Bestline Data Ltd v Her Majesty's Revenue & Customs [2009] UKFTT 42 (TC)

FTT-Tax
Bestline Data Ltd v Her Majesty's Revenue & Customs
[2009] UKFTT 42 (TC) · 2009-04-08
[1]TC00020 VAT – assessment – whether assessment valid as made to best judgment where made in absence of a return and not withdrawn and re-issued on return being furnished – yes – application dismissed FIRST-TIER TRIBUNAL TAX BESTLINE DATA LTD Appellant -and – THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents (VAT) Tribunal: David Demack (Judge) Sitting in public in Manchester on 3 March 2009 Leslie Allen of DLA Piper UK LLP, solicitors of London for the Appellant Richard Chapman of counsel instructed by the Solicitor to H.M Revenue and Customs for the Respondents © CROWN COPYRIGHT 2009 DECISION In this appeal by Bestline Data Ltd ("Bestline"), I am required to decide as a preliminary point whether an assessment to VAT of £16,473,346 notified to it in Form 152A by HM Customs and Excise ("HMCE") on 24 July 2001 is valid. If it is not, then Bestline's appeal will stand allowed.[2]Bestline's application was made by Mr Leslie Allen of DLA Piper UK LLP, solicitors, London, acting for the court appointed receiver and manager of Bestline's assets, and opposed for Her Majesty's Revenue and Customs ("HMRC"), as successors to HMCE, by Mr Richard Chapman of counsel. To assist me, each party produced a bundle of copy documents, and Mr Allen also provided me with a skeleton argument. From the documents so produced, I make the following findings of fact.[3]Bestline registered for VAT with effect on 15 March 2001 as a wholesaler and retailer of telecommunications equipment. Its sole director was Mr Monomoham Singh Sandhu. From the outset of trading, Bestline dealt only in mobile phones.[4]It would appear that Mr Sandhu and Bestline came to HMCE's attention as possibly being involved in MTIC fraud, and both were investigated. The company's invoices and records were uplifted by HMCE on a date not disclosed but prior to 16 July 2001. They showed that from 20 June 2001 it purchased phones exclusively from MS Coten Ltd ("Coten"), a company said to be based in London.[5]In the 11 weeks prior to 19 June 2001, Bestline's recorded turnover was slightly over £5 million. From 20 June 2001 to 16 July 2001 inclusive, its turnover increased to over £100 million. In those 27 days, Bestline's records showed it as purchasing some 400,000 phones from Coten for £80 million plus VAT of £14 million. They also showed it as having sold those phones to Waves International Ltd ("Waves") for £95.5 million plus VAT of £16.473 million. However, HMCE did not accept that Bestline purchased the phones from Coten as their investigations indicated that it had acquired them direct from EU suppliers based in Luxembourg and had paid the suppliers rather than Coten. They further maintained that Coten was a sham company.[6]Mr Sandhu was arrested on 16 July 2001 and charged with a number of offences. On 28 October 2003, he was convicted of cheating the public revenue and sentenced to seven years imprisonment. His conviction was quashed by the Court of Appeal in March 2006, and he was ordered to be retried. Prior to retrial, HMRC, which HMCE had by then become, determined to offer no evidence against him, and he was formally acquitted of all charges in May 2007.[7]Following Mr Sandhu's arrest, HMCE served a formal notice on Bestline under regulation 25(1)(c) of the VAT Regulations 1995 requiring it to make a VAT return for the period between 1 June 2001 and 16 July 2001 inclusive by 23 July 2001. The vast majority of its records were returned to it for the purpose, but a few were inadvertently retained by HMCE.[8]Bestline failed to make the required return and, on 24 July 2001 HMCE notified the assessment referred to at [1] above. It was accompanied by a four page schedule which clearly revealed that the sum assessed was calculated on the basis of Bestline's recorded sales to Waves and its purchases in the period.[9]As I mentioned at the outset, the assessment was notified in Form 152A, which stated that the sum assessed "should be paid without delay", and continued, "If you have already sent in the return and paid any tax due for the above period [1/06/01 to 16/07/01], please disregard this notice". The Form was accompanied by a letter of even date with the assessment headed "Without prejudice", in which reference was made to the accompanying schedules. The letter stated that no deduction of input tax had been allowed in respect of VAT said to have been charged to Bestline by Coten as Coten's invoices did not appear to relate to genuine supplies of goods; and that the assessing officer had not "reached a final view on the input tax that appears on the invoices of other suppliers, and those sums have been deducted from your liability". The deductions were expressed to be made without prejudice to any further action HMCE might take regarding those invoices, and the company was informed that the sums in question might subsequently be disallowed.[10]On the afternoon of 24 July 2001, unaware that it had already been assessed to tax, Bestline submitted the missing return to HMCE by fax. In it Bestline claimed repayment of £223,631.84. (HMCE's subsequent analysis of the figures included in the return showed that, assuming Bestline's own records were correct, it had a liability to tax of some £2.4 million).The following day Bestline submitted the supporting calculations.[11]HMCE quickly realised that they had failed to return all the uplifted documents to Bestline, so that if its return was based on those documents returned it would necessarily be incomplete and incorrect. The records inadvertently retained were returned on 26 July 2001, and Bestline was informed that it might submit an amended return by 3 August 2001. It failed to submit the further return.[12]On 3 August 2001 Bestline appealed the assessment to the tribunal. Its appeal was then stoodover the outcome of the criminal proceedings against Mr Sandhu. Consequently, it was not until 15 July 2008 that HMRC served the statement of case.[13]Against that factual background, I turn first to consider the relevant law. A VAT registered business has a legal obligation to submit returns and pay any tax due not later than a given date, the due date, which is normally the last day of month next following the end of each accounting period. However, HMRC may vary the length of any period or the date on which any return has to be submitted (Regulation 25(1)(c), VAT Regulations 1995). Where a trader fails to submit a return, by section 73(1) of the Value Added Tax Act 1994 HMRC are given the power to make an assessment for that period. The power is provided in the following terms: "73(1) Where a person has failed to make any return required under 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".[14]It is common ground that the assessment was issued timeously.[15]I then move on to deal with Mr Allen's submissions. Principally, he contends that when an assessment is made in the absence of a return, it must automatically be disregarded once the missing return is made. He maintains that the assessment in the instant case having been made in the absence of a return, once the return was submitted the ground on which it was based is no longer relevant. Consequently, HMRC must then review the documentation and, if they believe the return is incomplete or incorrect, they must then make a new assessment to the best of their judgment and notify the person assessed accordingly. He also relies in part on the Report of the Committee on Enforcement Powers of the Revenue Departments (Cmnd 8822) Vol 1 para 3.4.10 where it was said that HMRC withdraw assessments in the majority of cases where returns are subsequently furnished.[16]Following the notifying of the assessment and its appeal, Mr Allen observes that the matter went into abeyance for the duration of the criminal proceedings against Mr Sandhu. He contends that if those proceedings had been successful, HMRC would have pursued confiscation proceedings against Mr Sandhu to confiscate his and/or the assets of Bestline. However, the proceedings having proved unsuccessful, HMRC have sought to resurrect an old and invalid assessment as they are out of time to revisit and re-assess. Mr Allen further submits that it is no longer open to them to rely on an invalid assessment in support of their claim against Bestline.[17]Alternatively, Mr Allen submits that where there is no return, there is no scope for HMRC to exercise best judgment. As Woolf J (as he then was) observed in Van Boeckel v Customs and Excise Commissioners [1981] STC 290 at 292,293:
"…, clearly there must be some material before the Commissioners on which they can base their judgment. If there is no material at all it would be impossible to form a judgment as to what tax is due"
. In the instant case, Mr Allen maintains, the assessment made did not involve the exercise of best judgment; when the facts were put before the HMRC, they should have withdrawn the assessment and exercised best judgment either to make a new assessment or not to do so. He further contends that once it is established that there is some factual basis on which to base an assessment, HMRC must act honestly and genuinely in determining the amount of tax due.[18]In summary, Mr Allen claims, first, that if there is a failure to submit returns, there is no need for HMRC to apply best judgment in making an assessment. Secondly, where returns have been furnished, HMRC must apply best judgment in determining whether an assessment is correct. Once information is before them, they must make an honest and genuine attempt to make an assessment. Hence, there is a clear difference in an assessment made where there is no return and one where a VAT return has been rendered. In the instant case, he submits, HMRC have failed to deal with that difference, and the assessment cannot stand; and, in relation to the question of best judgment, I should hold that they have not applied any judgment at all, and therefore they cannot have made an honest and genuine attempt to assess.[19]I am unable to accept that an assessment made in the absence of a return must automatically be disregarded when the missing return is made. As Woolf J said in Parekh v Customs and Excise Commissioners [1984] STC 284 at 288, a case which involved a missing return but which was decided on the basis that assessments made subsequent to the furnishing of such a return were made out of time, "The commissioners were not obliged to withdraw the previous assessments which were made prior to the making of the returns and they should have continued to rely on them". (The assessments in that case were made under section 31 of the Finance Act 1972, the predecessor of section 73 of the 1994 Act). Plainly, HMRC may withdraw an assessment or assessments made in the absence of a return, and may in practice do so in the majority of cases, but they are not required to do so. In the instant case, they chose not to do so.[20]I am also unable to accept Mr Allen's submission that if there is a failure to submit a return, there is no need for HMRC to apply best judgment in making an assessment. Section 73(1) deals with the matter in the plainest of terms: "Where a person has failed to make any return required under this Act… they [HMRC] may assess the amount of VAT due from him to the best of their judgment and notify it to him" [my emphasis].[21]What "best of their judgment" means in this context was the subject of guidance first by Woolf J in Van Boeckel itself and later by Carnwath J (as he then was) in Rahman v Customs and Excise Commissioners [1998] STC 826 . In Van Boeckel Woolf J pointed out at 292:
"Clearly they [the commissioners] must perform that function [of exercising their powers in such a way that they make a value judgment on the material which is before them] honestly and bona fide. It would be a misuse of that power if the commissioners were to decide on a figure which they knew was, or thought was, in excess of the amount which could possibly be payable, and then leave it to the taxpayer to seek, on appeal, to reduce that assessment."
The further guidance offered by Carnwath J in Rahman at 835 was in the following terms:
"…there are dangers in taking Woolf J's analysis [in Van Boeckel ] of the concept of "best judgment" out of context… the tribunal should not treat an assessment as invalid merely because it disagrees as to how the judgment should have been exercised. A much stronger finding is required; for example, that the assessment had been reached 'dishonestly or vindictively or capriciously'; or is 'spurious estimate or guess in which all elements of judgment are missing'; or is 'wholly unreasonable'. In substance those tests are indistinguishable from the familiar Wednesbury principles…Short of such a finding, there is no justification for setting aside the assessment."
Nothing in the documents before me indicates that HMCE did anything other than analyse and then extract information from Bestline's own records in arriving at the sum in which the company was assessed; and since there is no evidence whatsoever of their having committed any of the faults identified by Woolf J and Carnwath J which might have resulted my being able to find that the assessment was not made to best judgment, I find that it was made to best judgment.[22]Since the assessment is based on Bestline's own records, and is in fact in the sum of the output tax it claimed to have charged Waves in sham transactions, there is on HMRC's case no requirement for it to be amended. (Although I was not told so, I have no doubt that the assessment was reviewed once Bestline submitted the outstanding return to ensure that no amendment was necessary).[23]Having held that an assessment made in the absence of a return need not be disregarded when the missing return is made, that HMRC are required to make all assessments under section 73(1) of the 1994 Act to their best judgment, and that the assessment under appeal by Bestline was made to best judgment, it follows that I find the assessment to be valid. I therefore dismiss its application. In so concluding, I have taken account of the submissions of Mr Chapman, and my decision reflects them.[24]Mr Chapman indicated that in the event of my dismissing the application HMRC would make no application for costs. Consequently, I make no direction as to costs.[25]Although the application was heard in private, the parties agreed that my decision should be released generally. MAN/2001/0703 DAVID DEMACK TRIBUNAL JUDGE Release date: 8 April 2009