Revenue and Customs v Chamberlin [2011] EWCA Civ 271

[2011] EWCA Civ 271Case No A3/2010/1840IN THE HIGH COURT OF JUSTICE
COURT OF APPEAL (CIVIL DIVISION)
[2010] EWHC 2589 (Ch)
ON APPEAL FROM Chancery Division
David Donaldson Q.C. sitting as a Deputy High Court Judge
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 22/03/2011
Before
THE CHANCELLOR OF THE HIGH COURTLORD JUSTICE TOULSONLORD JUSTICE SULLIVAN
Between
HER MAJESTY'S REVENUE AND CUSTOMSAppellantMARIE CHAMBERLINRespondent
Mr Marcus Flavin (instructed by HMRC Solicitors) for AppellantMr Arfan Khan (instructed by CT Emezie Solicitors) for RespondentHearing Hearing date: 8th March 2011
Judgment

The Chancellor:

[1]Ms Marie Chamberlin (“the Applicant”) was, at the material time, a solicitor practising in the field of asylum and immigration law. She was registered as a taxable person for VAT purposes. As required by the VAT Act 1994 and regulations made thereunder, the Applicant made returns from time to time disclosing substantial sums as due to HMRC in respect of VAT but failed to discharge them. On 22nd April 2005 she was served (by substituted service) with a statutory demand seeking payment of £28,559.79 in respect of VAT due, interest and penalties. No payment was made in respect thereof and on 23rd June 2005 the Applicant was personally served with a bankruptcy petition presented by HMRC on 26th May 2005 based on that debt and demand. The Applicant did not appear on the hearing of the petition and a bankruptcy order was made against her by Mr Registrar Rawson on 9th September 2005.[2]On 14th December 2005 the Applicant applied under s.282(1)(a) Insolvency Act 1986 for the annulment of the bankruptcy order on the ground that it ought not to have been made. That application was ultimately dismissed by Mr Registrar Nicholls on 7th December 2006. In the meantime the Applicant appealed to the VAT Tribunal but her appeal was rejected on technical grounds. On 4th July 2006 she applied to HMRC for the correction of errors in her returns pursuant to VAT Regulations 1995/2518 paragraph 35, conventionally called a voluntary disclosure. That application was rejected by HMRC on 2nd October 2006.[3]On 25th March 2009 the Applicant again applied under s.282(1)(a) for an order annulling the bankruptcy order made against her on 9th September 2005 on the ground that it should not have been made. Her application was supported by her witness statement made on 25th March 2009 contending that no VAT was due to HMRC. An officer of HMRC, Mr Thomas, made a witness statement on 13th May 2009 challenging the Applicant’s contentions to which the Applicant replied by means of a witness statement made shortly before the hearing of her application on 8th July 2009. The annulment application was rejected by Chief Registrar Baister. The Chief Registrar noted that the petition debt was based on the Applicant’s own returns. He described the proceedings, the Applicant’s appeal and voluntary disclosure and their rejection. He concluded in paragraph 8:
“I accept ... that there are circumstances in which certain categories of client may not be subject to VAT in relation to immigration or asylum claims [but] it does not follow in any way from that that these returns were wrong. It seems to me that what [the Applicant] would have to demonstrate to the Revenue is, by reference to individual clients, that they fell within one of the exempt categories. It does not follow from her blanket statement that her returns were wrong. It seems to me, therefore, that to the extent this application repeats the application made to Mr Registrar Nicholls, it is as hopeless as the application that was made to him, in that it is plain for the reasons that I have given that on the date the bankruptcy order was made it ought to have been made and was properly made. For these reasons, I dismiss this application.”
[4]On 24th July 2009 the Applicant issued an appellant’s notice. On 20th August 2009 she made a further voluntary disclosure under regulation 35 seeking the amendment of those parts of her returns she contended were completed in error; but that application was rejected by HMRC on 14th September 2009 as being out of time. Permission to appeal was granted by Mr David Donaldson QC, sitting as a deputy judge of the Chancery Division. For the reasons given in his reserved judgment handed down on 8th July 2010 he allowed the Applicant’s appeal and annulled the bankruptcy order made against her on the ground that:
“...under the legislation in force at the material times the [VAT] returns did not give rise to a debt as submitted by [HMRC]”
HMRC now appeal to this court with the permission of Jacob LJ.[5]The question for our determination is whether on grounds existing at the time it was made, namely on 9th September 2005, the bankruptcy order ought not to have been made. I will consider that issue and the rival arguments presented to us in respect of it in due course. First it is necessary to refer to the structure and details of the VAT regime, to certain aspects of the Insolvency Act and the practice of the Bankruptcy Court and to the judgment of the deputy judge. VAT[6]VAT Act 1994 s.1 provides for value added tax to be charged in accordance with the provisions of the Act on inter alia the supply of services in the United Kingdom. Subsection (2) stipulates that VAT on such a supply is a liability of the person making the supply and, subject to the provisions relating to accounting and payment, becomes due at the time of supply. S.3 requires the registration of taxable persons and s.4 stipulates that a supply to be taxable must be made in the course of a business carried on by the taxable person. Ss.5 and 6 deal with the concept of a supply and the time it is made. S.7 deals with the place of supply. At the time relevant to this appeal s.7(10) laid down the basic rule that the place of supply is determined by the place to which the supplier ‘belongs’. S.7(11) enables the Treasury to vary such a rule by order. That power had been exercised under the Act which preceded the VAT Act 1994 and has been continued under the present act so as to specify the place of supply in respect of lawyers’ advisory services as the country to which the recipient belongs if that country is not a Member State of the European Union, see VAT (Place of Supply of Services) Order 1992/3121.[7]S.24 defines the expressions “input tax” and “output tax”. Those expressions are then extensively used in s.25 and the regulations made thereunder in connection with the accounting and payment provisions. I should refer to subsections (1), (2) and (6). They provide:
“(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. (2) Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him. [(3) – (5)] (6) A deduction under subsection (2) above and payment of a VAT credit shall not be made or paid except on a claim made in such manner and at such time as may be determined by or under regulations; and, in the case of a person who has made no taxable supplies in the period concerned or any previous period, payment of a VAT credit shall be made subject to such conditions (if any) as the Commissioners think fit to impose, including conditions as to repayment in specified circumstances.”
S.58 and Schedule 11 paragraph 2 authorise regulations for administration, collection and enforcement of VAT to which I shall refer in due course. (a) in respect of supplies made by him, and (b) in respect of the acquisition by him from other member States of any goods,[8]S.73 provides a mechanism for assessment in cases where, inter alia, a person fails to make the returns required of him by the Act or makes incomplete or incorrect returns. In any such case HRMC may assess the amount of VAT due from that person. Subsection (9) provides that:
“Where an amount has been assessed and notified to any person under subsection (1), (2), (3) or (7) above it shall, subject to the provisions of this Act as to appeals, be deemed to be an amount of VAT due from him and may be recovered accordingly, unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced.”
[9]S.80 in the form relevant to this appeal provides for a person being given credit for or repayment of overstated or overpaid VAT but only on a claim being made for the purpose not more than four years after the relevant date as defined in subsection (4ZA). In the circumstances of this appeal the relevant date was the end of the accounting period in which the overstatement had been made. S.83 provides for appeals to the VAT Tribunal in a wide variety of matters. They include assessments under s.73 and a claim for a repayment or credit under s.80.[10]The relevant regulations are VAT Regulations 1995 SI 2518. Part V deals with accounting, payment and records. Regulation 25 requires every person registered for VAT periodically to make a return to the Controller in the prescribed form “..showing the amount of VAT payable by or to him and containing full information in respect of the other matters specified in the form and a declaration, signed by him, that the return is true and complete..” As is well known the prescribed form has 9 boxes to be completed by the person making the return. Boxes 1 to 3 relate to the VAT due in the period, box 4 to VAT reclaimed in the period and box 5 to “Net VAT to be paid to Customs or reclaimed by you”. At the foot of the form is a declaration to be signed by or on behalf of the person making it that “the information given above is true and complete”.[11]Regulation 32 requires every taxable person to keep and maintain in accordance with that regulation an account to be known as the VAT Account. The Regulation sets out in some detail what the VAT Account should contain. The details include “the total of the output tax due from the taxable person for that [prescribed accounting] period”. Regulations 34 and 35 deal with the correction of errors in a return. Regulation 34 deals with errors to a value not exceeding £2,000. They may be corrected within 3 years since the end of the accounting period in which they occurred by means of a subsequent corrective return.[12]Regulation 35 deals with other errors. It provides:
“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.”
The procedure known as “voluntary disclosure” is that described in VAT Notice 700/45. The procedure relevant to this appeal is called ‘Method 2’. Its requirements have varied in detail over the years but in essence it requires the registered person either on the prescribed form or otherwise in writing to give full details of the alleged error, whether it relates to output tax or input tax, the VAT accounting period in which it occurred and the amount of the adjustment sought. There is a time limit of three years since the end of the accounting period in which the alleged error was made or occurred.

(a) in accounting for VAT, or (b) in any return made by him,

[13]Regulation 40 requires VAT to be accounted for in returns. Thus subparagraph (1) stipulates that any person making a return shall in respect of the period to which it relates account in that return for “all his output tax”. Sub-paragraph (2) provides that any person required to make a return shall pay “such amount of VAT as is payable by him in respect of the period to which the return relates...”.

The Insolvency Act

[14]A bankruptcy petition may be presented against an individual by a creditor to whom a sum certain in excess of the bankruptcy limit, currently £750, is owed which the debtor appears to be unable to pay, see ss.264-267 Insolvency Act 1986. S.268 provides that a debtor appears to be unable to pay a debt if, but only if, he has been served with a statutory demand requiring him to pay it and three weeks have elapsed since service of the demand. S.271(1) states that the court shall not make a bankruptcy order unless it is satisfied that the debt in respect of which the petition was presented has been neither paid nor secured or compounded for.[15]The statutory demand referred to in s.268 is prescribed by Insolvency Rule 6. Rule 6.4 provides a procedure enabling a debtor to apply to the court for an order setting aside a statutory demand served on him. The grounds on which the court may set a statutory demand aside are those set out in Rule 6.5(4). Those grounds include cases where “the debt is disputed on grounds which appear to the court to be substantial” or “the court is satisfied, on other grounds, that the demand ought to be set aside”. The Applicant did not apply to set aside the statutory demand served on her.[16]The interaction of the insolvency regime and the various tax regimes has led to a well established practice to the effect that the courts involved in the former leave the establishment of a liability to tax to the statutory procedures applicable by the latter. For instance the bankruptcy court does not usurp the jurisdiction of the VAT Tribunal by itself enquiring into matters within the statutory jurisdiction of the latter. This practice is well illustrated by Re Calvert [1899] 2 QB 145 and Lam v Inland Revenue [2005] BPIR 301.[17]In Re Calvert a debtor sought to expunge a proof for schedule D tax. This was rejected by Wright J. He said, at page 147:
“I cannot think it possible that it is competent to the Bankruptcy Court, on the invitation of the trustee in bankruptcy or of the debtor, to reopen questions of that kind on a motion to expunge. It is quite impossible to conceive that it would be competent for me sitting here to go into the question of the rateable values of a union or of a parish, or any question of that sort. That seems to me to be a case which is analogous to the case in which I am at present invited to act. I think the application fails and must be dismissed with costs; but my decision will not interfere with any application the debtor may be advised to make to the Inland Revenue under the Board of Trade Regulations of May, 1888.”
[18]In Lam v Inland Revenue the Revenue had served Lam with a statutory demand seeking payment of arrears of assessed tax and when Lam failed to comply presented a petition for his bankruptcy. Lam had throughout protested that the assessments were erroneous. He had appealed against some but not others. The Registrar made a bankruptcy order and Lam appealed. He continued to protest that he had not made the profits on which he had been assessed to tax. In his judgment Blackburne J said:
“[12] I understand, but I have to remind myself (as [counsel for the Inland Revenue] has submitted), that authority clearly establishes that where assessments to tax are concerned Parliament has provided a clear and exclusive machinery for considering appeals against them. The statutory machinery does provide for appeals to the court. That machinery, as [counsel] correctly submits, is an exclusive machinery and an assessment, when made, is final and binding if it is not appealed. If it is appealed, the determination of an appeal is likewise final and binding, subject to any application there may be, in appropriate circumstances, to the court. In particular, she submits, it is not for the Bankruptcy Court to go behind those matters. As [counsel] also submits, there is a wealth of authority to that effect, stretching back (in relation to predecessors of the current legislation) to the latter part of the 19th century. [13] [Counsel] is correct in that submission. It is not open to the Bankruptcy Court to review the manner in which the assessment has been made, much less to investigate the merits of the assessment. I can see that if there were evidence that the assessments had been made in some fraudulent or collusive way, or there were some other glaring miscarriage of justice, it might be that the Bankruptcy Court could go behind the assessment and not make the Bankruptcy Order based upon the debt created by the unpaid tax resulting from the assessment, but there is no suggestion of that in this case. On the contrary, as I have endeavoured to show, the Revenue have entertained attempts by Mr Lam, personally and through advisers, to reconsider the amount of the assessments, but have not been persuaded on the information that has been provided that they should do so.”
[19]The same principle was expressed more broadly by Lord Nicholls of Birkenhead in Autologic Holdings plc v IRC [2006] 1 AC 118. That case did not concern bankruptcy proceedings but an attempt by the taxpayer to recover tax paid otherwise than by means of the statutory procedure. After referring to the statutory jurisdictions for which the Taxes Management Act and other statutes provided Lord Nicholls said:
“12. Clearly the purpose intended to be achieved by this elaborate, long established statutory scheme would be defeated if it were open to a taxpayer to leave undisturbed an assessment with which he is dissatisfied and adopt the expedient of applying to the High Court for a declaration of how much tax he owes and, if he has already paid the tax, an order for repayment of the amount he claims was wrongly assessed. In substance, although not in form, that would be an appeal against an assessment. In such a case the effect of the relief sought in the High Court, if granted, would be to negative an assessment otherwise than in accordance with the statutory code. Thus in such a case the High Court proceedings will be struck out as an abuse of the court's process. The proceedings would be an abuse because the dispute presented to the court for decision would be a dispute Parliament has assigned for resolution exclusively to a specialist tribunal. The dissatisfied taxpayer should have recourse to the appeal procedure provided by Parliament. He should follow the statutory route.”
Later, in paragraph 15, Lord Nicholls continued:
“Lord Wilberforce's formulation indicates that, apart from cases of straightforward abuse, there is an area where the court has a discretion. In Glaxo Group Ltd v Inland Revenue Commissioners [1995] STC 1075, 1083-1084, Robert Walker J put the matter this way: 'It is not easy to discern any clear dividing-line between High Court proceedings which are, and those which are not, objectionable as attempts to circumvent the exclusive jurisdiction principle. Possibly the correct view is that there is an absolute exclusion of the High Court's jurisdiction only when the proceedings seek relief which is more or less co-extensive with adjudicating on an existing open assessment: but that the more closely the High Court proceedings approximate to that in their substantial effect, the more ready the High Court will be, as a matter of discretion, to decline jurisdiction.' I respectfully agree with this approach, subject to noting that, at least as a general principle, the taxpayer and the revenue are each entitled to insist that the statutory procedure for dealing with disputed assessments should be followed.”
[20]In the case of judgment debts the bankruptcy court has been prepared to go behind the judgment to satisfy itself that the judgment was not collusive or otherwise for proper consideration, see for example Ex Parte Kibble (1875) 10 Ch App 373. In addition the general principle appears to have admitted of exceptions in the case of the late council tax, see for example London Borough of Lambeth v Simon [2007] BPIR 1629. Neither of those exceptions can avail the Applicant if, as I shall consider in due course, the statutory liability to VAT imposed by the VAT Act and subordinate legislation and the returns submitted by her in compliance with it created debts due by her to HMRC.[21]Finally in this section I should refer to s.282(1) Insolvency Act 1986. It provides that:
“The court may annul a bankruptcy order if it at any time appears to the court- (a) that, on any grounds existing at the time the order was made, the order ought not to have been made, or (b) that, to the extent required by the rules, the bankruptcy debts and the expenses of the bankruptcy have all, since the making of the order, been either paid or secured for to the satisfaction of the court.”
The application made by the Applicant is made under paragraph (a). Thus the relevant ground must have existed at the time the bankruptcy order was made against her on 9th September 2005 even though it did not become apparent until later, see Royal Bank of Scotland v Farley [1996] BPIR 638. Thus it would suffice if an appeal against, for example, an assessment to Schedule D tax were successful after the bankruptcy order in respect of which it had been made. (a) that, on any grounds existing at the time the order was made, the order ought not to have been made, or (b) that, to the extent required by the rules, the bankruptcy debts and the expenses of the bankruptcy have all, since the making of the order, been either paid or secured for to the satisfaction of the court.”

The judgment of the Deputy Judge

[22]I have set out in paragraph 4 above the conclusion of the deputy judge on the basis of which he annulled the bankruptcy order. It is now necessary to consider the basis on which he reached that conclusion. Having set out the statutory framework of the VAT Act and regulations, the deputy judge commenced his discussion of the issue before him with the following statements in paragraph 10:
“The Respondent accepts that in the case of an asylum seeker or an illegal immigrant his usual place of residence is outside the United Kingdom. It follows, and is also common ground, that the Appellant’s asylum and immigration clients did not “belong” in the United Kingdom for the purposes of the 1992 Order, and that her services to them were therefore supplied outside the United Kingdom and in consequence were not chargeable to VAT.”
It is clear from the written arguments before the deputy judge and now before us that HMRC certainly accepted and still accept that a lawyer’s advisory services supplied to a person belonging abroad are not supplied for the purposes of VAT in the United Kingdom. But they did not then and do not now accept that the services in respect of which the Applicant made the returns on which the statutory demand and the bankruptcy order were based were so supplied. Those facts have never been established to the satisfaction of either HMRC under either voluntary disclosure or of the VAT Tribunal on appeal.[23]The deputy judge then considered whether a VAT return could give rise to a debt. He concluded that it could not because it is not so stated in s.25 and that omission was in marked contrast with Paragraph 5 of schedule 11 and the terms of s.73 VAT Act 1994. He then considered the terms of ss. 25 and 80 and paragraph 40 of the VAT Regulations. On that basis the deputy judge reached the conclusion I have quoted in paragraph 4 above. This is to be contrasted with the approach and conclusion of the Chief Registrar I have quoted in paragraph 3 above.

Submissions and conclusion

[24]Counsel for HMRC submits that the Chief Registrar was right and the deputy judge was wrong. In relation to the decision and reasoning of the deputy judge his submissions are to the following effect:(1) In the context of the VAT Act 1994 and its subordinate legislation a duly signed return gives rise to a debt for a sum certain sufficient to ground a statutory demand, bankruptcy petition and order.(2) There were no circumstances entitling the deputy judge to determine whether or not the VAT stated in those returns to be due were due.(3) Therefore there was no ground entitling the deputy judge to interfere with the decision of the Chief Registrar to the effect that the discretion conferred by s.282(1)(a) Insolvency Act to annul the bankruptcy order had arisen, let alone to exercise it in the way that he did.[25]Counsel for the Applicant founded himself, as he had to do, on the decision of the deputy judge. He started with the proposition that no VAT was due by the Applicant to HMRC because most of her clients were asylum seekers and ‘belonged’ abroad. He contended that the Chief Registrar was wrong to have assumed that VAT was due and should himself have investigated the alleged liability, not least because it is only the bankruptcy court which has the power to annul a bankruptcy order. He submitted that this was such an exceptional case as Lord Nicholls and Blackburne J recognised in Autologic and Lam respectively. He relied on the cases where the bankruptcy court will go behind a judgment or order for payment of council tax and submitted that VAT was no different.[26]In my view the approach and conclusion of the Chief Registrar was correct. The ground on which the deputy judge set aside his decision was wrong in law and not open to him on the facts. I reach that conclusion by the following steps. First, in the context of the VAT Act 1994 and subordinate legislation the supplier of services in the United Kingdom is liable to VAT on the value of his supply. This liability is expressed in s.1(2) and 25(1) of the VAT Act 1994 and in paragraph 40(2) of the VAT Regulations. The liability is quantified by the return the taxable person is obliged to make. In particular boxes 1 and 5 constitute a form of self-assessment. It is true that other provisions of the Act and rules specify that in the cases to which they refer HMRC may make an assessment and in some cases that the amount of the resulting assessment is recoverable as a debt. But the converse cannot be correct. Take s.73 - that section permits an assessment in the case of incorrect or incomplete returns. It cannot seriously be suggested that in cases where a complete and correct return has been made there is no liability for the amount shown by the taxable person to be due. It is at the least an admission of a statutory liability for VAT. The returns submitted by the Applicant clearly established the liabilities on which the statutory demand and bankruptcy order were based, no separate point of relevance was taken in respect of the surcharges.[27]Second, the question whether those returns had been made in error and had overstated the amount of VAT due was clearly referable to HMRC pursuant to Regulation 35 of the VAT Regulations which I have quoted in paragraph 12 above. The Applicant made two voluntary disclosures under that Regulation after the bankruptcy order had been made, namely on 4th July 2006 and 20th August 2009. The first was rejected on its merits the second was out of time. In those circumstances it was not open to the deputy judge to conclude as a matter of fact that the relevant returns had contained errors or overstatements because the Applicant’s clients all belonged abroad. Nor was this such an exceptional case as was recognised by Lord Nicholls and Blackburne J as would entitle the bankruptcy court to entertain the question. Indeed the deputy judge made no mention of either voluntary disclosure nor, save in footnote 12, of the general principle I have considered in paragraphs 16 to 19 above.[28]Third, it must follow that the legal consequences of the original returns and the unsatisfied statutory demand remain notwithstanding the assertions of the Applicant. Accordingly the Applicant had failed to demonstrate any ground existing on 9th September 2005 for considering that the bankruptcy order against her made by Mr Registrar Rawson on that day should not have been made. It is not appropriate to assume, as both the deputy judge and counsel for the Applicant did, that the relevant facts had been established in favour of the Applicant and then to exercise the jurisdiction which Regulation 35 conferred on HMRC.[29]I would allow this appeal and restore the order of Chief Registrar Baister. Lord Justice Toulson[30]I agree. Lord Justice Sullivan[31]I also agree.

Cited in 7 later judgments