Revenue & Customs v BUPA Purchasing Ltd & Ors

Background

BUPA Purchasing Ltd (“BPL”), the first respondent, is a member of a group of companies that are leading national suppliers of private medical, health care and hospital services. Most of the supplies that it makes are exempt supplies, that is, supplies on which VAT is not charged. As a result, most of the input tax that the group has to pay when it buys goods or services is not recoverable. (I need not refer to the other members of the group because it is common ground that the result as respects BPL will govern the position of the other respondents.)

In the early 1990s, the group entered into a scheme (known as “the group exit scheme"), which was designed to enable the respondents to recover the input tax attributable to large purchases of supplies from outside suppliers. The judge ([2006] STC 388) described the group exit scheme as follows:

“[11] The stages of the scheme were as follows:

i)

At the outset BPL was an indirect 100% subsidiary of BUPA. Further it was a member of the VAT group of which BUPA was the registered member. (See my previous judgment for statutory references, and for fuller details of the scheme).

ii)

On 1 October 1992 BUPA and BPL entered into an agreement whereby BPL agreed that it would supply goods and services to BUPA over a spread of future years. BUPA made a large prepayment (£30m) to BPL, to be applied from time to time to the cost of those goods and services as they came to be supplied.

iii)

A few days later BPL, while continuing to be an indirect 100% subsidiary of BUPA, was removed from the VAT group registration. It therefore became a taxable person it its own right, and acquired its own VAT registration. In future VAT accounting periods it was liable to make its own VAT returns.

iv)

Thereafter from time to time BUPA requested BPL to supply specified goods or services to it pursuant to the agreement at (ii) above. When that happened BPL bought in the goods or services from outside suppliers and supplied them on to BUPA. Alternatively, BPL may have already bought in goods and services from outside suppliers in anticipation of being asked to supply them to BUPA.

v)

Suppose that the outside supplier’s charge for an item of goods or services bought was 100 plus VAT. The outside supplier invoiced BPL for 100 plus 17.5 for VAT. BPL paid 117.5 to the supplier.

vi)

BPL supplied the item on to BUPA at an uplift calculated at 1% on the pre-VAT price. So, VAT apart, BPL supplied the item to BUPA for 101. However, 98% of that 101 (which is 98.98) was taken to have been satisfied out of the prepayment which BUPA had made to BPL at stage (ii). So the pre-VAT amount for which BPL invoiced BUPA was only 2% of the 101: that is 2.02.

vii)

The group had been advised that BPL was liable to account to Customs & Excise for VAT on the 2.02, but not on the 98.98. So BPL invoiced BUPA for 2.02 plus 17.5% (VAT). The VAT was 0.3535, and the total of the invoice was 2.3735. (The 0.3535 was input tax suffered by BUPA, but because BUPA’s recoverable proportion was low -assumed in my previous judgment and in [10] above to have been 7.5%-it would yield only a negligible recovery from Customs & Excise).

viii)

The foregoing transactions were repeated over the years in relation to various individual supplies of goods and services (in BPL’s case goods as well as services, not just as assumed in my previous judgment) until the original prepayment of £30m had been used up. The scheme had then run its course. That occurred by July 1996.

[12] The scheme was intended to have two vital effects, one related to input tax and the other related to output tax. First when BPL suffered input tax on buying in goods and services from an outside supplier, it should be entitled to recover the full amount of the input tax from Customs & Excise. In the example it should be entitled to recover the 17.5 which (together with the basic price of 100) it paid to the supplier at stage (v). That was the intended input tax effect. Second, when BPL supplied the goods or services onward to BUPA or BHL the output tax which it was liable to pay to Customs & Excise should be 17.5% of only the two percent of the total price which it invoiced to BUPA or BHL. It should not be liable to pay output tax on the 98% of the price which was satisfied out of the prepayment which had been made when it (BPL) was a member of the BUPA VAT group. In the example BPL should be liable to pay output tax on 2.2 (ie 0.385), and not on 101 (ie not on 17.675). That was the intended output tax effect. If the scheme had indeed achieved both of the intended effects it would have improved the group’s VAT position significantly, to the disadvantage of Customs & Excise.”

Pursuant to the scheme, the respondents submitted sixteen monthly VAT returns for periods from April 1995 to July 1996. The Commissioners took the view that the returns were wrong. They sought to correct the position by making assessments under s 73(1) of VATA. The Commissioners erroneously made their assessments only on input tax grounds instead of partly on input and partly on output tax grounds. The assessments were first notified on 17 April 1997. The Commissioners then withdrew their assessments and replaced them with other assessments on 5 June 1997, which were then themselves amended by amended assessments dated 27 November 1997. The respondents appealed to the tribunal. In 2000, shortly before the tribunal was due to hear the appeal by the respondents and three years after the assessments were made, the Commissioners wrote to the respondents indicating what the assessments would be if they were recalculated on the correct basis.

The reason for this recalculation at the eleventh hour was that the original treatment of the exit scheme was found to be wrong as a result of the decision of the House of Lords in Customs & Excise Commissioners v Thorn Materials Supply Ltd [1998] STC 725. Mr Nigel Pleming QC, for the Commissioners, submits that group exit schemes were acknowledged to be complex in their analysis and that there had been substantial debate and litigation concerning the correct VAT analysis of such schemes which was not settled, so far as goods were concerned, until after the decision of the House of Lords in Thorn Materials. Even after that, on Mr Pleming’s submission, both Customs officers and taxpayers made mistakes. The judge dismissed any suggestion that the taxpayers had not provided full information (judgment [27]).

The Commissioners initially considered that goods and services were to be treated in the same way for VAT purposes. However, following the decision in Thorn Materials, they accepted that they had to be treated differently. I need not go into the details because it is sufficient for the purpose of the point now under appeal to explain the effect of the recalculations. The effect was that in some periods the amount due by way of VAT was less than the figure appearing in the assessments originally made by the Commissioners. The Commissioners contend that they were entitled to reduce these assessments by virtue of s 73(9) of VATA. However, in the case of other periods, the amount of VAT was higher following the recalculations. It was of course only in respect of those periods that the tribunal was called upon to consider exercising its power under s 84(5) of VATA.

In due course, the tribunal dismissed the appeals by the respondents. The tribunal found that the assessments made by the Commissioners were reached by the exercise of their best judgment. The tribunal further held that on the true interpretation of s 73 of VATA the assessments were valid notwithstanding the recalculation. The tribunal also considered that they had power under s 84(5) of VATA to increase six of the assessments in line with the amount of VAT which the tribunal considered was due.

The respondents then appealed to the High Court. Park J considered the case in two stages. At the first stage ([2003] STC 1203), he considered whether the output tax was recoverable from the companies participating in the group exit scheme. The second stage of the case ([2006] STC 388) concerned the validity of the assessments, and was decided on 8 October 2005. He took by way of example, the assessments of April 1996 and May 1996. I need not go through the samples in detail. I would summarise what he said about the assessment of May 1996 as follows. (The figures to be rounded). The original assessment made by the Commissioners for May 1996 was in the sum of £223,288. The Commissioners recalculated that a further amount of input tax was deductible and that amount was £37,978. But they also recalculated that output tax had been underdeclared in the sum of £22,943. Accordingly, they sought to reduce the assessment by the difference between the sums, namely from £223,288 to £208,252.

The judge rejected the argument of the Commissioners that the situation could be resolved by adjustments. He took the view that the right course was for him to follow the decision of Popplewell J in Ridgeon’s Bulk Ltd v Customs & Excise Commissioners [1994] STC 427. In that case, the Commissioners having wrongly disallowed input tax in the sum of £51,598 sought to resist any reduction in the assessment on the basis that there was an under declaration of output tax in the sum of £54,782. Popplewell J held that it was not open to the Commissioners to seek to uphold the assessment in the circumstances. He held:

“I turn back to the 1983 Act itself. I find no basis for the commissioners’ contention that where an assessment of overclaimed input tax cannot be supported it is open to them on fresh evidence to seek to treat that assessment as an assessment of underdeclared output tax for a different amount and maintain it. Their proper course is to issue a new assessment relying on the proviso.

It has been said in argument and was said by the tribunal that this is an argument which is purely technical in nature and that Bulk has not suffered any prejudice. To that, in my judgment, there are two answers. It is clear from the authorities that if for instance the wrong period is assessed the assessment cannot stand even though the figures are the same and there is no prejudice to the taxpayer. Second all cases involving time limits are in one sense technical. If a writ in a Queen’s Bench action is not issued within the statutory time limit the action cannot proceed. Provision is made in various Acts of Parliament or by rules of court to enable the court where time limits are concerned to exercise of discretion. No such power appears in the 1983 Act. Finally, the argument that there is some discretion if there is prejudice finds no support in my judgment from either from the decided cases or from the Act itself. The argument that the commissioners could have issued a valid new assessment in time is irrelevant because they did not in fact issue a new assessment, in relation to the £3.183, in time, and the effect of maintaining the existing assessment was to prevent the taxpayer from taking a limitation point. I do not therefore, with respect, agree with the reasoning of the tribunal nor with the result and I shall allow Bulk's appeal on this aspect of the case. ”

The judge held that the effect of this was that there was a rule that a fresh assessment was always required when an assessment is sought to be upheld partly because tax initially thought to be due wholly or partly because of over declarations of input tax is found correct because of equivalent under declarations of output tax. He distinguished the decision of Forbes J in Customs & Excise Commissioners v Sooner Foods Ltd [1983] STC 376, to the apparent contrary effect. The judge did not find assistance in the decision of this court in Customs and Excise Commissioners v Pegasus Birds [2004] STC 1509, to which I will refer below. Accordingly, he held that the Commissioners in this case should have issued new assessments, relying on the legally correct justification for the assessments made on the basis of facts that, in the judge’s judgment, they had known all along. It followed that the tribunal should not have exercised its power to increase any of the assessments under s 84(5) of VATA.

The order that the judge proposed is important. He held that the appropriate form of order was that the assessments should be confirmed, not in the amounts directed by the tribunal, but in amounts equal to the original amount as reduced by eliminating elements which were intended to recover alleged overclaimed input tax in respect of goods (judgment [60]).

Before I turn to deal with the submissions to this court and my conclusions, it would be convenient to set out the legislative framework in one place.

Legislative framework

S 24(1) of VATA defines the terms “input tax” and “output tax”:

“(1)

Subject to the following provisions of this section, "input tax", in relation to a taxable person means the following tax, that is to say-

(a)

VAT on the supply to him of any goods or services;

(b)

VAT on the acquisition by him from another member State of any goods; and

(c)

VAT paid or payable by him on the importation of any goods from the place outside the member States,

being (in each case) goods or services used or to be used for the purposes of any business carried on or to be carried on by him.

(2)

Subject to the following provisions of this section, "output tax", in relation to a taxable person, means VAT on supplies which he makes or on the acquisition by him from another member State of goods (including VAT which is to also to be counted as input tax by virtue of subsection (1)(b) above). ”

S 25(1) to (3) deal with the calculation by a taxpayer of the VAT due from him. He has to account for his output tax net of his input tax (see per Auld LJ in University of Sussex v Customs & Excise Commissioners [2004] STC 1 at [147]). Thus, s 25 provides:

“(1)

A taxable person shall –

(a)

in respect of supplies made by him, and

(b)

in respect of the acquisition by him from other member State of any goods,

account for and pay VAT by reference to such periods (in this Act referred to as "prescribed accounting periods") at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances.

(2)

Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.

(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 section is referred to in this Act as a "VAT credit". ”

The Commissioners’ power to make an assessment where it considers that a return is incorrect is one of the powers set out in s 73(1):

“73 (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.”

I will need to deal with the question of best judgment below. It will be noted that the power to make assessments is of “the amount due by way of VAT”. S.73 also contains a number of consequential provisions. S 73(2) provides that the Commissioners may make an assessment to recover a repayment or credit of VAT which should not have been made:

“(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…..”

s 73(4) (which I need not set out) provides for the combination of assessments under subsections (1) and (2). S 73(5) deals with assessments on persons acting in a representative capacity. S 73(6), which must be read with s 77(1), lays down the time limits for making an assessment, including an assessment under s 73(1). These limits play an important part in this appeal. An assessment under s 73(1) must be made within an overall limit of three years after the end of the prescribed accounting period unless dishonesty is involved. Moreover no assessment may be made after the later of two years from the end of the prescribed accounting period or one year after evidence of facts sufficient in the opinion of the Commissioners to justify the making of an assessment comes to hand. Further assessments may be made if the Commissioners receive evidence of facts after they have made an assessment. We are not concerned with the details of the limitation periods but rather with the fact that there are limitation periods for the making of assessments and that the Commissioners would have been out of time if in 2000 they had made further assessments on the respondents.

S 73(9) (as amended by the Finance Act 1996) provides that the VAT assessed and notified is treated as an amount of VAT due from the person assessed, subject to the rules as to appeals, except to the extent that the assessment has subsequently been withdrawn or reduced:

“(9)

Where an amount has been assessed and notified to any person under subsection (1), (2), (3), (7), (7A) or (7B) above it shall, subject to the provisions of this Act as to appeals, be deemed to be an amount of VAT due from him and may be recovered accordingly, unless, or except, to the extent that the assessment has subsequently been withdrawn or reduced.”

In this context of withdrawal or reduction, the act of withdrawal or reduction referred to must be that of the Commissioners. S 77(6) enables the Commissioners (in the case of assessments under s 73(1) and certain other provisions) to make supplementary assessments if in certain circumstances it appears to them that:

“the amount which ought to have been assessed in an assessment …exceeds the amount which was so assessed.”

However, any such supplementary assessment must be made “on or before the last day on which that assessment could have been made” (s 77(6)).

S 82 deals with the constitution and jurisdiction of the tribunal for the purposes of VATA, and I need not set that out. S 83 deals with appeals. It is to be noted that separate provision is made for appeals in relation to output tax, input tax and assessments. Moreover in relation to assessments, an appeal lies both in relation to the assessment and in relation to the amount of the assessment:

“Subject to section 84, an appeal shall lie to a tribunal with respect to any of the following matters-

…

(b)

the VAT chargeable on the supply of any goods or services…

(c)

the amount of any input tax which may be credited to a person;…

(p)

an assessment …under section 73(1) or the amount of any such assessment. ”

The power of the tribunal to increase the amount of the VAT due from any person is to be found in s 84(5) of VATA:

“(5)

Where, on an appeal against a decision with respect to any of the matters mentioned in section 83 (p)--

(a)

it is found that the amount specified in the assessment is less that it ought to have been, and

(b)

the tribunal gives a direction specifying the correct amount,

the assessment shall have effect as an assessment of the amount specified in that direction, and that amount shall be deemed to have been notified to the appellant.”

Discussion and conclusions

The essence of the argument of Mr Nigel Pleming QC, for the Commissioners, is that assessment is an assessment of the amount due by way of VAT. There are no further separate assessments of input tax or output tax. The Commissioners will have to give reasons for an assessment under s73(1) but those reasons are not part of the statutory assessment. Those reasons can be amended, unless there is some objection under public law to the Commissioners amending the reasons. The Commissioners are required only to make the assessment to the best of their judgment: the judge failed to take that point sufficiently into account. It is consistent with that requirement that an assessment under s 73(1) can be amended without invalidating it. Its validity is not affected by intrinsic error. The power to reduce or withdraw an assessment is implicit in s 73(9) (set out above).

Mr Pleming further submits that in so far as Ridgeon’s Bulk, which the judge followed as a matter of comity, decided that the Commissioners could not, subsequently to making an assessment, accept that input tax was deductible but contend that an equivalent amount of output tax was underdeclared, it was wrongly decided and should be overruled. The conclusion of Popplewell J was erroneous, because it proceeded on the basis that there were further separate assessments of input and output tax. This vitiated the conclusion of the judge, which appears in the passage already cited above, that what the Commissioners were seeking to do was to treat the assessment “as an assessment for underdeclared output tax for a different amount.” Accordingly, on Mr Pleming’s submission, the judge in this case was wrong to follow Ridgeon's Bulk.

The Commissioners make some important concessions. They accept that there may be cases where it would be unreasonable in the public law sense for them to maintain an assessment where in all the circumstances to do so would be manifestly unfair to the taxpayer. They also accept that it would be unreasonable to exercise the power to alter the basis for an existing assessment where, for example, the altered assessment is an entirely new replacement assessment not arising from the same set of circumstances or transactions that led to the making of the original assessment. In other words, the Commissioners accept that an assessment must be supported by reasons and that an amended assessment must derive from the same transactions as the original assessment. The leading authorities on the circumstances in which the Commissioners would be held to be acting unfairly in the public law sense are by analogy R v IRC ex parte Preston [1985] 1 AC 835 and R v IRC ex parte MFK Underwriting Agencies Ltd [1990] 1 WLR 1545. These cases deal with the position of the Inland Revenue. They show (by analogy) that the decisions of the Commissioners would be susceptible to judicial review if for example they constituted an abuse of power or were such that no reasonable Commissioners could have reached them, and that unfairness must be substantial and amount to an abuse of power or unreasonableness. The test is a high one and it will thus be a rare case in which unfairness is shown. Moreover fairness “imports the notion of equitableness, of a fair and open dealing, to which the authority is entitled as much as a citizen." (R v IRC ex parte MFK Underwriting Agencies Ltd, at 1570 per Bingham LJ). Whether unfairness is shown or not will depend on the circumstances of the particular case. It is not said that any of the decisions of the Commissioners in this case were in fact susceptible to judicial review. We were not taken to these authorities, but the principle of fairness is referred to the Elias Gale case, which was cited and to which I refer below.

Mr Roderick Cordara QC, for the respondents, seeks to uphold the judgement of the judge. His challenge is not therefore to the existence of a power in the Commissioners to reduce or withdraw an assessment but to changing its legal basis. The gravamen of Mr Cordara's argument is that, once the assessment has been made, the legal basis of the assessment has become fixed. On his submission, there are three features of an assessment. First, the assessment must relate to a prescribed accounting period. Secondly, it must set out the legal basis for the charge to VAT. Thirdly, it must identify the class of transactions concerned. These three ingredients are necessary to satisfy legal certainty, a requirement of Community law. Thus, the reasons given for making an assessment will form part of the assessment itself and the assessment taken with those reasons fixes the elements of the transaction and in particular, whether those elements are input or output elements. It is thus not open to the Commissioners subsequently to accept that they were wrong as regards input tax but then to seek to increase output tax with the result that the assessment stands.

Mr Cordara concludes that, if the Commissioners are right on this appeal, an assessment under s 73(1) does not include the reasons which support it and must be treated as an assessment without reasons. But that is not the Commissioners' case. They accept that there have to be reasons as a matter of public law, and that they would be subject to judicial review if reasons were not given. However, they say that those reasons can in an appropriate case be changed.

Mr Cordara further submits that the Commissioners’ interpretation of VATA should be rejected because it avoids the limitation provisions in ss 73 (6) and 77(1). He submits that it is a general feature of tax systems that there is a period of limitation after which the tax authority is time-barred and prevented from recovering tax due. Community law lays down requirements of legal certainty and proportionality. The time bar mechanisms operate on the making of the assessment. Once an assessment is made, there is no limitation period for its enforceability. If the reasons underlying assessment can be changed in the way suggested, it would allow the Commissioners to get around the limitation period contained in section 73. Moreover, the appeal provisions draw a distinction between an assessment and the amount of the assessment and this makes it plain that the assessment is more than just a figure.

It follows from Mr Cordara’s submissions as to the ingredients of a valid assessment that Ridgeon's Bulk was rightly decided. Mr Cordara also submits that the decision draws the balance fairly as between tax payers and the Commissioners. The Commissioners have sufficient protection against developments in the law in that they can use alternative or parallel assessments: see, for example, University of the Court of Glasgow v Customs & Excise Commissioners [2003] STC 495. The decision in Ridgeon's Bulk accordingly does not cause difficulties in the collection of VAT.

In my judgment, the Commissioners are correct in their submission that VATA does not prevent them, when, following the making of an assessment under s 73(1), they decide to accept that additional input tax is deductible, from deducting underdeclared output tax in respect of the same transactions as formed the basis of the assessment which has not previously been taken into account. I reach this conclusion for the following reasons, which I amplify below:

I take those reasons in turn.

As a matter of interpretation, it is an essential part of an assessment for the purposes of s 73(1) that it determines the net amount due by way of VAT

This conclusion is based on my interpretation of the relevant provisions of VATA.

There is no statutory definition of “assessment”. It is in general a legal act on the part of the Commissioners constituting their determination of the amount of VAT, interest, penalty or surcharge that is due (see generally, Courts plc v Customs & Excise Commissioners plc [2004] STC 27).

S 73(1) states that an assessment under that section is of “the amount of VAT due”. Accordingly, unless the assessment determines the net amount of VAT due it cannot be an assessment for the purpose of s 73(1). Similarly, in s 73(6) the assessment is described as an assessment "of an amount of VAT due”. Thus there cannot be an appeal against an assessment under s 73(1) unless it assesses that there is a net amount of VAT due. If the taxpayer contends that he is entitled to a repayment of VAT, he will have to appeal on some other ground, such as against the amount of input tax allowed, and VATA makes express provision for this in s 83. Further support for the conclusion that an assessment must assess an amount due can be found in s 77(6) dealing with supplementary assessments: the power to issue supplementary assessments under s 77(6) is of the net amount of the excess which is due.

Indeed there are reasons for concluding that in some contexts VATA uses the expression “amount of the assessment” and “assessment” interchangeably. Thus s 73(9) of VATA provides for the amount assessed to be deemed to be an amount of VAT due from the taxpayer unless “the assessment” has been “reduced”. The reference to an assessment in this latter context can only be to the net amount due since the provision would not make sense if it applied to a reduction in say input tax without any reduction in the net amount due.

I take into account that s 84(4), which deals with appeals against input tax, refers to “so much of any assessment as concerns, the amount of input tax…”. However, this reference does not alter the fact that s73(1) refers to assessments of the amount of VAT due. What s 84(4) does is confirm that input tax and output tax may be part of the assessment. They are not, however, in my judgment "assessments of the amount of VAT due" nor do they mean that the computation of input tax or output tax in an assessment are separate assessments for the purpose of s 73(1).

Of course, if further information clearly discloses that the amount assessed as the net amount of VAT due is excessive, the Commissioners would be bound to reduce it. As Mr Pleming submits, it would be unreasonable of the Commissioners in those circumstances to rely on the old assessment. (They could not however increase the amount of VAT due, unless they could issue a new supplementary assessment.) However, the critical figure for the purpose of the assessment remains the bottom line figure – the amount of VAT due. The figures for input tax and output tax are of course legally significant, and this is recognized in s 83, dealing with appeals. Those figures form part of an assessment but they are not the figures that make the act of the Commissioners an assessment for the purposes of s 73(1).

Accordingly I conclude that an assessment under s 73 (1) must include an assessment of the net amount of VAT due.

As a matter of statutory interpretation, the statutory consequences as to alteration which apply to an assessment under s 73(1) do not apply to the reasons for an assessment which must be given by the Commissioners

There is a separate question of statutory interpretation, to which I now turn, as to whether the reasons which have to be given for an assessment form part of the assessment which therefore cannot be changed without a power to do so in VATA itself.

It is common ground that as a matter of public law the Commissioners must provide the basis on which they make an assessment. In other words, they must supplement the assessment with a notification of the reasons. But this duty is grounded in public law, and not in the statute.

The duty of the Commissioners under public law may be discharged by the provision of the estimates as to input and output tax on which the assessment is based. In other cases it may need supplementary narrative. Accordingly the fact that VATA refers to input tax and output tax and makes them part of an assessment for the purposes of s 73(1) does not mean that VATA treats the reasons required for an assessment as part of the assessment which cannot therefore be changed.

In fact, VATA makes no reference to the obligations of the Commissioners under public law to give reasons as such for an assessment under s 73(1). There may be good reasons for this. First, it is unnecessary for Parliament to set out a duty grounded in public law. Secondly, to set it out in the statute might well preclude the courts from developing it further. Thirdly, if it is included in a statute the taxpayer may obtain additional remedies over and above those to which he is entitled under public law. In other words, there may well be good reasons why Parliament should not wish to put the public law duties of the Commissioners into s 73(1).

Mr Cordara relies on s 83(p), which, in permitting appeals, draws a distinction between an assessment and the amount due under an assessment. (This formula is also used in s 83(sa), (t), (ta) and (zb)). On the face of it, this supports his submission that an assessment includes the reasons for an assessment. However, this wording in s 83(p) is equally appropriate to cover the situation in which a taxpayer denies that the power to make an assessment under s 73(1) has arisen. His contention may be (for example) that he has made all the relevant returns. Accordingly, the wording of s 83(p) cannot determine the issue in this case. Moreover the drafting approach in s 83(p) has to be taken into account. The drafter has created a long list of appealable matters, and it is likely that the drafter has erred on the side of caution rather than precision in creating this list.

In the circumstances, I conclude that the reasons for an assessment do not form part of an assessment under s 73(1) to which statutory consequences as to alteration apply.

The Commissioners have power to reduce an assessment, and it must thus follow that when they reduce an assessment they have power under VATA to change the calculation as to input tax or output tax on which the assessment was based

I now turn to the question of the legitimacy of altering the input tax elements and output tax elements in an assessment. I deal with this in two stages, first (under (iii)) where the Commissioners make a reduction in the amount due under an assessment, and (under (iv) below) where they do not make any such reduction or where they seek to offset underdeclared output tax against the further deduction of input tax.

For this purpose, it is not sufficient to find that the taxpayer has the protections under public law conceded by the Commissioners and explained above. Nor, of course, would it be possible to interpret the statute as allowing the Commissioners to make changes to the input tax or output tax just because the court takes the view that that would have been a sensible provision for Parliament to make. It is still necessary to decide whether VATA prohibits or permits these elements to be altered. Self-evidently, VATA contains no express exclusion.

Mr Cordara does not contend that the assessments could not be reduced by the amount of inputs that ought to have been allowed as deductions. Accordingly he accepts that there are circumstances in which assessments can be reduced.

In my judgment, Mr Cordara is correct to accept this. It must inevitably follow from the fact that the Commissioners have power under s 73(9) to reduce the net amount which they have assessed as due by way of VAT from the taxpayer that they have power to reduce the amount of output tax or to increase the amount of input tax which formed the basis of the assessment of that amount.

To hold that the Commissioners could only reduce an assessment with respect to either output tax or input tax, rather than by output tax or input tax (as the case may be) less any offset, or that the Commissioners could only make adjustments to input and output tax if they were exercising their power to reduce an assessment, is inconsistent with the intention of Parliament appearing from the power to make assessments to the best of their judgment

Mr Cordara contends that underdeclared output tax cannot be brought into an assessment already made, and he puts forward some cogent reasons for this. In particular, he submits that it is inconsistent with the limitation provisions in ss 73(6) and 77(1) that the Commissioners should be able to amend the input and output tax elements of an assessment in this way. To do so avoids the need for them to issue a new assessment, which they can only do if they act in time. If the input and output elements of an assessment can be amended in the way contended for by the Commissioners, the taxpayer loses the benefit of the time bar defence in this respect, and furthermore, if he appeals, the assessment may be subject to the power of the tribunal under s 84(5).

In these circumstances, the court has to examine critically whether Parliament has impliedly excluded the possibility of the Commissioners amending the output and input tax elements of the assessment in the way they have sought to do in this case. It is quite possible that the drafter did not expressly contemplate alteration of the component parts of assessment in this type of case. The appeal provisions in s 83, like the limitation provisions, provide some additional support for Mr Cordara’s approach since, if the input and output tax elements can be amended, the taxpayer may be dealing with a moving target and he may find that an appeal that has been entered becomes abortive. However, he will still have his right of appeal, and he will have to be given proper notice of the amendments and accordingly I have not found this submission of great assistance on this question of interpretation.

There are other textual indicators. VATA expressly confers on the Commissioners power to make supplementary assessments for the excess of VAT due, and, as we have seen, in s 73(9) there is power to withdraw or reduce an assessment. In support of Mr Cordara’s approach, it can be said that it is odd that no reference is made to altering the components of an assessment where there is no effect on the net amount due. These textual indicators confirm an impression already gained that the drafter did not expressly contemplate alteration of these components and they provide little assistance in detecting the intention of Parliament.

I have found greater assistance in the further provisions of s 73(1) that make it clear that what is required of an assessment is that this should be to the best of the judgment of the Commissioners. This requirement has been elucidated in the judgment of this court, and in particular in the judgments of Carnwath and Chadwick LJJ, in Customs & Excise Commissioners v Pegasus Birds Ltd [2004] STC 150g. Chadwick LJ explained that the Commissioners are not bound to do more when making an assessment than their honest best:

“[77] It is important to keep in mind that it does not follow, necessarily, that an assessment which is ‘wholly unreasonable, being outside the parameters of the reasonable’ is not, nevertheless, the result of an honest and genuine attempt to assess the amount of VAT properly due from the taxpayer. All that can be said is that an assessment may be so far outside the bounds of what would have been reasonable that it calls into question whether there was, indeed, an honest and genuine attempt to assess the amount properly due. It is open to a tribunal to find that it is so unlikely that an experienced officer of Customs and Excise, seeking to make a proper assessment of the VAT properly due, would have made an assessment in the amount that he did that the proper inference to draw is that, in making that assessment, he could not have been doing his honest best. But that is an evidential inference from the facts; it is not a finding that because (although doing his honest best) his assessment fell below an objective standard of reasonableness, he failed to exercise the power to assess to the best of his judgment as a matter of law.”

Waller LJ agreed with both judgments. In the earlier case of Rahman v Customs & Excise Commissioners [2003] STC 150 at [45], this court held that if the Commissioners do not exercise their best judgment in making an assessment, the tribunal may set it aside. However, the decision of this court in Pegasus Birds at [25] to [29] and [90], establishes that the tribunal is not bound to set the whole assessment aside if it is satisfied that justice can be done by correcting the amount of the assessment. Carnwath LJ concluded that the position was as follows:

“[29] In my view, the tribunal, faced with a "the best of their judgment" challenge, should not automatically treat it as an appeal against the assessment of such, rather than against the amount. Even if the process of assessment is found defective in some respect applying the Rahman (2) test, the question remains whether the defect is so serious or fundamental that justice requires the whole assessment is set aside, or whether justice can be done simply by correcting the amount to what the tribunal finds to be a fair figure on the evidence before it. In the latter case, the tribunal is not required to treat the assessment as the nullity but should amend it accordingly.”

VATA thus requires the Commissioners to make an assessment only to the best of their judgment and no doubt it is implicit in this that the Commissioners will make that assessment at as early a stage as reasonably practicable. In setting the standard at best judgment, Parliament has as I see it recognised that there is no absolute certainty about the amount of the VAT due or its components in an assessment under s 73(1). It has also expressly recognised that as other facts become known or as the matter develops further assessments may be needed. Moreover, it has given the tribunal powers to direct that an amount of VAT is due even if the Commissioners have not followed the correct procedure under s 73(1). It is true that there is no express power for the Commissioners to amend the input and output tax elements of the computation where no alteration is made to the overall amount of VAT due. However, such a power, and likewise a power to take into account by deduction offsets of overclaimed input tax or underdeclared output tax (as the case may be), must in my judgment follow from and be implicit in the best judgment requirement. Those powers are reasonably necessary for carrying out the assessment process. Otherwise, the Commissioners could find that even though they raised an assessment to the best of their judgment at an appropriate time that assessment cannot be amended to reflect facts and matters becoming known later in the particular circumstances of this type of case in circumstances where it would be proper and reasonable for them to make those changes.

I do not find ultimately persuasive the submission that the Commissioners’ interpretation removes protection for the taxpayer given by the provisions for time bars in ss 73(6) and 77(1). I accept that time limits are an important driver of good governance in tax matters. They are imposed by Parliament on the Commissioners, and by their very nature in any context they often give uncovenanted (but important) benefits to a party.

Nonetheless, the purpose of time bars is primarily to protect the taxpayer from being faced with a stale claim for the first time after the limitation period had expired. In the situation contemplated in this case, the taxpayer will have been duly warned of his liability by the original assessment. The Commissioners will have already made an assessment to the best of their judgment. In those circumstances, I can see no reason why Parliament should have wished to confer the benefit of a time bar defence on the taxpayer in this case. The contrary conclusion could give the taxpayer a considerable windfall. It may be said that a further adverse effect on the taxpayer is that if he appeals the tribunal may increase the amount due under s 84(5). But the tribunal's power can on no interpretation go beyond the amount of VAT due. The s.84(5) point is not in this respect a separate point. It applies whenever the taxpayer appeals. The most important point is that, on the view which I take of the powers of the Commissioners in relation to an assessment, he has no right to rely on an absolute time bar defence, and I have sought to respond to that point above. There are other points that can be made. If the assessment is altered at a late stage, he may be entitled to relief by way of judicial review. If he is taken by surprise before the tribunal he may be entitled to his costs of dealing with the new points at a late stage. So the taxpayer is not without some protection against these events.

Mr Cordara submits that, if the Commissioners are right, an assessment could be made without reasons and reasons added later. In my judgment, this is not an objection to the conclusion that I have reached because public law would prevent this.

It is not an objection to the alteration of the input tax and output tax components of an assessment that both would require amendment, and, in so far as Ridgeon's Bulk decides otherwise, it should be overruled

My fifth reason is that it is not of itself (and leaving aside any objection in public law on the particular facts of the case) an objection to the alteration of the input tax and output tax components of an assessment that both would require amendment, and in so far as Ridgeon's Bulk decides otherwise, it should be overruled. I have set out the ruling of Popplewell J above.

Part of the rationale of the conclusion of Popplewell J was in effect that there were separate statutory assessments of input tax and output tax. Accordingly neither of those components could be increased and there would have to be a new assessment if any increase were sought in either component. For the reasons given above, I accept Mr Pleming's submission that this is not correct on the true interpretation of VATA. Forbes J appears to have come to the conclusion that the Commissioners could amend input tax and output tax forming the basis of a single assessment: Customs and Excise Commissioners v Sooner Foods Ltd [1983] STC 376. In my judgment, that conclusion is to be preferred and the ruling of Popplewell J to the contrary should be overruled.

The scope of the power of the tribunal under s 84(5) of VATA

I now turn to the question of the power of the tribunal under s84(5). Mr Cordara submits that this power is limited to computational errors, and cannot apply where there is a different legal or factual basis for the assessment. As I have explained above, if the power is wider, there is a potential adverse effect to the taxpayer. In particular, he will be unable to take advantage of the time limits that prevent the Commissioners from making assessments after a certain date. However, I am not persuaded by Mr Cordara’s argument, because the language of s 84(5) does not impose any limitations on the discretion of the tribunal (see Elias Gale Racing v Customs and Excise Commissioners [1999] STC 66). Moreover, as Chadwick LJ (with whom Brooke LJ and Bodey J agreed) said in Rahman with respect to s 84(5) and other provisions of VATA:

“[t]he underlying purpose of the legislative provisions is to ensure that the taxable person accounts for the correct amount of tax.”

Mr Cordara submits that this interpretation exposes the taxpayer to a potentially unlimited liability for a potentially unlimited time. There is no limit on the time within which the tribunal can exercise its power. I am not persuaded by Mr Cordara’s submission on this point. The taxpayer cannot be rendered liable to pay, by a direction by the tribunal to pay a further amount in respect of VAT due, more than he ought to have paid in the first place. In addition, the process before the tribunal limits the time within which he is exposed to an order under s 84(5).

Subsidiary issue: Is the power of the Commissioners to alter the input or output tax elements of an assessment or the power of the tribunal to increase the assessment subject to the requirement that the tax altered relates to the same period as that of the assessment?

This point arises as a result of the submission by Mr Cordara in relation to the power of the Commissioners to alter the input and output tax shown in an assessment, but it seems to me that his submission must apply equally to the question of the tribunal’s power to increase the amount of an assessment under s 84(5). It does not affect the conclusions already reached because it arises on the specific facts of this case. The judge held that the input and output tax amended by the Commissioners in this case related to different periods (judgment [32]), and it appears from the same paragraph of his judgment that he would have gone on to hold that this would have prevented the Commissioners from exercising any power to amend those items for that reason if he had not held that they had no power to amend those items anyway.

Mr Cordara submits that it is of the essence of an assessment that it relates to a particular period. In my judgment, while this might be so in the generality of cases as a result of the concessions made by the Commissioners, in this case (see para 29 above), it is necessary to look to see why the Commissioners included any item for a different period. Mr Cordara submits that there was in fact a very fundamental change in the characterisation of the underlying transactions. But we are told that the reason why the assessments as altered contained input tax and output tax relating to different periods was fortuitous. The fact was that some items were only claimed a month late. Nonetheless, they related to the same transactions as the original assessment. By that, as I understand it, he means that all the transactions formed part of the same group exit scheme as I have described above.

Mr Cordara has not disputed the factual basis of the explanation given to us. His position is that he takes a different view of the effect of that explanation. He says that it is not a fortuitous but a radical change. However, I prefer the submission of Mr Pleming that these circumstances are permissible because the tax in question relates to the same series of transactions as are included in the original assessment. I do not consider that their inclusion would be contrary to the principle of fairness imposed on the Commissioners by public law. If the taxpayer is entitled to additional input tax in respect of a series of transactions, he should bear the burden of additional output tax that should have been borne on that series of transactions.

Miscellaneous points

In the recent case of Liaquat Ali v HMRC [2006] EWCA Civ 1572, Lloyd LJ, with whom Tuckey LJ agreed, observed that the Commissioners had no power to amend an assessment (judgment [9]). However, that observation was made in the context of a case where the Commissioners purported to increase the amount of VAT due from a taxpayer. The Commissioners subsequently accepted that that amended assessment was invalid. Therefore the court (of which I was a member) did not have in mind the situation that has arisen in this case, where Commissioners have sought to amend the input tax and output tax on which the computation of the amount due was based.

Mr Cordara submitted that if the Commissioners can alter the output tax and the input tax components in the manner in which I have held above, the assessment would lack legal certainty. However, as I see it, the legal position as I have held it to be does not lack clarity, or prevent a taxpayer from effectively exercising his right of appeal, or impose a disproportionate burden on him. The taxpayer would be entitled (and bound) to proceed on the basis of an assessment before any alteration of the basis stated in it. There may never be any such alteration. The taxpayer has, moreover, the protections in public law described above against any abuse of power or irrationality in the alteration of the input tax or output tax involved in it. He must be given proper notice of any alteration. In those circumstances I would reject Mr Cordara’s submission based on legal certainty. For the reasons given above, the amendments can in an appropriate case relate to inputs and outputs in different periods than that covered by the assessment, but I do not consider that that can affect legal certainty. There is no requirement (as submitted) for an assessment to set out the legal basis for the assessment.

Disposition

For the reasons given above, I would allow this appeal.

Lord Justice May:

I agree.

Lord Justice Auld

I also agree.