Vision Express (UK) Ltd v Revenue & Customs

This is an appeal by Vision Express (UK) Limited (“VEUK”) from a decision dated 14 November 2008 of the VAT and Duties Tribunal, sitting at Manchester, whereby the Tribunal dismissed appeals by VEUK: first, against a Notice of 22 March 2005 served on VEUK by the Commissioners of Revenue and Customs (“the Commissioners”) under regulation 102A of the Value Added Tax Regulations 1995 (“the Regulations”); and secondly, against an assessment dated 1 February 2007 designed to recover input tax totalling £4,119,103 for which VEUK claimed credit, which the Commissioners say exceeded the amount properly recoverable.

VEUK operates a well-known chain of retail opticians’ shops. For purposes of VAT, like many others in this business, it makes two types of “supply”. It supplies to customers goods (in the form of spectacles and contact lenses) and services (in the form of eye-testing, optical advice and the like). Its supplies of goods are “standard rated” for VAT purposes; its supplies, in so far as properly described as “medical care” services, are exempt from VAT. VEUK is, therefore, (what is known in the jargon as) a “partially exempt trader” for VAT purposes. The issue raised by the appeal is as to the proportion of VAT paid by VEUK (known confusingly, but notoriously, as “input tax”) in the course of its business that is deductible by it from the sums for which it must account to the Commissioners for tax paid by customers (known, equally confusingly, as “output tax”).

The typical VEUK customer pays a single total price for the services and goods he or she receives, the end product being usually dispensed spectacles or contact lenses. The customer is, of course, only interested in the total price, not in the niceties of taxable and exempt supplies that he or she receives from VEUK. However, on part of that price the customer is paying VAT, on the other part he/she is not. VEUK pays VAT on goods and services that it purchases from suppliers in the course of its “partially exempt” trade. Some supplies to it are used exclusively for its exempt business, others exclusively for its taxable business and others for both. Its suppliers are, of course, indifferent as to the proportion in which VAT paid to them is deductible from VAT paid to VEUK which would otherwise be payable by VEUK to the Commissioners. However, VEUK is by law only entitled to deduct a part of the amount of VAT that it has paid to suppliers for those goods and services which are acquired in part for its exempt business and in part for its taxable business. The question on these appeals is to find, in principle, how that deductible “part” is to be ascertained. In 2001 VEUK agreed with the Commissioners a method of calculating the apportionment – a “partial exemption special method” or PESM.

The basic statutory scheme for solving the apportionment dilemma is helpfully summarised by the Tribunal in paragraph 2 of its Decision under appeal as follows:

It will be seen that this scheme endeavours, so far as possible, to attribute directly the input tax appropriately between taxable and exempt supplies by reference to the use made of the acquired goods and services in making those different supplies. That which cannot be attributed in this way is called “residual input tax” and is attributed to the taxable and exempt parts of the business in a more or less rough and ready, “proxy” fashion. While precision is impossible in this exercise, the apportionment so achieved must be “fair and reasonable”. As a matter of legislation, at the relevant times in this case, this was all achieved by a combination of Article 2 of the First Council Directive (67/227/EC), Articles 13.1 (c), 17.1, 17.2, 17.5 (especially subparagraph (c)), 18.1, 19.1 and 19.3 of the Sixth Directive (77/388/EEC), the Value Added Tax Act 1994 sections 24(1), 25(1) and (2), 26 (1) and (3) and regulations 101(1) and (2) of the Regulations. It is not necessary to set out those provisions in full.

The Commissioner’s notice in this case (an “override notice”) was served under r.102A of the Regulations. This provides as follows:

The effect of the override notice was not to require another specified method of calculating a proper deduction, but (by reference to regulation 102B) to require VEUK to calculate its recoverable input tax in a manner which “represents the extent to which the goods or services are used by [it] or are to be used by [it] in making taxable supplies…”. In other words, the regulations specify the end to be achieved but not the method by which it is to be achieved.

The way in which the PESM operated in this case is again helpfully summarised in paragraphs 22 to 26 of the Tribunal’s decision as follows:

In the annex to the override notice the Commissioners set out their reasons for wishing to override the PESM. First, the use of floor areas as a factor in the calculations was attacked. It was said that the areas of the stores identified as used for the making of taxable supplies were in fact used for making both taxable and exempt supplies. Further, it was said that even if VEUK’s assessment of the use of floor areas was correct, as much as 46% was used for mixed supplies and there was no evidence that the application of step 3 of the PESM reflected the actual proportions. It was also contended that there was little relationship between some of the supplies whose costs were dealt with in step 3 and the floor areas. Secondly, the Commissioners challenged the use of the concept of “zoning” in attributing rental costs to the various store areas. Thirdly, and finally, the Commissioners objected to the use of the preceding year figures for the apportionment and required that the recovery be determined by contemporaneous figures.

The business of a retail optician was described by McCullough J in CEC v Leightons Ltd [1995] STC 458, 461 as follows:

The treatment of opticians’ supplies for VAT purposes has had a chequered history in this country. Eye-tests have always been regarded as constituting an exempt supply. There was, however, at one time a doubt as to the proper treatment of the supply of dispensed spectacles. Until 1988 the whole supply was treated as exempt. However, that position changed with the decision of the European Court in EC Commission v UK [1988] STC 251 where it was held that, while the provision of the “medical care” element of the supply was exempt, the supply of spectacles and contact lenses themselves was taxable. In the wake of that decision the Commissioners decided that the services of ophthalmic opticians undertaking eye-tests constituted exempt supplies. However, strangely, their view then was that dispensing opticians made a single taxable supply of spectacles and lenses to which the dispensing service was merely ancillary. Not surprisingly, it was then decided in Leightons’ case (supra) that that was incorrect and that dispensing opticians, providing prescription spectacles, made separate supplies of goods and services, the former being taxable and the latter exempt. As the Tribunal noted in this case,

The principal deductions in issue in the present case are the rents and service charges and the other expenses relating to VEUK’s retail stores. As indicated above, steps 2 and 3 of the PESM allocated different uses to various parts of the retail stores. The Tribunal heard oral evidence on the store layouts, studied plans and other documentary materials bearing on that subject and visited one of these stores which was at the Trafford Centre in Manchester. On that visit they saw the layout there and were provided with information, as required by the Tribunal members, by VEUK’s store staff. It made the following findings as to the physical layout of the stores:

VEUK’s position throughout, both in the operation of the PESM and in argument on the appeals, has been that the “display area” of each store is used exclusively for taxable purposes, save for a small notional part of that area (at the entrance), known in the case as the “doormat adjustment”, designed to reflect the fact that customers walk through the display area to get a sight test or to have spectacles fitted or dispensed at a dispensing desk. This adjustment area is treated as being used for “mixed” supplies, i.e. used for both exempt and taxable purposes. The laboratory areas are treated as being used wholly for taxable supplies. The examination rooms are treated as areas involving exclusively exempt supplies. The contact lens instruction rooms are treated as being of “mixed” use, since the “exempt” element of advice and instruction is provided there and the taxable sales of lenses also occur in this area. The dispensing desk areas are treated as mixed, as are the waiting areas, near the eye-test rooms and the contact lens instruction rooms. The storage and staff areas are treated as involving mixed use, although the Tribunal found that the storage rooms were principally used to store taxable goods.

The Tribunal found that some of VEUK’s store staff (particularly ophthalmic opticians) made predominantly or exclusively exempt supplies, while others (mainly lab staff) made predominantly or exclusively taxable supplies. The remaining staff made mixed supplies, by dispensing prescriptions and selling frames and lenses. No staff members undertook dispensing only.

The essential stance of VEUK before the Tribunal was that the allocation of the various areas of the stores to exempt, taxable and mixed use correctly reflects the way in which the stores are used in practice, and was a suitable “proxy” for the attribution of the use of residual input tax. On the other hand, the Commissioners’ position was that the allocation of the display area to taxable purposes was inappropriate because, although the frames displayed within that area form the subject of a taxable supply, the area is not used exclusively for selling frames, but also for the dispensing process as a whole. The Commissioners further contended that a very high proportion of the store was said by VEUK to be devoted to mixed use and that a floor area allocation can only satisfactorily be used to meet the statutory test when a high proportion of aggregate floor area can be directly attributed to exempt or table supplies. In other cases, such as this one, the high proportion of mixed areas distorts any proper evaluation of the use of the premises in question.

The parties were further divided about the manner in which VEUK calculated the costs of renting its stores, by use of the valuation tool known as “zoning”. It is well known that for the purposes of calculating the rent of a shop, surveyors value first the front portion of the shop, usually in England the front 20 feet, which is known as “Zone A”. The rental value for the portions further to the rear, Zones B, C and D etc., are then calculated by dividing the rental of the preceding zone by 2. Once the rental value of zone A is determined the rest of the shop then falls into place. As the Tribunal noted, the consequence of the system is that the rent of a broad fronted shallow shop will be greater than that of a narrow fronted, deep shop.

VEUK’s position was that such zoning was not merely a convenient valuation tool but a reflection of the reality that the front part of a retail store, used for taxable supplies, is more costly to it than the rear portions of the same store. In this case, therefore, the prominent area which VEUK contends is devoted to taxable supply costs more than the other parts of the shops, leading to a higher recovery of input tax in respect of rent.

The Tribunal’s principal findings on this issue can be found in paragraphs 51 and 53 of its decision (Footnote: ¹) in the following terms:

Subject to one point taken by Mr Cordara QC (who appeared with Mr King) for VEUK, relating to the precise scope of the “medical care” exemption, it seems to me that these paragraphs of the Tribunal’s decision include clear findings of fact as the use or uses to which the various areas of the store are actually put. Such findings are not open to challenge in this court, where appeals are confined to matters of law. The conclusion drawn from those findings of fact was that the PESM does not represent a fair and reasonable attribution of the residual input tax to taxable supplies. I agree with Mr Thomas that that is a value judgment of a primary decision maker with which an appeal court has to be slow to interfere. The appeal court must apply the principles set out by Jacobs LJ in the Court of Appeal in Procter & Gamble UK v Revenue and Customs Commissioners [2009] STC 1990 at p.1993j – 1994h, paragraphs 9 – 11.

On the subject of zoning and its appropriateness or otherwise in determining costs of the various store areas in this context, the Tribunal’s decision was as follows:

As a result of the findings summarised above, the Tribunal decided that the PESM did not produce a fair and reasonable result and that the combination of the method itself and the manner in which it had been implemented, by the allocation of floor areas to various supposed uses, would inevitably result in over-recovery by VEUK of input tax. The Tribunal noted that overall VEUK’s output tax calculation assumes that about 35% of its supplies from its stores are taxable, yet it has recovered 88% of the input tax attributable to stores expenditure by use of the PESM.

On the present appeal, VEUK takes three principal points against the tribunal’s decision. In each respect, it argues that the Tribunal was wrong in law. First, it is submitted that the Tribunal erred in its determination of the scope of the exempt services provided in the stores. Secondly, it is said that the Tribunal erred in its consideration of the accuracy, fairness and reasonableness of the PESM. This point raises, in essence, the suitability of a “floor-space + zoning” calculation in making an attribution of the residual input tax – in my view, a value judgment of the type to which Jacobs LJ’s comments in Procter & Gamble (supra) apply. Thirdly, it is argued that the tribunal was wrong in its acceptance of the override notice and the assessment as leading to a fair and reasonable outcome.

Mr Cordara’s first point was that the Tribunal had erred in its approach to the PESM because it misunderstood or misapplied the ambit of the “medical care” exemption provided for by Article 13 A.1 of the Sixth Directive. That Article is in the following terms:

Mr Cordara argued that the Tribunal did not properly appreciate the narrowness of this exemption and, therefore, it misassessed the areas of the stores in which true “medical care” was being provided. In his submission, the display area of the shop was simply devoted to the supply of goods and no relevant “medical care” was provided away from the dispensing desks. It is said that once the optician strays with his customer away from the dispensing desk he embarks upon the supply of goods and “medical care” ceases.

In my judgment, that is not correct. I agree with Mr. Thomas, who appeared for the Commissioners, that the supply of the services of a dispensing optician, aside from the physical sale of the spectacles or the contact lenses themselves, have been found by this court to be exempt. That is the effect of the decision in Leightons (supra). The dispensing optician’s function is to convert the prescription drawn up by the ophthalmic optician into an order for the manufacture of a suitable optical instrument, spectacles or lenses, which will correct the customer’s vision. As it was put by the Tribunal in Southport Visionplus Ltd v CCE (2001) Decision No.17502,

It is not necessary to accompany the Commissioners’ witness, Professor Jalie, so far as to find that the provision of cosmetic advice by a dispensing optician, as to the aesthetic appearance of a set of frames, by a dispensing optician may in some senses be regarded as part of a psychological (and ergo, a “medical”) service to the customer. However, in my judgment, the service function, looked at as a whole, of the dispensing optician, as described for example in Leightons’ case, seems to me to be a therapeutic one directed to the correction of the customer’s vision. The optician does not stop the exercise of that function when he strays away from the dispensing desk and into the display area, even if he does assist the customer in choosing a frame from the display racks, among other reasons, because of the frame’s aesthetic appeal. It is to be recalled that Article 2 of the Sixth Directive provides that,

The function of the dispensing optician, as found by the Tribunal here, is obviously different from the services considered by the European Court in the three cases to which Mr Cordara referred: D v W Case C-384/98, Ambulanter Pflegedienst Kuegler GmbH v Finanzamt fuer Koerperschaften Case C-141/00, and Diagnostico & Therapeftiko Kentro etc. v Ipourgos Ikonomikon [2006] STC 1349. Those cases concerned respectively the taking and analysis of medical samples for paternity proceedings, the provision of general domestic services to patients and the provision of accommodation and board to the relatives of hospital in-patients. Clearly, none of those services amounted to “therapeutic” treatment of a patient. The principle emerges in a short passage in D v W (supra), at paragraphs 18 and 19 of the judgment of the court in these terms:

I also agree with Mr Thomas that the finding of the Tribunal in this respect does not fall foul of the decision of the European Court in EC Commission v UK [1988] STC 251. That case simply indicated that a line had to be drawn for VAT purposes between the distinct supplies of goods and the supply of medical care services. In the infraction proceedings brought by the Commission in that case, the court simply held that it was not permissible to extend the exemption to a supply of goods by seeking to subsume it in the related supply of medical care services: see paragraph 34 of the judgment of the court. It was not attempting to lay down the precise boundaries between the two supplies.

I turn now to VEUK’s second point. This raises the question whether a floor-area attribution of residual costs (with or without “zoning”) produces a fair and reasonable result in this case. I remind myself that I am assessing the Tribunal’s value judgment, made after hearing extensive evidence.

The Commissioners made a number of criticisms of the PESM to some of which I shall return. However, I think it is useful to mention at the outset two points. First, this case is not dealing with input costs which have a direct and immediate link with only taxable or only exempt outputs. It is concerned with costs that are agreed to be residual, i.e. they relate to some extent to both taxable and exempt supplies. Secondly, as already mentioned, VEUK treats the income from each sale of dispensed spectacles as consisting of 35.63% taxable and 64.37% exempt. With regard to contact lenses, the comparable split is 49% to 51%. The sale of spectacles is the substantially larger portion of the business. Notwithstanding these percentages, the PESM attributed 88% of the store related input tax to taxable supplies. Those stark figures must raise a very serious question, at the outset, as to whether the PESM represented a fair and reasonable attribution of the costs in question, even before one begins to examine the detail of the operation of the PESM. In short, the immediate impression from these simple figures is that something has gone wrong somewhere.

The first major criticism of the PESM was that the attribution that it made of floor space within the stores was simply wrong. The most significant deficiency was said to be the treatment of the “retail” or “display” area at the front of the stores as relating wholly to taxable supplies. I have already considered the question of the boundary between the supply of medical care and the supply of frames and lenses. That question also bears on this issue.

In my judgment, it is impossible for VEUK to overcome the factual findings of the Tribunal on this aspect of the case. Those findings were to the effect that these stores as a whole were used for the supply and sale of dispensed spectacles and contact lenses and that it was unrealistic to divide them into retail areas and medical care areas. The short findings are encapsulated in two passages of the decision in paragraphs 43 and 51. First, the Tribunal found that,

The other findings in paragraphs 46, 47 and 50 to 53 all support that view of VEUK’s business activities at the stores. I find it impossible, consistently with the test laid down by Jacobs LJ in Procter & Gamble (supra), to impugn those findings as a whole or the “value judgment” as to the fairness and reasonableness of the PESM in this case. In any event, given the evidence before the Tribunal, I consider that those findings were clearly right.

In those circumstances and in the light of those findings, the economic use of the inputs in question here could not be fairly and reasonably attributed between taxable and exempt supplies by the rigid categorisation of floor areas that the PESM presupposes.

In my judgment, the Tribunal’s findings also accorded with the approach adopted by Warren J in St Helen’s School Norhtwood Ltd. v Revenue & Customs Commrs. [2007] STC 633. In that case a suggested alternative method of apportionment of input tax, based upon temporal use of the school’s sports complex between exempt educational user and taxable use by fee payers under licence of the facilities, was rejected. The learned judge concentrated upon the economic use to which the relevant inputs themselves had been directed, namely the school’s business of making exempt supplies of education services. The licence to the fee-paying users simply put to productive use that which had been acquired for a different main purpose, namely education. In my view, the Tribunal here similarly directed its attention to finding the economic use to which the relevant inputs were directed and found that they could not be attributed by means of a physical floor space allocation.

I also consider that some of the Commissioners’ other criticisms of the PESM go to support the main conclusion of the Tribunal to which I have alluded above. These points are summarised in paragraphs 54 to 59, 65 and 66 of Mr. Thomas’s skeleton argument and need not be set out extensively here. There were five points: first, the “doormat adjustment” made so little difference to recovery of input tax as to be a merely cosmetic attempt to adjust for the mixed use characteristics of the front of the store; secondly, the floor space calculation assumes that 46% of mixed use floor space is used in the same ratio as “taxable” floor space bears to “taxable” plus “exempt” areas, whereas only 54% is allocated specifically to one or other category; thirdly, costs other than rent and service charges are also apportioned according to a floor space method; fourthly, it is not demonstrated that the sample stores are representative of the estate as a whole.

It seems to me that each of these criticisms of the floor space assumptions added weight to the overall conclusion that the Tribunal reached in this case. I shall look at each briefly in turn. I shall return separately to the question of “zoning”.

First, there is the “doormat adjustment”. Here it was shown that if the adjustment was removed from the calculation recovery of input tax in respect of rent and service charges and other store related inputs would increase by less than 1 per cent. This is such a minimal effect on the recovery rate that it appears to give no real force to the factors that the adjustment was supposed to represent.

Secondly, the Commissioners raised objection to the apportionment of mixed-use areas according to the ratio between taxable-use areas and taxable-use areas plus exempt-use areas. Their point was that there was no reason to suppose that these mixed areas, amounting to as much as 46% of the whole floor area, were in truth used for taxable and exempt activities in these proportions. The thinking behind this argument is that the less that can be said to be properly and clearly attributable to either taxable or exempt supplies, the less merit there is in calculating the recovery of other costs by reference to the use of relatively small parts of the store. A similar argument found favour with the Tribunal in Banbury Visionplus v CCE [2005] Decision 19266: see paragraph 125. The present Tribunal made findings in this case which support this argument: see paragraphs 52 and 53.

Thirdly, calculations produced to me indicated that some 73% of store related costs, other than rent and service charges, were not related to floor areas at all. Yet those costs too are attributable in terms of input tax by reference to the same floor areas.

Fourthly, the point was raised that the sample stores were not shown to be representative of VEUK’s stores as a whole. This submission was supported by references to the evidence before the Tribunal which indicated that no witness was able to throw light upon how the stores were selected for the sample and how others were omitted. In addition, there was no objective evidence available to support the selection of the stores in question. The point is made that one aspect of fairness of a PESM is the ability to verify and audit it. In this respect, it was argued, the present PESM failed to be fair and reasonable. In my view, this too is a valid point militating against the fairness and reasonableness of the PESM.

I turn now to the issue of “zoning” in calculating rental costs of the allocated store areas. I have explained above how this concept operated in the context of the PESM. I have also summarised the Tribunal’s findings on the issue. Those are to be found in paragraphs 42 and 43 of the Decision. In my judgment, the Tribunal was right for the reasons it gave. The result of the application of “zoning” into the PESM was that it was legitimate to view the rent as being overwhelmingly attributable to the taxable stream of VEUK’s business in supplying frames and lenses and only marginally used in providing exempt services. This is patently absurd in the light of the nature of VEUK’s business as it was found to be by the Tribunal on the basis of ample evidence available to it. In my view, the Tribunal was entirely correct in finding that rent does not weigh more heavily on any one part of the business more than on any other. Similar uses of zoning were also rejected by other Tribunals in Optika at paragraph 143 and in Banbury at paragraphs 135-138. The reasoning was similar and, in my respectful judgment, equally correct.

In my judgment also the reasoning which compelled the Tribunal’s conclusion in the light of its findings with regard to VEUK’s business is well supported by analogy with the findings of the Tribunal with regard to the very different business of the gaming premises in Aspinall’s Club Ltd. (2002) Decision 17797. That case concerned a floor area attribution of input tax in relation to a casino which provided exempt gaming supplies and taxable catering supplies. Only a very small physical area was in fact devoted to gaming, whereas the rest of the premises was used to provide catering and other common recreational areas, creating an aura of “luxury and opulence” for the club as a whole: see paragraph 1 of the decision. The trader was seeking to promote a “floor based” special method of input tax attribution. In finding that this did not produce a “fair and reasonable” result, the Tribunal said this at paragraph 49:

Before leaving this aspect of the appeal, it is necessary to say something about the Tribunal’s decision in DCM (Optical Holdings) Ltd. v Commrs of Revenue & Customs (2009) Appeal No, EDN/02/182. In that case, it is clear that a final decision remains to be delivered, but the approach in the published decision does favour VEUK’s submission here that a floor area is capable of producing a fair and reasonable result in the case of that optician’s business, at least if “zoning” is removed from the calculation.

It is clear that in that case also the submissions about the true ambit of the medical care exemption were advanced more fully than they had been in this case before this Tribunal – this was described as a “fresh legal issue” set out in the taxpayer’s “Supplementary Heads of Submission” (see paragraph 14 of the Decision). On the facts in DCM the floor plans had also been drawn to specify only an area of 1.8 metres in front of the frame display stands as a “taxable” area, rather than the whole “display area” identified here as “taxable”. Further, there was, as here, a factual dispute between expert witnesses as to the ambit of “dispensing” services.

Mr Cordara submitted that I should be guided by the reasoning of the Tribunal in DCM to find that a floor area method could be applied in a fair and reasonable manner, even if adaptations of detail were required. I should not feel compelled to “throw out” the PESM, if capable of fair operation, just because certain details might be thought to operate unsatisfactorily. Clearly, he also commended to me the Tribunal’s approach in that case to his submissions upon the ambit of the “medical care” exemption.

Mr Cordara is obviously right to submit that the approach of the Tribunal in DCM is supportive of his argument to me. However, it must be noted that the findings of fact in that case differed from those made by the Tribunal here and they were made on the basis of a different floor space approach. Those factual findings were clearly more restrictive of the nature of the “medical supply” element in that case: see the lengthy “Revisals to Findings-in-Fact”, especially in paragraph 17(ii), which were extremely restrictive in this sense. Further, the decision in law was also firmly based upon the factual findings made: see again paragraph 16 of the Decision in that case. I do not see, however, that the DCM decision, even if correct in law, would compel a finding that the Tribunal in this case erred in law in its decision on the facts as it found them to be.

In the result, I find that the Tribunal made no error of law in dismissing VEUK’s appeal against the override notice. In my judgment, this follows from the conclusion that the statutory criteria for the service of that notice were satisfied: see regulation 102A. Once it was found that the PESM did “not fairly and reasonably represent the extent to which goods or services are used by [a taxable person] in making taxable supplies”, it followed that the notice was valid and the appeal had to be dismissed.

I cannot agree with Mr Cordara in his submission that it is necessary, at this stage of the process, to examine the methodology adopted by the Commissioners in raising their assessment in order to find whether the “cure is worse than the disease” as Mr Cordara put it. The sole issue on the appeal against the notice is whether regulation 102A is satisfied. If it is satisfied, that is the end of the matter and the notice is good. It is, as a matter of statutory construction of the regulations, unnecessary for these purposes to decide whether the Commissioners, in calculating their later assessment, have come up with an alternative which does satisfy the overall statutory objective of a fair and reasonable attribution.

The final step in the PESM which was criticised in the Commissioners’ override notice was the use of the preceding calendar year’s figures in calculating each year’s recoverable residual input tax. The Tribunal’s finding on this point can be shortly stated by reference to two sentences in paragraph 55 of the Decision. The Tribunal said this:

The argument on both sides on this point was, with respect, sketchy at the end of a demanding case: see paragraphs 76 and 77 of VEUK’s written submissions and paragraph 77 of the Commissioners’ skeleton argument. In the light of what I have said previously, the point could not in any way be decisive of the competing arguments. It is not necessary to say more than that I can find no ground on which to fault the Tribunal’s finding as a matter of law.

I turn now to the appeal against the assessment.

The parties are agreed that the matter which the Tribunal had to decide was the validity of the assessment “in principle”. The Tribunal understood that this was the issue: see paragraphs 1 and 64 of the Decision. However, it now appears that the parties and the Tribunal itself may have been at odds to some extent as to what a decision “in principle” meant. Mr Thomas argued before me that once it was decided that the override notice was valid, in the sense that the PESM failed to achieve a “fair and reasonable” result for the reasons contended for by the Commissioners, it was inevitable that the recovery of input tax had been excessive and, in the absence of a further “use based” account by the taxpayer under regulation 102B, an assessment necessarily followed. Matters of quantum were to be decided later. Accordingly, the appeal against the assessment was bound to fail on this ground alone. The Tribunal’s understanding of its task may have been the same as that of the Commissioners’. Its finding was fairly short (in paragraph 64) as follows:

It does not appear to me, therefore, that the Tribunal made any decision as to the suitability of the rival method of calculation that underlay the Commissioner’s assessment. It simply gave informal views. However, both parties addressed argument to the Tribunal on the point: see paragraphs 145 to 158 of the VEUK’s written heads of argument below and paragraphs 71 and following of the Commissioners’ skeleton argument. Equally, it is apparent that the Commissioners’ assessing officer was cross-examined about it. As the Commissioners said, they heard “some evidence” about the calculations referred to as a “full cost apportionment”. I too have heard argument about those calculations. In the light of these features of the case I have considered whether it is either open or desirable for me to express views on the underlying calculations. I have concluded that it is neither. It is clear to me that the Tribunal made no findings on the subject against which any appeal would lie; it seems that their view was that, if the parties could not agree upon a method of calculation, the matter would have to be determined at the further hearing for which they gave permission to the parties to apply.

In so far as the present appeal goes to the Tribunal’s brief finding in paragraph 64 of the Decision (quoted above), it must be dismissed for the reasons there given, as amplified by Mr. Thomas in his argument before me.

In the result, both appeals to this court must be dismissed.

In conclusion, I would like to express my thanks to counsel for their extremely helpful arguments.