19298

Assessment:  Whether discretion to make assessment; whether exercised in the instant case; assessment discharged.  VATA 1994, s.73.

EDINBURGH TRIBUNAL CENTRE

	TECHNIP COFLEXIP OFFSHORE LTD	Appellant

	- and -

	HM REVENUE AND CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  T Gordon Coutts, QC
					 (Member):     K W Pritchard, OBE., BL., WS

Sitting in Aberdeen on 23rd June 2005.

for the Appellant		Leslie Allen, Dorsey & Whitney

for the Respondents	Andrew Young, Advocate

© CROWN COPYRIGHT 2005.

DECISION

Introductory
This appeal is against an assessment in the sum of £635,579 issued to Coflexip Stena Offshore Ltd, as the Appellant was then called, on 29 August 2001 in relation to accounting period 08/00.  In their accompanying letter the Respondents described the situation which had arisen as “unfortunate circumstances”.  That is an understatement.  Although the appeal is against one assessment it is instructive to review the background leading up to that assessment in order to assess whether it must be sustained.  The Appellant was a “repayment trader” who submitted monthly returns.

Contractual Background
In May 1996 the Appellant entered into a contract with a firm Odebrecht Oil and Gas Limited.  That contract related to work being undertaken outside the territorial waters of the United Kingdom.  It was accordingly outwith the scope of the VAT regime.  The Appellant however treated the supply as standard-rated.  It was not clear on the facts whether the Respondents knew the precise terms of the particular contract or where it was to be carried out at that time.    

In 1997 Odebrecht had serious financial problems and the Appellant created a bad debt provision in its accounts.  Odebrecht had failed to make their staged payments as agreed under the contract and the Appellant decided to invoice for the amounts outstanding.  Those invoices dated from 30 January 1997 through to 30 January 1998.  In April 1998 the Appellant served an action on Odebrecht for recovery of unpaid monies totalling about £9million.  The matter was settled in June 2000 for a sum considerably below £9million.  The Appellant having treated the supply as standard rated considered that it had a bad debt relief claim and was within time to make a claim for recovery of those amounts.  The Appellant in the return for 08/00 adjusted the amount on its VAT return as a bad debt.  In December 2000 an Officer of the Respondents reviewed the bad debt claim which was still within time.

The Appellant was informed by the Respondents that Odebrecht did not accept that they owed any money and it was then realised by the Appellant that the supply made was outwith the scope of the tax.

Accordingly there was in reality no debt due by Odebrecht in relation to VAT since there had been no legitimate claim made in respect of VAT and in consequence no bad debt.

Following meetings between the parties seeking a way forward a decision was made to raise an assessment on 21 August 2001 for £635,579.  The Officers ground was as follows:-

“The settlement is considered an agreed reduction to the invoiced value of the supplies.  Where there has been an increase or decrease in the consideration for a supply, Regulation 38 VAT Regulations 1995 requires businesses to adjust their VAT account via a credit note.  However, any such adjustment is subject to the 3 year capping rules and credit notes have to be issued within 3 years of the original supply.

In these circumstances I shall have to disallow their BDR claim made in August 2000 VAT return for £635,579.23 by raising a Notice of Assessment.  You may still raise credit notes to adjust the value of any supply where a tax point is still within the 3 year time limit, and adjust your current VAT return accordingly.  Unfortunately there appears to be no scope for Departmental discretion in the application of the capping provisions, regardless of the circumstances.”

That decision did not proceed upon a clear understanding of the facts or law, and by that time we find as fact that the officer knew that the supply was outwith the scope of the tax.  There was thus no tax point.  The discussion in that letter about agreed reductions and the issue of credit notes was without point.

Confusion continued between the parties until a few weeks before the appearance of the action before the Tribunal.  It was finally conceded on all hands that the sum assessed (which was the amount of the illegitimate demand for VAT which had been made against Odebrecht) was in fact not a bad debt but outwith the scope.  Confusion however continued to reign in a joint statement of “agreed facts” presented to the Tribunal which referred to these supplies as zero rated, thereby conceding they were taxable supplies.  Subsequent clarification from the parties resulted in final documented acceptance that the transactions were outwith scope of VAT and accordingly not taxable supplies.  The sum in question was also agreed as to quantum.

The net result of these events is that the Appellant has been served with an assessment demanding a sum of money which it is agreed relates to matters outwith the scope of the tax.  The Appellant has not received payment of any VAT but is now being faced with a demand for a considerable sum it has have never received and has no hope of recovering.  It was conceded that absent capping legislation the sum in question would have been paid to the Appellant.  The question for the Tribunal is whether that assessment had to be made and further whether it would constitute an unjustified windfall gain.  Must it be sustained?

Material Before The Tribunal
The evidential material before the Tribunal consisted of correspondence between the parties and the said agreed Statement of Facts.  The Tribunal is not in a position to make any findings as to the responsibility for the confusion which arose or find any justification for the actings of the Respondents beyond the contentions hereafter discussed.

Argument For Respondent In Support Of The Assessment
By their invalid bad debt relief claim the Appellant obtained a refund which “ought not to have been so paid or credited”.  The Commissioners are empowered to issue an assessment to recover the overpayment.  The Appellants ought not to have obtained this refund for bad debt relief so, prima facie, an assessment is competent.

The fact that the original supply is now agreed as being outwith the scope does not affect the validity of the assessment.  VAT is a self assessing tax in which the figures placed by the taxpayer in his returns will determine the liability of the taxpayer for that period.  It may not be a final determination since both the Commissioners and the taxpayer have access to mechanisms which may result in that liability being revised.  However, until those mechanisms are correctly applied, the liability of the taxpayer is fixed by his return.  (Scott Baker LJ in Cardiff County Council v C & E [2004] STC 356 at paras 74-77.)  When the Appellant incorrectly included these supplies as standard rated output tax in its returns, this created a real VAT liability albeit it was subject to possible revision.  When the Appellant initially sought to revise that liability in August 2000, it adopted an inept procedure.  The assessment was issued in August 2001 to return to the status quo which existed before the inept procedure had been adopted by the Appellant but this was without prejudice to the Appellant seeking to revise the original liability adopting a competent procedure.  Until the Appellant adopted a competent mechanism leading to revisal of the original VAT liability, there was a real liability to pay this level of VAT to the Commissioners even though the Appellant would have had no such liability if it had correctly classified the supply as outwith the scope from the outset.  Accordingly, there is no difficulty in seeing how the Commissioners could issue an assessment for VAT due from the Appellant in August 2001.  If the Commissioners could not issue an assessment in this situation, it would lead to certain adverse consequences.  A taxpayer with a valid but capped claim for a repayment of VAT would be able to escape from the cap through recovering the sum via an overstated claim for tax credit.  If the Commissioners then sought to recover the overpaid tax credit, the taxpayer would challenge the assessment as being incompetent on the basis that there was no real VAT liability to be assessed.  This ability to evade the cap would not only exist where the original overpayment of VAT arose from incorrectly classifying an “outside the scope” supply as standard rated.  It would also arise where a zero rated supply was incorrectly classed as standard rated.  In both situations, a taxpayer would be able to argue that the original VAT liability had been overstated so that once the additional tax credit had been recovered, there was truly no “amount…being VAT due from him” which could justify an assessment.  Such a construction would circumvent the well established procedures (including time limits) for correcting errors.  In a self assessing tax system, it is important that both the taxpayer and the Commissioners follow the procedures set out for the determination of tax liability.  This is also important given the turnover nature of the tax, since revisals of liability usually have knock on effects for third parties.  In the present case, the Commissioners have simply sought to follow the correct procedures through (i) disallowing what is now agreed as an inept claim, (ii) requiring the taxpayer to revert to the status quo as if the inept claim had not been made, and (iii) allowing the taxpayer to proceed with such competent correction methods as are still open at the relevant time.

Argued for Appellants
The Commissioners made an assessment under Section 73(2) of VATA 1994 subsection 2 which provides that in any case where for any prescribed accounting period there has been paid or credited to any person (a) as being a repayment or refund of VAT or (b) as being due to him as a VAT credit an amount which ought not to have been so paid or credited or which would not have been so paid or credited had the facts been known or been as they later turn out to be the Commissioners may assess that amount as being VAT due from him for that period and notify to him accordingly.  In respect of the accounting period in which the bad debt relief was claimed while it is true that there was an amount paid or credited to the taxpayer that sum was not a sum which would not have been paid or credited  having regard to the facts as they later turned to be.  The Appellant has allowed the Commissioners in respect of the input tax claimed by him, a sum which was not and never could have been tax due.  

When the Respondents made their decision to assess they had all the information before them to know that in relation to the supply, the invoices in question and the liability of the supply the Appellants did not owe any money to the Respondents.  The Respondents should have considered the question of all amounts due and they are not confined to amounts which arise in any particular accounting period.  The reference to the accounting period in Section 73(2) merely locates the time at which the payment was made or credit was claimed.  The officer who determined to make the assessment knew that the Appellant had given an excessive amount as set off to the Respondents.   He also would have known that the Appellants had sought to reclaim those amounts timeously, had they been bad debts, and the Respondents were in process of verifying the sums in question.  Accordingly when considering the period in question knowing the facts as they later turned out to be, the officer would have known that there was no VAT due to the Respondents.  For the period 08/00 the Appellant had not been credited with an amount that was not due to it, the Appellant was paid an amount that was due to it.

Throughout the relevant periods the Appellant was a repayment trader and the amount of input tax recovered by it always exceeded the amount of output tax that it was due to pay.  Accordingly the Appellant’s claim would not fall under Section 80 of VATA 1994 since it had not paid sums to the Respondents.  In the course of correspondence the Respondents contended that credit notes in respect of the sum or sums in question should be issued and a formal claim made to enable the Commissioners to recover such amounts if necessary from Odebrecht.  While it is probably the case that there were no sums which would have been recoverable from Odebrecht in any event, no credit note can be issued - the Appellant falls outside the normal situation.

The Respondents contention that the method of correction of error is prescribed in Public Notice 700/45, is unsound.   The notice itself does not have the force of law and does not claim to have it. Further in the Customs and Excise Manual Volume 1-33 Sections 2 & 17 the Commissioners retain to themselves significant discretion as to the form manner and time within which they may allow claims.  Notification can be made by letter (17.20) and, in short there is no prescribed formula for making this claim.

In the period 08/00 the Appellant adjusted the amounts on its return to reflect an amount of money due to it.  The Commissioners were informed of the amount claimed to be due and were ultimately made aware that it was established that the underlying reason for that amount being due was not that it was a bad debt but that it was outwith the scope of tax.  Furthermore the Appellant being a repayment trader its claim would fall within Regulation 35, VAT Regulations 1995.  The capping provisions in Regulation 29(1a) deals solely with claims for input tax.   The Appellant is not claiming input tax in the instant case and accordingly escapes the capping provisions.

The Appellant does not contend that the whole of the capping legislation is invalid.  However the lack of a transitional period has prevented the Appellant from making a valid claim in respect of 2 of the invoices which fell before the implementation of the cap on 1 May 1997.

No assessment should have been raised or, alternatively, the Appellant has made a claim within time and that claim was sufficient to stop the clock running against it.  The fact that the underlying technical basis of the claim was not verified until later does not alter the proposition that the monies were properly due to it.

Decision
Although the matter does not seem to have been the subject of express decision hitherto the Tribunal considers it to be the case that the Commissioners do have a discretion in the matter of making an assessment.  The enabling provisions use the word “may”.  The Commissioners accordingly may make an assessment or they may not.  There is nothing imperative in the statute.  Even if there was an ascertained and justified sum due the Commissioners still are not obliged to issue a demand for it.

It is apparent from the correspondence in the present dispute that the Commissioners took the view that they had no discretion at all and never considered the particular circumstances of the particular case in which they recognised that these were “unfortunate circumstances”.  In our opinion that is an erroneous approach.  They are not entitled so to fetter their actions.  The circumstances of the present case are that the effect of what the Commissioners have done is to attempt to secure to themselves a sum of money which never was due in reality and always fell outwith the scope of the tax.  There never was a taxable transaction.  There could be no tax point.  It is in such circumstances that the Commissioners, in the Tribunals view, require to consider whether they are justified in seeking, obtaining or retaining this windfall which in our view would be a matter of unjust enrichment, before making an assessment like the present.  As a public body they have to consider the appropriateness of the whole circumstances, and not to seek a manifestly unfair advantage.

In Whiteman on Income Tax under the heading unreasonableness causing injustice there appears at para 30.51 “There is a long standing Inland Revenue practice not to collect tax where the taxpayer has clearly satisfied the Revenue that no tax is due notwithstanding that an amount may have become final and conclusive in respect of the year in question.   The practice was drawn to the attention of the Court of Appeal in the unreported case of Nolan v IRC (1956) where the Court specifically approved the practice.”    That is also in our view, a factor to be borne in mind.

Since the Commissioners did not exercise any discretion and paid no attention to the circumstances of the case, for aught yet seen,  the assessment in the Tribunal’s view cannot stand.  It will therefore be discharged.  It is not for the Tribunal to exercise a discretion which is vested in the Commissioners even if this would appear to be a case where, if there is discretion, the taxpayer should not be deprived of funds which were never due to the Commissioners.  There is something deeply unsatisfactory about a Government department relying upon accounting procedures to create a taxable transaction which did not exist in the particular circumstances of this case.  That would not be fair dealing and can be distinct from errors in discounting for taxable transactions.  It appears to the Tribunal that there is a significant difference between something which is outwith the scope of the taxing statute and a normally taxable transaction which is either exempt or zero rated and therefore has to be accounted for.  A transaction which is outwith the scope does not have to be accounted for at all.  

The view we have taken makes it inappropriate to decide at this stage upon the other arguments put forward by that Appellant.  However, we would observe that in relation to the present there is no prescribed formula for making a claim that the repayments have been improperly credited with a sum which could never be tax.  The Commissioners are not precluded from dealing with such a claim, and in particular not precluded by Public Notice 700/45.  We make no decision upon the Appellants argument quoted above in relation to the application of capping provisions in this particular case.  That is a stage beyond the matter in issue – an assessment.

Accordingly the assessment is discharged.  Neither party sought expenses.

T GORDON COUTTS, QC

CHAIRMAN

RELEASE:  19 OCTOBER 2005.

EDN/01/165