Glasses company loses appeal against timebar decision on 2005 VAT assessment

DCM (Optical Holdings) Ltd, which primarily sold spectacles and lenses but also offered VAT-exempt optical services, challenged the finding of the Upper Tribunal that assessments by HMRC from October 2005 were not timebarred in respect of the determination of input tax. HMRC also appealed issues relating to the timebar in relation to output tax. 

The appeal was heard by the Lord President, Lord Carloway, sitting with Lord Malcolm and Lord Doherty. 

Sufficient knowledge of facts 

Between 26 and 30 September 2016 the First-tier Tribunal (Tax Chamber) heard six appeals by DCM against decisions and assessments of the Commissioners for HMRC. The first of these related to assessments issued to DCM on 20 October 2005 for the prescribed quarterly accounting periods 10/02 to 04/05. 

The 2005 assessments assessed DCM as being liable to pay more VAT than it had declared in the relevant returns, as there had been understatement of output tax due and overstatement of allowable input tax. The understated output tax arose because HMRC considered that DCM had incorrectly apportioned the charges it had received between the chargeable supplies and the exempt supplies. The overstated input tax arose because HMRC considered that DCM had incorrectly apportioned residual input tax between chargeable and exempt supplies. 

DCM challenged the assessments on the ground that they were made more than one year after HMRC had knowledge of facts which were sufficient to justify the making of assessments, contrary to section 73 of the Value Added Tax Act 1994.  

The First-tier Tribunal found that there were no material facts which would have justified making the assessment prior to 31 August 2005, when HMRC officers met with DCM in relation to apportionment methods and were given copies of DCM’s VAT account for the period 07/02 to 01/04, at which point the figures relied upon in the 2005 assessments became known to HMRC. 

On appeal to the Upper Tribunal, it was decided that the assessments were not time-barred insofar as they assessed DCM to take account of the fact that input tax had been overstated, but that they were time-barred insofar as they assessed DCM to take account of the fact that output tax had been understated.  

It was submitted for HMRC that the UT erred in law in deciding that an assessment was a unitary demand for tax. Where HMRC became aware within a year of an assessment of material facts sufficient in HMRC’s opinion to make an assessment to recover overstated input tax, it was also open to them to use the assessment to recover additional VAT where output tax had been understated for the same prescribed accounting period. Further, the UT was not entitled to reach a different conclusion to the FTT as to when in the HMRC officer’s opinion there were sufficient facts to justify the making of an assessment. 

It was submitted for DCM that the UT had been entitled to decide the time bar issue in the way it had. It was for the FTT and the UT to look at the content of the assessments and determine, in light of that content, when the last piece of material information came to the attention of HMRC, and the UT was entitled to come to a different decision to the one the FTT made. 

Swayed by its own assessment 

The opinion of the court was delivered by Lord Doherty. On the reasoning of the FTT, he said: “The FTT did not accept that HMRC could have known whether DCM was using [a certain apportionment method] or not without seeing the VAT records. There had been no voluntary disclosures of under-declared output tax. The FTT did not think that HMRC ought to have inferred from that that DCM was not adhering to the 2003 Settlement. It considered that a far more obvious conclusion was that there was no under-declaration of output tax. It concluded that it was wholly unable to see any material fact which was known to HMRC prior to 31 August 2005 which would have justified making the assessments earlier. It found that [the HMRC officer] acted appropriately and quickly and that HMRC certainly were not perverse in not raising assessments earlier.” 

He continued: “In our view it is not possible to reconcile those findings with the contention that HMRC had all the facts required to make assessments for the output tax under-declarations more than a year before 20 October 2005. We turn then to examine the basis upon which the UT upheld that contention.” 

Regarding the difference in findings between the FTT and UT, he said: “In our opinion it is clear that, rather than considering whether the FTT’s findings were findings which the FTT was entitled to make, the UT was swayed by its own assessment and evaluation of the evidence. In particular, it drew conclusions from the discussions at the meeting on 29 January 2004 which [the HMRC officer] had not drawn and which the FTT did not draw. In our view those conclusions are not compatible with the FTT’s findings.” 

He continued: “In our view the UT was not entitled to conclude that more than a year before 20 October 2005 HMRC had knowledge of all the material facts sufficient in their opinion to justify making assessments for the additional output tax which was due. The FTT was the fact finder, and on the evidence it was entitled to make the findings which it did. It was not open to the UT to make findings in relation to output tax which were at odds with the FTT’s findings. In making such findings the UT erred in law. Accordingly, in our opinion HMRC’s appeal is well founded.” 

For these reasons, the appeal of HMRC was allowed on the evidence of facts issue, and the assessments of 20 October 2005 were re-instated. Other appeal grounds raised by DCM were also refused.