Infinity Distribution Ltd (In Administration) v HM Revenue & Customs

This is the trial of issues ordered to be tried by Chief Master Winegarten on 16 July 2009.

The Claimant was a company carrying on business in the wholesale supply of mobile telephones. The Defendants (‘the Commissioners’) are responsible for the collection and management of revenue from Value Added Tax (‘VAT’) pursuant to powers under the Value Added Tax 1994, as amended, (‘VATA’).

The Commissioners took various decisions in relation to the Claimant between 18 August 2006 and 22 June 2007.

First, the Commissioners made decisions as to what they considered to be the correct VAT in relation to certain transactions.

Secondly, the Commissioners took steps which were designed to ensure that their view of the correct VAT treatment of those matters was reflected in a process of accounting and enforcement.

The Claimant appealed against each of those decisions. In respect of some of the decisions, the Claimant made applications under then s.84(3) of VATA that the appeal should be entertained notwithstanding that the amount in question had not been paid or deposited with the Commissioners (‘hardship applications’).

One of the appeals, MAN/07/740, was allowed by the VAT & Duties Tribunal on 24 July 2008 as a result of the Commissioners’ failure to comply with an ‘unless’ order previously made by the Tribunal. As a result of that appeal being allowed, the Commissioners were bound to credit the Claimant for input tax in the sum of £12,957,628.25 (I shall refer to this sum as £12.95m for convenience) in respect of VAT periods 02/06 to 05/06 (‘the MAN/07/740 Input Tax Credit’). The other appeals (‘the Unresolved Appeals’) remain pending before what is now the First Tier Tribunal (Tax Chamber).

In order to account for the MAN/07/740 Input Tax Credit, the Commissioners revised the amounts which they considered to be due to the Claimant in respect of VAT periods 02/06 to 05/06, while maintaining their other decisions which were under appeal by the Claimant. On that basis the Commissioners calculated their net liability to the Claimant in respect of VAT periods 02/06 to 05/06 to be £5,807,396.71.

The Commissioners also set off against that liability other sums which it considered to be due from the Claimant. These included sums due as a result of assessment decisions appealed by the Claimant. Having set off these sums, the Commissioners calculated their net liability to the Claimant as £2,401,304.83, which they paid to the Claimant on or about 10 November 2008.

Chief Master Weingarten ordered the following issues to be tried:

The Claimant contends that the answers to questions (1) and (2) are, no. The Commissioners contend that the answer to each question is, yes.

For reasons which will become apparent later in this judgment, the parties agreed these issues could be expressed differently.

The relevant statutory regime is that which existed as at 8 December 2008.

The UK legislation relating to Value Added Tax is contained in VATA (as amended) and the subordinate legislation made under the Act.

In summary, VAT is charged on taxable supplies of goods and services in the United Kingdom made by a taxable person in the course or furtherance of any business (s.4).

A taxable person is required to make VAT returns for accounting periods which account for VAT on supplies made by the taxable person (‘output tax’) and claim credit for VAT on supplies made to the taxable person (‘input tax’) (ss.24 and 25). If the amount of input tax exceeds the amount of output tax the Commissioners are required to pay the excess to the taxable person as a VAT credit (s.25(3)).

Obligations in relation to the accounting, payment and records which must be kept in relation to VAT are set out in Part V of the Value Added Tax Regulations 1995: S.I. 1995/2518 (‘the 1995 Regulations’). A taxable person must make a return in accordance with regulation 25. Returns are normally made every three months but the Commissioners may allow or direct a taxable person to make monthly returns (regulation 25(1)(a)).

Regulations 34 and 35 deal with corrections of errors. Regulation 34 permits correction by the taxable personto his account subject to a financial limit. Regulation 35 provides that:

Where a taxable person has made an error -

(a)

in accounting for VAT, or

(b)

in any return made by him,

then, unless he corrects that error in accordance with regulation 34, he shall correct it in such manner and within such time as the Commissioners may require.

Regulation 39 deals with the way in which the return must be completed by the person making the return; and regulation 39(4) provides,

Where any correction has been made and a return calculated in accordance with these Regulations then any such return shall be regarded as correcting any earlier returns to which regulations 34 and 35 apply.

Regulation 40(2)requires the person to pay the amount of VAT payable.

The Commissioners have the power under s. 63 of VATA to impose a penalty for a mis-declaration.

Section 73 deals with failures to make returns.

(1)

Where a person has failed to make any returns required under this Act ... or where it appears to the Commissioners that 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.

Section 73(9) of the Act provides (so far as is relevant),

Where an amount has been assessed and notified to any person under subsection (1), (2), (3)… 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 and may be recovered accordingly, unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced.

Section 74 confers the Commissioners with the power to charge interest on VAT recovered or recoverable on assessment.

The Commissioners have powers under s.76 to raise assessments in relation to amounts due by way of penalty, interest and surcharge.

(1)

Where any person is liable –

(a)

to a surcharge under s.59 ... , or

(b)

to a penalty ...

(c)

for interest under s.74 ...

...

The Commissioners may ... assess the amount due by way of penalty, interest, or surcharge as the case may be, and notify him accordingly ...

...

(9)

If an amount is assessed and notified to any person under this section, then unless, or except to the extent that, the assessment is withdrawn or reduced, that amount shall be recoverable as if it were VAT due from him.

Section 79 provides for the payment of a supplement (‘a repayment supplement’) if a VAT credit is not paid within a certain time. The supplement has the effect of increasing the amount of the VAT credit which is due from the Commissioners.

Section 81(3) provides for a right of set-off.

Subject to subsection (1) above, in any case where

(a)

an amount is due from the Commissioners to any person under any provision of this Act, and

(b)

that person is liable to pay a sum by way of VAT, penalty, interest or surcharge,

the amount referred to in paragraph (a) shall be set against the sum referred to in paragraph (b) above and, accordingly, the obligations of the Commissioners and the person concerned shall be discharged.

Section 83 deals with appeals and provides (so far as is relevant) that there is a right of appeal to the Tribunal against a decision in relation to:

...

(n)

any liability to a penalty or surcharge under sections 59 to 69B

...

(p)

an assessment–

(i)

under section 73(1) ... in respect of a period for which the appellant has made a return under this Act;

...

or the amount of such an assessment

(q)

the amount of any penalty or interest specified in an assessment under

section 76

Section 84 of the Act provides

...

(2)

An appeal shall not be entertained unless the appellant has made all the returns which he was required to make ... and has paid the amounts shown in those returns as payable by him.

(3)

Where an appeal is against a decision with respect to any of the matters mentioned in section 83(1) ... , (n), (p)… it shall not be entertained unless -

(a)

the amount which the Commissioners have determined to be payable as VAT has been paid or deposited with them, or

(b)

on being satisfied that the appellant would otherwise suffer hardship the Commissioners agree or the tribunal decides that it should be entertained notwithstanding that that amount has not been so paid or deposited.

Section 84(8) confers powers on the Tribunal to order sums paid or deposited to be repaid with interest if it finds that the amount was not due.

It was apparent at trial that the issues between the parties went rather beyond the issues which were ordered to the tried; and that there were large parts of the oral argument which had not been prefigured in the Skeleton arguments. For this reason I asked the parties to agree in written form what the real issues were, which they helpfully did.

The parties are agreed that the first question is directed to considering the effect of the VAT & Duties Tribunal decision allowing the Claimant’s appeal, and the consequences which flowed from the sum of £12.95m becoming due to the Claimant.

In summary, the Claimant argues that the sum became due from the Commissioners, subject to any set-off that the Commissioners were entitled to make. The Commissioners submit that they were required to credit the Claimant with input tax in the sum of £12.95m in respect of the periods 02/06 to 05/06.

In her argument on the Claimant’s behalf, Mrs Hamilton submitted that the £12.95m was a VAT credit which was adjudged payable, and crystallised as a debt due to the Claimant. Subject to any right of set-off that the Commissioners were entitled to make, they were bound to pay this sum and were not entitled to adjust the various returns which had been made by the Claimant. Regulations 34 and 35 make clear that it is only the taxable person who can correct the return. The Commissioners are not entitled to correct returns. Their reserved power is confined to correcting errors by assessment. Thus, when the Commissioners made an adjustment in relation to the output tax it was an assessment under s.73(1) of VATA, which carried with it an obligation to notify.

In his argument on behalf of the Commissioners, Mr Woolfe submitted the process of adjusting the Claimant’s VAT returns for periods 02/06 to 05/06 was an appropriate exercise of the power to require a taxable person to correct a return under regulation 35; and should be taken for the purposes of the present proceedings as properly establishing the net VAT payable from the Commissioners to the Claimant in respect of each of the relevant periods.

By letters of 28 June 2007 and 9 July 2007, the Commissioners adjusted the Claimant’s returns for periods 02/06 to 05/06 pursuant to Regulation 35. By their letters of 28 June and 9 July 2007 in respect of periods 02/06 to 04/06, the Commissioners indicated that they considered that net balances were payable from the Claimant to the Commissioners and issued assessments under s.73. Following the allowing of appeal, the Commissioners adjusted the Claimant’s’ accounts and returns for periods 02/06 to 05/06 under Regulation 35, as set out in a letter from the Commissioners on 8 December 2008, to take account of the MAN/07/740 Input Tax Credit. That adjustment showed net balances in each case being due from the Commissioners to the Claimant, such that no assessment was appropriate. The balances payable were in fact paid, following a further process of set-off.

I have concluded that the Commissioners’ argument and analysis on this issue is correct. The effect of the Tribunal’s decision allowing the appeal was not that the Tribunal gave judgment for a sum to be paid within a certain period, as a civil court might do. Its decision had the effect of allowing the appeal against the Commissioners’ decision that credit for input tax was to be denied, so that amounts which the Commissioners had excluded from account should be brought into account. In effect, Commissioners were required to credit the Claimant with input tax of £12.95m, and they did so.

In the light of my conclusion on Issue 1, it is common ground that I must consider 2 further questions, before coming to what was the main issue between the parties.

On the hypothesis that the Commissioners are right on Issue 1, a further question arises as to whether the effect of letters dated 28 June and 9 July 2007 was to amend the Claimant’s VAT returns for the period 02/06 to 05/06, or only to raise assessments for the periods 02/06 to 04/06?

It is one of the ordinary incidents of VAT that sums may become due both from and to a taxable person. These amounts generally become due at the time of supply, when the tax becomes chargeable. These entitlements and liabilities will occur at various points in time, depending upon the rules relating to the time of supply. There is in effect a running account between the taxable person and the Commissioners, with the former being required to keep an account, distinguishing between VAT payable and VAT allowable in particular VAT periods: see regulation 32(1). The settlement of that account is made by the submission of VAT returns under s.25 of VATA and regulations 25 and 40. Where the return shows a net balance as being due from the taxable person payment must be made not later than the last day on which the return is due: regulation 40(2). Where the return shows that a net balance is due to the taxable person, the Commissioners must pay the amount of the excess to him: see s.25(3).

Once a net balance in respect of a period is established by the ordinary process of accounting, the obligation to pay the net balance arises by reason of regulation 40(2) (if the net balance is due from the trader), or under s.25(3) (if the net balance is due from the Commissioners).

Where no return is made, the Commissioners must issue an assessment under s.73(1) VATA so as to establish the VAT payable in respect of that period. Such an assessment is for the net amount of VAT payable for the relevant period. In a case where the return is submitted, but contains incorrect figures, the Commissioners can invoke their powers under s.73(1) and regulation 35. The legislation does not provide for any particular form in which notification should be made. A letter is plainly sufficient.

Regulation 35 deals with the correction of the accounts kept under regulation 32, and the returns submitted under regulations 25 and 40; and s.73(1) provides for the assessment of amounts of VAT which are due. In either case the Commissioners must establish the net balance of VAT properly payable for the accounting period.

Where a net balance is or remains payable from the trader in respect of a period, the Commissioners may assess that amount as being payable under s.73(1). Where a net balance is due from the Commissioners s.73(1) does not apply. The account and returns are adjusted and the balance paid by the Commissioners.

Where a net balance of VAT is due from the trader as shown on a return, it is recoverable as a debt due to the Crown. The entitlement to recover the debt does not depend on issuing an assessment. However, where an assessment has been issued, it is not a defence for a trader, in civil recovery proceedings, to argue that the VAT covered by the assessment is not due, since s.73(9) provides that the sum is deemed to be due, subject to the proviso.

The assessment provisions relate solely to the payment of tax by the trader to the Commissioners, not to the process of accounting for tax. Thus where, for example, the Commissioners decide that they are liable to make a repayment to a trader in respect of a particular VAT period, albeit a smaller repayment than that claimed by the trader, there is no reason to issue an assessment. In effect there is an enforcement mechanism which may be operated when, for some reason, the ordinary accounting procedure has not ensured the payment of net VAT which is due from the trader, or where sums are due by way of interest, penalty or surcharge for which the trader would not ordinarily account.

It follows that the Commissioners were, in my view, entitled to amend and adjust the Claimant’s VAT returns for the periods 02/06-05/06.

In the light of the answers to issues 1 and 2, a further question arises as to whether the Commissioners were right to calculate their net liability to the Claimant in respect of the periods 02/06 to 05/06 as set out in their letter of 8 December 2008.

I did not understand Mrs Hamilton to argue that the Commissioners were wrong to calculate the net liability on this hypothesis. In my view that concession was rightly made.

The question raised by this issue is whether the Commissioners were further entitled to set off against their net liability to the Claimant in respect of periods 02/06 to 05/06, the amounts of the assessments to VAT and penalties in respect of other VAT periods? In particular, were they entitled to set off those amounts in light of the fact that the Claimant had commenced appeals to the VAT and Duties Tribunal against those assessments?

Mrs Hamilton submitted that the Commissioners had no right to set off the amounts of the assessments under s.73 against the input tax due. The right to set-off under s.81(3) only applies to sums which a person ‘is liable to pay’. By s.73(9) assessment of VAT is only deemed to be due ‘subject to the provisions [of VATA] relating to appeals.’ The juxtaposition of that qualification to the deeming provision shows that it must relate to, and limit, the deeming provision. If Parliament had intended (notwithstanding the provisions relating to appeals) that an assessment should be deemed to be an amount of VAT due and that the appeal process only prevented it being recovered, the sub-section would have read ‘… shall be deemed to be an amount of VAT due from him and, subject to the provisions of this Act as to appeals, shall be recovered accordingly.’ Even on that construction, the lodging of an appeal should suspend the ability of the Commissioners to recover that amount of the assessment while an appeal is pending. In interpreting a deeming provision, the hypothetical should only be carried as far as necessary to achieve the legislative purpose, see Bennion on Statutory Interpretation 5th Ed. section 304.

In addition she submitted that the separation between the deeming words and the words ‘unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced’; which qualify the extent to which an amount deemed to be due can be recovered, is a clear indication that the deeming provision is not confined to the extent to which a debt can be recovered. If the true construction of s.73(9) were that an assessment was still deemed to be an amount due to the Crown (notwithstanding an appeal) sub-sections 84(3) and (8) which ensure that the appeal procedure is not used to delay payment of an amount which the Commissioners, ‘have determined to be payable as VAT’ would be redundant.

By contrast, there is no requirement under s.84(3) to deposit the amount of any penalty which has been assessed under s.76 before there can be an appeal against that penalty because a penalty is not ‘deemed to be VAT due’ and must be recovered as a debt due to the Crown under paragraph 5(1) of Schedule, 11. There is, therefore, no danger of the appeal process being used to delay payment of an assessment which would otherwise be payable immediately.

Furthermore, if the true construction of s.73(9) were that an assessment was still deemed to be an amount due to the Crown, notwithstanding an appeal, s.83(4) would refer to ‘the amount of VAT which is due’ rather than ‘the amount which the Commissioners have determined to be payable as VAT’.

For these reasons, on the ordinary and natural meaning of the words of ss.73(9) and 84(3), once an appeal has been lodged with the Tribunal, the amount of any assessment which is the subject of that appeal cannot be ‘deemed to be an amount of VAT due’ and so there is no right of set-off under s.81(3) during the pendency of an appeal, since there is no undisputed amount which the taxpayer is ‘liable to pay’.

In developing her submissions Mrs Hamilton recognised that there were a number of cases which were contrary to the construction which she urged. She submitted that these cases, when properly analysed, did not amount to an insurmountable impediment to her argument.

Mr Woolfe submitted that the effect of s.84(3) was that the taxpayer’s failure to pay an amount assessed operated as a jurisdictional bar to the Tribunal hearing the appeal unless either the Commissioners or the Tribunal agreed to the hearing of the appeal notwithstanding the sum had not been paid, if the hardship criterion were satisfied.

A hardship application does not have the effect that VAT which the Commissioners have determined to be payable is not so payable. Nor is an application to the Tribunal to make a determination under s.84(3)(b) sufficient to relieve the taxable person of liability to pay the amount that the Commissioners have determined to be payable.

In my judgment the effect of s.84(3) is clear. It is a jurisdictional provision. If an appeal is to be entertained by the Tribunal against the Commissioners’ determination of amounts payable then, either (a) the amount issue must be paid or deposited, or (b) in a case of where the taxpayer would suffer hardship if required to pay or deposit the sum in issue, either the Commissioners agree or the Tribunal decide that the appeal should proceed notwithstanding the amount in issue has not been paid or deposited. The words ‘shall not be entertained’ are emphatic.

Section 73(9) makes clear that the assessment stands as the amount due, whether or not it is in fact due (thus the word ‘deemed’) and continues to stand as the assessment unless and until it is subsequently set aside on appeal. I accept that the sense might have been better expressed; but the statutory intent is clear from both the following words, ‘unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced’, and from the proper construction of s.84(3).

It seems to me that this is the ordinary meaning of the applicable provisions; but the matter is put beyond question by at least one of the cases which Mrs Hamilton sought to distinguish or, where unavoidable, submitted were wrongly decided. It would be an unusual step for a Court of First Instance to accept a submission that prior decisions of the High Court and the Court of Appeal were decided per incuriam; but, in the event, I am quite clear that the substance of the criticisms was not made out.

In Customs and Excise Commissioners v. Holvey [1978] 1QB 187 the Commissioners argued that where there was a claim to recover VAT as a debt it was no defence for the taxpayer to contend that no VAT was owed. Peter Pain J considered the effect of s.31(6) of the Value Added Tax Act 1972, which was in identical terms to s.73(9) of VATA, and its interaction with the provisions relating to appeals.

It seems to me that, on the wording of the 1972 Act, there is really no answer that can be put forward as a matter of construction to rebut the commissioners' case. The Act quite clearly provides that, subject to an appeal to the value added tax tribunal, the amount assessed shall be deemed to be the amount due.

This passage is support at least for the proposition that if there is no appeal, then it is not a defence to a claim for VAT to assert that the sums are not due: the assessment stands.

In HM Commissioners of Customs & Excise v. Cozens (1999) BPIR 252 the Court of Appeal allowed an appeal against an order of the High Court setting aside a statutory demand for unpaid VAT shown on a notice of assessment. A District Judge had refused to set aside the statutory demand on the grounds that the taxpayer had subsequently lodged an appeal to the VAT Tribunal. The Court of Appeal held that the District Judge’s approach was correct

The amount stated in the letter of assessment ... was deemed to be the amount of VAT due from Mr Cozens by virtue of the provisions of section 73(9). That sum is recoverable as a debt due to the Crown. The sum mentioned in the assessment remains a debt due, until that assessment is successfully appealed to the Tribunal (see Customs and Excise v Olway [sic] [1978]1 All ER 1249).

Mrs Hamilton submitted that there had been no reference to a ‘successful’ appeal in Holvey, merely to an appeal; and that the Court of Appeal were wrong to treat Holvey as authority for the proposition that VAT was deemed to be due in accordance with s.73(9) unless and until there had been a successful appeal. She pointed to the fact that there does not appear to have been a hardship application under s.84(3); and that, in the absence of such an application, although the amount of the assessment was not deemed to be an amount due under s.73(9), there was still an obligation under s.84(3) to pay the VAT which the Commissioners had determined to be payable as VAT.

In Re D & D Marketing (UK) Limited [2002] EWHC 660 (Ch) the Court was concerned with an application by the Commissioners for a winding-up petition based on assessments for VAT which had been appealed. Evans-Lombe J at p.10, having considered the terms of s.73(9) and 84(3) and Holvey, held (p.10),

For these reasons, it seems to me that at all material times the amounts of the assessments made by the Commissioners on 28 November and 6 December are deemed to have remained due notwithstanding that an appeal to the VAT Tribunal has been initiated by the applicants.

Mrs Hamilton submitted that the Judge had failed to take account of the terms of s.84(3) which refers to ‘the amount the Commissioners have determined to be payable as VAT’ rather than an ‘amount of VAT due.’ She also invited attention to the fact that there did not appear to have been a hardship application under s.84(3) and therefore the Judge and was not required to consider the effect of such an application and did not do so.

In Re Anglo-German Breweries Limited [2002] EWHC 2458 (Ch) Lawrence Collins J held that a winding-up order could be made in respect of assessments for VAT and excise duty which were the subject of appeals to the VAT Tribunal in which hardship applications under s.84(3) had been made.

[92] I am satisfied that the Commissioners are right on this point. It is essentially a question of construction of the expression ... ‘subject to the provisions of this Act as to appeals’ in section 73(9) of the Value Added Tax Act 1994.

[93] The debt becomes due on assessment, and it is plain that the mere lodging of an appeal cannot suspend the obligation since the Tribunal can be seised with a hardship application after the appeal has been lodged. There is nothing in the relevant sections that expressly suspends the obligation or its enforcement. In my judgment the natural meaning of the provisions in ... section 73(9) of the Value Added Tax Act 1994 is that the debt is due and may be recovered unless and until the Tribunal decides that it is not due in whole or in part. This fits well with the other exception ... , namely that the debt is due and may be recovered ‘unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced.’ The section ... therefore deal with the eventualities of withdrawal or reduction by the Commissioners on informal or formal review, and the determination by the Tribunal that the whole or part of the amount assessed is not due. The continuing enforceability of the debt is not a denial of access of the right to appeal. I also accept the submission of the Commissioners that if the appeals had the result that the Commissioners were not creditors, they would be in a worse position than an ordinary litigant, who could obtain provisional remedies pending resolution of the issues. (I have deliberately excluded references to provisions in the Finance Act which do not apply in the present case).

This passage, as Mrs Hamilton accepted, provided a formidable obstacle to the construction of s.73(9) which she advanced. However, she submitted there were a number of points which could properly be made about the case. First, that the taxpayer had not argued that if there were appeal an assessment was not deemed to be VAT due, the taxpayer had argued that the effect of s.73(9) was that the debt was suspended when there was an appeal. The Court was therefore not required to consider the question whether, by virtue of the qualification of the deeming provision in s.73(9), an assessment which had been appealed could not be ‘deemed to be an amount of VAT due’. Secondly, Lawrence Collins J had relied on Re D & D Marketing in support of his reasoning, and for the reasons already noted this was a case which should not have been followed. Thirdly, in construing s.73(9) in the first sentence of [93] the Judge failed to take into account the wording of s.84(3) which does not refer to VAT which is ‘due’, but ‘to the amount which the Commissioners have determined to be payable as VAT.’ Fourthly, in concluding that the interpretation he adopted fitted well with the other exception in both sections,namely that the debt is due and may be recovered ‘unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced’, the Judge should have borne in mind that the words apply equally if the assessment is not a debt due while there is an outstanding appeal.

The views expressed in all these cases are at the very least consistent with each other; and although the observations of Mummery LJ and Evans-Lombe J were not central to the decision in those cases, what was said in Re Anglo-German Breweries Limited by Lawrence Collins J at [93] was plainly an important and necessary part of his conclusion on the matter in issue. Even if I had doubts about the correctness of the decision Re Anglo-German Breweries Limited, I would have been hesitant about coming to a different view. In this field, it is undesirable that Judges at First Instance adopt different views as to the meaning of statutory wording. However, I do not differ from the construction of Lawrence Collins J in Re Anglo-German Breweries Limited. On the contrary, expressed clearly and emphatically, they coincide with my own.

For these reasons I would answer the question posed under issue 4, yes.

It follows that I find for the Commissioners on all points and the claim fails.