HM Revenue & Customs v Dunwood Travel Ltd [2008] EWCA Civ 174

[2008] EWCA Civ 174Case No A3/2007/0587
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
MR JUSTICE MANN
CH/2006/APP0491
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 07/03/2008
Before
LORD JUSTICE LAWSLORD JUSTICE RIXSIR JOHN CHADWICK
Between
THE COMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMSRespondents/DUNWOOD TRAVEL LIMITEDAppellant/
(Transcript of the Handed Down Judgment ofWordWave International LimitedA Merrill Communications Company190 Fleet Street, London EC4A 2AGTel No: 020 7404 1400, Fax No: 020 7831 8838Official Shorthand Writers to the Court)
Mr James Puzey (instructed by The Solicitor’s Office for HM Customs & Excise) for the Respondents/ClaimantsMrs N Preston (instructed by Peter Anderson, Wolters Kluwer (UKJ(Ltd)) for Appellant/DefendantHearing Hearing dates : 8th February 2008
JudgmentLord Justice Rix :
[1]This appeal raises a point of construction on the three year limitation provision contained in section 77(1)(a) of the VAT Act 1994 (“VATA”) as applied to assessments arising out of the Tour Operators Margin Scheme (“TOMS”) found in the TOMS notice 709/5, under section 12, Tertiary Law TL5.[2]The appellant is Dunwood Travel Limited (“Dunwood”) who faced an assessment notice issued on 24 June 2004 which, after amendment in September 2004, assessed Dunwood in the amount of £17,260.85 in respect of the quarter ending 30 June 2001. It is common ground that in as much as that assessment relates only to that quarter or “prescribed accounting period” known as 6/01, the assessment is within time. However, Dunwood submits that, when section 12 is properly understood, most of that assessment is really to be regarded as relating to the four previous quarters, namely the four prescribed accounting periods of Dunwood’s previous financial year from 1 April 2000 to 31 March 2001, in other words the periods known as 6/00, 9/00, 12/00 and 3/01, and as such is out of time.[3]The VAT Tribunal (Chairman, Mr David Porter), whose decision was given on 19 May 2006, agreed with Dunwood and held that the assessment in question must fail as being out of time. That decision was appealed by HM Revenue & Customs (“HMRC”) and by his judgment dated 26 February 2007 Mr Justice Mann allowed that appeal and set aside the Tribunal’s decision, with the effect that the assessment for the period 6/01 was restored. Dunwood now appeals from Mann J with the leave of this court (Gage and Lawrence Collins LJJ).[4]Dunwood is a tour operator and therefore falls within the TOMS regime, whereby tour operators account for VAT only on the margin between the amounts received from their customers and the amounts paid by them to their suppliers. The details of TOMS do not matter, but the upshot of the scheme is that in any financial year the tour operator pays VAT on a provisional basis in accordance with a fixed percentage derived from his previous year’s trading applied to his ongoing sales, and subsequently in the first quarter of his next financial year adjusts the VAT payable by reference to a complicated formula (containing 30 steps) which then provides the percentage to be applied to the four quarters of his current financial year.[5]The critical provisions for these purposes are those of TL5, which reads as follows: “1. Subject to Section TL3 of section 12 of this Notice, the value of designated travel services, in-house supplies and agency supplies shall be determined by applying the formula set out in Section 8 of this Notice (hereinafter referred to as “the full calculation”), unless during the relevant period all such supplies are liable to VAT at the same rate, in which case the value shall be determined by applying the formula set out in Section 10 of this Notice (hereinafter referred to as “the simplified calculation”). 2. The provisional value of designated travel services, in-house supplies and agency supplies shall be determined in accordance with the formula set out in: –(a) section 9 of this Notice, where the full calculation applies; or(b) section 11 of this Notice, where the simplified calculation applies. 3. A tour operator shall be required to account for VAT on the provisional value of his supplies of designated travel services, in-house supplies and agency supplies on the VAT return for the prescribed accounting period in which the supplies are made. 4. The difference between the amount of VAT due on the value of designated travel services, in-house supplies and agency supplies supplied during a tour operator’s financial year, and the amount of VAT paid on the provisional value of those supplies, shall be adjusted by the tour operator on the VAT return for the first prescribed period ending after the end of the financial year during which the supplies were made.” (a) section 9 of this Notice, where the full calculation applies; or (b) section 11 of this Notice, where the simplified calculation applies.[6]The issue on this appeal effectively depends on whether the relevant “prescribed accounting period” is that referred to in TL5’s paragraph 3, in which case the four relevant quarters are outside the three year limitation period, or that referred to in TL5’s paragraph 4, in which case that fifth quarter is just within that three year period.

The statutory provisions

[7]The legal basis of TOMS is to be found in VATA section 53, which provides:
“53(1). The Treasury may by order modify the application of this Act in relation to supplies of goods or services by tour operators or in relation to such of those supplies as may be determined by or under the order.”
[8]The relevant order anticipated in section 53(1) is the Value Added Tax (Tour Operators) Order 1987 (SI 1987/1806), paragraph 7 of which provides that – “the value of a designated service shall be determined by reference to the difference between sums paid or payable to and sums paid or payable by the tour operator in respect of that service, calculated in such manner as the Commissioners of Customs and Excise shall specify”.[9]The Commissioners, now part of HMRC, have so specified in the TOMS notice referred to in the opening paragraph of this judgment. Section 12 of that notice at TL5, set out above, has the force of law.[10]Other relevant provisions of VATA are as follows:
“25(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 States 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. 73 (1). Where a person has failed to make any returns required under this Act (or under a 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. 77(1). Subject to the following provisions of this section, an assessment under section 73, 75 or 76, shall not be made – (a) more than 3 years after the end of the prescribed accounting period or importation or acquisition concerned…” (a) in respect of supplies made by him, and (b) in respect of the acquisition by him from other member States 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. 73 (1). Where a person has failed to make any returns required under this Act (or under a 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. 77(1). Subject to the following provisions of this section, an assessment under section 73, 75 or 76, shall not be made – (a) more than 3 years after the end of the prescribed accounting period or importation or acquisition concerned…”
[11]That is the limitation provision with which we are concerned in this appeal.

The assessments

[12]In early 2004 an investigation was carried into Dunwood’s VAT returns over the previous few years. Two errors came to light – due to Dunwood’s mistake, for there was no allegation of dishonesty – namely,(1) the margin on coach travel costs had been treated as carrying a zero rate of VAT rather than the standard rate; and(2) no annual adjustment pursuant to TLR 5’s para 4 had been carried out. On 24 June 2004 a notice of assessment was issued in respect of the periods from 6/01 to 3/03. The assessment was in the total sum, including interest, of £73,078.13. An amended assessment dated 22 September 2004 followed in the reduced sum of £58,716.27. Of that total, £17,260.85 related to the period 6/01. However, that assessment for that period covered the total under-declaration of VAT for the periods covered by Dunwood’s previous financial year, namely 6/00 through 3/01. For the periods after 6/01, the assessment worked out each quarterly period separately. However, for the period 6/01 the total under-payment of VAT over the previous four quarters was ascribed all in all to period 6/01. Dunwood objected, and submits on this appeal, as it did to the VAT tribunal and to Mann J below, that this was an illegitimate failure to take account of the three year limitation imposed by section 77 of VATA. Whereas the period 6/01 was within the limitation, Dunwood submitted that the previous four periods lay outside it.[13]The figures work out as follows. The percentage provisional margin used by Dunwood for calculating its returns for the periods 6/00 to 3/01 was 17.44%. On Dunwood’s erroneous calculations the VAT paid over those four quarters totalled £27,039.80. As recalculated for the purpose of the 6/01 quarter, pursuant to TL5’s para 4, the VAT due in respect of the value of designated travel services over the previous four quarters totalled not £27,039.80 but £44,300.65. The difference of £17,260.85 was the relevant amount of the assessment for present purposes.

The VAT tribunal

[14]The VAT tribunal found in Dunwood’s favour. Its decision dated 19 May 2006 reasoned in critical part as follows:
“14. Section 77(1)(a) effectively prevents the Commissioners from circumnavigating the 3 year period, except in the case of fraud or where the VATA specifically provides for it. This is the primary legislation. In applying the annual adjustment the Commissioners must, of necessity, carry out the calculation in the following quarter and apply the result to the prescribed accounting period immediately preceding that calculation. The legislature has decided that the appellant should be protected from any VAT liability which is more than 3 years old. The ‘prescribed accounting period’ under section 77(1)(a) for the purposes of this appeal is the period 4/00 to 3/01. That period is outside the 3 year cap. The annual adjustment is no more than a method of re-calculating the ‘prescribed accounting period’. It may be calculated in 6/01 but the Commissioners cannot assess other than for the periods 04/00 to 3/01 and in attempting to assess the period in 06/01 they will ‘widen the purpose of the Act’ (see Bennion above) which they cannot do under the interpretation rule of primary intention. The decision of Customs & Excise Commissioners–v- Laura Ashley Ltd is to be applied to this appeal and results in our allowing the appeal.”
[15]The reference there to Bennion was to Bennion on Statutory Interpretation, 4th ed, at section 59, where the following is found:
“Underlying the concept of delegated legislation is the basic principle that the legislature delegates because it cannot exert its will in every detail. All it can do is lay down the outline. This means that the intention of the legislature, as indicated in the outline (that is the enabling Act), must be the prime guide to the meaning of the delegated legislation and the extent of the power to make it. In the Code this is referred to as the rule of primary intention…”
[16]The reference in the tribunal’s decision to Customs & Excise Commissioners v. Laura Ashley Ltd [2003] EWHC 2832 (Ch), [2004] STC 635was to a case where David Richards J held that an assessment in relation to a claim for overpaid output tax related to the periods in which the output tax had originally been accounted for, rather than the period in which the repayment had been claimed.

The judgment of Mann J

[17]On HMRC’s appeal from the tribunal, Mann J set aside the tribunal’s decision and restored HMRC’s assessment for the period of 6/01. His critical reasoning was as follows:
“28. For that exercise to be barred by section 77 it must be the case that the assessment is being raised more than 3 years after the prescribed accounting period concerned. It is therefore necessary to identify the “prescribed accounting period…concerned”
. Is it the period 06/01, or is it the preceding 4 periods (which contained the provisional calculations brought into the calculation)? In my view it is plainly the former. On its face the assessment complains of an under-declaration in the 06/01 period, and on analysis that is what happened. The return for that period contained an error in that it did not contain any figure based on any year end calculation (no such calculation had been carried out). TL5 paragraph 1 requires that VAT for the preceding financial year be determined by carrying out a section 8 calculation. That amount becomes payable in the first prescribed accounting period of the following year under paragraph 4, less, of course, the amounts already paid. The prescribed accounting period concerned is therefore that for 06/01. That conclusion is not affected by the fact that the sum due is calculated by taking into account sums paid in the previous periods. It is the activities in the period 06/01 that were incorrect. It does not matter that the returns for earlier periods were also incorrect. It is not those earlier periods that are being adjusted. Mrs Preston relied on the fact that the sums returned and paid in those earlier years are paid by reference to a value described in the notice as “provisional”, and submitted that a two stage exercise was required – correct the provisional returns, and then carry out the year end calculation. That is what HMCE seem to have done in respect of later periods. I do not consider that that exercise is necessary. A year end calculation can and should be carried out by reference to the correct figures after the year end, and it is neither necessary nor sensible to recalculate the provisional values and amounts in the preceding 4 quarters. It is no part of the required exercise. What is required is that the sums paid be deducted from the year end figure.”

Discussion and decision

[18]On this appeal, Mrs Nicola Preston submitted that the judge was wrong and the tribunal was right. She emphasised that the calculations made in respect of the four earlier quarters were incorrect: if they had been carried out as they should have been, and as HMRC’s assessment showed had been done for subsequent periods, more VAT would have been paid each quarter. Admittedly, those figures, being based on only the “provisional value” of the designated travel services, would need adjusting again in the first quarter after the financial year end, so that a final figure for VAT in respect of the previous financial year would then be generated, which might be higher or lower than the VAT previously calculated and paid over the previous four quarters: however, the subsequent assessment purportedly imposed by reference to the 6/01 period wrongly elided the provisional calculations to be performed within the four quarters of any financial year and the year end adjustment to be calculated in the ensuing quarter at the beginning of the next financial year. The provisional calculations were mandatory, for TLR’s para 2 stated that the provisional value “shall be determined” in accordance with the set formula and TLR’s para 3 stated that tour operators “shall be required to account for VAT” on the provisional value on the VAT return for the “prescribed accounting period in which the supplies are made”. Therefore, because of Dunwood’s original errors, they had calculated the VAT payable in each quarter in the periods from 6/00 to 3/01 incorrectly, and it was too late for HMRC to reassess what was due beyond the three year limitation of section 77(1)(a). She conceded, however, that if Dunwood had correctly calculated the provisional values and then had made the additional error of failing to calculate the adjustment required by TLR’s para 4, then the additional VAT calculated as due in the fifth quarter (6/01) would have been within the limitation period. For similar reasons, the interest charged was similarly in respect of prescribed accounting periods beyond the three year limitation.[19]In my judgment, however, the tribunal was wrong to say that the relevant prescribed accounting periods were those of 6/00 to 3/01 and that the annual adjustment was no more than a method of recalculating the VAT due in those accounting periods; and the judge was right to reason the matter as he did. When it comes to the fifth quarter, the VAT due in respect of the whole of the previous financial year has to be calculated entirely anew by reference to the formula set out in section 8 of the TOMS notice (see TLR 5’s para 1). That is “the full calculation” so-called (unless section 10’s “simplified calculation” can be adopted, but even that is a recalculation by a new formula). The VAT due is then the “difference between the amount of VAT due…and the amount of VAT paid”. That difference, between what is due and what had been previously paid has to be adjusted on the VAT return “for the first prescribed accounting period ending after the end of the financial year during which the supplies were made”. Therefore, “the prescribed accounting period…concerned” for the limitation purposes of section 77(1) (a) is that fifth quarter.[20]It follows that if the taxpayer has overpaid VAT on the basis of his provisional figures in the previous financial year, he will still be in time to claim back his overpayment if he is within three years from the end of the fifth quarter. The position for interest will follow accordingly.[21]This conclusion, which is mandated by the language of TL5, is supported by two further considerations. The first is this: suppose an accurate in-year provisional value calculation of VAT to be accounted for, but no VAT in fact paid. It is unarguable that the amount of VAT to be paid and accounted for in the fifth quarter will be the total amount of VAT finally determined by the full or simplified calculation. I see no reason why, if that quarter lies within the three year limitation period, a tour operator cannot be assessed for that.[22]The second relates to the purpose and rationale of the limitation period itself. That is presumably designed to avoid the need, after the three years stipulated, to enter onto the calculations of a prescribed accounting period which lies beyond the statutory limitation. Irrationally, however, and counter-intuitively, Mrs Preston’s submissions would require the VAT authority’s assessment to do precisely that. For it is the essence of Mrs Preston’s submission that, in order to find out the limit of an assessment which could be made in respect of the fifth quarter (ex hypothesi, and as in this case, within the three year limitation period), one has to perform an additional calculation in respect of each of the four quarters of the previous financial year (ex hypothesi and as in this case outside the three year limitation period) in order to discover what is the VAT which should have been determined and paid albeit on a provisional basis in each of those quarters. It is then only the excess of that provisionally determined VAT which can be accounted for and assessed in the fifth quarter in accordance with the full calculation then required. In my judgment, that would, at least in theory, run counter to the purpose of the limitation period. On the contrary, it is HMRC’s approach, which emphasises that the fifth quarter calculation, whether full or simplified, is an entirely new calculation which derives an entirely new figure for the VAT due in respect of the previous financial year, which seems to me to fall rationally within the three year period prescribed. Mrs Preston herself recognises this when she allows, as she does, that any additional VAT due (or any reclaim for VAT overpaid) thrown up by that fifth quarter calculation is within and not outside the three year limitation.[23]It follows that the “rule of primary intention” (see Bennion cited above from the tribunal’s decision) to be derived from section 77(1) (a) cannot in this case assist Dunwood. It also follows that Laura Ashley is not in point.

Conclusion

[24]For these reasons, which are essentially those of the judge, I would dismiss this appeal and uphold HMRC’s amended 24 June 2004 assessment in respect of the period 6/01 in the sum of £17,260.85.

Sir John Chadwick:

[25]I agree.

Lord Justice Laws:

[26]I also agree.