20728

Apportionment – assessment – whether to best judgment – Agreed method departed from during taxpayer’s tax year – appeal allowed.  VATA 1994 s 24(5).

EDINBURGH TRIBUNAL CENTRE

	THE UNIVERSITY COURT 
	OF THE UNIVERSITY OF DUNDEE	Appellant

	- and -

	THE COMMISSIONERS FOR 
	HER MAJESTY’S REVENUE & CUSTOMS	       Respondents

			Tribunal:	 (Chairman):  T Gordon Coutts, QC
					 (Members):   I R Welch, CA, JP
							  James D Crerar, WS., NP

Sitting in Edinburgh on Monday 26 November 2007 and Monday 12 and Tuesday 13 May 2008

for the Appellant	  	Mr Charles Rumbles

for the Respondents	Mr Iain Artis, Counsel

© CROWN COPYRIGHT 2008.

DECISION

Introductory
This appeal concerns solely an assessment issued on 18 April 2005 for the year to 03/04.  The issue is whether that assessment can be considered as having been issued “to best judgment” and whether even if it were it should be sustained.

The material before the Tribunal consisted of a statement of agreed facts, written material in 2 substantial files of correspondence, in substantial measure spoken to by Mr Brunton, Tax Consultant of the RCB Partnership who gave evidence in his capacity as the person responsible for compiling and negotiating the Appellant’s tax position with the other witness Mr Hannah who was described as a Tax Operations Senior Assurance Officer employed by the Respondents who at the material time had responsibility for the Appellant’s tax affairs.  From that material a certain measure of factual matter could be found or inferred.  

At the conclusion of the evidence parties agreed to provide written submissions to the Tribunal for which the Tribunal is grateful.

Genesis of the Assessment
The background to this entire matter requires to be considered and the actings of the Respondents looked at in the light of the situation before the particular assessment of 2005.

The first matter which requires to be borne in mind is that a University and in particular this University presents a complex situation with regard to VAT.  With that in mind a simplistic solution may not be either appropriate, fair or reasonable.

Matters were brought to a head by an ill considered letter from an officer of the Respondents, Mr Kennedy which made various erroneous assumptions and assertions for which apology had to be made and appears to have been a letter sent to all, or at least all Scottish Universities.  It not only demanded a variety of answers to matters with which this University was not concerned but it goes on to say that in relation to information requested “I appreciate that this may appear onerous”.  It then goes on to demand a prompt response because the writer was “mindful of the time limits for raising an assessment”.  The next matter was a meeting between Mr Hannah and Mr Crozier also of RCB Partnership, on 27 January 2004.  At that meeting the way in which business/non-business adjustments had been made up until that time was raised by Mr Hannah who expressed some misgivings.  He requested much further information an attitude in which he has persisted throughout.

The Business/non-Business Calculation Operated by the Appellant
The Appellant has all along recognised that an apportionment in that regard was required.  Parties’ attention had been turned to that matter in the previous decade,

In the event by letter dated 24/1/2000 formal approval of the method used by the Appellant was given and it was adopted thereafter.  It was adopted after discussion amongst the Respondents’ higher officers and their appropriate centre in Cambridge.  It was not sought to be varied in any way by the Respondents until the events hereafter narrated.

Mr Hannah who had had no previous involvement with the Appellant nor was it clear according to the evidence that he had any involvement at all with University taxation began his “new broom” approach in January 2004, well into the University’s tax year.  He conducted, in parallel, consideration of the University’s partial exemption special method as well as the matters of apportionment with which this Tribunal is concerned.  In each of these matters assessments were made which required to be modified thus indicating to the Tribunal a haste to issue an assessment and attempt to justify it later, seeking to shift the total burden of ascertaining the amount actually due under any assessment to the Appellant by leaving it to the Appellant to try to obtain modification.

The Evidence and Attitude of Mr Hannah
Mr Hannah did not impress the Tribunal as being an officer capable of sensible or selective application of general principles to particular cases.  He was, on the evidence before the Tribunal a person who concentrated almost obsessively on detail making many demands for information about matters which could happily have been accommodated by a general approach.  During the course of his inspection, which persisted for a substantial period of time, he had admittedly requested copies of over 600 purchase invoices from which he asked various questions about the use of the VAT charged such as “who used the new bike shed?  Where were new carpets installed?  Who was using a refuse skip hired by the Appellant?”  Relevant or not such an approach is significantly indicative of a mindset.

Mr Hannah then announced that he was going to issue assessments for the periods 2001/2002 and 2002/2003.  In a letter dated 21 June 2004 his rationale was expressed as “if neither Dundee University nor the RCB Partnership can justify the business/non-business apportionment method used in 2001/2002 then clearly it should not have been used and unless an alternative apportionment is agreed I intend to apply the apportionment method previously advised for assessment purposes”.  Mr Hannah obviously had not considered the appropriateness of re-visiting matters which had been disposed of by retrospectively changing the agreed method.  The University were “justified” in using the method which had been agreed and until the difference was resolved needed to go no further.  He reluctantly accepted, by letter dated 29 June 2004, that the agreed method could be used in 2001/2002 and 2002/2003.  That letter of 29 June went on to say “but from 2003/2004 the method outlined in my schedule of 28 May 2004 should be used unless an alternative method can be agreed”.

The Search for an Alternative Method
It should be noted that it had all along been recognised that there were some anomalies or criticisms to be made of the method agreed in 2000 if examined in minute detail but both parties had at that time sensibly recognised a clear and easily applied method of apportionment, albeit it represented compromise on both sides.  Various methods other than that sought to be imposed, were suggested on behalf of the Appellant but all fell on stony ground.

The Applicable Law and HMRC Guidance
Since the University undertakes both business and non-business activities any tax which relates to goods or services obtained solely for business activities is input tax, any tax which relates to goods or services obtained solely for the purposes of their non-business activities is not input tax and parties have operated on that basis.  Tax on goods and services that relates to both activities must be apportioned as is provided by Section 24(5) VATA 1994.  That provides that if goods or services are used or to be used partly for the purposes of a business and partly for other purposes VAT on supplies, acquisition and importations shall be apportioned so that only so much as is referable to business purposes is counted as input tax.  

In the case of any, but particularly Dundee University, that statutory duty is frequently not capable of easy ascertainment if indeed it is capable of accurate ascertainment at all.  Accordingly devices have been adopted to act as a “proxy for use”, total accuracy being impracticable as acknowledged in the Respondents’ guidelines below.

It is clear law that a business/non-business apportionment must be determined before getting to the stage of a partial exemption calculation and the attribution of input tax to taxable and exempt supplies.  That much is plain from the ECJ Decision in EDM and Fazenda Publica v Ministerio Publico, C77-01, 29 April 2004 paragraphs 53, 54 and 73, and should have been done first.

The Respondents in their guidance, V1-6; Business/Non-Business Apportionment of Tax Section 5 undertake to give guidance to officers in the situation where a trader incurs tax on goods or services that they intend to use for both business and non-business activities.  The guidance section is clear and balanced and does not attempt to lay down any preferred method or suggest that only one method would be appropriate.  One factor which is made plain in the guidance is that the officer requires to have consideration to whether benefit is outweighed by cost to both the trader and the department in carrying out and checking an apportionment.  In other words the cost to a trader of providing detailed evidence and calculations is a relevant factor to be weighed against the perceived benefit in terms of revenue.  The guidance goes on to discuss various methods of business/non-business apportionment.  In particular it says that an income based method, although given as an example, is not one for which HMRC have an automatic preference; there has to be a fair and reasonable result (5.8.4).  A fair reading of the guidance indicates that it instructs officers that any method may require individual modification and in particular that all the relevant circumstances which apply require to be weighed.  In other words a mere arithmetical manipulation of sums of money is not apportionment. 

Contentions for the Parties
A –  Best Judgment?

The Appellant contended that the assessment was not made to best judgment in respect that it was a device to allow retrospectively disallowing an agreed method.  In response the Respondents said that it had been made clear in a letter dated 29 June 2004 that they had withdrawn their agreement to the continued use of the previously agreed method.

It should be noted that the University was for the year 2003/2004 operating the previously agreed method for at least 10 months of its tax year before any implied withdrawal in the letter of 29 June.  The reconciliation processes which take place at the end of the year to join together the provisional claims for credit which had been incorporated in the returns had not taken place by 29 June.  On the other hand the Appellant was legitimately and reasonably operating and expecting on the cost coding and budgeting arrangements which applied from the beginning of that tax year and conducting its affairs accordingly.

It has been authoritatively stated that for an assessment to fail the requirement of best judgment the fact that the assessment is wrong or appears to be objectively unreasonable does not justify the finding that the assessment was not to best judgment unless the only explanation is that it was produced as part of something other than a genuine and honest attempt to calculate the amount of VAT.

The Tribunal having considered the background and the circumstances in which the assessment was made do not consider that it was a genuine and honest attempt to ascertain the amount of tax due.  Instead the assessment was driven by other, oblique, motives.  The first of these was an attempt to circumvent an agreement on which parties had been operating for the greater part of the tax year and under which they had conducted their affairs.  The second, we infer from the correspondence and evidence we heard was that the issue of an assessment was made not with a view to its accuracy or appropriateness but as a measure of perceived exasperation by the officer because he thought that the University and its advisers were not complying with his demands for information within the timescale he thought they should.  When coupled with the obvious fact derived from the whole evidence written and oral that no proper consideration had been applied to the peculiarities of the University’s so called trading position, its widely differing use of resources taxable and otherwise human and material in particular locations and activities, gave the Tribunal the impression that the matter had been approached on the basis that the University was a dishonest trader rather than an institution of learning compelled by Government demands to acquire sources of finance.

In short this assessment, but this assessment only, was issued for entirely the wrong reasons i.e. not to correct the result produced by the operating method but in order to change an operating method without advance notice.  The assessment cannot be considered as having been made to best judgment and cannot be upheld.

B – Was the assessment sustainable even if made to best judgment 

This matter occupied much time before the Tribunal and they have considered it.

Parties were much concerned about the presence or absence of evidence in relation to particular departments and operations of the University as a complex trader.  The Tribunal is unable on the information it has properly to ascertain the true amount of tax due if any even with liberal use of compromise.

The Tribunal says nothing at this stage about the various alternative calculations produced and, summarily rejected, by Mr Brunton in an attempt to resolve the matter.  On an overview the best attempt was probably his last one but it received no consideration whatsoever being simply rejected by Mr Hannah who failed to appreciate the necessity for qualification of the crude method he wished to have adopted in the light of the actual trading position of the University.  That he had closed his mind to anything other than that which he thought produced the best result for the Revenue, thereby departing from the HMRC guidance above quoted is summarised in a letter from him of 17 August 2007 in which he says “I am rejecting your proposal because you are using input tax as a driver to identify the non-business portion of the non-attributable input VAT”.

That an input tax based method can be appropriate in a University context is illustrated by this Tribunal’s decision in The University Court of the University of Glasgow v HMRC.  What was said in that case is appropriate to the present which is that the apportionment requires to be achieved in the particular circumstances of this University’s trading.  It was plain in the particular circumstances of this University’s trading in the present case that distorting factors could arise in the situation at Ninewells Hospital and the Welcome Building and also consideration of individual departments which varied considerably in not only the amount of tax they incurred or the amount of goods and services they consumed which on the face of it if some universal criteria was to be adopted must be given a weighting.  Customs calculations are crude and not case specific and the Tribunal does not feel that it has the material in front of it in sufficient detail from either side to make a determination of the true assessment.

Disposal
Since the Tribunal is of the view that the assessment was not made to best judgment they discharge it.  For the future agreement requires to be achieved as is plainly indicated in the Respondents guidance notes.  It may be that no accurate apportionment can be made in which case parties must do the best they can to achieve a fair result bearing in mind the various complex and disparate activities which they operate.  It may well be that matters as disclosed before this Tribunal about the relationship between the parties indicate that a different officer should be engaged to achieve a future agreement.  In the event however the Tribunal allows the appeal discharges the assessment and finds the Appellant entitled to its expenses which failing agreement will be taxed in terms of Rule 29(3).

T GORDON COUTTS, QC

CHAIRMAN

RELEASE:  1 JULY 2008

EDN/05/102