20778

Value Added Tax  -  failed scheme for the pre-payment of drugs and prostheses  -  whether assessments made to recover input tax that had initially been allowed  were made in time  -  when the Commissioners had all the evidence of facts, sufficient in their opinion to justify the making of the assessments  - Application to change the grounds of appeal  -  both Appeals allowed  -  Application granted in part

LONDON TRIBUNAL CENTRE

ST MARTIN’S HEALTHCARE LIMITED
	ST MARTIN’S MEDICAL SERVICES LIMITED	          Appellants

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

		Tribunal:	HOWARD M NOWLAN (Chairman)
				PROFESSOR ROY SPECTOR MD. PhD, FRCP, FRCPath	

Sitting in public in London on 8 to 16 July 2008

Roderick Cordara, QC and David Scorey, counsel, for the Appellant

Philippa Whipple, counsel, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

 Introduction

1.     This was a somewhat extraordinary case. Although it involved only one relatively simple question, the hearing took seven days. Notwithstanding this, and the fact that we allow both Appeals, this is not the end of the matter.  There remains first the possibility that the Respondents will appeal against this decision, and aside from that there remains the question of whether or not the Respondents will refund to the second Appellant the sum of £1,489,362 which the second Appellant has demanded under a Voluntary Disclosure. It was intimated at the commencement of the hearing before us that whilst this sum would almost certainly be refunded were we to dismiss the Appeals, if the Appeals were allowed the Respondents would then consider whether to refund the relevant amounts or to refuse to do so on grounds of abuse and unjust enrichment. Whatever the outcome of that further consideration, the position at present is that this decision has not concluded the dispute. Furthermore, and somewhat perversely, it remains possible that notwithstanding that the scheme undertaken by the two Appellants to pre-pay for drugs and prostheses failed on substantive grounds, and on our count could have been faulted on six or seven grounds, the Appellants might gain more from failure than they would have gained from total success. 
2.      The origin of the scheme implemented by St. Martin’s Healthcare Limited (“Healthcare”) and of this dispute lay in the 1997 decision of the Court of Appeal in Customs & Excise Commissioners v. BUPA [1997] STC 447, affirming this Tribunal’s decision that when private hospitals provided drugs and prostheses to inpatients, that was a zero-rated supply of goods, and it was not to be taken to be an integral part of the one single exempt supply of medical services.  
3.      It was rightly perceived that this decision would be reversed by a legislative change, and therefore at least five hospital groups, including BUPA Hospitals Limited and Healthcare, decided to try to maximise and preserve the benefit of the zero-rated analysis by agreeing to buy large quantities of drugs and prostheses from an affiliate for onwards supply to inpatients, and by pre-paying for the drugs and prostheses that would only actually be delivered over the following years. Thus in the instant case, a newly formed affiliate, St. Martin’s Medical Services Limited (“Services”), contracted to supply Healthcare with drugs and prostheses with a present value of £10 million. Healthcare paid £10 million on 16 December 1997, just before the 1 January 1998 change in law, and Services invoiced Healthcare.   
4.      Ignoring numerous deficiencies in the detailed implementation of the scheme, the hope and expectation was that the issue of the invoice and the receipt of payment would fix the time of supply, whereupon Services would pay VAT of £1,489,362 in respect of the supply. It was then hoped that the effect of Regulation 108 of the VAT Regulations 1995 would be that Healthcare would be able to treat the corresponding input as related to supplies to inpatients, and as being characterised by the then zero-rated status of the supply of such items to inpatients, notwithstanding that it was appreciated that by the time the drugs and prostheses were delivered, their supply to inpatients would be exempt and no longer zero-rated. On this basis Services accounted for VAT of £1,489,362 in its period 12.97 and Healthcare re-claimed the VAT related to its zero-rated analysis. In short, HMRC accepted these contentions and received the VAT payment from Services and refunded the same amount to Healthcare.
5.      The further assumption was that when Healthcare called for actual delivery of drugs for which it had pre-paid, Services would recover VAT since VAT included in actual supplies and deliveries of drugs from suppliers such as Glaxo would not be matched by any related outputs, because the supply of these drugs to Healthcare had been  treated as having already been made in December 1997.
6.   Without mentioning at this point several startling deficiencies in the implementation of the scheme, Services lent back the bulk of the pre-payment that it received by way of a demand loan, initially at 7%, to Healthcare, and, although this was never spelt out, the obvious intention was that that loan would periodically be reduced as Services required money to pay outside suppliers. 
7.     The then Control Officer of HMRC responsible for overseeing the VAT affairs of Healthcare was Janet Taylor. The 1997 BUPA decision meant that Janet Taylor had already been discussing with Healthcare, prior to the implementation of the pre-payment scheme, precisely how aggregate purchases for both inpatients and outpatients of drugs by one single pharmacy department operated by Healthcare for its three hospitals would be split between drugs purchased for the two categories of patients.  This needed to be ascertained in order to calculate the purchases that would qualify for refund as a result of the 1997 decision, as having been purchased in order to make zero-rated supplies to inpatients. The supply of drugs to outpatients was at all times zero-rated and no issue ever arose in relation to this.  
8.      Janet Taylor and her colleagues had even speculated that various private hospital groups would make pre-payments for drugs and prostheses in the short interval between the decision in the BUPA case and the effective date of the change in the law that was expected to reverse the BUPA decision. The officers were correct in this speculation in that BUPA Hospitals made a £100 million pre-payment, other private hospitals did likewise and as mentioned in paragraph 2 above, Healthcare made its £10 million pre-payment. 
9.      Janet Taylor was responsible for reviewing the pre-payment scheme undertaken by Healthcare and Services, and to this end she made two Control Visits. We will quote the notes that she made of those visits in full below. Janet Taylor admitted that she was not familiar with the decision in Faith Construction, on which the pre-payment notion was admitted and claimed to be based, and was not familiar with the type of challenge that might be made under one or another variant of the Ramsay, “abuse”, or “non-economic activities” type of ground. Accordingly there emerged a split in the potential challenges on the scheme with Janet Taylor gathering information and considering whether she could fault or at least hamper the scheme by addressing the practical difficulties of allocating drug and prostheses deliveries between those destined for inpatients and those for outpatients. By contrast, consideration of a possible Ramsay type challenge was effectively assumed and conducted by a more senior group of officers in the Anti-Avoidance branch of HM Customs & Excise.  By the time Janet Taylor ceased to be the Control Officer for the two companies in October 1999, she had been told by this group not to despatch a fairly familiar Ramsay type letter that had been drafted, enquiring into the motivation for the scheme.
10.     Following a somewhat extraordinary hiatus in the enquiries spanning the period from about July 1999 to July 2000, the new Control Officer, Mr. McAleer, made a further visit, the information gathered at which was summarised in a paper headed “Observations” that we will also quote in full.  By this time it was too late, under the “two-year cut-off date” for assessments to be made on either company to recover the amounts refunded to each company in respect of inputs unless an assessment could be justified on the basis that “further evidence, sufficient in the opinion of the Commissioners to justify an assessment” had come to the attention of the Commissioners. Were that so, then if an assessment was then made within one year of the new and sufficient evidence coming to light and within three years of the relevant VAT period (12.97 so far as Healthcare was concerned), valid assessments could still be made. 
11.      The contention on behalf of HMRC was that the information obtained in July 2000 constituted the required “new evidence” which, coupled with later taxpayer refusals to respond to more enquiries, justified a variety of Ramsay and “abuse” attacks which were made and which culminated in assessments being made on 19 December 2000. The contention on behalf of the Appellants was that all the information gathered by Janet Taylor was sufficient to mount that type of attack and that nothing of any real relevance was derived from the visit in July 2000 by Mr. McAleer or the refusal of the companies to reply to further questions. On this distinction hinged the issue of whether the assessments were in time or not. 
12.     For reasons that we will explain fully we have unreservedly reached the conclusion that the Appellants’ contentions are correct, and that the assessments are invalid as not having been made in time. 
13.     One further minor point is that an Application was made on behalf of Services to modify the grounds of appeal advanced by Services. We will explain this in full below, but confirm now that we allow this Application as regards the appeal in relation to the one VAT period, namely 12/98, and reject it for all others. 
The points at stake in this appeal
14.     As already mentioned, Services paid HM Customs & Excise £1,489,362 in respect of its contract to supply drugs to Healthcare, and Healthcare claimed and was granted and paid its input deduction of the same amount in early 1998 on the basis that the drugs and prostheses were to be used for inpatients, and at the technical time of supply (16 December 1997) such use was zero-rated. When Services actually commenced to purchase drugs and deliver them pursuant to its prior obligation (at first in November 1998 and more significantly in the first quarter of 1999), it claimed deductions on the basis that the input tax borne on purchases was not matched by any outputs since the supply to Healthcare had already occurred. For some period, these claims for recovery of input tax were accepted, and refunds duly paid. 
15.     When the scheme was finally challenged, the contended analysis advanced by HM Customs & Excise was that the initial supply and purchase both fell to be disregarded, as did deliveries pursuant to the disregarded contract. Instead it was accepted that input tax charged by drug suppliers would be allowed in the hands of Healthcare, albeit that the invoices had identified Services as the purchaser. 
16.     Following the assessments made on Healthcare (to recover the £1,489,362) and on Services (to recover various input recoveries in different periods commencing with the period ending 12/98) Healthcare and Services both appealed on substantive grounds and intimated that they would also be contending that the assessment on Healthcare and the first assessment on Services were out of time. Shortly thereafter Services made a Voluntary Disclosure to recover the VAT that it had actually paid (as it was invited to do in the Commissioners’ letter of 19 December 2000 quoted at paragraph 63 below), on the basis that if indeed the initial transaction was to be disregarded, then just as Healthcare’s input deduction was to be struck out, so Services’ payment of VAT should also be reversed. It also followed that when Services made further claims to recover VAT in later periods, these claims were refused.
17.     When, at a much later date, BUPA Hospitals’ case before the ECJ indicated that in such pre-payment schemes the correct analysis was that the initial contract did not generate any supply at all on contractual grounds, and when the Halifax case was decided on different grounds, but also against the taxpayer, Healthcare and Services abandoned the substantive grounds of their appeals but both indicated that they would continue to contend that the initial assessments were out of time and so invalid. As regards Services, the result was that the appeal was continued only in relation to £95,000 believed to be at stake on the one assessment that it was contended was out of time; Services repaid the input deductions that it had received for the later periods for which the assessments were in time on any basis, and Services also dropped its appeals against the refusal decisions to refund input tax for the yet later periods after the tax avoidance challenge had been mounted. 
18.     Ignoring a minor detail in relation to the one remaining assessment against Services that is under appeal (which we will deal with under paragraphs 74, 75 and 132 to 134 below), it follows that at present Healthcare and Services are appealing on the timing point to retain the aggregate sum of £1,584,362 that they currently hold which HMRC are seeking to recover under the assessments. At the same time, Services is reclaiming the £1,489,362 VAT that was wrongly paid once the initial prepayment had been rightly disregarded.  No issue in relation to this possible refund or retention of the amount covered by Services’ Voluntary Disclosure was in issue in these appeals. As recorded above, HMRC had intimated at the commencement of the appeals that if they won the appeals, they would almost certainly refund to Services, the VAT wrongly paid.  In the event that they lost the appeals, however, as they have done unless they bring successful appeals against this decision, HMRC intimated that they would consider whether to refund the £1,489,362 to Services, or to contend that on abuse or unjust enrichment grounds they are entitled to retain it. It does thus follow that these appeals will not conclude the dispute between the two taxpayers and HMRC, and that if Services eventually recovers its wrongly paid VAT, then on account of the timing points in relation to the assessments, the two companies together will have recovered significantly more in VAT than they would have done had the scheme been entirely successful.
The facts in relation to the pre-payment scheme

19.     The facts in relation to the scheme undertaken by Healthcare and Services are of only secondary relevance because this appeal really turns on what the Commissioners knew and not on the detail of the arrangements. It is worth mentioning a few of the facts however.   

20.    We should first mention that Healthcare operated three private hospitals, the London Bridge Hospital, the Lister, and the Devonshire Hospital. All three were operated directly by just the one company, Healthcare.  We were told that their roles were somewhat different so that for instance it would not be possible to judge the ratio of drug supplies to inpatients and those to outpatients at one hospital and then assume that that ratio would apply at the others. Furthermore the Devonshire had quite some practice in actually exporting drugs, whereas neither of the others did. 

21.     When Services made its claimed supply to Healthcare on 16 December 1997, it was not even registered for VAT purposes. Services made several further rather extraordinary errors in issuing what purported to be a VAT invoice for this claimed supply. First, the invoice failed to split out the VAT exclusive element of the price and the VAT. It also contained standard text indicating that 30 days’ credit was given for payment, which would have put the payment after, rather than before, 31 December as was plainly intended. Rather more significantly we were told that when the invoice simply stated  “Prepayment for drugs and prostheses to be supplied under contract”, Services and Healthcare failed to enter into a contract that the invoice had referred to. We were shown a Heads of Terms that KPMG had sent to Healthcare for signature on 16 December but there was no indication that it was either signed or agreed orally between the parties.  We make no finding of fact in relation to this as it is not material to this appeal.  Had it been signed, however, it did at least provide for payment to be made “on December 23”, and it also specified that Services was selling “goods to a net present value of £10 million inclusive of VAT”.  Although the invoice itself had not spelt this out, the definition of the term “goods” used in the contract made it clear that the drugs and prostheses contracted to be sold would be entirely for inpatients. We observed that there was something rather un-commercial about the Heads of Terms in that they indicated that when drugs were called for (over, it was assumed, a three-year period) they would be supplied at a 20% discount. Thus if Glaxo or any other supplier supplied drugs for a VAT-inclusive price of £100, those drugs would be delivered to Healthcare, and this would discharge the pre-existing obligation to the extent of £80 worth of drugs. 

22.     Following the issue of the invoice, and payment of £10 million by Healthcare to Services, Services loaned £9 million back to Healthcare and placed £1 million in the money market.  The Commissioners saw bank accounts that evidenced the payment and the two applications of cash, which in fact occurred on 23 and 24 December respectively, but they did not see any loan agreement until at least mid-2000. There was in fact a Loan Agreement, which simply provided that:

“St. Martin’s Medical Services Ltd agree to loan St Martins Hospitals Limited a maximum sum of £9m repayable on demand. The interest rate will be fixed for the year ending 31 December 1998 at 7%. It will be reviewed on 1 January 1999 and annually thereafter in line with the prevailing base rate.”

How the two companies envisaged that this scheme would work is a bit of a mystery in that if the drugs were expected to be called for by Hospitals roughly evenly over a three-year period, it was a little difficult to see how Services would pay drugs suppliers £100 and discharge only £80 worth of its future delivery obligations, when by the time it had paid VAT of £1,489,362 three months later, it would only have roughly £8.5m left on deposit earning 7%.  

23.     Turning now to the first communication in which Janet Taylor, HM Customs and Excise’s Control Officer for Healthcare, was informed of the scheme, on 12 January 1997 Liz Chinoy of KPMG wrote to Janet Taylor to inform her of the transactions that had been undertaken and to request early repayment of the VAT that Services would be paying, and that Healthcare was hoping to recover. The precise text of this letter was naturally significant in relation to the point that we had to decide.  Those parts of the letter, and of every document quoted in this Decision that are in emphasised text, are the passages that we need to flag in order to comment on them in the course of explaining our decision. Having first dealt with other points, the letter went on to say the following:

“Prepayment of VAT

“Prior to the change in law, St. Martins made a prepayment for the supply of qualifying drugs and prostheses to an associated company, St. Martins Medical Services Ltd. The supply was made on 23 December 1997 and VAT of £1,489,360.00 is due. This VAT will be recovered by St Martins on the VAT return for the period ending 31 December 1997. As the amount is large it may generate an enquiry from Southend and in order to ensure St Martins receives early repayment I should be happy to provide you with any information you may require in order to authorise repayment.

The principles of the Faith Construction case establish that prepayment under these circumstances is a genuine contractual payment and we can demonstrate the commercial reality of the transaction if required.

Regulation 108 of the VAT Regulations 1995 deals with the situation where an amount of input tax is attributed to taxable supplies on the basis that goods are intended to be used to make taxable supplies, but before the intention is fulfilled the goods are used to make exempt supplies. Regulation 108(3) provides that the nature of a supply shall be determined in accordance with the provisions of the Act at the time when the input tax was first attributed. The input tax was attributed at the time of the supply and St Martins will therefore attribute this VAT to the making of taxable supplies (at zero rate) of drugs and prostheses to patients, recovering the VAT in full. 

The basis of such arrangements was fully tested at the time of the change in liability of construction services in 1984 and again in 1990 when supplies of fuel became standard-rated, and as I understand that most private hospitals have put similar arrangements in place, I imagine that you will be able to agree the repayment without difficulty.  However, if you require any further information, please do not hesitate to contact me.”

The “scene” in relation to VAT law in 1997/8

24.     Prior to turning to the evidence given to us, it may be appropriate to mention that in early 1998 there were two assumptions made in relation to VAT law that now seem rather curious. Firstly there was a prevalent view, even shared to an extent by officers of HM Customs & Excise that the anti-avoidance concept often referred to as the Ramsay principle did not apply to VAT. Furthermore, precisely as the KPMG letter just quoted indicated, there was a general belief that artificial prepayments were effective for VAT purposes. Thus when it had been announced that construction services were going to be charged to VAT at the standard, rather than zero, rate several construction companies had agreed with their clients to invoice them early and take early payment. In the various different cases litigated the receipt of the prepayments was always somewhat fictitious in that the monies received were either blocked in escrow accounts, only to be released against later provision of architects’ certificates, or they were lent back to the client on the basis that those loans would only be repayable against similar architects’ certificates. The case referred to in the KPMG letter of Commissioners of Customs & Excise v. Faith Construction Limited [1989] STC 539 had confirmed the validity of such payments, and it is fair to observe that it was widely believed that the same conclusion would arise in other prepayment cases. It is also fair to say that such cases had been justified on technical grounds and not because tax avoidance motives had been outweighed by some commercially-driven reasons for arranging the prepayments.  

The evidence given to us

25.    Evidence was given to us by five HM Customs & Excise officers. Oral evidence was given by the three most significant, being Janet Taylor, Rod McAleer and Nicholas Dean-Webb. Witness Statements were accepted by the Appellants in respect of the evidence given by the other two officers, namely David Webb and Russel Davis, so that these two officers did not give their evidence in person and they were not cross-examined. We should say immediately that we regarded all the witnesses as being transparently honest and reliable. 

Janet Taylor’s evidence

26.     Janet Taylor was the Control Officer for Healthcare from the period prior to the implementation of the prepayment scheme until she moved to a different department of HM Customs & Excise in October 1999.  In addition to having confirmed that Janet Taylor was honest, we would both like to record that we found Janet Taylor’s conduct of the case, and her written Visit Reports to be exemplary.  In short we considered that if other more senior officers had paid more direct attention to her Visit Reports and to what she discovered about the scheme, and about the taxpayer’s motives for implementing the arrangements, a Ramsay “abuse” type challenge might have been levelled against the Appellants much earlier.  We fully appreciate that there may have been policy reasons why this was not done.  Furthermore those officers later considering (after the expiry of the two-year period for the making of assessments) whether they had credible grounds for assessing in the third year, on the ground that they had discovered new evidence and were then assessing within one year of discovering that new evidence, might have appreciated that their case was somewhat weak had they carefully re-read Janet Taylor’s Visit Reports. . 

27.     Janet Taylor confirmed that she, and other HM Customs & Excise officers, had been aware of the likelihood of prepayment schemes being undertaken. She also said that she was not a lawyer and she was unfamiliar with the whole anti-avoidance line of cases under the Ramsay heading, and she was not familiar either with the Faith Construction case.  Her role was thus principally directed to finding out as much as she could about what had actually happened; whether the scheme was a tax avoidance scheme, and whether indeed practical difficulties in implementing the scheme would ultimately mean that it would be too complex for the taxpayers to make their own scheme work. She fully appreciated that net tax would only be lost to HM Customs & Excise if and when Services actually came to deliver drugs, and then claim input tax back. Thus if these deliveries could be precluded, or at least delayed, either by the fact that soon came to light, namely that Services had not yet obtained a licence to supply drugs, or by the difficulty in deciding how to split deliveries of drugs made to the one single pharmacy department of Healthcare between those destined for inpatients and those destined for outpatients, she could actually delay or frustrate the taxpayers’ hoped for net recoveries.  

28.    Janet Taylor’s first visit to Hospitals to enquire into the prepayment scheme was prompted not so much by Liz Chinoy’s letter but by the point anticipated in that letter, namely that the Southend office of HM Customs & Excise would issue a “Credibility Pre-Repayment Query” or “Pre Cred” enquiry. This was a questionnaire issued by the Southend office of HM Customs & Excise to Control Officers, designed to ascertain either why a trader’s turnover had suddenly altered dramatically, or why (as in this case) there was a large claim for input tax and a claim for a VAT repayment.

29.    The following is the full text of Janet Taylor’s record of her visit on 19 February 1998 at which she met Mr. Williams, the relatively new Finance Controller of Healthcare.    Again, the emphasis below is ours.

“(i)Trader had Pre Cred …. for £1.58m repayment.    Control Officer was aware that there would be a large repayment from trader because trader was prepaying for drugs and prostheses as a tax avoidance measure before changes in law on drugs & prostheses on 1/1/98.    However, CO wanted to speak with trader about new company and therefore decided not to desk clear the Pre Cred but to visit and check details.
Checked VAT working paper – see (iv).
Checked nominal ledger details for output tax.
Checked documents – invoice and bank statement – to verify major part of claim.
CO not satisfied with documentation provided so further checks done at LVO on time of supply; tax points; tax invoices. These further checks decided response to claim. 

(ii) Trader “rounds” input tax and output tax to nearest whole £ - told he must not do this.  Trader told that valid tax invoices must be held in order for input tax to be claimed.

(iii) No risk analysis sheet done because CO aware of repayment and the likelihood of a Pre Cred being issued. Only risks checked are those noted in this report. 

(iv)	Trader had “rounded” both input tax and output tax to nearest £.   
Breakdown of claim:
1,489,362 – prepayment for drugs & prostheses to subsidiary
109,915 – VAT on drugs for period to 12/97
4,046 – VAT on catering purchases
1,282 -VAT re telephones
207 –VAT re transport
Trader did not have a valid tax invoice from wholly owned subsidiary – St. Martin’s Medical Services Ltd (SMMS) because at the time SMMS issued their invoice for the prepayment of drugs and prostheses they were not VAT registered. They applied for registration using their invoice to this trader as the grounds for needing to be registered. When VAT registration was granted it was from the date of the invoice  - 16/12/97.   However, SMMS had not issued a tax invoice even after they knew their registration number so trader only held an invoice for a VAT-inclusive amount from a non-registered trader.    CO decided to let pre-cred go through for the following reasons:-
•	Invoice had Tax point date on it;
•	Output tax would be due on that invoice;
•	Monies had been paid – bank statement for SMMS seen.  £10m receipt 23/12/97 into bank account for SMMS.  £9m was taken out next day apparently “loaned” back to trader and the remaining £1m was kept by SMMS and placed on the money market.
•	CO felt that there would be no support from HQ to disallow this money on the grounds of there being no valid VAT invoice.    It was unlikely that HM C&E would win at Tribunal if the output tax was demanded but a claim to input tax refused. 
•	Considered EU legislation – Articles 17, 18 & 22 of the 6th Directive – relating to the right to deduct and the rules governing deduction.    In conversation with VAT Input branch on this point CO learnt that HM C&E had lost an ECJ ruling. However, Input tax branch said that an invoice did not give the right to deduct – only a supply gave the right to deduct!  After consultation Input tax agreed that they did not like the situation but would not support CO in a Tribunal.  

Mr.  Williams admitted that SMMS was still waiting for a “Controlled Drugs Licence” and a “wholesale Drugs Licence” from the authorities.    Therefore, it could not supply the drugs yet. 

(v) This prepayment was known to CO and it was using a well-known tax avoidance scheme.   Thus trader has done nothing beyond what others have done.   However, the failure to have the correct documentation did pose an interesting point for discussion with the possibility that there was some defence against the continual attack by tax advisors.   This was an area that had not arisen before.    Trader did not attempt to hide the fact that it was a tax avoidance situation.   The drugs & prostheses prepaid would be for inpatients only and are expected to last about 2-3 years. 

(v)	System building up to VAT return details needs to be checked.”

30.     On the next day, Janet Taylor did two things of note in relation to this case.    She signed off the Pre Cred form, authorising repayment of the claimed input tax to Healthcare, and noting on the form:

“This repayment is due to a tax avoidance scheme.  Monies have been prepaid to purchase drugs and prostheses for inpatients to get round legislation introduced on 1 Jan 98.”

The second relevant communication was a Memorandum to Allan McArthur and Chris Colford, two more senior officers particularly involved with attacking tax avoidance.    The Memorandum read as follows:

“Tax Avoidance

I have been dealing with St Martins Hospitals Ltd … one of the trio that took us to CoA and won!   They have set up a subsidiary – St Martins Medical Services Ltd … to purchase drugs & prostheses for inpatients.  I visited the Hospital side because we received a pre-cred.  This related to the prepayment  - £10m. (VAT inc). However it took some time to clear because they had forgotten to issue a tax invoice!!  (See attached for a laugh).

The Medical Services side will buy the drugs – that is it will be their name on the invoices from the suppliers. However, to date they still do not have a Controlled Drugs License, nor do they have a Wholesale Drugs License both necessary before they can operate as they want to.

The Hospitals paid the Medical Services – see attached bank statement for receipt. Then 1 day later the Medical Services “loaned” the Hospitals side £9m and put £1m on the money market – hence there is no money in the bank account now!

Input tax claimed by Hospitals side £1,489,362 should be paid by end Feb 1998.  The output tax due by the Medical Services will not be paid until later and it is expected to cover drugs & prostheses for inpatients for the next 2-3 years. Drugs for outpatients and export are not included as the tax on these can be claimed back. As I saw a document issued to suppliers stating that drugs/prostheses will be bought by Medical Services and therefore invoices must be addressed to them I’m interested to see how this will work in practice.   How do you separate invoices/payments /supplies to outpatients and inpatients in the same hospital which only has one pharmacy?   Who will purchase supplies for outpatients and exports?

If you need any further information I’m on ext … at Dorset House.”

31.     From this point onwards, the review of the scheme proceeded in a divided, slow and somewhat unsatisfactory manner.    

32.    It was divided in that it was clearly implicit that it was not for Janet Taylor to mount a Ramsay or any other “abuse” type challenge. She fully appreciated that there was a team of specialists looking at that issue, and reviewing not only all of the hospital pre-payment schemes but other tax avoidance schemes in relation to both VAT and direct taxes. Her role was essentially to conduct the exchanges with Mr. Williams and anyone else on behalf of the Appellants, and to gather information.   The divided nature of the review was well illustrated by the fact that Janet Taylor was not generally a party to the discussions between members of the high level team considering a Ramsay / “abuse” type attack. It was also emphasised by the following extract from her Witness Statement:-
“In mid-November 1998 I received a letter (dated 16 November 1998) from Mr. Williams, Group Financial Controller at SMHL with a proposed method of input tax recovery relating to the outpatients pharmacy.  I decided that a visit was needed to discuss the proposals and to ask further questions.   A case against this trader, and others, was being considered.    The case would be that SMMSL had been introduced for tax avoidance purposes and not commercial reasons.  It was therefore necessary to understand the new structure and how it worked.    If there was no commercial reason to involve SMMSL there would have been no pre-payment of drugs and therefore no zero-rating of unspecified drugs and prostheses for an unknown length of time.”

33.     The slow level of progress on Janet Taylor’s side of this divide resulted from the difficulties the Appellants were having in deciding how to deal with the allocation of deliveries between inpatients and outpatients, which delayed the operation of the ordering and delivery phase of the scheme, and thus gave no occasion for further allocation suggestions to be put to Janet Taylor. In her own words in her Witness Statement, she said:-

“In between February and October 1998 the contact with SMHL was minimal, but related to another VAT matter, which involved the refurbishment of the Lister hospital. I was waiting for information on how the prepaid drugs would be split between inpatients and outpatients”.

34.    The slow progress made by the high-level team will become more evident in due course, but at this stage it is best to record the Visit Notes that Janet Taylor made of the visit that she had decided was necessary in November 1998.  The full report of a meeting held with Mr. Williams and Ms K Grimshaw (senior finance assistant) on 25 November read as follows:-

“(i)   This visit was necessitated by a letter from the trader requesting approval to use a method to calculate the proportion of outpatient drugs to inpatient drugs based on outpatient pharmacy revenue.  As information was needed re the application of the “pre paid drugs” scheme for a potential case against the trader a visit was deemed essential.
Mr. Williams started by admitting that they had not claimed any I/T re drugs during the year as they had been unable to differentiate between types of supplies. Currently they were ordering and receiving drugs through the “old” system i.e. each hospital ordered and paid for its own drugs. St. Martins Medical Services Ltd … had not been used during the year to supply drugs to the hospital because initially it did not have a drugs licence; they had not got the systems right.   However, they had started to “test the system” during the current month. Contracts between SMMS and 2 suppliers (Abbott and David Bull) had been signed and drugs were being ordered using the correct stationery.  The drugs and invoice will go to the hospital ordering; when checked and agreed the invoice will be forwarded to Head Office (Park Street) for payment.  The Devonshire hospital will not be part of the scheme.   The exports from this hospital were said to be from particular sources and readily identifiable. 
There are still some problems. Ms Grimshaw estimated that around 80% of the drugs purchased were supplied by around 12 companies.  The remaining 20% came from up to 100 other sources. The main suppliers have contracts with either the trader or the individual hospitals; the remaining suppliers have supply agreements. With SMMS taking over the role they are seen as wholesale suppliers. This means with some suppliers there are minimum orders that must be placed.  Some of the minimum levels are far greater than the trader would need and there are some negotiations on this matter.   If they cannot reach agreement then it is possible that some drugs would be ordered under the old system. 

CO not happy with agreeing the method for 9 months only – what is to happen when SMMS comes on the scene?  What impact will this have on the method?
Would there be a mark-up on the drugs or a management charge?  -  to be agreed.
What had happened to the monies pre-paid to the associate company?  More money had been loaned back (at commercial interest rates). The annual accounts were waiting for signature – draft copy to be forwarded.  The pe-payment is expected to last around 3-4 years.
What happened to recharges on the associate company’s ledger?
Current year to date figures from the Lister hospital suggested that around 1/3rd of the pharmacy revenue was from outpatients. CO requested YTD figures for all hospitals.
What (if any) non-drugs were sold in the pharmacies?  Ms Grimshaw to check and advise.   CO may visit a pharmacy to examine situation. 
When asked what the purpose of SMMS was Mr. Williams said “to supply drugs to inpatients” and that he had to maximise the tax recovery for the shareholders.   It was pointed out to him that any problems implementing the new arrangements were because of the addition of SMMS.

On return to LVO discussed situation with Mark Alderton (tax avoidance NKBH). Agreed to await response from trader before seeking further information.  It is possible that agreement to this method might work against trader if he cannot identify, when purchased, what drugs are for.

25/11/98”

35.    Mark Alderton of the high level tax avoidance team made a note on the same day, 25 November, of the conversation that he had had with Janet Taylor.  This note records that two trial suppliers were “involved this month”, and it goes on to paraphrase the exchange just quoted where Janet Taylor had asked Mr. Williams “What the purpose of SMMS was?”  The text of Mark Alderton’s note reads as follows and is somewhat different to the equivalent passage in Janet Taylor’s note:-

“Wouldn’t say avoidance scheme – unclear if alert or primed – suggested central stock control”

It will be necessary in due course for us to rationalise the difference in wording between the record in the Visit Report just quoted at the end of paragraph 34, and Mr. Alderton’s wording.  When questions on this were put to Janet Taylor she said that, as she had put quotation marks around a phrase in her Report, that indicated that the quoted words would have been precisely what Mr. Williams had said.  She also said that the reference in Mark Alderton’s note to the fact that Mr. Williams “wouldn’t say tax avoidance scheme” could not have meant that the taxpayer refused to confirm this on the question being put to him, but rather that he did not confirm, or re-confirm on this occasion that the scheme was a tax avoidance scheme. 

36.     We have already referred to the fact that the review of the scheme was now divided and that numerous tax avoidance specialists were reviewing the St. Martin’s and other schemes. A meeting of this group was held on 14 October 1998 (i.e. somewhat before Janet Taylor’s visit referred to in paragraph 34 above).  We were given extracts from the write-up of the meeting written by Chris Colford on 16 October.  Following a diagram and a broadly correct write-up on the scheme, one of the paragraphs of the report read as follows:-

“Commercial purpose

The trader has not yet been asked to suggest a commercial purpose for the arrangements. It is difficult to imagine what such a purpose might be, although there is scope for the trader to argue that the insertion of the subsidiary is for (say) more efficient purchasing, while conceding that the prepayment and loan-back are uncommercial”.

Two other paragraphs of this report are important.   They read as follows:-

“Current status of case

There has been no action on this case for some time, but there should be no special difficulty in picking it up again, so long as this is done relatively quickly.

Tentative Recommendation

We should agree that Ramsay applies to this kind of arrangement in the way suggested above, and proceed to gather further factual evidence regarding preordination and commerciality.”

37.   There was then a significant interchange between the technical tax avoidance group and the Control Officers dealing with the particular taxpayers, including Janet Taylor. This took the form of an e-mail summarising the essence of a Ramsay challenge to the Control Officers, and giving them an admirable draft letter to prompt the taxpayer either to admit that the scheme was motivated entirely by tax avoidance motives, or an opportunity to advance commercial motives for the transactions if there were any. 

38.   This communication was obviously firmly in Janet Taylor’s mind when she arranged her 25 November visit. The passage from her Witness Statement quoted at paragraph 31 above confirmed this, as did the questions that she put to Mr. Williams, recorded at the end of the Visit Report. The only defect with the draft Ramsay letter referred to in paragraph 36 above was that it was accompanied by a paragraph which commenced with the words “Please don’t go out and use the above wording immediately”.  Cautioned in this manner, Janet Taylor confirmed in her evidence that, having been told not to send the letter out, she rather obviously did not send it out.     

39.   There is nothing further in the documents that were produced or in Janet Taylor’s evidence that impinged remotely on Ramsay type questions or the progressing of that attack, or indeed in endeavouring to ascertain more of the precise facts of the scheme until well after October 1999 when Janet Taylor was moved to a different department of HM Customs & Excise. The only points of relevance that occurred after the late November 1998 meeting were various exchanges between Mr. Williams and Janet Taylor in relation to when deliveries would actually all be channelled through the scheme.  It will be recalled that Mr. Williams had already said at the 25 November meeting that “they had started to test the system” in November.   

40.      Mr. Williams wrote to Janet Taylor on 4 January and again on 13 January 1999 to follow up on points that had been left outstanding at the November meeting. The letters were not terribly clear, but the most natural reading of the 4 January letter was that Healthcare would be claiming the VAT on purchases of drugs for outpatients  (that were attributable to zero-rated supplies on any basis, quite apart from the law changes and the scheme in relation to inpatient drugs purchases) for the whole of the period up to 31 December 1998.  It was then specifically stated that Healthcare would be excluding from its claim for the period up to 31 December “any goods received via St. Martin’s Medical Services Limited”. In the later letter, Mr. Williams then said that “To clarify the point in my earlier letter, it is our current intention once St. Martin’s Medical Services is fully operational which I expect to be February/March 1999, to cease submitting claims from St. Martin’s Healthcare on the cost of the supply of pharmaceutical goods to outpatients”.  

41.     Prior to commenting on our understanding of the two letters, we should add that Mr. Williams’ second letter contained a closing paragraph on the different subject of “supplier contracts”, as follows:-

“As far as contracts are concerned, formal contracts of supply do not exist although there is of course a general correspondence on prices etc and copies of invoices to confirm supply to St. Martin’s Medical Services.  Perhaps the best way forward is for you to review some of these when you next pay us a visit”. 

42.     Insofar as we could understand these exchanges and their references to how and when the new purchasing system would be operating, the points that Mr. Williams was trying to convey seemed to be as follows. Adopting the example that drug purchases for inpatients and outpatients were in the ratio of 75% to 25%, the original intention of the scheme was presumably that until £10 million worth of drugs had been delivered by Services, Healthcare would be buying outpatients drugs itself, and reclaiming the VAT in the ordinary way. The purchases filtered through Services would be confined to drugs and prostheses for inpatients because that is what the Heads of Terms or “contract” envisaged, and in any event if drugs for outpatients were delivered, as if in satisfaction of the prepayment contract, then that would effectively waste 25% of the tax saving of the scheme. Implicitly thus the 13 January letter confirmed that Healthcare and Services were going to abandon their efforts to apportion between drugs for inpatients and outpatients, once the Services scheme was “fully operational”, and all drugs would be purchased by Services and delivered under the pre-contract.  Thus the group on this example would be sacrificing 25% of the benefit of the scheme, in that the delivery of outpatients drugs would diminish the delivery obligation but not generate any incremental VAT saving. At least however they could forget about the difficulties of apportioning. Not that this is of much significance, they also forgot that the pre-contract (assuming that it was agreed) provided that drugs supplied under it would only be for inpatients!

43.     Whether this is indeed what Mr. Williams meant, we certainly take it that the earlier letter referred to some purchases having been made by Services, and having been delivered to Healthcare. This tallies of course with the remark at the meeting that some test purchases had been made under the new system. In this context it is noteworthy that Services delivered a VAT return for the period ending 12/98, signed on 19 January 1999, that showed outputs of NIL, VAT exclusive purchases of £544,072 and input VAT reclaimed of £95,157.47. We will need to address this return for other reasons in due course, but one point that we now record is that Janet Taylor said that she did not see this return, because it was sent naturally to Southend, and for some reason did not prompt a Pre Cred request. Nevertheless the Return was unquestionably received by HM Customs & Excise and since no Pre Cred was issued, the VAT refund claimed was paid out in the ordinary course. 

44.     We should also confirm that it was supposed, until the seventh day of the hearing, that the Return just referred to simply covered reclaimed input tax in respect of deliveries of drugs for which the supply pre-dated the Return. By this time, “the waters had become somewhat muddied” however because Services had also taken on a role in relation to another input recovery scheme involving building works on the Lister hospital. The essence of that scheme so far as Services was concerned was that it would always make taxable supplies that would match its own receipt of services so that it was generally expected that Services would just pass on the VAT borne and would not itself be reclaiming VAT in respect of this other activity. This is why it was supposed that a Return showing no supplies, but a large input tax reclaim, would have represented solely drug deliveries under the contract because it is those deliveries that would naturally generate a Return with this profile. There emerged to be an error and some confusion in relation to this and we will revert to it in due course.  

45.     From October 1999, Janet Taylor was working in a different department, and so had nothing further to do with this enquiry. Indeed virtually nothing appears to have happened in relation to the enquiry, following the November 1998 meeting, beyond the few exchanges about when and how the new purchasing procedures would be introduced. 

Documents disclosed between Janet Taylor’s departure and the first letter, dated 19 April 2000 from Mr. McAleer, the new Control Officer for Healthcare

46.    We were shown a further document prepared by the tax avoidance group, written in January 2000. This document contained a somewhat longer draft letter designed to press the taxpayer to disclose whether or not the prepayment arrangements were introduced solely for tax avoidance reasons or whether they had any commercial purpose. The document contemplated that on this occasion the Control Officer (whoever it was at this stage, and we were not clear whether at this point anyone had been introduced to replace Janet Taylor) would despatch the letter.   There was not, in other words, the “embargo” that had been attached to the draft back in October 1998.   The letter was, however, not sent. 

Mr. Rod McAleer’s evidence

47.     Rod McAleer became the Control Officer for Healthcare on 1 April 2000.

48.    In contrast to Janet Taylor, Rod McAleer, although plainly also very competent, was not experienced in VAT law or practice. He effectively took up the Control Officer appointment for a short period in an interval between dealing with smuggling in the Dover area, and a later appointment as an investigator in non-VAT matters. Whilst he had obviously had a meeting or a long explanation to brief him in relation to the Control Visit that he made to St. Martins, and whilst the points that he recorded from that Visit all appear to have been accurate, his comparative lack of experience in relation to commercial contracts and business practices was evident to some degree. 

49.    On 19 April 2000 Rod McAleer wrote to Mr. Williams, introducing himself, and indicating that he wanted to review “the introduction of the new arrangements for the supply of drugs by St. Martin’s Medical Services Ltd to St. Martin’s Healthcare.   I believe the new arrangement for the supply of drugs came into effect in February/March 1999”.  No specific reference was made to a Ramsay type challenge but this is why, almost certainly at the behest of the tax avoidance team, who remained firmly in the background, Mr. McAleer was making his visit. 

50.     After his visit, Rod McAleer wrote out his notes in the form of a paper, headed “Observations”.  We will quote this paper in full because it is of crucial importance. Its importance derives from the fact that assessments made after December 1999 and before December 2000 will only be valid and “in time” if new evidence came to the knowledge of the Commissioners and they finally made their assessments within 12 months of that new evidence emerging. Since the crucial assessments were not in fact made until 19 December 2000, it was broadly only information and evidence derived in 2000 that could justify the eventual assessments, and the contention on behalf of the Respondents was that the relevant new evidence was the information obtained by Rod McAleer, coupled with the taxpayer’s later refusal to respond to any further questions. 

51.     Rod McAleer’s paper read as follows:-

“PREPAYMENT SCHEME -  St. Martin’s Healthcare

OBSERVATIONS

1.	There are pricing agreements with 20 suppliers – no formal contracts.
2.	SMMS did not previously have a drugs licence.
3.	The money paid to SMMS was loaned back to St. Martin’s Healthcare.  Interest is payable at 7% which is settled annually.  No invoices are raised.
4.	The hospitals in question are Lister and London Bridge.
5.	Prior to this, SMMS was a dormant company.
6.	All invoices are processed through Headquarters at 97-99 Park Street.
7.	Trader has been trying to sell St. Martin’s Healthcare for the last 12 months.
8.	SMMS – according to Trader  - was set up to maximise purchasing power but this avenue was not pursued because of the impending sale.   Company was also set up because of the tax advantage.  There is no correspondence to reflect intentions. 
9.	There were no written guide-lines for the new purchasing system.    Apparently, only verbal directives were given to staff at the hospitals.      E-mails may have been sent but have not been retained.
10.	There is no correspondence regarding the loan agreement.
11.	Orders are placed by SMMS. The goods are sent with a delivery or despatch note and subsequent issue of invoice. The invoice goes to the hospital to verify that the goods were received after which it is sent to Headquarters. A cheque is drawn to pay for the goods under SMMS’ account. 
12.	With regard to interest, there is no physical transfer of interest. Money is paid into the SMMS account as and when required. 
13.	Purchase orders do not always comply with the quantities of goods although the job order no. is quoted in each case. 

Rod McAleer”.

52.    On 30 June 2000 a Memorandum was written by Mark Alderton to another member of the tax avoidance team, yet again recommending the despatch of a Ramsay letter, and reviewing the material before the Commissioners at this point.  It may just be worth mentioning, in view of the fact that this Ramsay letter was drafted so often, that it was in fact not despatched until 27 October 2000.  

53.   Whilst the inexplicable delays in this case and the seeming keenness and reluctance to despatch a Ramsay letter are the affair of the Commissioners and they have no bearing on the critical question of when facts and evidence were first gathered and obtained, it is very noteworthy that when Mark Alderton reviewed the information available at this time to the Commissioners, neither of Janet Taylor’s Visit Reports appears to have been considered.  Indeed one important paragraph under the heading “Information held” reads as follows:-

“25/11/98   TC from Janet Taylor (control officer) indicated:
•	First use of prepayment in Nov 98- two trial suppliers
•	Each hospital (two of three in the group) orders drugs, receives them, checks invoices and sends them to HO for payment by SMMSL;
•	Person interviewed would not say this was a VAT avoidance scheme – suggested central stock control
•	Drugs for outpatients and inpatients cannot be distinguished – unclear if some form of apportionment being tried so only the latter charged against prepayment”.

54.     In the same Memorandum there was also a section headed “What do we still need?” Under this 10 items were listed. They seem to us not to be material to the precise question that we must address, though it is worth mentioning that one item read as follows:-

“Evidence of intentions.  It appears that they are not prepared to admit tax avoidance intention”

The very final observation in this paper by Mark Alderton was as follows:-

“Even if we have to accept the interposition of SMMSL has commercial purpose – which I doubt – the prepayment appears to be non-commercial.    Just attacking that would be a different approach, but if that is the only artificial element, that is what we should in principle do.”

The evidence of Nicholas Dean-Webb

55.    Nicholas Dean-Webb was, and remains, an experienced VAT officer with a role in effectively bridging the gap between the two halves of the divided attack that we have noted thus far. In other words his speciality was to deal with particular taxpayers whose transactions were being attacked on tax avoidance grounds, seeing the dispute through to resolution, and at the same time having a broad knowledge of the relevant law and possible grounds of challenge in relation to tax avoidance and artificial transactions.  He has been involved with the Healthcare/Services case from about October 2000 and remains the HMRC officer who will handle the dispute until final resolution. 

56.   Mr. Dean-Webb’s first role in relation to the case was to conduct some correspondence with PWC, who by this time were acting for Healthcare, following a change of control of the group. It is unnecessary to give any detail of the correspondence because the sole purpose of the correspondence was to obtain further information about the scheme, the precise documentation and the motivation for the transaction. PWC declined to give any further information, and refused also to respond to formal Notices demanding the further information. One observation was made in relation to the request for further documentation in that the reply to this request was that so far as PWC were aware, there was no further documentation.  PWC also refused to provide documents relating to any external advice in relation to the transactions. 

57.   While we somewhat accept the proposition advanced by counsel for the Appellants that Mr. Dean-Webb was not the actual decision-maker in this case, he nevertheless recorded in his Witness Statement the point that, following further refusals to respond to formal notices, “the Commissioners felt entitled to draw appropriate conclusion from the information they did have, bearing in mind that the three-year time limit for making assessments had nearly expired.” His Witness Statement then continued as follows:

“The Commissioners concluded that there was no commercial purpose in entering into the prepayment arrangements, other than the avoidance of VAT.

In the alternative, the Commissioners considered that transactions whose sole purpose was, on the available evidence, the avoidance of VAT could not be supplies within the meaning of the VAT legislation.

As a further alternative, the Commissioners considered that a tax advantage (here, the avoidance of sticking VAT on SMHL) arising from transactions whose sole purpose was to achieve an effect running counter to the spirit and purpose of the legislation, could be denied on the basis of abuse of law.”

58.     Mr. Dean-Webb’s Witness Statement then closed with a list of the facts that the Commissioners took into account in reaching their conclusions. This was of course written for the purposes of the appeal and not written when the assessments were made in December 2000, but it nevertheless provides a useful list of facts. Rather than record the list at this point, we will refer to the points made in the course of giving our decision, and will comment on whether we consider the facts to be (i) irrelevant, or (ii) known at the time when Janet Taylor was the Control Officer or (iii) to be of some significance to the actual assessment made and to have been first known to the Commissioners in the 12-month period prior to the making of the assessments.    Were there to be any significant facts in that third category, that would conclude this appeal in favour of the Respondents, but we have already indicated that we do not consider that any facts fell into this category. 

59.     In the course of cross-examination, there was a significant interchange between counsel for the Appellants and Mr. Dean-Webb in relation to the material that had been considered by the decision-makers when the assessments were finally made.  Mr. Dean-Webb had explained that, before the days of electronic files, the basic information in relation to each registered trader was retained in a Green File, and that when a particular enquiry or dispute commenced, a Board File would be opened. It was that latter Board File that the high-level team considering the Ramsay challenge would have had at their disposal. All of the Visit Reports, including of course the two critical Visit Reports prepared by Janet Taylor, would have been on the taxpayer’s Green File as a matter of course. They could have been photo-copied and inserted into the Board File, and the interchange between counsel and Mr. Dean-Webb related to whether in fact they were on the Board File at the end of the year 2000. It was accepted as a fact that they were now in that File. Mr. Dean-Webb eventually said that they were in the Board File when the final decision to assess was made, but earlier references in his evidence had been slightly more qualified, along the lines that “they would have been” or “must have been” in the Board File.  

The evidence of David Webb and Russel Davis

60.   Neither of these officers gave their evidence in person since their Witness Statements were accepted by the Appellants. Both officers had been Control Officers for Healthcare (Nicholas Dean-Webb never having formally held that role). The main involvement of David Webb was to despatch some of the letters demanding information to PWC, and indeed to despatch the formal decision letter on 29 December. David Webb did have one or more meetings with PWC representatives, at which they refused to produce documents or information. Having already said that they could not produce any contractual documentation, “because so far as they were aware no such documents existed”, they “gave the same response for the other three categories of information requested – External Advice, Internal Communications and Minutes of Formal Meetings – that they would not produce any documents because the demand was outside of HMRC’s remit, and Ramsay did not apply to VAT”.

61.     Russel Davis became the Control Officer after David Webb and of course after the making of the assessments. His main involvement related to a minor dispute as to the amounts required to be assessed on Services. It appears that it was common ground that it was appropriate to assess Services to the extent that input tax had actually been refunded to Services in respect of drugs input tax.  The dispute appears to have related to whether it was also necessary to assess where, so far, refunds had been refused on the grounds that queries as to the entitlement to the refund were being considered. It was decided that assessments were required in these cases as well as those where the tax had actually been refunded. 

The assessments and the letter giving the reasons for the assessments

62.     On 19 December 2000, a few days before the expiry of the three-year period for the making of assessments, the Commissioners wrote the key decision letter to the two Appellants, and simultaneously made the Assessments. Ignoring irrelevant paragraphs about the right to appeal etc, the following is the text of the letter sent to Healthcare, a copy being sent to Services:-

                                                                                           19 December 2000                  

“Dear Sir/Madam,    
                                                                                          
Healthcare
and 
Services

Prepayment for Drugs and Prostheses

1.    As you know the Commissioners have been making enquiries to establish the correct VAT treatment of the payment of £10m which [Healthcare] made to [Services] on 23 December 1997.

Commissioners’ View of the Law

2.   On the basis of the information available to me, I consider that the payment did not constitute consideration for a supply or create a time of supply for VAT purposes under S.6(4) of the Value Added Tax Act 1994, and that no entitlement to input tax deduction thereby arises. Accordingly, I have today made an assessment in the sum of £1, 489,361, which represents the amount of tax over-claimed in this connection. The normal assessment documentation will be issued in due course under separate cover.   

3.    The reason for this decision is that, applying the “Ramsay” principle of statutory construction, when goods which are subject to the arrangement are supplied to Services, there is no practical likelihood that they will not also be the subject of an onward supply by Services to Healthcare. Despite repeated requests for information and documentation concerning the arrangements, culminating with your failure to comply with a formal Notice of Demand on 5 December 2000, you have failed to demonstrate that you had any commercial purpose, other than the avoidance of a liability to VAT, in entering into the arrangements. The Commissioners have therefore been left with no alternative but to conclude that your sole purpose was to avoid any future impact caused by the withdrawal of the zero-rating for supplies of drugs and prostheses, and the consequent irrecoverability of the VAT charged on those supplies.  

4.     The Commissioners therefore consider that the interposition of Services between the external supplier and Healthcare is an inserted step which has no purpose other than the avoidance of a liability to VAT. They consider that supplies of goods from external suppliers which are subject to the arrangements fall to be taxed as supplied direct to Healthcare.  The payment which Healthcare made to Services, which purported to be in respect of future supplies, therefore has no VAT status.

5.    Alternatively, if the Commissioners are incorrect in believing that the Ramsay principle applies to the arrangements, they nevertheless consider that transactions whose sole purpose is the avoidance of VAT are not supplies within the meaning of the VAT legislation. However, if the transactions are supplies, they are not properly treated as made in the course or furtherance of any business. 

6.     As a further alternative, the Commissioners believe that the tax advantage arising from transactions whose sole purpose is to achieve an effect which runs counter to the spirit and purpose of the VAT legislation falls to be denied by the EC principle prohibiting acts in fraud of the law. 

7.     The effect of these alternative interpretations is the same as the effect of the Ramsay principle.

Consequences for Services and Healthcare

8.    It follows from each of these analyses that Services has wrongly accounted for output tax in respect of the payment received on 23 December 1997.   The company may make a claim to recover the amount paid as VAT.   The Voluntary Disclosure procedure can be used for this purpose. If you wish, the assessment on Healthcare can be offset against the claim to repayment by Services.

9.     It further follows that Services has no entitlement to input tax deduction on the purchase of drugs and prostheses, which form part of the prepayment arrangements. I shall issue assessments in respect of input tax already claimed on such purchases in due course. However, as on the Commissioners’ analysis, supplies of drugs and prostheses are made direct from the external suppliers to Healthcare, Healthcare may recover whatever proportion of the VAT on such purchases as relates to its taxable business supplies in accordance with its partial exemption method. The Voluntary Disclosure procedure should be used for such claims. The Commissioners will allow the invoices issued by the external suppliers to Services to be treated as valid tax invoices for these purposes and will allow Healthcare to use them to support any claim for input tax notwithstanding the fact that they show Services and not Healthcare as the recipient of the supply.

Right of Appeal

……

Yours sincerely,

D. Webb”

The Law

63.    This appeal depended fundamentally on whether the assessments made on 19 December 2000 on Healthcare and Services in respect of the VAT periods ending 12/97 were made in time or not. Two further minor issues were raised, one being whether, on account of an alleged concession made on behalf of the second Appellant back in 2002, Services was precluded from taking a timing point before us. The second point relates to whether, in one relatively minor way, the second Appellant could amend its grounds of appeal. We will deal with these minor points in due course. 

64.    The four legislative provisions that we need to refer to in order to consider the main point of dispute are subsections (1), (2) and (6) of section 73 and section 77 VAT Act 1994.   These provide as follows:-

“73.    Failure to make returns etc.

(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.

(2)    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 it to him accordingly.
……

(6)    An assessment under subsection (1), (2) or (3) above, of an amount of VAT due for any prescribed accounting period, must be made within the time limits provided for in section 77 and shall not be made after the later of the following - 
(a)	2 years after the end of the prescribed accounting period; or
(b)	one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge,
but (subject to that section) where further such evidence comes to the Commissioners’ knowledge after the making of an assessment under subsection (1), (2) or (3) above, another assessment may be made under that subsection, in addition to any earlier assessment.

77.    Assessments: time limits and supplementary assessments

(1)  Subject to the following provisions of this section, an assessment under section 73 … shall not be made
(a) more than [3 years] after the end of the prescribed accounting period or importation or acquisition concerned ……”

65.     A number of legal points arise on the proper application of section 73(6).   In short they are that:-

•	our enquiry must be as to whether evidence of facts, sufficient in the opinion of the Commissioners to justify the assessments, was obtained in the relevant 12-month period, and that the question is not whether the Tribunal, with or without the benefit of hindsight, would have regarded the pre-existing evidence as sufficient to justify the assessments;
•	it is only evidence of facts and not the revelation of some new interpretation of the law that can justify assessments beyond the two-year period and thus under section 73(6);
•	it is evidence of facts justifying the actual assessments made and the grounds for those particular assessments that is relevant, and ignorance of facts, or indeed knowledge of facts that might have justified assessments on some different ground from the one on which the assessments were made, is all irrelevant; 
•	in the period 1997-2000 it was generally believed that the duty of the Commissioners to exercise “best judgment” in making assessment was a more onerous duty than has subsequently emerged to be the correct understanding in the light of later court decisions; 
•	similarly, it was generally believed in the period 1997-2000 that it was not possible, once assessments had been made on one ground, for the Commissioners to vary the grounds subsequently, and this strict view has more recently been held to have been misconceived;
•	that we should decide whether we should judge the hesitation of the Commissioners in making assessments in this case by reference to the earlier standards generally assumed to prevail in relation to “best judgment” and varying the grounds on which assessments were made, or whether we should apply the tests as now understood in the light of later case law decisions; 
•	whether the assessments in the present case were made under section 73(1) or section 73(2) and whether, if they were made under section 73(2), the “best judgment” duty is irrelevant; and
•	whose knowledge of facts is significant  in this enquiry, or whether for instance, only the knowledge of the particular “decision maker”, ignoring evidence obtained by other officers, is of significance.

It will not be necessary to address all of those points in our decision, having regard to the basis of that decision, but we will either indicate our approach to the points listed above, or state why we consider them irrelevant. 

The substantive law
 
66.     Nothing in this Appeal turned on the substantive law that would have been relevant had this been the first case fought on the substantive issues once thought relevant. It may, however, clarify matters somewhat just to indicate the following few points. 

67.     In the substantially similar, but dramatically better implemented, case involving BUPA Hospitals Limited, the decision of Sir Stephen Oliver QC in this Tribunal decided that the construction of Regulation 108 on which the prepayment schemes depended was wrong, and that if, on account of a law change, inputs would in fact be attributed to a supply that became exempt, then input tax would not be recoverable simply because the supplies to which the input tax was attributable were zero-rated supplies at the precise time of supply. 

68.     When the BUPA Hospitals case was referred to the ECJ, with a request that the ECJ indicate whether the case was suspect on any of the Ramsay type grounds indicated in the decision letter in this case quoted at paragraph 62 above, the ECJ indicated, without addressing that question, that there had been no supplies in the BUPA case because the contract did not sufficiently identify the supply to be made.   It was clear in this, the Healthcare case, once it was intimated that the contract referred to in the initial invoice may not have been agreed, that this ground of challenge (as to which the Commissioners were ignorant) was fatal to the present scheme.  The contract in this case, if agreed, would equally have been suspect on the grounds indicated by the ECJ, though rather more dramatically so than the contract in the BUPA case. 

69.   Were the Commissioners to have taken the type of points levelled against suppliers in “missing trader” cases, the lack of clarity in the invoice, even ignoring its other multiple defects, would have been fatal to the claim for an input deduction.  

70.    Even assuming that payments were made in the present case on 23 and 24 December 1997, which may be in doubt since the payments could only superficially be “made” because the two payments were “contra’ed”, the authority of Faith Construction must be in doubt on the ground that the payments were virtually shams. There have admittedly been later direct tax cases that have upheld the making of artificial payments but the authority of Faith Construction must still be doubtful quite apart from the application of one of the four Ramsay type challenges to a case of that nature. 

71.   At least two of the Ramsay type challenges levelled against the present Appellants in this case were vindicated by later VAT decisions in the ECJ, so that whether the case was also suspect on two, three or four further grounds is debatable. 

72.    Whilst all these substantive points were of little relevance (albeit that we will refer to one aspect that is relevant later), suffice it to say that on the merits of this case, the present Appellants were in woeful shape! 

The two minor issues

73.    One preliminary point raised was whether the second Appellant should be bound by a concession, apparently made in 2002 in the course of an Application made by both Appellants that the Tribunal should hear the allegedly simple point that the assessments were made out of time before (if needs be) going on to the main issue of whether the Appeals succeeded or not on substantive grounds. The Tribunal (Nuala Brice) rejected this Application but in the course of giving Directions, Nuala Brice recorded a concession allegedly made on behalf of the second Appellant that it would not be taking timing points. It was accordingly contended on behalf of the Respondents that Services should now be precluded from pursuing its appeal because it was now only the timing point that was being advanced. It was contended on behalf of the second Appellant that it was possible that the Directions had mis-recorded the concession though it was not suggested what concession (if any) had been made. In the alternative, and since some notice had been given of the application to withdraw this concession, and since identical facts would govern the outcome of the appeals by both Appellants, we were asked to permit the second Appellant to withdraw this concession. 

74.    The second minor issue was as follows. We have already said that it was assumed, from the profile of the VAT return made by Services for the VAT period 12/98, that the zero outputs, matched by significant inputs, resulted from the fact that all the inputs in that return would have related to drug purchases.  Following a request for disclosure by the Respondents, the second Appellant reviewed the background papers underlying the relevant Return and revealed that some of the inputs did in fact relate to the role that Services played in relation to the separate buildings scheme referred to above. Implicitly thus, although we were told that the nature of the role played by Services in relation to that scheme was such that inputs would always match outputs, there must have been a timing mis-match with inputs in relation to construction bills being paid in the relevant VAT period, and presumably only being cross-charged against Healthcare in a later period.

75.     In the light of this revelation the Appellants made an Application to amend the grounds of Services’ Appeal not only for the period actually in dispute before us on the timing point, but also to amend the grounds of appeal for later periods. The position in relation to these later periods was that once the substantive appeals had been withdrawn, although there remained no grounds of appeal for those later periods, the appeals had not strictly been withdrawn. The Application requested that “Insofar as any of the sums assessed were not input tax associated with the purchase of drugs, they ought not to have been assessed”.  The Application was that we add this ground to the timing appeal for the period already under review before us, and insert it, obviously as the only ground of appeal, for those later periods where appeals were still technically open. 

The contentions on behalf of the Appellants

76.     The contentions on behalf of the Appellants were that:

•	in order that the hearing should deal with all matters that the parties now wanted to be resolved, and since the Respondents had not been prejudiced by the requested withdrawal of the concession referred to in paragraph 73 above (since the facts and law underlying the timing points for Healthcare and Services were identical) Services should now be entitled to pursue the timing points, notwithstanding any concession that might once have been given;
•	the assessments on both Appellants were made under section 73(2) so that no requirement of “best judgment” applies;
•	if a requirement of “best judgment” does apply, it is right to review that issue in the light of the now “revealed” state of the law;
•	if the “best judgment” requirement does apply to the assessments and is to be tested under the earlier and stricter understanding of the requirement, issues of best judgment are not particularly material to this dispute;
•	the fundamental ground of appeal was that, on the information freely and openly given to Janet Taylor by KPMG and by Mr. Williams at the two Visits for which the Visit Reports are recorded above, the Commissioners (in this regard in the person of Janet Taylor) had all the information that in their own judgment (that is the judgment of the actual decision makers) they regarded as required for the making of the assessments; 
•	the obligation to make assessments in accordance with best judgment has never been interpreted to require the factual basis, known to the Commissioners to be “impeccable”, but merely sufficient to justify the assessments; and that
•	no information or evidence of any relevance was derived from the Visit of Rod McAleer or from the failure of the Appellants, and PWC on their behalf, to respond to further questions and requests for further information from the Commissioners.

The contentions on behalf of the Respondents

77.      It was contended on behalf of the Respondents that:-

•	the second Appellant should not be able, at a late stage, and following a period of years in which the confirmation by Nuala Brice that the second Appellant would not be taking timing points had not been questioned, to revoke that concession;
•	our duty was not to apply our own judgment as to whether we would have considered, at various times, that we had enough evidence on which to assess, but to ascertain when the Commissioners considered that they had evidence of facts that justified the assessments actually made;
•	we should not address this question with the benefit of hindsight and we should consider it in accordance with the standards at the time, as regards “best judgment” and the liberty to vary assessments and the grounds for supporting them;
•	we should not treat “hunch and speculation” as evidence; 
•	there were numerous facts in relation to the scheme of which the Commissioners were ignorant and which they wanted to know, and to this day some of those facts are still not known;  
•	on the critical matter of the existence or absence of any commercial motivations for the scheme, until the revelation at item 8 of Rod McAleer’s paper headed “Observations”, and the failure of the Appellants and PWC on their behalf to give any further information, the Commissioners did not have sufficient evidence of preordination and absence of commercial grounds on which to assess, and they did honestly conclude, following that information and that refusal, that an assessment was then justified; 
•	one other fact of which the Commissioners were unaware until mid-2000, was whether Services was even delivering drugs under the structure, and that since officers of HM Customs & Excise cannot be expected to spend their time challenging tax avoidance schemes that are not generating any net tax saving, it was significant to ascertain when the scheme was actually working; and that
•	it was for Mr. Williams to revert to Janet Taylor and indicate when the scheme was fully working and that he never did revert to Janet Taylor on this point.

Our decision

The time-barred point in the case of Services’ appeal

78.   We confirmed first that the second Appellant could advance the time-barred point, which was the only ground on which it was appealing.    

79.    We were told that if the alleged concession had been made, this would only have been as a tactical point to endeavour to persuade Nuala Brice to allow the timing point to be taken as a preliminary issue prior to the main hearing for the key company, Healthcare. Once that endeavour to deal with the timing point as a preliminary matter had failed, the relevance of the concession fell away, and in terms of justice we accepted that it was now right that the second Appellant should be able to proceed with its appeal as it had indicated it now wished to do. Since the facts and arguments on the timing point were identical for both Appellants, it was clear that the concession and its late withdrawal had not in any way prejudiced the Respondents.    Furthermore, the failed tactical point apart, there appeared no conceivable reason why one company would pursue the timing point, whilst the other should not. 

80.    We note with considerable amusement that Nuala Brice was vindicated in her decision to refuse to allow the “simple procedural timing point that would only take one day to resolve” to be heard as a preliminary matter, since it proved both complex and difficult, and it took seven days to deal with. 

81.     We did not consider it right to refuse to allow the second Appellant to advance its case on the timing point merely because its whole activity and scheme had been without merit. A time-barred point is a technical point which should be available when relevant, regardless of the underlying merit of the point originally in dispute. 

Our technical approach to the question under section 73(6) VAT Act 1994

82.     There are several rather curious aspects to the wording of section 73 and section 73(6) in particular.

83.   The premise of section 73(6) seems to be that we must identify “when the Commissioners formed the opinion” that they had knowledge of sufficient evidence of facts to justify the assessment that they made, whereupon if the assessment is made within one year of that knowledge coming to their attention, and within three years of the VAT period for which the assessment is made, the assessment is valid. 

84.    It would plainly be fatal on the above wording to an assessment dependent on section 73(6) for there to be evidence that:-

•	the Commissioners had concluded, say, 11 months after the VAT period, that they had sufficient factual evidence on which to make the assessments eventually made; but that
•	for policy reasons geared to the challenge of various tax avoidance schemes (or for any other reason) they wished to delay the assessments, and in the event only assessed after the 2-year period. 

85.   There was certainly no evidence in this case that the Commissioners actually formed the opinion at any early point that they did have all the required evidence; nor is there evidence that in late 2000 they concluded (implicitly with alarm and embarrassment) that they had had all the necessary factual evidence at an early date, and that they had not subsequently discovered some piece of final evidence that “first justified” the assessment. Indeed we confirm that there were a number of references in documents, from about July 1999 right through to late 2000, to the belief on the part of members of the high-level anti-avoidance team that they were looking for more information in order to buttress the case about “preordination” and “absence of commercial justification for the drug supply scheme”, in order to justify a Ramsay/ “abuse” type of attack.  We referred specifically to one at paragraph 54 above, where a list of 10 items of required further evidence was considered vital or desirable, and there were other such references. 

86.    That however is not the end of the matter. Counsel for the Respondents conceded that if, broadly on Wednesbury grounds we decided that the Commissioners did have evidence at some fatal early point on which no reasonable body of Commissioners could conceivably have doubted that they had the required evidence, then that would be fatal to an assessment dependant on section 73(6). Of far more relevance in this case, it was also common ground that evidence available to the Control Officers (whether or not passed on to whoever made the assessment decision) was “evidence of fact known to the Commissioners” and that if this evidence was sufficient in the opinion of the Commissioners to justify the making of the assessments, this would also be fatal to late assessments based on section 73(6).  That may sound a slightly difficult notion to test, because where the Control Officers were aware of facts or admissions and those making the decision were not aware of those facts or admissions, the latter can hardly have actually reached the opinion that facts of which they were ignorant were sufficient to justify the making of the assessments.  This notion thus involves assembling two lists, one of all the facts, evidence and admissions made “to the Commissioners” in the widest sense (including the Control Officers and indeed any officers of HM Customs & Excise), and then a list of facts and evidence believed to be required by the decision makers.  And if someone in HM Customs & Excise knew in a reliable manner the facts that the decision makers considered to be the required facts, then one clearly joins the two together, notwithstanding that the decision maker was ignorant of the facts and thus never formed the precise opinion that the facts were indeed sufficient. 

87.     The other critical point to note on section 73(6) is that in order to justify the late assessments, the Commissioners need to be able to demonstrate not only that there was no earlier point at which the required evidence was known to “the Commissioners” (in the widest sense), but they must also positively show that within the year before the assessments were actually made, the final piece of the jigsaw was inserted, and some fact did come to light that first justified the assessments.  That is of course why in this case so much emphasis was placed by the Respondents on the evidence ostensibly discovered by Rod McAleer in mid-2000.      

88.   We entirely accept that it is not for us to second guess the views that the Commissioners formed, and substitute our own judgment as to when assessments could have been made and justified. We also consider it appropriate to subject the approach of the Commissioners to the tests and “best judgment” requirements assumed to apply in 1997-2000, rather than to the current articulation of the “best judgment” test that basically just precludes bad faith. 

89.    The “best judgment” requirement is specifically inserted only in section 73(1), and is not actually referred to in section 73(2), albeit that it is not unreasonable to suppose that the Commissioners should exercise “best judgment” in all their dealings.  There does appear to us however to be a distinction in common sense terms between the two provisions. Section 73(1) may cover assessments made in relation to wrong assessments, and indeed assessments that are wrong for any reason (such as denial of input tax), but it is obviously primarily aimed at cases where taxpayers have failed to make returns or have made returns that are doubtful possibly largely as a matter of calculation of turnover etc. Sub-section (2) is concerned more specifically with assessments to deny input tax or to recover tax already repaid.  It seems to us more relevant and sensible to operate the “best judgment” test in the context of judging and estimating turnover for instance, and rather less appropriate to apply it to assessments such as those in this case.  In other words it is not permissible for the Commissioners to assess VAT on a small Indian take-away by estimating turnover at £1 million and challenging the trader to disprove it:  the assessment must make a best effort to judge the turnover realistically on the information available. The assessments in this case were made under code 22, which refers to “Input tax- disallowed” which appears to fall squarely within section 73(2), and only theoretically within sub-section (1).  And the notion of exercising “best judgment” seems rather less appropriate in this context than in the cases involving doubtful figures. 

90.     The tentative approach just advanced appears to us to achieve the same result as the point advanced by counsel for the Appellants to the effect that however the "best judgment" requirement is to be applied, there cannot be a requirement on the Commissioners only to make assessments on an impeccable understanding of the facts. Once they have sufficient evidence and sufficient facts in order to make a sensible assessment they must be entitled to make that assessment.  In this case we actually base our decision in favour of the Appellants on the finding that the Commissioners did have, in the form of the evidence recorded in Janet Taylor's Visit Reports, all the facts and evidence that they themselves considered that they required in order to make their assessment. Whilst it is not the basis of our decision we do however observe that the members of the high level "tax avoidance team" that master-minded the Ramsay/ "abuse" type challenge and the assessments based on that line of attack did have the information, even ignoring the information contained in Janet Taylor's reports, on which they could and should have proceeded to make assessments within the two year period, and it very much appears that it was other tactical and policy considerations that led to the delay in the making of assessments that could have been made at a much earlier point. The factors that seem to us to justify that observation, and we repeat to justify it without actually relying on the information that was in fact known to Janet Taylor, were as follows:-
•	the "high level team" were always aware that several hospital groups had introduced prepayment schemes at the same time, and all with a view to avoiding the impact of the law changes expected on 1 January 1998, and thus with a view to maximising input deductions and avoiding tax;
•	the same team were aware that the first Appellant conducted the trade at three private hospitals through one single company, a factor making it improbable that there could be any remotely cogent reason, in any business plan, for forming a new company in order to centralise drug purchases;
•	it was appreciated by the same team at all times that the initial letter from KPMG had made it clear that the prepayment scheme was based on the precedent of the Faith Construction case, and on the treatment of the prepayments made on the occasion of the tax changes in relation to construction services and fuel supplies, all such precedents having been artificial tax avoidance measures without any alleged commercial justification, and the absence of such commercial justification being regarded as unnecessary and irrelevant simply because the earlier cases had been held to be effective;
•	the well appreciated difficulties encountered in implementing the Healthcare/Services scheme, on account of the lack of the drug licences, the problem with being a drug wholesaler, and the problem in allocating supplies between those for inpatients and those for outpatients (the last of which would hardly have been relevant had the purchase arrangements been instituted for any commercial purpose distinct from the obtaining of the tax advantage) all rendered the possibility that there would be any commercial objective underlying the scheme distinctly improbable; 
•	the obvious fact that where taxpayers do have commercial reasons for implementing transactions that are also designed to achieve tax advantages they do tend to mention those commercial reasons at an early point, rather than mention them, as if as an "after-thought", when the scheme is challenged;
•	the same team could always have expressed the self-evident observation that Mark Alderton recorded in June 2000, namely that even if that team "had to accept that the interposition of [Services had] some commercial purpose – which [Mark Alderton doubted] – the prepayment appears to be non-commercial.  Just attacking that would be a different approach, but if that is the only artificial element, that is what we should in principle do".  This observation, which we consider to have been glaringly obvious at all times in fact failed to note the other equally clear point which was that the prepayment was in fact the whole essence of the scheme and was in fact the only thing that the Commissioners were attacking at all, and it was not "a different approach". 
For all these reasons we consider that it should have been glaringly obvious to the tax avoidance team that they had the information required to justify an "abuse" type attack on the Healthcare scheme at a very early date indeed. We also consider it overwhelmingly likely that the delay in attacking the scheme resulted from tactical and policy considerations of which we were ignorant and not because of any lack of evidence.  Finally we do not suggest that various references in the papers produced by the tax avoidance team after December 1999 to the effect that they were looking for further evidence were made because it was appreciated that such papers might in due course have been seen in the course of this appeal, but we do consider it both possible and likely that members of the team would have been disciplining themselves to operate as if further evidence was required in order to make the assessments because those members would have been aware of the significance of this feature. We very much doubt whether those members of the team who considered this matter could have reached the conclusion that they did about the need for further evidence, had they dwelt for a moment on the list of factors that we have summarised above.  They might have had some doubt, as a legal matter, as to whether they would be able to overturn the Faith Construction case, or to succeed as a legal matter in a Ramsay or "abuse" type attack, but that is an entirely different point, and it is clearly irrelevant to the present appeal, which is entirely governed by the need or not to obtain further evidence.  Having made those various points, we repeat that they are not the ground on which we actually allow the appeal, to which ground we now turn.  
. 
Our decision on the facts

91.    As indicated above, we consider that the primary reason why the assessments were out of time is that evidence of the facts that the Commissioners regarded as required to justify the assessments was in fact known to Janet Taylor at a very early date, and that nothing of any significance was learnt about the facts in the year 2000 to justify for the first time the actual assessments made in December 2000. The critical points that the Respondents say were not known to Janet Taylor, and that they say were subsequently revealed to Rod McAleer, were the issue of whether there was any commercial justification or purpose in setting up the drug supply arrangements and in particular the prepayments, or whether the arrangements were solely introduced for tax avoidance purposes.  Suggestions thus in the early days that there were or might have been commercial motivations, and later revelations that those possible commercial grounds were false and thus discredited would be particularly supportive of the Respondents’ case.

Janet Taylor’s initial considerations, the KPMG letter and Janet Taylor’s first Visit Report

92.     We commence this enquiry by noting that it was known to Janet Taylor and to several other HM Customs & Excise officers that various private hospital groups would be implementing prepayment schemes to try to “get round” the anticipated change in the law on 1 January 1998, and try to preserve the benefit of the zero-rated treatment of the supply of drugs and prostheses to inpatients.   It would seem a little unusual for Customs officers to be anticipating arrangements to foster the more efficient purchase or ordering of drugs by several hospitals, particularly if they all alighted simultaneously on similar commercial objectives, and rather remarkably introduced the schemes at virtually the same time. 

93.     We consider that the KPMG letter of 12 January 1998 was an excellent letter and that the information given in it is now of great significance.  On the fair reasoning that taxpayers and their advisers do not usually write to HMRC in either of its divisions and say that “Our client has implemented a tax avoidance scheme, and that there was no commercial reason for the steps required to achieve the tax saving”, this initial letter came as close to doing that as any we have ever seen.  The letter made it perfectly clear that the prepayment was basically similar to one that “most private hospitals had put in place”, and it relied entirely on the Faith Construction case and on the resultant supposed efficacy of prepayments with no commercial substance already established in the case of the construction and fuel tax changes.  The candid nature of this letter resulted no doubt from the reasonably firm belief that the Ramsay doctrine did not apply to VAT, and from the belief that the prepayment itself was of broadly the same nature as two earlier sets of prepayment transactions that had been declared effective or left unchallenged. So there was no objection to being very straight-forward, all the more so perhaps if the writer had realised that the recipient of the letter might be expecting to receive details of such an arrangement. 

94.     Counsel for HMRC contended that the reference in the letter to the effect that “we can demonstrate the commercial reality of the transaction if required” indicated that there was some commercial motivation behind the structure created, and that this was thus an untrue statement because it eventually emerged that the structure was put in place solely for tax avoidance purposes. We absolutely reject this suggestion.  By saying that “we can demonstrate the commercial reality of the transaction”, it is clear to us that KPMG were referring to the fact that there had been a payment and that in due course drugs would be supplied by Services to Healthcare under the contract.      KPMG were not saying that the structure had been set up for commercial as distinct from tax avoidance reasons.  Were there any doubt on this, the doubt was soon dispelled, and we also note that whilst members of the high-level tax avoidance team periodically noted that it was possible that the trader might advance some sort of commercial reason, geared to efficient or bulk purchasing, for the creation of the scheme, that logic would never extend to any commercial justification for the prepayment itself. Whatever others thought at later dates, however, we reject the contention that the KPMG letter contained lies, and that it suggested that there was some commercial purpose for the scheme. It was simply saying that the artificial prepayment was designed to achieve the same objective as that sought by most private hospital groups, namely to preserve the benefit of zero-rated status of the provision of drugs to inpatients, and to “get round” the 1 January changes. 

95.     Janet Taylor’s Visit Report of her visit on 19 February 1998 is crucial, as is her note of the same date to Allan McArthur. Significant passages in the Visit Report confirmed that  “The trader was prepaying for drugs and prostheses as a tax avoidance measure before changes in law on drugs and prostheses on 1/1/98 would remove the zero-rated status”.  She confirmed that the “trader did not attempt to hide the fact that it was a tax avoidance situation”.  And she also re-confirmed that “this prepayment was known to CO and it was using a well-known tax avoidance scheme”.  Moreover, “trader has done nothing beyond what others have done”. She objected to this transaction, and referred to “the continual attack of tax advisors”, and exhibited the same tone in the opening paragraph of her note to Allan McArthur where in substance she referred with irritation to the trio that had taken HM Customs & Excise to the Court of Appeal and won, and now they have come back again.  As a Control Officer, and we would venture to suggest a quite excellent Control Officer, Janet Taylor was naturally unaware of the Ramsay line of cases, which is not surprising since they all related to direct taxes, and she was not aware either of the Faith Construction case.    Thus she personally did not leap immediately to the conclusion that she might be able to challenge the scheme on wider grounds.  She did however note, from her dealings with the difficulty of segregating purchases by one pharmacy department between those for inpatients and those for outpatients, that there might be difficulties in implementing the new system.  She thus latched onto this point about a year ahead of the companies themselves. She also referred to the failure to have the correct documentation, and considered that that might open up a quite different possible area of potential challenge. That thus was an area that she could and would concentrate on. 

96.     The extraordinarily blunt explanation inserted by Janet Taylor into the Pre-Cred report admitted of little doubt on the part of Janet Taylor as to the reality.  As quoted above, it simply said “This repayment is due to a tax avoidance scheme.  Monies have been prepaid to purchase drugs and prostheses for inpatients to get round legislation introduced on 1 Jan 98”.  There may not at this stage have been an admission on the part of the taxpayer that the motivation for the scheme was solely tax avoidance, and that there was no commercial motivation, but there had certainly been an admission, that “the taxpayer did not seek to hide”, that the scheme was a tax avoidance scheme. 

97.    Nothing much to our minds turns on whether or not Services was a new company and an SPV, i.e. a Special Purpose Vehicle. Since however it was argued that it was only discovered that the company was a new company by Rod McAleer, we might just point out that in the documents quoted at paragraphs 29 and 30 Janet Taylor referred to the company as a new company, and to the setting up of a subsidiary.  Since the company had not even been registered for VAT purposes, to her considerable amusement, when it made its first supply, the proposition that it was not appreciated to be a new company by Janet Taylor is unsustainable.  

Janet Taylor’s second Visit Report  

98.    We accept that the extract from her Witness Statement that we have quoted at paragraph 32 above was written recently, and not something written back in 1998, but we still think that the black printed section quoted at paragraph 32 indicates that Janet Taylor had by this time been briefed to ascertain whether there were commercial reasons for setting up the drug supply structure, and she appreciated that “if there was no commercial reason to involve SMMSL there would have been no prepayment of drugs and therefore no zero rating of unspecified drugs and prostheses for an unknown length of time”.  The second sentence of her second Visit Report quoted and emphasised at paragraph 34 above records the broadly similar point, and was of course written at the time. 

99.    We need to comment on five different points in relation to the crucial Visit Report, dated 25/11/98.

100.    Much the most important point was the reported reply of Mr. Williams to the critical Ramsay question of “what the purpose of SMMS was”.  The answer given, in quotes, and Janet Taylor confirmed in evidence that this indicated that the words would have been the precise words used by Mr. Williams, was “to supply drugs to inpatients”, followed by the unquoted remark that Mr. Williams said that he had to maximise the tax recovery for the shareholders. 

101.     Counsel for the Respondents suggested that the quoted remarks were a lie, and an untrue suggestion that there was a commercial motivation for the scheme. We utterly reject that suggestion, and are satisfied that no objective reader could possibly read the words in this sense.  The words indicating that the purpose of Services was to supply drugs to inpatients was an example of the slightly embarrassed taxpayer answering the question posed by the tax officer in the wrong sense. Of course the immediate purpose of Services was to supply drugs, as it was also to place the prepayment that it had received on deposit in order to generate a return and render it feasible to supply drugs at the discount that may or may not have been “agreed”.    But none of this was anything to do with whether the whole scheme had been set up for tax avoidance reasons alone, or whether there was an alleged commercial justification for the structure. It was exactly equivalent to the answer that the directors of Greenjacket could have given in the Furniss v. Dawson case to the effect that their purpose had been “to acquire a timber company for an issue of debentures, sell it for cash to Wood Bastow, and lend the cash interest-free to its share and debenture holders”.  Yes, that was its immediate purpose, but it had nothing to do with whether the whole exchange had been set up and Greenjacket inserted into the structure solely for tax purposes.

102    Having dismissed Mr. Williams’ first answer as being simply a weak endeavour to “duck the real question”, his subsequent answer to the real question posed by Janet Taylor was that “he had to save the tax in order to improve the return to shareholders”.  That again is a classic reply.  It means that the purpose of the scheme was to avoid tax, and that when it is legal to do that, it is an entirely proper motivation of a Finance Controller and a company to enhance its after tax profits and improve “return to shareholders”.

103.   Our conclusion thus on the most important point is that Mr. Williams gave classic answers to Janet Taylor, and he did say that the motivation for the scheme was tax avoidance.  He may not have added that “in addition we confirm that we had no commercial justification for the transactions”, but we conclude that this was unnecessary. His answer indicated only one real purpose. Taxpayers trying to justify a scheme on commercial grounds are hardly going to be reticent about those grounds, and since in all the circumstances it was staggeringly obvious that this tax avoidance scheme was barely proving workable at all (after 11 months!!), we consider the absence of the follow-up wording, following the admission that the scheme was a tax avoidance scheme designed to improve return to shareholders, to be irrelevant.

104.     The second point on which we must comment in relation to the second Visit Report is that this Report does indicate that drugs were being ordered under the Services structure. In the current month they were testing the system by Services ordering drugs on the correct stationery from Abbott Laboratories and David Bull, with which two companies “contracts had been signed”. When this statement is coupled with the statement in Mr. Williams’ letter of 13 January (quoted at the end of paragraph 40 above) that he expected the scheme to be “fully operational” by February/March 1999, and when in January 1999 a VAT return was received from Services indicating significant inputs, and no outputs (i.e. a return precisely consistent with the profile expected under the prepayments scheme) we consider the proposition that HM Customs & Excise were unaware that the scheme was being operated to be unsustainable. 

105.     The third point to address is the reference to the fact that two contracts had been exchanged with suppliers. It was asserted by counsel for the Respondents that this statement was in conflict with the statement made in the last paragraph of Mr. Williams’ letter of 13 January 1999  (quoted at paragraph 40 above) where he said that there were not formal supply contracts.  Considerable stress was placed on this alleged inconsistency and on the fact, said to be inexplicable, that there appeared not to be comprehensive supply contracts with all the suppliers. We found this very curious. We can well imagine that a hospital would contact drugs suppliers and indicate that, as a licensed operator, it would from time to time be ordering drugs, and it would doubtless want details from the drug company of current price lists, drug availability and information about the characteristics of drugs. We found it difficult to understand what would be included in formal contracts between suppliers and drug companies, and found it perfectly credible that contracts, presumably on the drug companies’ standard terms, would simply be created when drugs were ordered. On the assumption that this is realistic, it seemed perfectly natural that the introduction of the Services’ structure would only have required a letter informing the drugs companies that in future drug purchases by the group would be placed by Services, once it had obtained its licence (in April 1998), and we could see no need for any formal contracts.  The confusion thus as to whether there were contracts, or simply such a letter to the drug companies informing them that in future orders would be placed by Services, all seems to us to be of no great significance. 

106.    The fourth point to note is the extraordinary exchange as to whether drugs would be sold at a mark-up or whether Services’ return would be taken in the form of a management charge. To this the reply given was apparently that this was “to be agreed”.  This response was criticised for demonstrating indecision but no-one in the hearing commented on the really extraordinary aspect of this exchange. Janet Taylor can at least be forgiven for asking the wrong question because she had never seen the Heads of Terms, that may or may not have constituted the contract, referred to in the original December 1997 invoice from Services. Had she seen that Heads of Terms, and indeed had she seen the accounts that appeared to us to indicate that Services was generating an interest return on its cash in hand, and supplying drugs at approximately a 20% discount, she would have noted that the question about making a profit in one form or another on supplying the drugs was “off the agenda”. We attach no significance to this confusion in the context of this appeal, but simply comment that Mr. Williams and his colleague Ms Grimshaw, were somewhat at sea in the response that they gave to this question.  If one thinks about it for a moment, it is obvious that Healthcare would not pay £100 2 to 3 years early for drugs and then concede a mark-up to the supplier so that the supplier would pay Glaxo £100 two years later, and thereby discharge say £105 of the deferred obligation to supply drugs under the prepayment contract. We regard this confusion not as deceitful, but simply as indicating that there was some confusion on the part of Mr. Williams as to what was actually meant to be happening. 

107.    The fifth and final point to note was the obvious one that the group were having great difficulty in makings the scheme work. 

Mark Alderton’s note of 20 November 1998

108.     We turn now to the note that Mark Alderton prepared of his exchange with Janet Taylor, and in our view it is at this point that the Respondents case goes “off the rails”. This note paraphrases the discussion with Janet Taylor but it completely changes the meaning of the response that the trader is asserted to have given to Janet Taylor as to the purpose of the scheme.   When it says:

“Wouldn’t say avoidance scheme – unclear if alert or primed – suggested central stock control”,

the first remark is simply wrong, because on several occasions Janet Taylor had confirmed that the taxpayer candidly admitted that this was a tax avoidance scheme.  There is also no reference whatsoever to any suggestion about central stock control in Janet Taylor’s Visit Report, and she confirmed in evidence that she had written the note immediately after the visit, and felt that it accurately recorded what had been said.  Since she had in part been despatched to go to see whether there was any indication of any commercial purpose behind the transactions, we consider it unthinkable that the taxpayer would have made some such suggestion and that she would have failed to record it in her note.  Equally such a remark would have been inconsistent with the answer that Mr. Williams did give and that was recorded in the Visit Report. 

109.    The only rationalisation that we can put on this, in the light of the fact that Mark Alderton was not called to give evidence, is that in producing the second-hand report of the meeting, matters got confused, and perhaps not surprisingly Mark Alderton remained on the song sheet quoted at paragraph 36 above, where reference had been made to the fact that the trader had not been asked to suggest any commercial motivation for the transactions. This, it will be recalled, was the somewhat earlier note by the tax avoidance group where there was speculation about commercial purpose, and the significance of this from the perspective of the Ramsay attack that that group was contemplating.  Whatever the explanation, we now make the two points that we consider to be the key element of our conclusions on the facts in this case. 

110.    The first is simply to repeat the point that Mark Alderton’s remark “Wouldn’t say avoidance scheme” was simply wrong, because this had been admitted on several occasions. It is immaterial to us whether the change in emphasis in Mark Alderton’s note was the fault of Janet Taylor or Mark Alderton. Whoever’s fault it was, Mark Alderton’s note was wrong. 

111.    In our view the crucial significance of this is that, from this point onwards, Janet Taylor’s input really ceases (save for the point about the commencement date of the supplies), and her Visit Reports sink without trace. They may or may not have been on the Board File in late 2000, and we have some doubt as to whether they were on the Board File, but we consider that to be of only secondary relevance.  The key fact is that in the whole build-up to the assessments, there is never one further reference to what Janet Taylor discovered.  Nobody in other words appears to have considered the crucial question of ascertaining what Janet Taylor had discovered and what she had recorded, and of comparing that with the information and evidence that the tax avoidance group considered vital in mounting a Ramsay challenge. In our view the Commissioners in the round had precisely the information that they wrongly thought that they lacked.

112.   The point just made is well-illustrated by the passage that we quoted at paragraph 53 above from a 30 June 2000 Memorandum of the tax avoidance group, written by Mark Alderton. Perhaps not surprisingly, this note records that Janet Taylor indicated various things, but instead of saying what she indicated, it precisely tracks the author’s wrong paraphrase, and says “Person interviewed would not say this was a VAT avoidance scheme – suggested central stock control”. Mark Alderton obviously went straight back to his own note of 25 November, and ignored Janet Taylor’s Visit Report, and this was the tenor throughout of the papers from the tax avoidance group. 

113.     Before concluding our comments on Janet Taylor’s evidence we should just make the observation that she was fully aware that the role of attacking the scheme on Ramsay/ “abuse” type lines had been assumed by the senior tax avoidance group, and that it was not for her to pursue this challenge herself. When she was shown the Ramsay letter that this group had drafted even before her late November 1998 Visit, she was told not to send it out, and so rather obviously she did not send it out.  She also realised that it was not for her “to let Liz Chinnoy know” what challenge was on the horizon.  That aspect of the enquiry was very much someone else’s business. 

Our conclusions in relation to Janet Taylor’s evidence

114.     To summarise, our conclusions in relation to Janet Taylor’s evidence and in particular to the 1998 Visit Reports are that:

•	her Reports were impressive and accurate, and we accept were almost always written on the date that the Visits were conducted;
•	the Reports revealed that on several occasions the trader had candidly admitted that the transactions were tax avoidance transactions;
•	in answer to the question of what was the purpose of the transactions, the trader had replied that the purpose was to save tax and enhance shareholders’ return, and had not added anything about any commercial motivation;
•	and the trouble that the trader was having in making the scheme work (geared to absence of the licence until April 1998; supply levels for a wholesaler; the exclusion of one out of only three hospitals from the system altogether, and difficulties in attributing purchases to eventual supplies to inpatients and outpatients) would have rendered any suggestion that the scheme was implemented for commercial reasons the likely subject of instant ridicule had the suggestion been advanced, which we conclude it was not. 

We conclude on the facts that Janet Taylor did have the evidence of facts required in the opinion of the Tax avoidance group, who collectively made the decision to assess, to justify the assessments actually made, and that all that evidence was obtained by the beginning of December 1998.

Rod McAleer’s evidence

115.     We have already indicated that for the Respondents to prevail in this case, they must show not only that they did not have the evidence that they considered essential to justify their assessment by the end of December 1999, but they must also show that positive knowledge of new facts and evidence came to light in the year 2000.  On the assumption thus that the conclusion that we have already given in the previous paragraph is wrong, we now turn to consider the alleged new evidence. The sole contention was that the evidence obtained in 2000 during the critical one-year period   was that obtained by Rod McAleer at his visit, which was on 16 May 2000, and recorded in his note headed Observations, coupled then with the inferences drawn from the refusal of the Appellants to respond to any more enquiries. 

116.     We accept that Rod McAleer was an honest and impressive witness, but we should record that it was evident that he was not as experienced as Janet Taylor in VAT matters, general trading arrangements and corporate transactions.  He was only the Control Officer for Healthcare and Services in a short gap period between having been involved with smuggling at Dover and being an Investigating Officer in a quite different area again. Some of his reactions to questions and answers as to what supply agreements he would have expected to see, how he would expect interest to be dealt with on Services’ loan to Healthcare, and what Loan documentation he would expect led us to view his evidence, and his paper headed “Observations”, with a little more caution than we have shown in relation to Janet Taylor’s evidence.  

117.     We have quoted in full Rod McAleer’s Observations paper in paragraph 51 above, and will now comment on which of the numbered items we considered to reflect existing knowledge, which were irrelevant to the actual assessments on Ramsay and “abuse” grounds, and which, if any, revealed crucial new evidence. 

118.     Going through the 13 items, our comments are that:

1.	This was known to Janet Taylor and is broadly irrelevant to the actual assessments;
2.	This, and the fact that Services had later obtained a drugs licence, was known to Janet Taylor.
3.	This was known to Janet Taylor, and it wrongly suggested that any company would actually issue invoices in order to receive interest on a loan.
4.	This, and more, was known to Janet Taylor.
5.	This was known to Janet Taylor in references that we have already flagged. 
6.	This was recited in Janet Taylor’s Visit Report of 25 November 1998.
7.	The intended sale of Healthcare seems completely irrelevant.
8.	This appears to be the only item of significance and we will revert to it. 
9.	We fail to see the significance of whether staff were given written or oral guide-lines on ordering drugs.
10.	 Whilst Rod McAleer may not have seen the very short Loan Agreements, which we regarded as broadly adequate between associated companies, we cannot see why there should be correspondence in relation to the Loan Agreement. 
11.	This was recited in Janet Taylor’s second Visit Report.
12.	This reflected a misunderstanding as to how interest would normally be dealt with. What would obviously have happened is that interest would have been credited to Services at year end; payments would only have been made to Services as Services needed to call for partial reductions of its demand loan in order to fund its obligation to pay for drugs and prostheses purchased from third party suppliers. None of this has much relevance to the actual assessments. 
13.	This is not surprising and is irrelevant to the assessments.

119.     We are thus left with the conclusion that just one item mentioned might have imparted new and relevant evidence, namely the suggestion, attributed to the Trader, that Services was set up to maximise purchasing power, but that this avenue was not pursued because of the impending sale. Beyond this it was still accepted that the company was also set up because of the tax advantage. And there was no correspondence to reflect intentions. 

120.    We find the reliance placed on this short and unexplored reference by the Respondents to some objective of maximising purchasing power to be unconvincing.

121.    We note firstly that one of the documents on which the Respondents rely, namely the 25 November 1998 note written by Mark Alderton already contained a broadly similar suggestion, when it said “suggested central stock control”.  We have actually concluded that text was a misrepresentation of what the trader had said to Janet Taylor, but all various later papers (for instance the one written after Rod McAleer’s paper) which we quoted at paragraph 53 above referred back to Mark Alderton’s earlier remarks about “suggested stock control”.  So if information about suggested stock control had been known by the Commissioners since late November 1998, what was the great significance of some vague reference in mid-2000 to “maximising purchasing power”?  If on the other hand we are right in our firm conclusion that Mr. Williams gave no indication of any fake or supposedly genuine commercial rationale for the Services structure to Janet Taylor on 25 November 1998, then it appears to follow that the information gained by Rod McAleer at item 8 in his “Observations” paper would, if anything, have weakened and conceivably undermined the Ramsay case rather than strengthened it.  The more compelling order of events would have been for Mr. Williams to have advanced some alleged commercial rationalisation back in 1998, and for Rod McAleer’s visit to have undermined those reasons.  Rod McAleer might for instance have got Mr. Williams to admit that the earlier remarks had been fabricated or he might have cross-questioned the alleged earlier claims and been able to conclude that they were without substance.   But, as matters stand, the sequence of remarks is the wrong way round. On the earlier occasion, either identical remarks were made (on Mark Alderton’s version) so that the later information added nothing, or more realistically the earlier remarks had been more candid and had advanced no suggestion of commercial grounds, so that the later reference either undermined the clarity of the Ramsay case or else the claim was instantly disregarded, thus leaving the Commissioners precisely where they would have been 18 months earlier had they dwelt more carefully on the more precisely worded note prepared by Janet Taylor. 

122.    Another possible interpretation is that Mr. Williams may have said to Rod McAleer something along the lines of the remark to Janet Taylor, namely that Services had been set up to buy drugs. When by mid-2000 the Services structure involved only two of the hospitals and could in no remote manner have “maximised purchasing power”, we are inclined to think that the report by Rod McAleer may have slightly muddled the points, as the report did in relation to several other aspects recorded.  Yet further confusion is created by the fact that the impending sale was not impending for at least two years after the structure had been set up, so that it is impossible to understand how anyone could have remarked that a structure was set up in December 1997 for some purpose, but that purpose was not pursued because a new event arose two years later. 

123.     In short, we are unimpressed with all the arguments based on this one item in Rod McAleer’s paper. We consider either that the point made was a total confusion, or that if it was not, then on one hypothesis, precisely this point was known 18 months earlier or on the more likely scenario, the Janet Taylor record of 25 November 1998 gave a more precise, more relevant and more damaging admission for the purposes of a Ramsay challenge than the record in Mr. McAleer’s paper. In that regard, Rod McAleer’s information would if anything have set the Ramsay challenge back, rather than been the key information that advanced it. 

The refusal on the part of the Appellants and PWC to respond to further questions

124.     There was considerable debate and argument as to whether a refusal to give information could constitute a relevant piece of information forming part of the relevant late information coming to the knowledge of the Commissioners to sustain an assessment under section 73(6).  We agree with the Respondents that, in appropriate circumstances, such a refusal could confirm suspicions and be relevant. 

125.     In the present case however, at a time when it was believed by PWC and many advisers that a Ramsay challenge could not be mounted against a VAT avoidance scheme, and when the Commissioners even confirmed that they knew that PWC took that view, there could be any number or reasons why PWC might have refused on behalf of the Appellants to give any further response to questions.  One such reason, indeed a rather astute one, might have been the realisation that the Commissioners were potentially faced with making an assessment that would be doubtful on time-barred grounds and that there was no purpose in assisting the Commissioners to defeat such an argument.  Thus the proposition that the Rod McAleer note revealed a weak commercial justification for the structure that was utterly undermined by the failure to give any further responses, seems to us to be totally unconvincing. 

The evidence in the round  -  and hunch and speculation

126.    We were cautioned by counsel for the Respondents to remember that we should look at the evidence in the round, and note that the Commissioners could not be expected to found assessments on Ramsay and “abuse” grounds on “hunch and speculation”.  We accept that in considering the evidence given by Janet Taylor we have looked carefully at the written record.  If we are asked however to look at matters in the round, and to judge where there was “hunch and speculation”, we consider that this approach leads even more clearly to a decision against the Respondents.  A fair summary in broad general terms is that Janet Taylor discovered the whole of the information that was required for a Ramsay challenge. There was much that she did not discover, and indeed that has still not been revealed (in that for instance it is still not clear whether the key contract was or was not entered into) , but Janet Taylor discovered everything required for a Ramsay challenge. The enquiry was then taken forward on a two-pronged basis with Janet Taylor being stood down from any type of tax avoidance challenge, and with a specialist team taking that possible attack forward. Unfortunately that team never focused on the information gathered by Janet Taylor. Mark Alderton’s wrong paraphrase of the critical discussion became part of the song sheet for the tax avoidance team.   There was no evidence at all at any stage thereafter that anyone went back to read and consider the Visit Reports.  Thus the enquiry veered off the correct track. Why there was delay after delay in despatching a Ramsay letter of questions we have no idea and it is not material.    Presumably this resulted from policy reasons geared to fighting the best case.    Whatever the explanation the attempt to found the section 73(6) assessments on new information obtained by Rod McAleer attempts to justify the assessments on information that was either not new or that was less damaging to the taxpayer than earlier clear admissions. And if anything was based on “hunch and speculation”, it was the proposition that the vague information obtained by Rod McAleer represented the big break-through. 

127.     We also consider that the weakness of the Commissioners case is exhibited by the suggestion that there were virtually lies in the original KPMG letter and in Mr. Williams’ answers recorded in the 25 November 1998 Visit Report.  We believe that our interpretation of those two statements is correct, and that it is unrealistic to suggest that either of them were advancing commercial justifications for the structure.   They were not and they were not lies. 

The list of facts that Nicholas Dean-Webb produced in his Witness Statement, and which it was asserted that the Commissioners took into account in their decision to make the Assessments, and our observations on each item

128.    Whilst it will regrettably involve virtually total repetition we consider that it is nevertheless important to reproduce the full list of the points that allegedly the Commissioners took into account in making the Assessments.  We will then add our own comments in italics, indicating whether we consider that each particular identified fact was either known before 31 December 1999 (i.e. effectively known to Janet Taylor), or was totally irrelevant to the decision process or finally something that only came to light after 1 January 2000, whereupon we will comment on why we consider items in that category definitely not to be decisive in favour of the Respondents.

129.      The list was as follows:

a.	SMMSL was a dormant company prior to the December 1997 prepayment transaction.  We have already quoted two references that confirmed that Janet Taylor knew this.   Since she said that “they have formed a subsidiary”, we assume that the company was not just dormant but that it had only recently been formed.   The fact is anyway of virtually no significance.
b.	The prepayment transaction by which SMHL paid SMMSL £10m (VAT inc) took place on 23 December 1997 at a time when HM C&E had published detailed information about the change in law regarding the supply of drugs and medical and surgical appliances.  Janet Taylor was aware of the above details and date of the transaction and the payment facts.   Whilst we have not recorded this point above, Mr. Williams had actually asked Janet Taylor what information she had about the date and nature of the expected change in the law, and on the very day after the question was put to her it was she who actually rang him back and gave him the relevant information!!!
c.	£9m of the £10m paid by SMHL to SMMSL was loaned back by SMMSL to SMHL under a loan agreement (comprising 3 sentences) on 24 December 1997.  Interest at 7% was payable by SMHL to SMMSL for the year ended 31 December 1998.  Janet Taylor recorded these details (apart from the fact that she had not seen the loan agreement) in her Report of the 19 February 1998 Visit, and she reconfirmed the points on the following day in her report to Allan McArthur, one of the more senior officers who was in “the tax avoidance group”.  We can see no relevance to the fact that the loan agreement consisted of only three sentences.    This was periodically referred to and ridiculed. In fact between associates, the Loan Agreement, which we have quoted was correct and adequate.   It failed to mention only one point, which was obvious, which was how interest was to be calculated on portions of the loan repaid during each actual interest period of the full year.   In contrast to the Tax Invoice, the Loan Agreement was a masterpiece. 
d.	At the time of the prepayment transaction, SMMSL had not applied for VAT registration.  Janet Taylor was aware of this and passed it on (for a laugh!!) in the 20 January memo to Allan McArthur. 
e.	At the time of the prepayment transaction, SMMSL was not in a position to supply drugs etc because it did not have the necessary licence.  Janet Taylor was aware that it did not have either of the licences that it required and was aware at a later date that the licences had been obtained. 
f.	Once a drugs licence had been acquired, SMMSL and SMHL had system difficulties which affected the ability of SMMSL to order and purchase drugs SMHL wanted.  No-one paid more attention to this fact than Janet Taylor.    
g.	The drugs licence appears to have been applied for and sent to Mr. T Smith, Chief Pharmacist with SMHL, who is also named as the person responsible for operations on behalf of the licence holder. Mr. T. Smith appeared to be employed by SMHL.  It was Janet Taylor who spelt out the ordering, delivery and checking details and the way in which drugs were to be ordered on Services’ stationery and then paid for by Services.    She may or may not have known who Mr. Smith was and this detail, which we consider to be completely irrelevant, was never mentioned as a factor of the faintest significance.  We assume that no-one was ever under the impression that Services employed its own separate staff.
h.	Mr. K. Williams, Group Financial Controller, provided conflicting information regarding arrangements between SMMSL and third party suppliers. In November 1998 he stated that two contracts had been signed with such suppliers. In January 1999 he stated that formal contracts with such suppliers did not exist.  Since the dates given by Nicholas Dean-Webb indicate rightly that the source of this minor confusion was revealed in a Visit of Janet Taylor and in Mr. Williams 13 January 1999 letter to her, Janet Taylor obviously knew these matters which were anyway completely irrelevant and were over-emphasised by the Respondents for reasons that we have already given. 
i.	SMMSL was still not “operational” in January 1999.    In fact it was, and Janet Taylor was fully aware that sample transactions with Abbott Laboratories and David Bull had been undertaken; she was then told that it was expected that the new system would be in full operation in February/March 1999, which implicitly it was since the VAT return for the period 12/98 included inputs referable to drug supplies (the exact split between drug supplies and inputs referable to the construction activity was not known), and someone in HM Customs & Excise, if only at Southend, can hardly deny knowledge of various VAT Returns on receipt of that Return and all subsequent Returns in which large amounts of input tax were being reclaimed.   Virtually a year elapsed following the receipt of the first Return reclaiming input tax, and the expiry of the two-year period for the making of assessments.
j.	After January 1999, no further information was provided to Janet Taylor concerning the actual operation of the arrangements, even though there were outstanding requests for information. Nevertheless HM Customs & Excise were informed that it was expected that the scheme would be in full operation by February/March, and the Returns just referred to matched that expectation and were all received by HM Customs & Excise. 
k.	The actual operation of  the arrangements was subsequently examined by Mr. McAleer in May 2000.  Not a revelation of fact in itself.
l.	At that time there were still no written contracts between SMMSL and third party suppliers, simply pricing agreements. This was irrelevant and is a comment based on ignorance, as mentioned above.  
m.	No written guidelines existed for the new purchasing system. Only verbal directives were given to hospital staff.  Since, by May 2000, the system had been operated for at least 16 months, and since drug ordering  requirements were doubtless the responsibility of very few staff in each hospital, and the mechanics required for implementing the new system were extraordinarily simple, this observation seems irrelevant, particularly to a Ramsay type challenge.  
n.	Goods purchased by SMMSL were despatched directly to hospitals by suppliers where they were checked by hospital staff against supplier invoices. Checked invoices were then sent to SMHL headquarters where a cheque was then drawn against the SMMSL bank account.  The very text of this item in Nicholas Dean-Webb’s Witness Statement is a virtual verbatim copy of the relevant paragraph of Rod McAleer’s paper, which in turn was a virtual verbatim copy of the passage from Janet Taylor’s Visit Report of 25 November 1998, reproduced at paragraph 34 above, so that this information was manifestly known to Janet Taylor. 
o.	It was explained to Mr. McAleer that SMMSL had been set up to maximise purchasing power. No evidence was presented to Mr. McAleer to support this assertion. Furthermore, it was admitted that the company was being used to gain a tax advantage.  We have dealt with this point at paragraphs 119 to 123 above. 
p.	There was no correspondence regarding the loan agreement made on 24 December 1997. There was no physical transfer of interest from SMHL to SMMSL.  Money was paid into the SMMSL [bank account] as and when required.  We would have been surprised had there been correspondence.    What would it have said:  “Here is a four-line Loan Agreement!”?    No-one would have expected more than that interest would be credited at year end, which it was, and that partial repayments of the demand loan would be made as and when Services had to pay third party drug suppliers.   This comment was entirely based on ignorance, as was one remark made by Rod McAleer in giving his evidence to the effect that the accounts did not reflect receipts of interest, which in fact they did.     Indeed, somewhat perversely, two wrongs ultimately on this occasion made a right, because the excessive discount contracted to be given to Healthcare (at 20%) emerged not to be so commercially disastrous in the light of the matching unanticipated event that total chaos and delay in bringing the system into operation gave Services a year’s grace to accumulate interest, and slow deliveries thereafter at the discount meant that the excessive discount did not put Services into insolvent liquidation, which initially was its likely fate!!
q.	No written contracts existed between SMHL and SMMSL describing the prepayment arrangements. This may or may not be right.  The alleged fact is presumably based on one of the PWC replies to the effect that so far as they were aware, there were no written contracts.   It may be that the Heads of Terms to which we have referred was agreed orally between the parties, and although neither the Appellants nor the Respondents made any reference to the Accounts of various years, we did note that the Accounts suggested that in the period when drugs were being purchased for delivery under the prepayment structure, they were being delivered at approximately the 20% discount mentioned in the Heads of Terms.   No reliance was placed on this particular item by the Respondents in the course of the hearing and we are inclined to agree that, whilst it would have opened up another BUPA/ECJ challenge had it emerged that there was no contract , we can see no relevance in this particular assertion to the question of whether tax avoidance was the sole motivation, or whether the structure was in part set up also for commercial reasons.   Even as regards a BUPA/ECJ type point, i.e. one along the lines that absence of certainty meant that there was no supply, such a challenge could in fact have been made whether or not there was a contract, so that the significance of the alleged discovery, even in that context, appears marginal. 
r.	SMHL and SMMSL had refused to provide any of the documents set out in the Commissioners’ Notices of Demand. There could have been any number of explanations for this, and insofar as one might have been that it implicitly conceded that the tax avoidance transaction had had no commercial motivation, we repeat that this was more clearly and specifically admitted to Janet Taylor.   We repeat the point that if there was “hunch and speculation”, then indeed there was, but if those in the tax avoidance team had not utterly lost sight of the clear information obtained by Janet Taylor and meticulously recorded, and instead themselves relied on “hunch and speculation” in the shape of paragraph 8 of Rod McAleer’s Observations paper, and in the broadly neutral refusal of PWC and the Appellants to reply to further questions, this case might not have gone off the rails as it did. 

130.   Our conclusion thus remains that all the material that the Commissioners, (largely in the shape of the tax avoidance group which oversaw and master-minded the challenge of this case on Ramsay and “abuse” grounds) considered to be required to justify the assessments  was known to the Commissioners (in the general sense and plainly including Janet Taylor) by the time Janet Taylor ceased to be the Control Officer. This was in October 1999. Nothing material was discovered thereafter.      The failings in this case resulted from the dis-connect between Janet Taylor, and those simultaneously and later handling the strategy of how to attack the case. The delays on the part of that group in despatching the Ramsay letter were left unexplained and were curious. They are however not strictly relevant to when facts were learnt, and whether other facts were learnt at a later date. 

The interaction between the Ramsay and “abuse” type challenges and those based on simpler failings in the scheme

131.    We have assumed, we think rightly, throughout this decision that the facts on which we must concentrate are those relevant to the actual assessments raised, i.e. those raised on Ramsay and “abuse” grounds. It is thus immaterial to consider whether facts were or were not discovered that might have had a bearing on other possible lines of attack. We consider this is even so if one contemplates the possibility that after the ECJ judgment in the BUPA case the Healthcare/Services scheme might have failed on that type of ground, and that the realisation of that might have rendered a Ramsay or “abuse” challenge unnecessary, and perhaps inappropriate. Our view however remains that what we must address is simply the information and facts discovered to justify the actual assessments raised, and the reasons given for them.  We also consider that all of the Ramsay type grounds of attack are still proper and cogent grounds on which the assessments might have been made and on which they would have succeeded. There is nothing in any of those doctrines, where the appropriate intentions and level of abuse etc exist, that undermines such an attack just because the scheme may also fail for other simpler reasons. Some other more straightforward attack might be more obvious, and might render the uncertainties of a Ramsay type attack unnecessary and thus not the first option. But on appropriate facts, such an attack could well have remained sound, and on the “abuse” ground, we consider that this case would have failed for that reason, alongside several other possible challenges.  

The Application made on behalf of the second Appellant

132.    In paragraphs 74 and 75 above, we set out the Application made on behalf of the second Appellant. 

133.    At the conclusion of the hearing the facts as regards the allocation of inputs in Services’ 12/98 Return had not been discovered, though we were told that it was definitely the case that some of the inputs related to drug purchases, whilst some others related to the activity in relation to construction services. We grant the Application insofar as it relates to the Appeal for the one period 12/98.  Thus if it can be demonstrated that those inputs in that period not referable to drug and prostheses purchases related to an activity where corresponding outputs were charged to VAT at the standard rate, with those outputs implicitly being taxed in one or more later periods, then we consider that the Appeal should still be allowed as regards those other inputs in the period 12/98.

134.     We refuse the Application as regards other later periods in that there are no active appeals in relation to those periods. To re-open those later periods at this very late stage would involve great work for the Respondents, and it would appear that it would only be a worthwhile exercise if there was some later further mis-match in timing of inputs and outputs as regards other periods. It would only be in that case that there would be any chance of the Second Appellant recovering any further repayment. And the second Appellant has had more than ample time to have realised this, without the fortuitous prompting on the part of the Respondents. 

Costs

135.     No order was requested as regards costs, save for a request by the Respondents that if we allowed the second Appellant to advance time-barred contentions notwithstanding its alleged 2002 concession, we should award costs in relation to this issue to the Respondents. Since the Appellants have won this appeal, and no additional argument or evidence was required on the part of either the Appellants or Respondents to deal with the timing point for the second Appellant, in addition to that required to deal with the same much more important point raised by the first Appellant, we make no order for Costs. 

HOWARD M NOWLAN
CHAIRMAN

RELEASED: 20 August 2008

LON 2001/0090
LON 2001/0600
LON 2001/0874