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Amount is the issue

The director of the taxpayer company pleaded guilty to various VAT offences. Customs alleged that he had not kept proper records of purchases, and failed to account for the VAT that became due. Assessments were raised and the company notified. The company appealed to the VAT tribunal stating that the assessments were not made 'to best of their judgment' (section 73(1), VAT Act 1994). The tribunal agreed, and set the assessments aside.

Customs appealed to the High Court, where the judge upheld the appeal, saying that all the assessments had been made to best judgment. The matter was remitted to the same tribunal for determination of the amount. The issue of costs was deferred until the tribunal's final decision was known.

The taxpayer appealed.

In the Court of Appeal it was said that when faced with best judgment in future cases, a tribunal should:

The Court of Appeal said that a best judgment challenge might be dealt with as a preliminary issue in some cases, but the better way to proceed was to proceed on the issue of amount, and deal with best judgment at the end of the hearing.

The instant case was not appropriate for the assessments to have been set aside. Serious fraud had occurred to which the taxpayer had pleaded guilty. It was for him to show what was the correct amount, and Customs were justified to be sceptical of information provided by a fraudster. The tribunal should not have concentrated on the best judgment issue, rather it should have tried to determine the correct tax due. The judge in the High Court was right to hold the assessments had been properly made, and the appeal in this respect was dismissed.

However, the judge had been wrong to delegate the question of court costs to the tribunal, and the appeal on that issue was allowed.

(Commissioners of Customs and Excise v Pegasus Birds Ltd, Court of Appeal, 27 July 2004.)

Who bears the discount?

The taxpayer, a tour operator, sold package holidays through travel agents. The agents were allowed to sell the taxpayer's holiday at less than the brochure price, provided that the discount was made up by the agent. The taxpayer would send a customer invoice to the agent, showing the undiscounted holiday price, which the agent would then adjust for the customer. In the past, the taxpayer paid VAT on the basis that its taxable margin was the difference between the full price received by it for the holiday and the cost to it of providing the services of direct benefit to the customer. These costs did not include the agent's commission because his service was not of direct benefit to the customer, within the terms of Article 26(2) of the Sixth Directive (as implemented in the United Kingdom by Article 7 of the VAT (Tour Operators) Order 1987). However, the taxpayer claimed a VAT refund on the basis that the margin between receipts and costs should only be based on the amount paid by the customer to the agent.

The VAT tribunal and High Court both found in favour of the taxpayer, so Customs appealed to the Court of Appeal. The Court of Appeal referred to the European Court of Justice for a preliminary ruling. The European Court ruled that Article 26(2) had to be interpreted as meaning that the total amount to be paid by the traveller included the additional amount that a travel agent had to pay to the tour operator.

The issue was whether, as a matter of English law, the domestic material had not incorporated provisions which could be given the same meaning and effect as the Sixth Directive.

It was held in the Court of Appeal that the purpose of the Sixth Directive was to ensure that provision of the same services should be taxed similarly throughout the European Community. Thus the domestic contractual analysis did not matter. A payment for services could be viewed from the points of view of the provider and the receiver, and the European Court of Justice had decided that the provider was more important. The European Court having so ruled meant that domestic law had to be interpreted in line with that ruling if it could be, which in this instance it could.

Customs' appeal was allowed.

(Commissioners of Customs and Excise v First Choice Holidays plc, Court of Appeal, 29 July 2004.)

No bias

Section 73(1), VAT Act 1994 allows Customs to make assessments to the best of their judgment if they believe a taxpayer's returns to be incomplete or incorrect. In respect of the taxpayer's restaurant, they made assessments for the quarters from August 1997 to February 2000 based on Customs' officers' observations of numbers of diners at the restaurant. As a result of those observations, Customs concluded that the taxpayer must have substantially underdeclared her takings for the period.

The taxpayer appealed to the tribunal on the grounds that the assessments were 'totally arbitrary and disproportionate'. She claimed that each customer did not necessarily order and pay for a meal, as dishes tended to be shared. Furthermore, the table plan was inaccurate. The tribunal allowed the appeal to a limited extent. The taxpayer appealed, claiming that the tribunal chairman had proposed a visit to the restaurant, but did not do so. This led her to believe she had been 'victim to some sort of bias'.

In the High Court, Mr Justice Hart said that the tribunal had not shown any bias against the taxpayer. Whether or not to visit a site was up to the tribunal in the light of the evidence of the case. The tribunal's conclusion was reasonable given the evidence before it, and its approach in law was in order.

The taxpayer's appeal was dismissed.

(Hossain v Commissioners of Customs and Excise, Chancery Division, 30 July 2004.)

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