B e f o r e :
LORD JUSTICE BROOKE
LORD JUSTICE CHADWICK
MR JUSTICE BODEY
| || MOHAMED HAFIZ RAHMAN||Appellant|
| ||- and -|
| ||COMMISSIONERS OF CUSTOMS AND EXCISE ||Respondent|
(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
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Miss M Lonsdale (instructed by Messrs Salusburys for the Appellant)
Mr R Barlow (instructed by Solicitor of Customs & Excise for the Respondent)
HTML VERSION OF JUDGMENT
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Lord Justice Chadwick :
- This is an appeal from an order made on 25 October 2001 by Mr Justice Lawrence Collins on an appeal under section 11 of the Tribunals and Inquiries Act 1992 from a decision of the VAT & Duties Tribunal (Mr M S Johnson, chairman, Mr J M Lapthorne and Mr R J Freeson) on an appeal by the taxpayer, Mr Mohamed Hafiz Rahman, against part of an assessment which had been issued on 25 January 1995 by the Commissioners of Customs and Excise under section 73(1) of the Value Added Tax Act 1994. The Tribunal dismissed the taxpayer's appeal; and the judge upheld the Tribunal's decision. Permission to appeal to this Court was granted on 5 May 2002 by Lord Justice Aldous.
The legislative provisions
- Value Added Tax (VAT) is chargeable on the supply of goods and services in the United Kingdom where the supply is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him – see sections 1 and 4 of the Value Added Tax Act 1994. A person is a taxable person for the purposes of the Act while he is, or is required to be, registered under the Act – see section 3(1). Regulations made under section 58 of, and paragraph 2(1) of schedule 11 to, the Act require records to be kept and returns to be made in respect of the tax for which a taxable person is accountable – see paragraphs 25 and 31 in Part V of the Value Added Tax Regulations 1995 (SI 1995/2518).
- Section 73(1) of the Act provides for assessment where a person has failed to make returns, or where it appears to the commissioners that returns are incomplete or incorrect. The section is in these terms:
"Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are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."
- No appeal against an assessment under section 73(1) of the Act shall be entertained unless the appellant has made all the returns which he was required to make under paragraph 2(1) of schedule 11 and has paid the amounts shown in those returns as payable by him – see section 84(2). Subject to that, section 83 of the 1994 Act, at paragraph (p), provides that an appeal will lie to a VAT tribunal with respect to:
"an assessment – (i) under section 73(1) . . .in respect of a period for which the appellant has made a return under this Act; or (ii) . . . ; or (iii) . . . ; or the amount of such an assessment;".
The two-stage approach
- Section 83(p) of the 1994 Act provides both for an appeal "with respect to . . . an assessment under section 73(1)" and for an appeal "with respect to . . . the amount of such an assessment". That distinction reflects the two distinct questions which may arise where an assessment purports to have been made under section 73(1) of the Act. First, whether the assessment has been made under the power conferred under that section; and, second, whether the amount of the assessment is the correct amount of VAT for which the taxpayer is accountable.
- The first of those questions itself contains two elements: (i) whether the pre-condition to the exercise of the power is satisfied – that is to say, has there been a failure to make returns, keep records or afford facilities for inspection, or has it appeared to the commissioners that returns which have been made are incomplete or incorrect – and (ii) whether the assessment made by the commissioners was made "to the best of their judgment". The first of those elements is, I suspect, rarely in dispute; but the second element – the need for 'best judgment' – has led tribunals to adopt what was has been described as a 'two-stage approach' to appeals under section 83(p) of the Act. It has become the practice for tribunals to consider, first, whether – on the material available to the commissioners at the time when the assessment was made – the assessment satisfies the 'best judgment' test. It is only if that test is satisfied that the tribunal goes on to consider, as a second stage in the appeal, whether the assessment should be varied - or, as the taxpayer is likely to contend, reduced – by reference to additional material not available to the commissioners or in the light of explanation or argument advanced on the appeal. The existence of that practice is material to an understanding of the contentions on the present appeal.
The underlying facts
- Before addressing those contentions it is convenient to set out the underlying facts and the procedural history. From September 1992 the taxpayer had carried on a business known as Robi's Indian Takeaway at Bath Road, Cheltenham. He was not registered for VAT in respect of that business. In December 1992 he acquired the Khayam Restaurant at Vine Street, Evesham as a going concern. He became registered for VAT as sole proprietor of that business. In June 1993 he sold the Cheltenham business. In August 1994 the Commissioners became aware that he had made no returns in respect of the Cheltenham business. That led to an investigation, in the course of which officers of H M Customs & Excise, Mrs Stark and Mrs Green, visited the Khayam Restaurant in Evesham on 16 November 1994. Shortly thereafter, on 28 November 1994, the taxpayer sold the Khayam Restaurant. He was no longer required to be registered under the 1994 Act; and, accordingly, he de-registered.
- On 25 November 1994 Mrs Stark wrote to the taxpayer's accountants, enclosing a schedule which (as she said) she intended "to use as a basis for an assessment of further value added tax due." The schedule contained a calculation of mark-ups in respect of wine (116.73%), beer/lager (115.49%) and spirits and Indian lager (100%). By applying those mark ups to invoiced purchases of wine, beer, lager and spirits for the year to 31 August 1994, Mrs Stark calculated that total sales of those drinks from the Khayam Restaurant over the twelve month period were £23,410. From an examination of meal bills over a six week period she estimated that sales of drinks comprised 14% of total sales – that is to say, total sales of food and drink – made by that business; and so reached a figure of £167,214 for total sales of food and drink. On that basis she calculated that VAT in an amount of £29,428 (after taking account of beer and wine given away) should have been accounted for and paid by the taxpayer in respect of the business carried on at the Khayam Restaurant in the year to 31 August 1994; compared that with the amount of VAT actually declared in respect of that year (£19,531); and identified a shortfall in an amount equal to the difference (£9,897). She invited the taxpayer's accountants to comment on her schedule of calculations. She pointed out that the amount of the shortfall was equal to 50.67% of the amount actually declared; and indicated that she would treat amounts declared in respect of earlier periods as having been under-declared by the same proportion.
- No response was received to the letter of 25 November 1994 until the end of February 1995. In the meantime, on 20 January 1995 Mrs Stark had issued an assessment under the provisions in paragraph 4(1) of schedule 7 to the Value Added Tax Act 1983 - provisions which had, by then, been re-enacted as section 73(1) of the 1994 Act . The assessment comprised three parts. First, an assessment (£4,229 in aggregate) in respect of the Cheltenham business for the three quarters commencing February, May and August 1993. Second, an assessment (£9,897 in aggregate) in respect of under-declaration for the Khayam Restaurant business for the four quarters commencing November 1993, February, May and August 1994 (apportioned as to £2,474 per quarter). Third, an assessment (£7,353 in aggregate) in respect of under-declaration for the Khayam Restaurant business for the three preceding quarters, commencing February, May and August 1993.
- On 27 February 1995 the taxpayer's accountants replied to Mrs Stark's letter of 25 November 1994. The accountant's letter of 27 February 1995 contained no reference to the assessment of 20 January 1995; but it took four points on the earlier schedule of calculations: (i) that the amount said to be under-declared in respect of the year to 31 August 1994 (£9,897) was "very high"; (ii) that the allowance given for wastage was "very low"; (iii) that an allowance should have been given in respect of free drinks to staff; and (iv) that a greater allowance should have been given in respect of free drinks given to customers. The commissioners were not persuaded to reduce the assessment. On 8 January 1996, the taxpayer gave notice of appeal to the tribunal on the grounds that the amount "was excessive and very high".
The first tribunal hearing
- The appeal was limited to the assessments in respect of the alleged under-declarations (£17,249) in respect of the business carried on at the Khayam Restaurant. There was no appeal from the assessment in respect of the Cheltenham business. The appeal was heard on 3 March 1997 before a tribunal comprising two members (Mr Demack, chairman, and Mr Bridge). In the course of that hearing the commissioners accepted that the assessment in respect of tax under-declared should be reduced by £2,133 – that is to say, from £17,249 to £15,117.
- The two members of tribunal addressed, first, the question whether the assessment made on 20 January 1995 had been made by the commissioners "to the best of their judgment". They were unable to agree as to the answer to that question. The chairman took the view – in the light of observations made by Mr Justice Woolf in Van Boeckel v Commissioners of Customs & Excise  STC 290 - that it was enough that the Commissioners had, through Mrs Stark, acted "honestly and bona fide". That required, of course, that there should be some material before them on which they could exercise a judgment; and that their decision should be reasonable and not arbitrary. But, in his view, those requirements were satisfied: the assessments had been made to the commissioners' best judgment. The other member of the tribunal (Mr Bridge) thought the assessments arbitrary in a number of respects. He identified as "not made to best judgment" the decision not to allow any stock change, the calculation of average mark-up for wines, the extraction of a sample of meal bills to establish the drinks/total sales ratio; and "the calculation of the average sales ratio and its subsequent rounding". The chairman treated the disagreement on that first question as resolved by the exercise of his casting vote (conferred by paragraph 5(2) of schedule 12 to the 1994 Act).
- On the basis that the taxpayer did not succeed on the 'best judgment' question; it was necessary for the tribunal to consider whether the assessment should be varied or reduced. But it appears that the dissenting member (Mr Bridge) took the view that, once he had decided that the appeal should be allowed on the 'best judgment' question, his function was discharged. He took no part in the second stage of the process. The chairman, on the other hand, seems to have taken the view that his conclusion on the 'best judgment question' made it unnecessary for him to re-address, in the exercise of his own judgment, the question whether the assessment made by the commissioners was a correct assessment of the VAT payable by the taxpayer. In those circumstances the chairman dismissed the appeal. The decision was released on 16 May 1997 (see (1997) VAT Decision 14918).
The first appeal to the High Court
- The taxpayer appealed to the High Court. That appeal came before Mr Justice Carnwath in May 1998. His judgment is reported at  STC 826. He identified four issues (ibid, at 832g); but it is sufficient, in the context of the present appeal, to refer only to two, which may conveniently be described as the 'best judgment issue' and the 'no-deliberation issue'.
- On the 'best judgment issue' the judge rejected the taxpayer's submission that the chairman had erred in law. He held that there were no grounds for criticising the chairman's approach. That approach had been set out in paragraph 61 of the tribunal's decision:
"It is clear from the judgment of Woolf J in the Van Boeckel case that the Commissioners were required to exercise their powers of assessment in such a way that they make a value judgment on the material before them. The chairman is quite satisfied that they did so in the instant case. He is also satisfied that they performed that function honestly and bona fide. There was some material before the Commissioners on which they could base their judgment, albeit of a very limited nature. Finally, the chairman is satisfied that the Commissioners considered all the material placed before them and, on that material, came to a decision which was reasonable and not arbitrary as to the amount of tax which was due. Consequently, the chairman holds that the assessments under appeal were made to the Commissioners' best judgment as required by section 73(1) of the 1994 Act."
The judge described the approach of the other member of the tribunal (Mr Bridge) as "wrong". As he put it (ibid. 837a):
"He [Mr Bridge] made certain criticisms of the Commissioners' approach . . . but he nowhere considered whether those deficiencies were such as to render the assessment 'wholly unreasonable' or otherwise invalid according to the Van Boeckel criteria."
- The taxpayer's submission in relation to the 'no-deliberation issue' had been put in these terms (ibid 838c-d):
"The decision is ultra vires because the appellant was entitled to expect that both tribunal members carry out their lawful functions together but each carried out different functions in relation to the first question and Mr Bridge has failed to carry out any function in relation to the second."
The judge rejected that submission in respect of the first question; but accepted it in respect of the second. He said this (ibid, 838d-h):
"I have already made it clear that I see no basis for complaint in the way the first question, that is the 'best judgment' issue, was dealt with. There was disagreement between the members, and the chairman's view prevailed. His reasoning is clearly set out and is in my view impeccable.
However I see force in the appellant's contention in relation to the second issue. As I read the decision letter, once Mr Bridge had decided that the appeal should be allowed on the best judgment issue, he regarded his function as discharged . . .
If this is the correct interpretation, then it does in my view show an error of approach. Even accepting the validity of the two stage approach, the fact that there was a disagreement at stage 1, did not mean that the dissenting member ceased to have any further role."
The judge was persuaded that the appellant was entitled to complain that, if the dissenting member had taken part in stage 2 – the decision whether the amount of the assessment should be varied – there was at least a possibility that the result would have been more favourable to the appellant. On that ground, alone, he allowed the appeal. He expressed his conclusion at the end of his judgment (ibid 840b):
"In this case, Mr Bridge, seems unfortunately to have regarded his function as discharged when he had expressed his view on the best judgment issue. As a result, the assessment of the amount appears to have been conducted by the chairman alone. In these circumstances the decision cannot stand and I remit it to a different tribunal for rehearing."
- For my part, I find it difficult to believe that Mr Justice Carnwath thought that he was remitting the matter for further consideration of the best judgment issue – on which he had upheld the tribunal's decision. It seems to me reasonably plain that he intended that the further hearing before the tribunal should be confined to a consideration of the second question – whether the amount of the assessment should be varied or reduced – on which (as he had held) there had been no effective tribunal decision. Nevertheless, the operative provision in the order made by on 11 June 1998 was in these terms:
". . . the order dated 16 May  be set aside and the matter be remitted to be heard by a differently constituted Tribunal for re-determination."
The second tribunal hearing
- The matter came before a second tribunal, on remission, in January 2001. Whatever may have been the intention of Mr Justice Carnwath – or, perhaps more pertinently, whatever may have been the true effect of the order of 11 June 1998 – the second tribunal did not take the view that it was confined to a consideration of the question whether the amount of the assessment should be varied or reduced. It regarded itself as competent to reconsider the best judgment issue; although it did, of course, recognise that it should "take notice of the guidance given by the Judge to this tribunal in his judgment and . . . take full account of it in this decision". It allowed the taxpayer to argue that Mr Justice Carnwath had been wrong when he had said, at  STC 826, 835c-d:
". . . the tribunal should not treat an assessment as invalid merely because it disagrees as to how the judgment should have been exercised. A much stronger finding is required; for example that the assessment has been reached 'dishonestly or vindictively or capriciously'; or is a 'spurious estimate or guess in which all elements of judgment are missing'; or is 'wholly unreasonable'. In substance these tests are indistinguishable from the familiar Wednesbury principles (see Associated Provincial Picture Houses Ltd v Wednesbury Corp  1 KB 223). Short of such a finding, there is no justification for setting aside the assessment."
- The tribunal reviewed that statement of principle in Mr Justice Carnwath's judgment in the light of the subsequent decision of Mr Justice Dyson in McNicholas Construction Co Ltd v Commissioners of Customs & Excise  STC 553. It reminded itself that Mr Justice Dyson had said (ibid, 581d-e) that:
". . . the words 'to the best of their judgment' permit the commissioners a margin of discretion in making an assessment; a taxpayer may only challenge the assessment if he can show that the commissioners acted outside the margin of their discretion, by acting in a way that no reasonable body of commissioners could do. In order to succeed, the taxpayer must show that the assessment was wrong in a material respect, and that if so, the mistake is such that the only fair inference is that the commissioners did not apply best judgment, as explained by Woolf J in Van Boeckel v Customs & Excise Comrs  STC 290."
The tribunal treated that as "an obvious and unequivocal reformulation" of the guidance given by Mr Justice Carnwath in the passage which I have just cited ( STC 826, 835c-d). In my view it was correct to do so.
- The tribunal then considered the evidence and made findings of fact. It set out the circumstances in which the two officers of Customs and Excise, Mrs Stark and Mrs Green, had visited the premises of the Khayam Restaurant in November 1994. It accepted that there were two instances where it had been shown that discrepancies existed between the officers' notes and the documentation relating to the business. It went on to say this, at paragraphs 22 and 23 of the decision (see (2001) VAT Decision 17135):
"22. . . . Apart from these, we find that the lack of correlation between figures included in the notes and possible sources of information does not satisfy us that the officers' figures are mistaken or otherwise suspect. Having observed the demeanour of the witnesses and listened to their evidence, it is impossible for us to conclude that the figures contained in their notes were not a genuine attempt by them to set down what they considered to be required for the performance of their calculations. In some respects the witnesses were not able to explain their notes to the tribunal for lack of recollection. However we think that it is entirely understandable that, at this distance in time, memories should have faded. We do not criticise either officer on that account.
23. We find that an important factor influencing the task performed by the officers was acute shortage of time. At the meeting on 16 November 1994, the officers were informed that contracts had been or were about to be exchanged for the sale of the Khayam. It seemed to them therefore that speed was of the essence in taking a view on whether the VAT returns of the Appellant in respect of the business were complete. They only had a few short hours to devise and perform a method of checking the accuracy of the returns. We find this of necessity connoted a selective approach to the information made available by the Appellant and his accountant. A "rough and ready" calculation was undertaken when, had time been on Customs' side, a different and potentially more accurate method of calculation might have been employed."
- The tribunal described the method used by the officers as "very straightforward":
"It consisted of comparing all bills for the six weeks of sales so as to calculate the percentage represented by drinks (14% as a rounded up figure), recalculating by the application of mark-ups an alleged true figure for sales of drinks, grossing up the total sales to the true figure in the light of the recalculated drinks figure and the percentage, and calculating the shortfall of VAT paid on the grossed up sales."
It accepted that, from inspection of the premises and discussion with the taxpayer, the officers were able to form a view of the likely level of wastage and drinks given away. As it said:
"These levels were and are difficult to assess; on the evidence we find they might be as much as 10% of the total, although we consider it not unreasonable for Customs to have adopted a lower figure than this."
- At paragraph 27 of its decision the tribunal identified the two respects in which it accepted that the officers' calculations had been shown to be in error:
"Firstly it was shown that the beer/lager purchases per year should be reduced by £2,121.00, resulting in an underdeclaration of VAT for one year of £4,197.00 (not £9,897.00 as originally calculated). This apparently major miscalculation had an innocent explanation. It resulted from a double counting of purchase invoices and delivery notes. That this mistake should have been made was perhaps a function of the pressure that Mrs Stark and Mrs Green felt under to act with all possible speed. It is not as such a criticism of the method or of its performance. Secondly, we find that Customs recorded purchases of spirits @ £804.86, when the correct figure was £313.84. This too, we think, must have been an error brought about by virtue of the time constraints under which they were working. These two matters have the effect, conceded by Customs, that of the £21,478.00 VAT assessed on 25 January 1995, a total of £7,683.00 remains in dispute: that is, the Appellant contends that he has declared and paid VAT due from him in full, whereas Customs contend that there is a shortfall of £7,683.00 in the tax for which the Appellant is liable."
[It may be noted that, of the £21,478 assessed in January 1995, the amount (£4,229) assessed in respect of the Cheltenham business had not been challenged. Further, it was accepted by the commissioners that the effect of the errors identified was that the assessment in respect of the Khayam Restaurant should have been £7,316 (not £7,683). The true comparison was between the amount assessed in respect of the Khayam Restaurant (£17,249) and £7,316.]
- The tribunal rejected the submission that those errors lead to the conclusion that the commissioners, through Mrs Stark and Mrs Green, had acted in a manner which was illogical or unreasonable. It rejected, also, the submission – based on an alternative calculation prepared by counsel for the taxpayer in which different (and, it was submitted, more reasonable, assumptions) were made – that the officers ought to have reached the conclusion, on the material available to them in November 1994, that there was no under-declaration of tax. At paragraphs 32 and 33, it expressed its conclusions in these terms:
"32. Applying the principles of the Rahman judgment, as interpreted in the McNicholas case, we can see no ground for faulting the choice of 14% as the drinks/food ratio adopted for the purposes of the method employed in this case. It was urged upon us that a higher ratio would have been more realistic. But it has not been shown that 14% was unrealistic. As we say in paragraph 28 of this decision, Customs' approach in this case was neither illogical nor necessarily unreasonable. Any justifiable criticism of Customs in this case falls far short of satisfying the test propounded by the Judge in the Rahman judgment . . . From the evidence before us we can make no finding of the sort mentioned by the Judge.
33. Drawing together the foregoing, we hold that the method employed by Customs in this case has not been shown to be such that we should strike down the assessment; that the assessment satisfied the test of best judgment; that, as conceded by Customs, the assessment was however incorrect to the extent that the tax assessed in relation to the business at the Khayam should have been £7,683."
Accordingly, the appeal was allowed to the extent that the assessment was reduced to include only the VAT assessed in respect of the Cheltenham business (which had not been in dispute) plus £7,683 in respect of the Khayam. As I have said, it is accepted by the commissioners that that figure should have been £7,316.
The second appeal to the High Court
- The taxpayer appealed to the High Court for a second time. That appeal was heard by Mr Justice Lawrence Collins in July 2001. His judgment is reported at  STC 73.
- The judge considered the many authorities cited to him – including, in particular, Van Boeckel v Commissioners of Customs and Excise  STC 290, Koca v Commissioners of Customs and Excise  STC 58, Georgiou v Commissioners of Customs and Excise  STC 463, Rahman v Commissioners of Customs and Excise  STC 826, Murat v Commissioners of Customs and Excise  STC 923, Elias Gale Racing v Commissioners of Customs and Excise  STC 66 and McNicholas Construction Co Ltd v Commissioners of Customs and Excise  STC 553 – and concluded that the tribunal had directed itself correctly in law. At paragraph  of his judgment ( STC 73, 81c-d) he said this:
"In my judgment, the better view is that, first, an assessment which turns out on the evidence to be substantially correct cannot normally be attacked as contrary to best judgment, and the fact that it turns out to be substantially incorrect does not mean that it was contrary to best judgment. It follows from Van Boeckel, Rahman (No 1) and McNicholas that to show, on an appeal to the tribunal, that an assessment has not been made to best judgment the taxpayer must show that the assessment is wrong in a material respect, and that the mistake was such that the only inference is that the assessment was arbitrary (in Woolf J's formulation), or (in Carnwath J's formulation) dishonest, vindictive, or capricious, or is based on a spurious estimate or guess, or is wholly unreasonable. If the assessment is wrong in a material respect but the taxpayer fails to show that it was not made to best judgment the tribunal will deal with it on the quantum aspect of the appeal."
He rejected the submission that the duty of the tribunal was to put itself objectively in the position of a reasonably competent officer in order to test whether what had been done in preparing and issuing the assessment, and to consider whether the officer had fairly considered all the material, and come to a reasonable conclusion. As he put it, at paragraph  (ibid, 81f):
"In my judgment the tribunal was right to follow the approach that a much stronger finding was required, for example, that the assessment had been reached dishonestly or vindictively or capriciously, or was wholly unreasonable."
- The judge then addressed the submission that the errors which had been identified by the tribunal – and which were accepted by the commissioners – should have led the tribunal to conclude that there had been a failure to exercise best judgment. He rejected that submission, at paragraphs  and  of his judgment (ibid, 82e-h):
" In my judgment the tribunal correctly directed itself on the best judgment issue in accordance with the principles enunciated in Rahman (No 1) and McNicholas, and I do not think there is any ground for deciding that it could not have reasonably come to the conclusion that the officers had exercised best judgment. In particular the fact that the tribunal considered that the assessment should be reduced as a result of the accepted errors, even though it was a reduction of more than half the assessment, did not operate to require the discharge of the assessment as not being to best judgment. The errors were explained, and the reasons given for the errors fell far short of the standard required to find that best judgment had not been exercised. Indeed there appears to have been no evidence on which the tribunal could reasonably have come to the conclusion that the officers had not exercised best judgment in the sense of the authorities.
 I do not consider that the tribunal erred in law or acted perversely in rejecting the contention that the failure of the officers to adopt a weighted mark-up for each line of drinks, or to use the full menu prices, or to employ a higher wastage figure, was a failure to exercise best judgment. Nor do I consider that the tribunal erred in law or acted perversely in accepting that the drinks to food ratio propounded by the officers was reasonable. There was material to show that the officers had used their best judgment in the light of the information, and no serious evidence to the contrary. I have no doubt that there was evidence before the tribunal to support its finding."
- The judge reminded himself that, on the issue of quantum, the tribunal had a duty to evaluate the evidence for itself – see Murat v Commissioners of Customs and Excise  STC 923, 928; but that the role of the court, in considering whether to interfere with the decision of the tribunal on quantum, was to determine whether the finding was one which the tribunal was entitled to make – see Georgiou v Commissioner of Customs and Excise  STC 463, 475-476. At paragraph  of his judgment ( STC 73, 83b-c), he said this:
"Although the issues of best judgment and quantum are dealt with together [in the tribunal's decision], I am satisfied from reading the decision as a whole that the tribunal had well in mind the distinction between what has been described as its supervisory role with respect to best judgment, and its role as regards quantum, which may be described as original. I do not consider that the . . . quantum of the assessment, after allowing for the errors, is capable of being interfered with on the familiar principles, nor that it is vitiated by the failure to give adequate reasons . . ."
Accordingly, he dismissed the appeal.
The appeal to this Court
- The taxpayer's appeal to this Court is, of course, an appeal to which section 55(1) of the Access to Justice Act 1999 applies. When granting permission to appeal Lord Justice Aldous observed that it was appropriate for this Court to consider, and give guidance upon, the question whether the tribunal had adopted the correct approach to the best judgment issue. In those circumstances – and notwithstanding my own view that the best judgment issue was finally determined in relation to the assessment under appeal in these proceedings by the judgment of Mr Justice Carnwath, from which there has been no appeal – I accept that that issue is now before this Court.
The best judgment issue
- The appellant's primary attack on the tribunal's approach – in this Court as it was before Mr Justice Lawrence Collins – is based on the submission that the tribunal misdirected itself in failing to apply the Van Boeckel test. It is said that the approach which the tribunal did apply – which the appellant describes as "the standard of rough and ready assessment in the time available not fairly considering all the material available" – is directly contrary to the Van Boeckel test. It is convenient, therefore, to set out the test propounded by Mr Justice Woolf in that case. He said this, at  STC 290, 292e-293a:
"The contentions on behalf of the taxpayer in this case can be summarised by saying that on the facts before the tribunal it is clear, so it is contended, that the assessment in question was not valid because the commissioners had taken insufficient steps to ascertain the amount of the tax due before making the assessment. Therefore it is important to come to a conclusion as to what are the obligations placed on the commissioners in order properly to come to a view as to the amount of tax due, to the best of their judgment. As to this the very use of the word 'judgment' makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them. Clearly they must perform that function honestly and bona fide. It would be a misuse of that power if the commissioners were to decide on a figure which they knew was, or thought was, in excess of the amount which could possibly be payable, and then leave it to the taxpayer to seek, on appeal, to reduce that assessment.
Secondly, clearly there must be some material before the commissioners on which they can base their judgment. If there is no material at all it would be impossible to form a judgment as to what tax is due.
Thirdly, it should be recognised, particularly bearing in mind the primary obligation, to which I have made reference, of the taxpayer to make a return himself, that the commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to the best of their judgment, is due. In the very nature of things frequently the relevant information will be readily available to the taxpayer, but it will be very difficult for the commissioners to obtain that information without carrying out exhaustive investigations. In my view, the use of the words 'best of their judgment' does not envisage the burden being placed on the commissioners of carrying out exhaustive investigations. What the words 'best of their judgment' envisage, in my view, is that the commissioners will fairly consider all material placed before them and, on that material, come to a decision which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the commissioners can reasonably act then they are not required to carry out investigations which may or may not result in further material being placed before them."
- It is instructive, also, to note the way in which Mr Justice Woolf applied that test to the facts in the Van Boeckel appeal. He rejected the criticism that the commissioners had acted arbitrarily in extrapolating results over a five week period to the whole period of assessment. As he said (ibid, 295h):
"It is perfectly proper for the commissioners, if they choose to do so, to make a test over a limited period such as five weeks, and take the results which are thrown up by that period of five weeks into account in performing their task of making an assessment in accordance with the requirements of s 31 [of the Finance Act 1972, now section 73(1) of the 1994 Act]."
He rejected, also, the criticism that the commissioners had not made sufficient investigation into the way in which the taxpayer's business (in that case, a public house) was run. He said this, (ibid, 296a-b):
"As I have indicated, unless the situation is one where no material is before the commissioners on which they can reasonably base an assessment, the commissioners are not required to make investigations. If they do make investigations then they have got to take into account the material disclosed by those investigations. Obviously, as a matter of good administrative practice, it is desirable that the commissioners should make all reasonable investigations before making an assessment. If they do that it will avoid, in many cases, the necessity of appeals to the tribunal. However to try and say that in a particular case a particular form of investigation should have been carried out, is a contention which, in my view, as a matter of law, bearing in mind the wording of s 31(1), is difficult to establish."
He addressed the submission – which, as he said, had been advanced with considerable force – that the tribunal's finding (when considering quantum) that there should be a reduction made in the amount of the assessment to allow for pilferage ought to have led it to conclude that the assessment must be discharged for failure to exercise best judgment. He pointed out that the fact that the tribunal had differed from the commissioners as to the allowance to be made for pilferage did not mean that the commissioners' view was so unreasonable as to call into question their exercise of judgment:
"Their bona fides were not being challenged, and on the material put before the tribunal there was no way it could be said that it was wholly unreasonable for the officers not to make further investigations into the question of pilferage nor to come to the conclusion that there was pilferage in this case which had to be taken into account." (ibid, 297c)
- In my view there is no substance in the criticism that the second tribunal misdirected itself in failing to apply the Van Boeckel test to the facts before it in the present case. It directed itself in the light of the subsequent guidance as to that test given by Mr Justice Carnwath, in Rahman (No 1), and by Mr Justice Dyson, in McNicholas. It was correct to do so. In describing the officers' calculation as "rough and ready", the tribunal was saying no more than that, having regard to the time constraints which they perceived, the officers chose to adopt a methodology which was less sophisticated – and so, potentially, less proof against error – than the methodology which they might have chosen to employ had they not perceived those constraints. But that does not lead to the conclusion that, in choosing to proceed as they did, their judgment was flawed – or (to adopt the phrase used by Mr Justice Dyson in the McNicholas appeal) was outside the margin of discretion allowed to the commissioners.
- The second limb to the appellant's attack on the tribunal's approach is based on the submission that "assessments more than double the VAT which should have been assessed on the material before Customs are not to best judgment". It is said, in the skeleton argument prepared by counsel for the appellant, that where (i) the reduction in the assessments is made by the tribunal on the same material as that which was before the commissioners and (ii) the amount of that reduction is substantial (in this case the assessment was reduced by over 55%) it must inevitably follow that the commissioners' assessment was not made to the best of their judgment. But non sequitur: on a true analysis all that can be said is that the fact that, on considering the same material, the tribunal has reached a figure for the VAT payable which differs from that assessed by the commissioners requires some explanation. The explanation may be that the tribunal, applying its own judgment to the same underlying material at the second, or 'quantum', stage of the appeal, has made different assumptions – say, as to food/drink ratios, wastage or pilferage – from those made by the commissioners. As Mr Justice Woolf pointed out in Van Boeckel, that does not lead to the conclusion that the assumptions made by the commissioners were unreasonable; nor that they were outside the margin of discretion inherent in the exercise of judgment in these cases. Or the explanation may be that the tribunal is satisfied that the commissioners have made a mistake – that they have misunderstood or misinterpreted the material which was before them, adopted a wrong methodology or, more simply, made a miscalculation in computing the amount of VAT payable from their own figures. In such cases – of which the present is one – the relevant question is whether the mistake is consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or is of such a nature that it compels the conclusion that no officer seeking to exercise best judgment could have made it. Or there may be no explanation; in which case the proper inference may be that the assessment was, indeed arbitrary.
- In the present case the taxpayer identified two mistakes in the process by which the officers had arrived at their assessment. First, that the beer/lager purchases in the year to 31 August 1994 (taken as £9,305) had been overstated by £2,121. Second, that the purchases of spirits in that year (taken as £804) were, in fact, £314. If those adjustments are made to the officers' computations, the total projected drink sales for the year to 31 August 1994 reduces from £23,410 to £18,855 (after taking account of an agreed increase in the figure for wine purchases); the total projected sales of food and drink for that year (applying the ratio of 14%) reduces from £167,214 to £134,678; and the expected VAT for that year (after allowing for VAT due on wine and beer given away) reduces from £29,428 to £23,734. The effect of those adjustments is that the under-declaration in respect of that year is reduced from £9,897 to £4,203. The extrapolated figure for the seven quarters which are the subject of the assessment becomes £7,316; a substantial reduction on the comparable figure of £17,249 which was included in the assessment in respect of the Khayam Restaurant business.
- The tribunal accepted that there was an innocent explanation for the mistakes which had been made. They had resulted from a double counting of purchase invoices and delivery notes; and were errors brought about by the time constraints perceived by the officers at the date of their visit on 16 November 1994. It was because it accepted that there was an innocent explanation for the mistakes which had been made that the tribunal answered the relevant question – are these mistakes consistent with an honest attempt to make a reasoned assessment of the VAT payable – in the affirmative. It was entitled to give that answer. Indeed, having accepted that there was an innocent explanation for the mistakes, there was no other answer which the tribunal could have given.
- The third ground upon which the appellant attacks the tribunal's finding on the best judgment issue is put in these terms: "The tribunal has failed to deal with the issues, find facts and has made findings contrary to the weight of the evidence and the High Court has failed so to hold." As developed in this Court, this was an attack on the methodology adopted by the commissioners in making the assessment which they did in January 1995 – in substance, an attack on the methodology set out in Mrs Stark's letter of 25 November 1994. It is submitted that that methodology was wholly wrong and offered no prospect of leading to an accurate assessment.
- It is clear that the appellant failed to persuade the tribunal that the methodology which the commissioners adopted was wholly wrong and offered no prospect of leading to an accurate assessment. It is very much less clear that the appellant ever attempted to do so, although cousel informs us that she did so. It is, I think, significant that there is no hint of such an attempt in the initial response by the taxpayer's accountant to the letter of 25 November 1994. The extensive arguments deployed in the skeleton argument prepared for use in this Court are not reflected in the material which was before the tribunal – in so far as that material has been included in the bundles used in this Court. As I have said, that material comprised an alternative calculation prepared by counsel for the taxpayer. But the fact that a different methodology would, or might, have led to a different – even to a more accurate - result does not compel the conclusion that the methodology that was adopted was so obviously flawed that it could and should have had no place in an exercise in best judgment. I am not persuaded that the tribunal was asked to find, as a fact, that the commissioners' methodology was incapable of leading to a fair assessment; or to find, as a fact, that the commissioners and their officers must have appreciated that. In those circumstances I reject the criticism advanced under the third ground.
- The fourth ground of attack on this issue is put thus: "If assessments more than double what they should have been are to best judgment, the legislation is unlawful and contrary to EC law". It is said that the legislation does not accord with article 22.8 of the sixth directive on the harmonisation of the laws of Member States relating to turnover taxes (77/388/EC). Article 22.8 requires Member States to take measures which they deem necessary for the correct collection of the tax. It is said, also, that the legislation authorises an unlawful deprivation of property contrary to article 1 of the First Protocol to the European Convention on Human Rights.
- In my view there is no substance in that fourth ground. It must be kept in mind that the power to make an assessment under section 73(1) of the 1994 Act does not arise unless the taxpayer has failed to make returns or to keep documents and afford facilities for verification, or unless the commissioners are satisfied that returns which have been made are incomplete or incorrect. If the VAT legislation failed to provide some machinery for the assessment of tax in those circumstances, the United Kingdom would, indeed, be open to the criticism that it had failed to implement article 22.8 of the sixth directive. If the power to assess under section 73(1) of the Act could be exercised arbitrarily, there would be force in the point that the legislative response was disproportionate in the context of article 1 of the First Protocol. But it is accepted that the power cannot be exercised arbitrarily; and the 1994 Act itself provides a means, by way of appeal, by which the correct amount of tax payable by the taxpayer can be ascertained. An assertion that the legislation must be contrary to the United Kingdom's international obligations because an assessment, made in the exercise of best judgment, may be subsequently found to be substantially too high cannot be supported. The relevant question is whether an assessment which is subsequently found to be substantially too high can be an assessment made in the exercise of best judgment. That question has already been addressed in the context of the second ground of attack.
- It follows that I would reject the attack made on the tribunal's conclusion on the best judgment issue. The judge was right to dismiss the appeal on that issue.
The quantum issue
- It is not in dispute that, once it had rejected a challenge to the assessment on the best judgment issue, the tribunal was required to consider, for itself, whether the amount of the assessment was correct – see the observations of Mr Justice Collins in Murat v Commissioners of Customs and Excise  STC 923, 929a-e). It is true that, as Mr Justice Lawrence Collins pointed out in the present appeal ( STC 73, 83b), the factual issues relating to best judgment and quantum are addressed in the same paragraph of the tribunal's decision. But it is important to keep in mind that, in the present case, there was no documentation available from which the tribunal could ascertain the actual trading of the taxpayer's business – as the judge pointed out at paragraph  of his judgment (ibid, 82b). The assessment had to be based on estimate, assumption and extrapolation. The tribunal accepted that a drinks/total sales ratio of 14% "was in order". It also accepted that a wastage allowance of 10% (as urged by the taxpayer) was "persuasive"; but found that the resulting figure was so close to that in dispute as to make the difference "insignificant". The judge held that, reading the tribunal's decision as a whole, he could be satisfied that the tribunal had well in mind the distinction between its supervisory role in relation to best judgment and its original, or fact-finding, role in relation to an appeal on quantum. In my view he was right. If, as he held, the tribunal addressed itself correctly to the determination of the factual issues which it had to decide, he was right, also, to hold that the court had no jurisdiction to interfere with the tribunal's conclusion on those issues. An appeal under section 11 of the Tribunals and Inquiries Act 1992 is limited to a point of law.
- I would dismiss this appeal.
The approach which tribunals should adopt on appeals under section 83(p) of the 1994 Act
- In the final paragraph of his judgment in Rahman (No 1) Mr Justice Carnwath drew attention to the dangers of "an over-rigid adherence to the two-stage approach". He said this, at  STC 826, 840:
"I do not wish to diminish in any way from the importance of guidance given by Woolf J [in the Van Boeckel case] to Customs officers as to how to exercise their best judgment when making assessments. However, when the matter comes to the tribunal, it will be rare that the assessment can justifiably be rejected altogether on the ground of a failure to follow that guidance. The principal concern of the tribunal should be to ensure that the amount of the assessment is fair, taking account not only the commissioners' judgment but any points raised before them by the appellant."
I respectfully agree with those observations.
- It is inherent in the structure of the legislation that a taxpayer can challenge, on an appeal under section 83(p) of the 1994 Act, both the fact that an assessment under section 73(1) of that Act has been made and the amount of that assessment. There will be cases where the power to make an assessment ought not to have been exercised; because the pre-conditions to the exercise of the power (failure to make returns; failure to keep documents or afford facilities for verification; incomplete or inaccurate returns) were not satisfied. I suspect that those cases will be rare; but the tribunal can address them if and when they arise. There will also be cases where it is apparent on the face of the material before the tribunal that the power to assess has not been exercised in accordance with the 'best judgment' requirement; for example, where the commissioners have not taken into account information which was made available to them by the taxpayer before the assessment was made, or can put forward no basis upon which the assessment can be supported. Again, I suspect that those cases will be rare.
- In the usual case the tribunal will have the material before it from which it can see why the commissioners made the assessment which they did; and may have further material which was not available to the commissioners when the assessment was made. In such cases, as it seems to me, a tribunal would be well advised to concentrate on the question "what amount of tax is properly due from the taxpayer?" taking the material before it as a whole and applying its own judgment. If that leads to the conclusion that the amount of tax properly due is close to the amount of the assessment, the tribunal may well take the view that it would be a sterile exercise to consider whether the commissioners exercised best judgment in making their assessment. The tribunal has power "on an appeal against a decision with respect to any of the matters mentioned in section 83(p) [of the 1994 Act]" to give a direction specifying the correct amount of the tax due; and where such a direction is given the assessment has effect as an assessment of the amount specified in the direction – see section 84(5) of the Act.
- It is in cases where the amount of tax found by the tribunal to be properly due is substantially different from the amount assessed by the commissioners that the tribunal may think it appropriate to investigate why there is that difference; and to seek an explanation. That investigation may – but, often (as in the present case) will not – lead to the conclusion that the commissioners did not exercise best judgment in making their assessment. The tribunal may take the view, in such cases, that the proper course is to discharge the assessment. But even in cases of that nature, as it seems to me, the tribunal could choose to give a direction specifying the correct amount – with the consequence that the assessment would have effect pursuant to section 84(5) of the 1994 Act. It could not be criticised for doing so. The underlying purpose of the legislative provisions is to ensure that the taxable person accounts for the correct amount of tax.
Mr. Justice Bodey:
- I agree.
Lord Justice Brooke:
- I also agree.