the Commissioners explained
that the computer system operated by the Commissioners did not store any copy
or other record of the issue of a certificate of registration. The Commissioners were therefore unable
either to confirm or deny the respondents' statement that they had not received
any certificate prior to the certificate issued on 30 January
2007. It was accepted, in these circumstances, that
the court should proceed on the basis that that had been the only certificate
issued. The computer system
automatically entered on the certificate a date of issue which was the current
date, and an accounting period which ended after the current date.
The VAT assessment
[12] Section 73(1)
of the Value Added Tax Act 1994 as amended provides:
"Where
a person has failed to make any returns required under this Act ... the
Commissioners ... may assess the amount of VAT due from him to the best of their
judgment and notify it to him".
It was common ground before this court that, for an
assessment of VAT under section 73(1) of the 1994 Act to be valid, it must be
of an amount due for one or more prescribed accounting periods. That appears to follow from section 73(1),
since the amount to be assessed is the amount due by a person who has failed to
make one or more returns; and, by virtue
of section 25(1) of the 1994 Act and regulation 25(1) of the Value Added Tax
Regulations 1995 (SI 1995 No. 2518), returns are required in respect of
prescribed accounting periods. Section
25(1) provides:
"A
taxable person should -
...
account
for and pay VAT by reference to such periods (in this Act referred to as
'prescribed accounting periods') ... as may be determined by or under regulations
... ".
Regulation 2(1) of the 1995 Regulations defines the
expression "prescribed accounting period" as meaning (subject to an exception
which does not apply to the present case) "a period such as is referred to in
regulation 25". Regulation 25(1)
provides:
"Every
person who is registered or was or is required to be registered shall, in
respect of every period of a quarter or in the case of a person who is
registered, every period of 3 months ending on the dates notified either in the
certificate of registration issued to him or otherwise, not later than the last
day of the month next following the end of the period to which it relates, make
to the Controller a return on the form numbered 4 in Schedule 1 to these
Regulations showing the amount of VAT payable by or to him and containing full
information in respect of the other matters specified in the form and a
declaration, signed by him, that the return is true and complete;
provided
that -
(a) the Commissioners may allow or direct a
person to make returns in respect of periods of one month and to make those
returns within one month of the periods to which they relate;
(b) the first return shall be for the period
which includes the effective date determined in accordance with Schedules 1, 2
and 3 to the Act upon which the person was or should have been registered, and
the said period shall begin on that date;
(c) whether the Commissioners consider it
necessary in any particular case to vary the length of any period or the date
on which any period begins or ends or by which any return shall be made, they
may allow or direct any person to make returns accordingly, whether or not the
period so varied has ended ... ".
[13] In the present
case, the assessment notified by the letter dated 10 September 2002 was
expressly made in consequence of the respondents' failure to make a return "for
period 07/02 (18th September 1995 to 31st July 2002)", and was said to cover
"the period 18th September 1995 to 31st July 2002". The validity of the assessment therefore
depends on whether the period from 18 September 1995 to 31 July 2002 was a prescribed accounting period,
as counsel for the Commissioners maintained.
That question turns on the application of regulation 25(1).
[14] The effect of
the opening part of regulation 25(1) is to establish a default position: namely, that a return must be made in respect
of every quarter (i.e. every period of three months ending on 31 March, 30
June, 30 September and 31 December:
section 96(1) of the 1994 Act), by a person who is registered for VAT or
was or is required to be so registered, unless some other period of three
months has been notified to the person registered. That default position is however subject to
the provisos contained in paragraph (1)(a), (b) and (c), so far as
applicable. In particular, if a
direction has been made (or permission has been granted) under regulation
25(1)(a), returns must be made in respect of periods of one month. If regulation 25(1)(c) applies, the length of
any accounting period can be lengthened or shortened with the permission of the
Commissioners or at their direction. In
all cases, whether returns are made in respect of quarters or months or some
other period allowed or directed by the Commissioners, regulation 25(1)(b)
requires that the first period should begin on the date when the person was or
should have been registered.
[15] In the present
case, subject to the application of the provisos, the respondents were required
by regulation 25(1) to make returns, as from the point in time at which they
were persons "required to be registered", in respect of every period of a
quarter. Since they were required to be
registered as from 18 September 1995, they were required, prima facie, to make returns in respect
of the quarters ending on 30 September 1995, 31 December
1995 and so
on and so forth. By virtue of regulation
25(1)(b), however, their first return did not require to cover the part of the
quarter ending on 30 September 1995 which preceded their effective date
of registration: in consequence, their
first accounting period was prima facie
the period from 18 to 30 September 1995.
[16] Where a person
is registered late for VAT, it is open to the Commissioners to make a "long
period" direction under regulation 25(1)(c), directing that the first return
should cover the entire period from the date when the person ought to have been
registered until a point in time after the date of registration. The practice is illustrated by such cases as Bjellica v Customs and Excise Commissioners [1995] STC 329 and Hindle v Customs and Excise Commissioners [2004] STC 412. By issuing such a direction the Commissioners
can avoid periods becoming out of time for assessment under provisions of the
1994 Act (such as sections 73(6) and 77(1)) which allow an assessment to be
made only within a specified period following the end of a prescribed
accounting period. Such a direction
might be communicated by the certificate of registration. In the present case, however, the
Commissioners concede, in view of the limitations of their computer system and
the consequent absence of any record of a certificate being issued, that no
certificate was issued until 2007, being after the notification of the
assessments appealed against. They
concede that no direction was made under regulation 25(1)(c). That proviso therefore does not apply.
[17] There remains
the proviso contained in regulation 25(1)(a).
The Commissioners maintain that a direction was given under regulation
25(1)(a) by means of the letter dated 22 July 2002, and that it operated only
prospectively, so as to impose a requirement to make a return in respect of a
period ending on 31 July 2002. They then
argue that, since that was to be the first return actually made by the
respondents, and since the respondents' first accounting period began on
18 September 1995 (by virtue of regulation 25(1)(b)), it follows that the
first period ran from 18 September 1995 to 31 July 2002.
[18] This argument
cannot be accepted. In the first place,
as counsel for the respondents observed, the letter dated 22
July 2002 is
by no means clear. It, and the
Commissioners' subsequent communications, are based on the misconception that
tax liabilities can be "transferred" from one person to another. Although the letter contains the statement
that the Commissioners "require that VAT Returns be rendered on a monthly
basis", it also states that an enclosed schedule "covers the period 18th
September 1995 - 31st May 2002", and that "You [the respondents] will be
required to account for the amounts due for June and July 2002 on your first
VAT Return". As we have explained, the
Commissioners concede that the letter cannot be construed as containing an
implicit long period direction under regulation 25(1)(c). Absent such a direction, the period from 18
September 1995 to 31 May 2002 cannot, on any view, be an
accounting period of the respondents.
Nor can the respondents' first period be in respect of June and July
2002, since their first period must begin on 18 September
1995.
[19] Assuming,
however, that the statement that the Commissioners required returns to be made
on a monthly basis can properly be construed, in its context, as a direction
under regulation 25(1)(a) that returns were to be made in respect of periods of
one month, and assuming further that the Commissioners are correct in their
contention that a direction under regulation 25(1)(a) operates only
prospectively (presumably on the basis that it would otherwise retrospectively
place the person in question in breach of the consequent obligation to render
returns within a month of the end of each monthly period), then it follows, as
the Commissioners contend, that the respondents were required to make a return
in respect of a period ending on 31 July 2002.
It does not follow, however, that that return related to the
respondents' first accounting period.
The effect of a direction under regulation 25(1)(a) is to require a
person to make returns "in respect of periods of one month". If such a direction operates only
prospectively, then the default position continues to apply so far as a person
requires to make returns in respect of past periods during which he was
required to be registered but was not.
Such returns should therefore be made "in respect of every period of a
quarter", subject to the proviso that the first period is less than an entire
quarter, by virtue of regulation 25(1)(b), where the effective date falls at
some point during the quarter. The fallacy
in the Commissioners' argument is to assume that, where there has been a delay
in registration, with the consequence that the first return can only be
rendered late, it follows that the first accounting period must extend until
after registration has actually occurred.
That is not the effect of the legislation: the obligation to submit returns "in respect
of every period of a quarter" applies not only to a person who is registered, but also to a person who
was required to be registered but was not in fact registered. That is made clear by the language of
regulation 25(1), which makes explicit what was held in the Bjellica case (at page 339, per Neill
LJ) to be implicit in a previous regulation.
[20] It follows
from the foregoing that there was no prescribed accounting period lasting from
18 September 1995 to 31 July 2002: the
respondents were, instead, required to make returns in respect of each
quarterly period, and for the final period of one month, which elapsed between
those dates (the first period being somewhat shorter by virtue of regulation
25(1)(b)). If the Commissioners
considered it necessary that a single return should be made in respect of the
entire period from 18 September 1995 to 31 July 2002, it was open to them to
make a direction to that effect under regulation 25(1)(c). They did not do so.
[21] An alternative
argument was presented somewhat faintly on behalf of the Commissioners, to the
effect that the assessment had been made in respect of the quarterly prescribed
periods which (it was said) applied during the time when the respondents should
have been registered but were not, together with the monthly prescribed period
which applied after registration: the
assessment, in other words, was a global assessment of the aggregate amount of
VAT due in respect of a number of accounting periods. We do not doubt that it was open to the
Commissioners to make an assessment on that basis (cf. House v Customs and Excise
Commissioners [1996] STC 154). The
contention that they did so in the present case is however inconsistent with
the terms of the notice of assessment, which bore to give notice of an
assessment in respect of a single indivisible period, namely "period 07/02 (18th
September 1995 to 31st July 2002)".
Nor is the argument supported by the calculations contained in the
schedules which accompanied the assessment.
Although the calculations related in part to a number of individual
accounting periods, they were the accounting periods of the companies in
question, rather than those of the respondents.
That approach reflected the mistaken idea, expressed in the letter of 10
September 2002 which gave notice of the assessment, that the tax liabilities of those
companies could be transferred to the respondents. Thus, for example, the accounting periods
used in the calculations included three periods of non-standard length, which
were the first periods of each of the companies in question. The respondents could not have had three such
periods. Furthermore, the accounting periods
of On The Shore Ltd between April 2001 and May 2002 were periods of one month,
whereas the Commissioners do not contend that the respondents were obliged to
make returns in respect of monthly periods prior to July 2002. Moreover, as we have explained, the calculations
included figures in respect of Goa 1510 Ltd and The Spice Aroma Ltd which were not attributed
to any identified accounting period.
[22] In these
circumstances, we conclude that the VAT assessment does not relate to any
prescribed accounting period in respect of which the respondents were required
to make a return, and is therefore invalid.
The penalty assessment
[23] Section 60(1)
of the 1994 Act renders a person who acts dishonestly for the purpose of
evading VAT liable to a penalty equal to the amount of VAT evaded or sought to
be evaded. Where a person is so liable,
section 76(1) entitles the Commissioners to assess the amount due by way of
penalty. Section 76(3) provides that, in
such a case,
"the
assessment under this section shall be of an amount due in respect of ...
(b) ... the prescribed accounting period for
which the VAT evaded was
due".
[24] In the present
case, the penalty assessment notified on 20 December 2002 was expressly made in respect of
"the period from 18 September 1995 to 31 May 2002".
On any view, that period was not a prescribed accounting period of the
respondents. It follows that the penalty
assessment was not made in accordance with section 76(3), and is therefore
invalid. It again appears from the
notice of assessment, and particularly from the table showing how the penalty
assessment was calculated, that the Commissioners proceeded as though they
could simply transfer to the respondents the cumulative penalties which might
otherwise have been imposed on the various companies which had previously been
registered, without paying regard to the differences between their respective
accounting periods.
[25] The argument
presented on behalf of the Commissioners was that the Tribunal had erred in
proceeding on the basis that the penalty assessment and the VAT assessment
necessarily stood or fell together. It
was, however, conceded that that had been the position adopted before the
Tribunal on behalf of the Commissioners.
We accept that a VAT assessment and a penalty assessment need not in all
circumstances stand or fall together: Ali v Revenue and Customs Commissioners [2007] STC 618. In the circumstances of the present case,
however, the invalidity which vitiates the VAT assessment - that it does not
relate to any prescribed accounting period - equally vitiates the penalty
assessment.
[26] In the course
of his submissions, counsel for the Commissioners also suggested that an
argument, which had not been considered by the Tribunal, might be available to
the Commissioners under section 76(4) of the 1994 Act. That subsection provides:
"In
any case where the amount of any penalty ... falls to be calculated by reference
to VAT which was not paid at the time it should have been and that VAT ... cannot
be readily attributed to any one or more prescribed accounting periods, it
shall be treated for the purposes of this Act as VAT due for such period or
periods as the Commissioners may determine to the best of their judgment and
notify to the person liable for the VAT and penalty ... ".
It was conceded that no argument had been advanced before the
Tribunal in respect of section 76(4). We
also note that section 76(4) is not mentioned in the grounds of appeal to this
court. More fundamentally, section 76(4)
could only apply in a situation where the unpaid VAT "cannot be readily
attributed to any one or more prescribed accounting periods", and where in
consequence it is treated as due "for such period or periods as the
Commissioners may determine to the best of their judgment". There was no evidence before the Tribunal to
establish that there was a difficulty in attributing the unpaid VAT to a
prescribed accounting period or periods, or that in consequence the period
referred to had been determined by the Commissioners to the best of their judgment. In the absence of such evidence, no issue
under section 76(4) could properly arise.
The certificate
[27] There was some
discussion before the Tribunal, and also before this court, of the question
whether the certificate issued on 30 January 2007 affected the validity of the
VAT and penalty assessments issued in 2002, assuming for the purposes of the
discussion that those assessments were otherwise valid. The Tribunal construed the certificate as
directing that the respondents' first prescribed accounting period ended on 28
February 2007, and therefore as retrospectively amending any previously
prescribed accounting periods on which the VAT and penalty assessments might
have been based. Before this court,
counsel for the respondents submitted that the construction of the certificate
was a question of fact, and that the Tribunal's decision on this point was not
therefore capable of being challenged on appeal. Insofar as counsel for the Commissioners had
sought to provide an explanation to this court of how the Commissioners'
computer system generated certificates, such an explanation ought to have been
the subject of evidence before the Tribunal.
[28] In view of our
decision that the VAT and penalty assessments were invalid ab initio, the question whether the certificate affected the
validity of the assessments does not arise.
In those circumstances, and bearing in mind the limited evidence before
the Tribunal, it is undesirable, as well as unnecessary, that we should express
any concluded view as to the effect of the certificate.
Conclusion
[29] Since we have
concluded that the assessments in question are defective, it follows that we
must refuse the Commissioners' appeal.
