The taxpayer was the representative member of a VAT group comprising ten corporate optician businesses, whose supply of spectacle frames and lenses was standard rated for the purposes of VAT, but whose provision of eye tests and dispensing services was an exempt supply, so requiring their VAT returns to reflect an apportionment of the price they charged customers between the taxable and exempt elements. The revenue took the view that because of the taxpayer’s failure properly to differentiate between the taxable and exempt elements of the prices charged, the output tax stated in the taxpayers’ returns as due for the periods October 2002 to January 2004 was under-declared. Accordingly, in October 2005, it issued an assessment for substantial sums owing. In relation to other returns made by the same taxpayer, in respect of periods between 2005 and 2008, the revenue declined to pay to the taxpayer self-assessed VAT credits which it had claimed pending inquiries to verify those claims and, after the verification process, refused to pay the claims or decided to pay sums which were significantly lower than that which the taxpayer had claimed. The taxpayer appealed against the revenue’s assessment on the ground that it was time-barred, contending that section 73(6)(b) of the Value Added Tax Act 1994 required an assessment in respect of an incorrect return to be made no later than one year after evidence of facts sufficient to justify the making of the assessment came to the revenue’s knowledge and that the revenue must have acquired knowledge of facts sufficient to justify an assessment before October 2004. The taxpayer appealed against the revenue’s decision on VAT credits on the ground that section 25(3) of the 1994 Act imposed a mandatory requirement on the revenue to make a repayment of the amount specified on the return, with the revenue having at its disposal other statutory options to protect its position where necessary. Following decisions of the First-tier Tribunal and the Upper Tribunal, the Inner House of the Court of Session found for the revenue on both issues.
On further appeal by the taxpayer—
Held, appeal dismissed. (1) Section 73(6)(b) of the Value Added Tax Act 1994, in adopting a time-period based on the acquiring of facts sufficient to justify the making of “the” assessment, was addressing the assessment which the revenue had in fact made and not a hypothetical assessment which they might have made but did not. The focus was on the subjective opinion of the relevant revenue official as to what evidence was sufficient to justify an assessment, which was a question of fact. Absent a perverse view on the part of the official as to the adequacy of that evidence, it was the revenue’s knowledge of that evidence which started the clock running under section 73(6)(b). Since the First-tier Tribunal had made findings of fact refuting the submission that the revenue had evidence of facts sufficient to justify the 2005 assessment prior to their obtaining evidence in August and September 2005, it followed that the assessment fell within section 73(6)(b) and was not time-barred (paras 20–22).
(2) The revenue had both a power and a duty to conduct a reasonable and proportionate investigation into the validity of VAT credit claims and was entitled to take a reasonable time to investigate any claim before authorising repayment. Moreover, it was implicit in section 25(3) of the 1994 Act that the repayment obligation thereunder arose solely where a VAT credit was actually due. Accordingly, it properly could be inferred that the requirement on the revenue under section 25(3) was subject to an implied power to refuse to repay any self-assessed VAT credit until the accuracy of the claim, and the actual amount due, if any, could be verified. Such implied power was consistent with the purpose of the VAT statutory scheme, namely to ensure that traders both paid the correct amount of VAT and received the correct amount of any input tax due to them, and consistent also with the principle of fiscal neutrality. It was open to a taxable person to seek judicial review of a verification process that was not expeditious or proportionate. Here, however, the First-tier Tribunal had found that the revenue had acted within a reasonable time in the circumstances. Accordingly, since the revenue’s decisions to verify the repayment returns had been within their powers, and had been conducted within a reasonable time, the taxpayer’s appeal against the subsequent decisions to withhold the claimed credits, or to pay them at a lower rate, failed (paras 27, 29–34, 45–46).
Julian Ghosh KC and David Welsh (both of the English and Scots Bars) (instructed by Harper McLeod, Glasgow) for the taxpayer.
David Thomson KC and Ross Anderson (both of the Scots Bar) (instructed by Office of the Advocate General for Scotland, Edinburgh) for the revenue.