[2010] UKFTT 111 (TC)

TC00422

Appeal number LON/2008/2064

VALUE ADDED TAX – 3 year cap – Repayment overpayment VAT requested more than three years after the end of the prescribed period in which assessment made – s.80(4) Value Added Tax Act 1994 considered 
INFLATED ASSESSMENT REGIME – Implications considered – s.73(8) Value Added Tax Act 1994

FIRST-TIER TRIBUNAL
TAX CHAMBER

	IAN DEAR	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Value Added Tax)	Respondents

				TRIBUNAL: 	 MISS J C GORT (Judge)

Sitting in public in London on 30 April 2009 and 2 February 2010

The Appellant appeared in person

Mr Robert Wastell of Counsel instructed by the Solicitor’s Office appeared on behalf of the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal by Mr Dear against a decision of the Commissioners dated 24 July 2008 that they would not credit or repay an amount of £2,159.59 overpaid by Mr Dear in respect of VAT for the period 02/04.

2.	Mr Dear appealed on the following basis:

(i)	There was no basis for the assessment of £2,159.59 for the period 02/06;
(ii)	There was no legal basis under s.80(4) of the Value Added Tax Act 1994 (“VATA”) to enable the VAT authority to claim the full amount;
(iii)	S.80(4) of VATA allows a time limit of 6 years.

The facts are that Mr Dear is a barrister registered for VAT since 1 January 2001.  On some occasion or on more than one occasion prior to the period 02/04 he had failed to submit a VAT return and been assessed in respect of that period, or those periods.  The tribunal was not given the details of that/those period(s) or any prior assessment in respect of it/them.  The only specific information given was that Mr Dear had not submitted his return for the period 02/04 on time and on 16 April 2006 the Commissioners issued a central assessment in the sum of £2,298.  This assessment was stated in a skeleton argument provided by the Commissioners to have been issued to best judgment under s.73 of the Value Added Tax Act 1994.

3.	On 4 July 2008, i.e. some four years and four months late, Mr Dear submitted his return for the period 02/04 showing a net amount of tax due in the sum of £138.41.

4.	On 23 September 2008 Mr Dear lodged a Notice of Appeal against the Commissioners’ refusal to credit him in the sum of £2,159.59, being the difference between the assessed amount and the balance shown on the return of £138.41.  That refusal was based on the fact that the relevant return was received more than three years after the end of the prescribed accounting period in respect of which the assessment was made.

The Legislation

5.	Section 73 Value Added Tax Act (“VATA”) 1994 provides:

“(1)	Where a person has failed to make any returns required under this Act (or under any 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.
…
(8)	In any case where – 

(a)	as a result of a person’s failure to make a return for a prescribed accounting period, the Commissioners have made an assessment under subsection (1) above for that period,
(b)	the VAT assessed has been paid but no proper return has been made for the period to which he assessment related, and 
(c)	as a result of a failure to make a return for a later prescribed accounting period, being a failure by a person referred to in paragraph (a) above or a person acting in a representative capacity in relation to him, as mentioned in subsection (5) above, the Commissioners find it necessary to make another assessment under subsection (1) above,
Then, if the Commissioners think fit, having regard to the failure referred to in paragraph (a) above, they may specify in the assessment referred to in paragraph (c) above an amount of Vat greater than that which they would otherwise have considered to be appropriate.”

6.	Section 80 VATA 1994 provides:

“(1A)	Where the Commissioners – 

(a)	have assessed a person to VAT for a prescribed accounting period (whenever ended), and
(b)	in doing so, have brought into account as output tax an amount that was not output tax due,

They shall be liable to credit the person with that amount.”

7.	Subsection 4 of section 80 VATA 1994 provides:

“The Commissioners shall not be liable on a claim under this section – 

(a)	to credit an amount to a person under subsection (1) or (1A) above, or 
(b)	[not applicable],

if the claim is made more than 3 years after the relevant date.”

8.	Subsection 4ZA of section 80 VATA 1994 provides:

“The relevant date is – 

(a)	[not applicable];
(b)	[not applicable];
(c)	in the case of a claim by virtue of subsection (1A) above in respect of an assessment issued on the basis of an erroneous voluntary disclosure, the end of the prescribed accounting period in which the disclosure was made;
(d)	in the case of a claim by virtue of subsection (1A) above in any other case, the end of the prescribed accounting period in which the assessment was made;
…

9.	Whilst pursuant to s.80(1A) of the VATA the Commissioners would have been liable to credit Mr Dear with the overpayment of VAT resulting from the assessment, this liability is overtaken in the present case by s.80(4).  The ‘relevant date’ here is 31 May 2004, being the end of the prescribed accounting period in which the assessment was made, the assessment in question having been made on 16 April 2004.  The amendment to s.80(4) made by the Finance Act 2008 which came into force on 1 April 2009 and extended the time limit to four years only applies to assessments in respect of which the relevant date is 31 March 2006 and therefore is not applicable here.

10.	Mr Dear at the initial hearing of the appeal accepted that he had lodged his appeal out of time but submitted that he was entitled to know what criteria had been used to arrive at the quantum of the assessment and further the assessment figure did not reflect the likely income of a criminal barrister who was attempting to establish a practice.  The matter was adjourned for the Commissioners to produce evidence of the basis for the assessment.

11.	An amended Statement of Case was issued dated 12 May 2009 by which the Commissioners repeated their argument that the appeal was out of time but, in the alternative, submitted that by s.73(8) of the VATA they were entitled to issue assessments greater than they would otherwise consider appropriate.  No evidential basis for the entitlement was provided, nor was any evidence provided of the basis on which the assessment had been made, none being available at this distance in time.  At the adjourned hearing extracts from V1-35 “Assessments and Error Correction Guidance” were produced.  Paragraph 9.12 is headed “The Inflated Assessment Regime” and relates specifically to s.73(8) of the VATA.

The Inflated Assessment Regime (IAR)

Where a trader regularly pays prime assessments and does not make returns, a procedure for the inflation of subsequent prime assessments is invoked.  The power to inflate assessments in this way is provided by section 73(8) of the VAT Act 1994.

Section 73(8):

In any case where – 

(a)	as a result of a person’s failure to make a return for a prescribed accounting period, the Commissioners have made an assessment under subsection (1) above for that period;
(b)	the VAT assessed has been paid but no proper return has been made for the period to which the assessment related, and
(c)	as a result of a failure to make a return for a later prescribed accounting peri0od, being a failure by a person referred to in paragraph (a) above or a person acting in a representative capacity in relation to him, as mentioned in subsection (5) above, the Commissioners find it necessary to make another assessment under subsection (1) above.

Then, if the Commissioners think fit, having regard to the failure referred to in paragraph (a) above, they may specify in the assessment referred to in paragraph (c) above an amount of VAT greater than that which they would otherwise have considered to be appropriate.

A trader will enter the IAR when a prime assessment is due for issue and paid prime assessments are present in any two of the previous four periods.  Traders will not be advised separately of their entry to the IAR and the inflation amount will not appear separately on assessments or computer outputs.

(a)	Calculation of the inflation factor

The first assessment issued following entry into the IAR will be inflated by 20%.  Inflated assessments of less than £10 will be uplifted to £10 (de minimis assessment).  Subsequent assessments will be inflated by additional factors of 20% until a maximum inflation of 100% is reached.  When an assessment based on a 100% inflation is produced it is referred to the local office for action.  See paragraph 9.13.

(b)	Reduction of inflation factor

For a trader remaining in the IAR the inflation factor will revert to a minimum of 20% if:

•	A return is present for the period immediately preceding the period being assessed; or
•	The assessment is being based on an amount which can be regarded as a ‘true liability’, e.g. an assessment plus an additional assessment.
(c)	Exit from the IAR

A trader will leave the IAR if:

•	four consecutive returns are present for the periods immediately prior to the one being assessed; or
•	the local office input a VAT 717 (Cancellation of Inflated Assessment Factor) prior to the enforcement run.

The local office may make a prime assessment for a trader in the IAR.  The amount calculated as due should be inflated by the appropriate inflation factor.  If the trader is deregistered see paragraph 9.11.

An inflated assessment should not be used as the base figure for calculating other assessments.

Reasons for Decision

12.	At the hearing of the appeal I announced that the appeal would be dismissed because the original challenge to the assessment had not been made in time, and this caught all aspects of the appeal.  However, there are three matters which have arisen which give cause for unease and which merit consideration by the Commissioners.  The first is that the assessment was both stated to be centrally issued and also said to have been made to best judgment.  Are these compatible?  The second is that the Commissioners’ own guidelines provide under paragraph 9.12 that traders will not be advised separately of their entry onto the Inflated Assessment Regime and the inflation amount will not appear on assessments or computer outputs, therefore had Mr Dear been in time with his appeal, he still would not have been put in full possession of all the facts regarding the quantum of the assessment and would not have been able to mount a proper challenge to it.  Thirdly, s.73(8) provides for what might be considered to be a penalty, and both the fact that an assessment contains that penalty and the amount of that penalty is concealed from the taxpayer.  These however are not matters with which this Tribunal can deal in this appeal, but of which taxpayers should be aware.

13.	This appeal is dismissed.

MISS J C GORT
TRIBUNAL JUDGE
RELEASE DATE: 10 March 2010

A party wishing to appeal this decision to the Upper Tribunal must seek permission by making an application in writing to the Tribunal within 56 days of being provided with these full written reasons for the decision.  An application for permission must identify the alleged error(s) in the decision and state the result the party making the application is seeking.