20882

VAT – ASSESSMENT – 12 month time limit – when did evidence of facts to justify the assessment come to the Respondents’ knowledge – satisfied that the final piece of the puzzle was when the Officer received details of the other supplies on 23 October 2006 – assessment made within 12 months of when the Officer knew of the facts to justify the assessment – Appeal dismissed. 

MANCHESTER TRIBUNAL CENTRE

	KIDZ R US CHILDREN CENTRE LIMITED   	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

Tribunal: 	MICHAEL TILDESLEY OBE	 (Chairman)
MARJORIE KOSTICK FCA CTA  (Member)	  

Sitting in public in Birmingham on 5 September 2008

Doug Hildred of Sharman Fielding, Chartered Accountant, for the Appellant

Richard Chapman counsel instructed by the Solicitor of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The Appellant was appealing against an assessment for VAT in the sum of £95,412 plus interest for the periods 02/04 to 11/04 (inclusive) and 02/06. The disputed amount was £94,740 since the Appellant agreed with the assessment of £672 for quarter 02/06.
2.	The amended witness statement of Mrs Williams, the assessing officer, was admitted in evidence. We refused an application from the Respondents for Mrs Williams to give evidence adding to her statement. The application took the Appellant by surprise. We decided that the Respondents had more than sufficient time to have its case ready for the hearing without the need to resort to applications on the day. We received a bundle of documents in evidence. 
The Dispute
3.	The assessment related to the recovery of VAT mistakenly claimed by the Appellant as input tax on the purchase and refurbishment of a building. The dispute concerned whether the assessment had been made within the relevant statutory time limits. The specific issue in this Appeal was whether the assessment was made within one year after the facts to justify the assessment came to the knowledge of the Respondents. There was no argument on the merits and the quantum of the assessment. 
4.	The issues in dispute were as follows:
(1)	The date of making the assessment: 26 February 2007 (the Appellant); 2 February 2007 (the Respondents).
(2)	The date when evidence of facts came to the Commissioners’ knowledge to justify the making of an assessment: 9 May or 4 November 2005 (the Appellant); 23 October 2006 (the Respondents).
The Law
5.	Section 73(6) of the VAT Act 1994 sets out the time limits in which an assessment must be made:
“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)	Two 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”. 
The Facts
6.	The Appellant was registered for VAT on 17 June 2003.
7.	On 10 December 2003 the Respondents acknowledged the Appellant’s  notification of an option to tax a  property at 394 Gipsy Lane Leicester with effect from 26 June 2003.
8.	The Appellant purchased the property on 20 January 2004 at a cost of £310,000 plus £54,250 VAT.
9.	On 27 January 2004 the Appellant granted a lease for a term of 20 years of the property to Mr and Mrs Patel trading in partnership as Sunshine Nurseries. Mr and Mrs Patel owned 99 per cent of the issued share capital of the Appellant.
10.	The Gypsy Lane property was extensively renovated during 2004, and converted into nursery premises, which were occupied by Sunshine Nurseries in February 2005, accepting children for day nursery education.
11.	In the 02/04 VAT return the Appellant reclaimed VAT of £54,250 arising from the purchase of the Gypsy Lane property. In VAT returns 05/04, 08/04 and 11/04 the Appellant reclaimed a further £40,950 in VAT incurred on the renovation costs.  
12.	On 8 February 2005, Mrs King conducted a routine inspection of the Appellant’s VAT records. Mrs King concluded that the Appellant’s grant of a lease to Mr and Mrs Patel trading as Sunshine Nurseries was caught by the anti-avoidance measure in paragraph 2(3AA) schedule 10 of the VAT Act. This had the effect of disallowing the Appellant’s option to tax, which in turn reclassified the supply of the lease to Sunshine Nurseries as an exempt supply. 
13.	On 9 May 2005 Mrs King communicated her decision to Mr and Mrs Patel stating that
“5.1 The effect of both of my decisions is the same, namely that the grant of the lease in respect of 394 Gipsy Lane by the Appellant to Mr and Mrs Patel …… falls to be an exempt supply under Group 1 of Schedule 9, and that the Appellant is not entitled to credit for input tax on the purchase and subsequent refurbishment of the property.
5.2  If my understanding of the Appellant’s activities is correct at the time the Appellant applied for VAT registration its only intended  supplies was the rent chargeable in respect of the lease of the Gipsy Lane property. As a result of the decisions given in this letter, any rent chargeable under the lease is an exempt, not a taxable supply. It follows that the Appellant was never in a position to make any taxable supplies, and therefore was not eligible to apply for VAT registration.
5.3 ………… If your name is deleted from the register …. Under the provisions of VAT Act 1994 section 73 you shall also be called upon to repay any amounts which you have claimed and be paid as deductible input tax”.
14.	On 27 May 2005 the Appellant requested a reconsideration of Mrs King’s decision. On 8 June 2005 the Appellant’s accountants elaborated on the grounds for reconsideration and Appeal stating amongst other things:
“This Appeal is specifically against the ruling that the Appellant is not in a position to make taxable supplies and your subsequent intention to delete its name from the register.
We would advise you that the Appellant purchased 394 Gipsy Lane, Leicester in January 2004, and has spent a long time refurbishing the property. The building is now in use, but please note that the Appellant is occupying part of the building for the purpose of making taxable supplies, and only part is occupied by Sunshine Nurseries.
Therefore we request the Commissioners to reconsider their decision of 9 May 2005 and agree that the Appellant is entitled to remain VAT registered with a measure of input tax recovery due to its own activities and also accept that the option to tax on the property is appropriate because of the above circumstances and the potential letting of part of the building to a third party”.
15.	On 18 July 2005 the Appellant’s accountants wrote a further letter informing the Respondents that a Sure Start children’s centre was being built adjacent to the property which would effectively shut down the nursery business operated by Sunshine Nurseries. The accountants then stated that
“The current status of the building is that only part of one floor, out of four floors, is presently being used for nursery education. Therefore less than 25 per cent of the property is being used for an exempt purpose and that is the maximum level that will be achieved, because due to the above developments exempt activity will shortly cease and the building will then be used solely for taxable purposes. We request that you take this additional information into account as the use of the building is now completely different to that which was envisaged by your ruling of 9 May 2005 and whilst its use for non-eligible purposes is now very low, it will shortly finish altogether”.
16.	On 13 October 2005 the Appellant’s accountants pointed out to the Respondents that three months had elapsed without a response to their letter of 18 July 2005.
17.	On 19 October 2005 Mr Crombleholme of the Respondents’ Central Region Appeals Team sought clarification of which decisions the Appellant was seeking reconsideration. Mr Crombleholme proposed a site visit by the local audit service to determine whether there was a valid option to tax, and if there was, whether it should be applied to the whole or part of the premises. Mr Crombleholme was of the view that the accountants’ letter of 18 July 2005 contained new information and should be evaluated in this context.
18.	On 4 November 2005 Mr Crombleholme upheld Mrs King’s decision that the Appellant’s option to tax did not apply to the grant of the lease to Sunshine Nurseries. Mr Crombleholme considered the accountants’ letter of 8 June 2005 as a statement of further intentions which were not notified at the time of registration, and may form the basis of a valid current day registration or prior registration application but not part of the application for registration made on 17 June 2003. Mr Crombleholme repeated his proposal of a site visit to ascertain the present position in respect of Gipsy Lane property. Mr Crombleholme concluded by stating that this was a decision that could appealed to the VAT & Duties Tribunal.
19.	On 24 November 2005 the Appellant’s accountants emailed Mrs King stating that they hoped that Mr Crombleholme would have taken into account the change in intention and the different use of the building in his reconsideration rather than being treated as a separate exercise. The Appellant was unsure of its position until it knew whether its registration for VAT based on the new circumstances would be granted. The accountants, therefore, considered that the best way forward was for the parties to meet at the Gipsy Lane property. 
20.	On 3 February 2006 Mrs Williams who had taken over the case from Mrs King agreed to a site inspection on 17 February 2006. At that meeting Mrs Williams established that the Appellant’s original intention for the property was to rent it out to  Sunshine Nurseries but the opening of the City Council nursery next door made it virtually impossible for the partnership to run a viable business.  Further at the time of the disallowance of the option to tax, the Appellant had only incurred input tax that was attributable to the supply of the exempt lease to the partnership. Mrs Williams concluded the meeting by undertaking to approach the Respondents’ policy team for guidance but in her view the current VAT registration would probably be cancelled.  
21.	Following the meeting, the Appellant’s accountants wrote a letter to Mrs Williams on 3 March 2006 to clarify the Appellant’s position and provide additional information. The following extracts are taken from the letter:
“As you are aware, there have been a number of alterations to the company’s plans over the past year, changes have been made and continue to be made. This includes particularly the Appellant’s always held intention to make taxable supplies, other than just renting out an opted property, and the change in circumstances forced upon it has merely accelerated this intention to diversify.
The Appellant’s VAT registration was granted in respect of intended taxable supplies of property. An option to tax was accepted, although this was subject to the proviso that it may not apply in certain circumstances, and your ruling was then made regarding the lease to Sunshine Nurseries.
Our preferred interpretation of the Sunshine’s Nurseries’ partial occupation of 394 Gipsy Lane is that the partnership did not take up all their rights under the lease. However, if we follow your interpretation of the position Sunshine Nurseries have granted the Appellant the right to occupy the first and second floors, and this would be a sub lease and an exempt supply.
As a consequence of this, as the Appellant  has  opted to tax the building, it is making taxable supplies of the rental of land and facilities when contracting with third parties but on the inputs side the associated supply is exempt. Accordingly whilst the company initially incurred input tax associated with the property, this is exempt input tax and the Capital Goods scheme prevents its recovery.
By this point we are trying to answer your concern that you could not see how making taxable supplies could justify the recovery of the property and renovation input tax. As you can see in the above circumstances it does not, as there is no directly attributable input tax to these supplies.
However, the fact remains that the Appellant is making taxable supplies, it always had the intention to make such supplies and will continue to do so.
It follows that the Appellant’s VAT registration is appropriate and it always has been, and the Appellant wishes to ensure that it continues to be registered”.
22.	On 8 May 2006 the Appellant’s accountants wrote another letter to Mrs Williams stating that it was incorrect to assume that the Appellant’s only intended taxable supply at the time of applying for VAT registration was the rental to the partnership. The other trading had always been planned and the Appellant did have an entitlement to be registered at the time of its application.
23.	On 17 August 2006 Mrs Williams advised the Appellant’s accountants that she was still awaiting a response from the Policy Team. In addition she requested from the Appellant details of all supplies made by it since its creation to enable the Respondents to reach a complete conclusion. The Appellant provided the requested information on 23 October 2006.
24.	On 2 February 2007 Mrs Williams  sent a letter informing the Appellant’s accountants of the following:
“First I would draw your attention to Mrs King’s letter of 5 May 2005 in which she informed you the option to tax on the supply from your client to the nursery would disapply. We discussed this at our subsequent meeting with yourselves and your client and it was agreed there was no reason to dispute this decision. However this left your client in the position where no taxable supplies were being made and so the registration should be cancelled. You subsequently stated your client was making other taxable supplies and had always intended to do so. The Respondents have accepted your statement and assuming these supplies fall under the scope of VAT ……. have agreed to allow the registration to continue.
This then brings us to the subject of claims of input tax. As you accept your client was making supplies of exempt rent, they then become subject to the partial exemption rules ……. Also, both the building itself and the refurbishment are subject to the Capital Goods scheme
…… I enclose a schedule of the adjustments I shall be making based on these decisions and your client will shortly receive an official assessment of these amounts.
….. Should you have any queries regarding this assessment, please do not hesitate to contact me”
25.	The schedule enclosed with Mrs Williams letter dated 2 February 2007 set out the taxable and total turnover, taxable turnover expressed as a percentage of total turnover,  input tax recoverable, under declaration and over declaration of tax, and any adjustment for the capital goods scheme for each VAT quarter from 11/03 to 05/05 in respect of the Appellant.
26.	Mrs Williams sent additional letters to the Appellant dated 2 and 7 February 2007 which adjusted the Appellant’s VAT returns for quarters 02/05, 05/05, 08/05, 11/05 and 08/06.
27.	The Respondents’ VAT Audit Report for the Appellant contained the following entry dated 14 February 2007 added by D Minshall:
“Having now discussed case with Geoff Bell and asked him to check calculations, letter and schedule. He agreed figures. MP inhibit set due to complexity of liability and no reason to believe trader intended to avoid tax. Calculation date set as when they provided us with final figures. Forwarded for countersignature”
28.	The notice of assessment (VAT 655) in the sum of £95,412 plus interest of £14,639.48 for periods 02/04, 05/04, 08/04, 11/04 and 02/06 was dated 26 February 2007. The notice was accompanied by a letter from Mrs Williams which stated that this notice replaced the assessment issued on 2 February 2007 which contained a transposition error.
29.	In a letter dated 2 July 2007 Mrs Williams explained that the assessment was subject to the Capital Goods scheme. Further it was not possible to ensure a fair apportionment under the scheme until the exact amounts of the other supplies made by the Appellant were known, which was not until 23 October 2006.
Reasons for Our Decision
First Dispute: Date when Assessment Made
30.	Section 73(1) of the VAT Act 1994 distinguishes between the making of an assessment and its notification to a taxpayer. The time limits specified in section 73(6) run from the making of an assessment not the date of its notification. 
31.	There is no statutory procedure for determining when an assessment is made, which means that it is a matter to be resolved by the Respondents’ internal processes. Given this background Jonathan Parker LJ in Courts PLC v Customs and Excise Commissioners [2005] STC 27 concluded that it was not possible to arrive at a formula which would determine in every case whether or not an assessment has been made. The precise date for making an assessment may depend upon the particular facts of the case.
32.	Lawrence Collins J observed in Cheesman v Customs and Excise Commissioners [2000] STC 1119 observed that
“Assessment of VAT is an important step, and it is unsatisfactory that the process is not transparent, and not defined by legislation or even by clear administrative practice”.
33.	The Respondents’ published guidance in Notice 915: Assessments and Time Limits: Statement of Practice March 2002 expressed the view at paragraph 4.2 that the assessment was complete when the officer has taken all steps necessary to establish to the best of his judgement that a quantified sum was owed for a given reason.
34.	Paragraphs 4.3 and 4.4 of the guidance dealt with the concern about the transparency of making an assessment.  In these paragraphs the Respondents stated that as a matter of practice they would not rely for time limit purposes on any date which was not communicated to the taxpayer. In those circumstances they would rely on the notification date rather than an earlier made date. The Respondents indicated that there were two ways of notification of an assessment: VAT 655 (the formal notification), or by letter. A pre-assessment letter, however, did not qualify as a notification of an assessment.
35.	 The Appellant argued for the date of 26 February 2007 when the assessment was made, as against the date of 2 February 2007 contended by the Respondents.
36.	The Appellant considered that the issuing of the notice of assessment (VAT 655) on 26 February 2007 was the date when the assessment was made. The Appellant cited in support Respondents’ published guidance Notice 915, in particular their reliance on the date of notification of the assessment for the purposes of the time limits. In the Appellant’s view Mrs William’s letter of 2 February 2007 constituted a pre-assessment letter. The details of the assessment were still being checked on 14 February 2007 as indicated by D Minshall’s entry in the VAT Audit Report. Further Mrs Williams accepted that she had made a transposition error in the schedule dated 2 February 2007.
37.	 The Respondents submitted that the date of Mrs Williams’ letter of 2 February 2007 represented the date when the assessment was made. The letter did not state that it was a pre-assessment letter. The language of the 2 February 2007 letter was that of a notice of assessment. 
38.	Our starting point is the decision in Courts PLC which held that there was no set formula for determining when an assessment was made, and that ultimately the determination may depend upon the facts of an individual case. We find that the process of assessment was complete on 2 February 2007 when Mrs Williams issued her letter of the same date. In that letter Mrs Williams provided a final response about the cancellation of the Appellant’s VAT registration. She supplied a schedule of detailed calculations of the VAT due for each quarter in dispute. Mrs Williams referred to her letter as this assessment in her final paragraph, and indicated that the official assessment would be based on the decisions in this letter.  We consider that the letter was not a pre-assessment letter, and fell within method 2 of notification as set out in Respondents’ Notice 915. The letter supplied transparency to the process by being dated. The transposition error in the schedule attached to the letter of 2 February 2007 was not significant and did not challenge our finding that the assessment was complete on that date. We hold that the disputed assessments were made on 2 February 2007.
Second Dispute: Date when evidence of facts came to the Commissioners’ knowledge?
39.	Section 73(6) of the VAT Act 1994 sets out two separate time limits. Section 73(6)(a) provides that an assessment must be made within two years of the end of the accounting period in which the VAT is due. We found that the disputed assessments were made on 2 February 2007 which was outside the two year period for the accounting periods to which the assessments related, namely 02/04 to 11/04 inclusive. Thus in order for the assessments to be valid they must meet the requirements of  section 73(6)(b), that is, made within 12 months of when the Respondents knew the facts justifying the assessment.
40.	The Court of Appeal in Pegasus Birds Limited v Customs and Excise Commissioners reviewed the authorities on the wording of section 73(6)(b) concluding at paragraph 15:
“An opinion as to what evidence justifies an assessment requires judgment and in that sense is subjective, but the existence of the opinion is a fact. From that it is possible to ascertain what was the evidence of facts which was thought to justify the making of the assessment. Once that evidence has been ascertained, then the date when the last piece of the puzzle fell into place can be ascertained. In most cases the date will have been known to the taxpayer, as he will be the person who supplied the information”.
41.	The Court of Appeal cited with approval the interpretation of His Honour Stephen Oliver QC in ClassicMoor Ltd v Customs and Excise Commissioners [1995] V & DR 1:
“The statutory words are ‘one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment comes to their knowledge’. My task is to determine when the last piece of evidence of sufficient weight to justify assessing was communicated to Mr Apsey (a Customs and Excise Officer). He says that it was the information gained at the interviews held on 20 April 1993. This evidence satisfied him that there was unlikely to be any change in the positions taken by the parties to the invoice and the alleged credit note. I can interfere with Mr Apsey’s decision but only if there is sufficient material to show that his failure to make an earlier assessment was perverse”.
42.	The Appellant contended that on the facts the Respondents’ investigation comprised two separate parts. The first part was the enquiry about  disallowance of the option to tax on the rental supplies to Sunshine Nurseries. The second part concerned the cancellation of the Appellant’s VAT registration.
43.	 According to the Appellant, it did not challenge Mrs King’s decision on the the option to tax. It was this part of her decision which generated the assessments for the accounting periods 02/04 to 11/04 (inclusive). The assessments related to the disallowance of the VAT repayments on the purchase and refurbishment of the property which were directly attributable to the supply to Sunshine Nurseries.
44.	 The Appellant’s challenge related solely to the Mrs King’s decision to cancel its VAT registration. Its submissions about other taxable supplies connected with the Gipsy Lane property did not affect the recovery of VAT on the purchase and refurbishment of the property. The submissions were directed at keeping the registration open.
45.	The Appellant considered that the Respondents’ investigation of the option to tax was completed by the decision of Mrs King in her letter of 9 May 2005 or in the alternative Mr Crombleholme’s reconsideration of 4 November 2005. Thus the Respondents had sufficient evidence to justify the making of the disputed assessments on either 9 May 2005 or 4 November 2005. The latest date for making the assessments within the 12 month time limit was the 4 November 2006.
46.	The Respondents disagreed with the Appellant’s version of the events. They considered that the Appellant’s representations following Mrs King’s decision on 9 May 2005 were keeping the whole dispute alive. In their view the Appellant was constantly moving the goalposts. First the Appellant raised the issue of other taxable supplies from the property. In March 2006 the Appellant put forward an additional argument of having an intention from the outset to make taxable supplies, other than just renting out an opted property to Sunshine Nurseries. The Appellant’s new arguments went to the heart of the assessment. Mrs Williams was not in a position to form a judgment until she was supplied with details of all supplies made by the Appellant since its creation, which was on 23 October 2006. Thus the Respondents’ preferred position was that the date of knowledge accrued on 23 October which was within the 12 month time limit imposed by section 73(6)(b) of the VAT Act 1994.
47.	We make the following findings of fact:
(1)	Mrs King’s decision of 9 May 2005 was based on her understanding that the Appellant’s only intended supply was the rent chargeable in respect of the lease of the Gipsy Lane property to Sunshine Nurseries.
(2)	The Appellant’s correspondence of May, June and July 2005 introduced new facts about other taxable supplies connected with the property, and challenged the entirety of Mrs King’s decision.
(3)	  Mr Crombleholme’s confirmation of Mrs King’s decision on 4 November 2005was restricted to disallowing the option to tax the supply to Sunshine Nurseries. He considered the information about other taxable supplies as new, which should be evaluated in that context suggesting a site visit to progress matters. Mr Crombleholme did not make any specific decision on a potential assessment to recover input tax on the purchase and refurbishment of the Gipsy Lane property.
(4)	At the site visit on 17 February 2006 Mrs Williams expressed concerns about a potential link between the taxable supplies and the recovery of the property and renovation input tax, as acknowledged in the Appellant’s letter of 3 March 2006. Mrs Williams established that the Appellant’s original intention for the property was to rent it out to  Sunshine Nurseries, and at the time when the option to tax was disallowed the Appellant had only incurred input tax that was attributable to the supply of the exempt lease to Sunshine Nurseries.
(5)	The Appellant’s letters of 3 March and 8 May 2006 undermined Mrs William’s understanding of the facts by asserting that it was incorrect to assume that its only intended taxable supply at the time of applying for VAT registration was the rental to Sunshine Nurseries. 
(6)	On 17 August 2006 Mrs Williams requested from the Appellant details of all supplies made by it since its creation to enable the Respondents to reach a complete conclusion. The Appellant provided the requested information on 23 October 2006.
(7)	The details of the other supplies were relevant to the assessment because they brought into play the capital goods scheme.
(8)	Mrs Williams considered that she could not calculate the assessment until she was provided with the exact amounts of the other supplies.
(9)	On 2 February 2007 Mrs Williams made the assessment for the periods 02/04 to 11/04 (inclusive) and 02/06.

48.	We are satisfied from our findings that the Appellant was keeping the dispute alive and changing the goalposts following Mrs King’s decision of 9 May 2005. The Appellant was challenging the factual matrix upon which Mrs King made her decision. We find that Mrs Williams was unable to form an opinion about how the Appellant’s representations affected the recovery of the VAT claimed on the property purchase and refurbishment until she was given the details of the Appellant’s supplies since its creation of 23 October 2006.  We consider that the details of these supplies were the last pieces of the puzzle necessary to justify the making of the disputed assessments. 
Decision
49.	We hold that the 23 October 2006 was when Mrs Williams knew that she had sufficient evidence of the facts to justify the making of the assessments for the accounting periods 02/04 to 11/04 inclusive. As the disputed assessments were made on the 2 February 2007, they were within the 12 month time limit imposed by section 73(6)(b) of the 1994 Act. We, therefore, dismiss the Appeal and make no order for costs.   

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 24 November 2008

MAN/2007/814