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Cite as: [2004] EWCA Civ 1015

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Neutral Citation Number: [2004] EWCA Civ 1015
Case No: C3/2003/2717

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
MR JUSTICE PATTEN

Royal Courts of Justice
Strand, London, WC2A 2LL
27th July 2004

B e f o r e :

LORD JUSTICE WALLER
LORD JUSTICE CHADWICK
and
LORD JUSTICE CARNWATH

____________________

Between:
PEGASUS BIRDS LTD
Appellant
- and -

COMMISSIONERS OF HM CUSTOMS AND EXCISE
Respondent

____________________

(Transcript of the Handed Down Judgment of
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)

____________________

Eleanor Sharpston QC and Jeremy Woolf (instructed by Philippsohn Crawford Berwald) for the Appellant
Alison Foster QC and Eamon Mc Nicholas (instructed by The Solicitor for Customs and Excise) for the Respondent

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    Lord Justice Carnwath:

    Introduction

  1. This case took 42 days before the Tribunal. It was apparently the second longest case ever heard by the Tribunal. It illustrates in an acute form the potential dangers arising from the adoption of the so-called "two-stage" approach in considering appeals against assessments made "to best of their judgment" under the Value Added Tax Act 1994. I drew attention to the dangers in Rahman v Customs and Excise Commissioners [1998] STC 826 (Rahman (1)). Since then, and since the decision of the Tribunal in this case, further guidance has been given by the Court of Appeal in Rahman (No 2) [2003] STC 150.
  2. After summarising the course of the proceedings, and the grounds of appeal, I shall review the case-law and the arguments relating to the "best of their judgment" principle, and then consider the application of the principle to the present case.
  3. The proceedings so far – summary

  4. On 8th October 1996 Mr Brett Hammond, the Director of Pegasus, pleaded guilty to various offences under the VAT statute. The particulars of the offences charged were that between 1st January 1993 and 24th May 1995 Mr Hammond and a Mr Eric Foster (owner of a firm called "E & J Birds") purchased live birds in Belgium and Holland and transported them to England, where they were sold for cash. They were alleged to have failed to keep proper or complete records of the purchases and subsequent sales and to have failed to account for the VAT that became due.
  5. The Crown's case for the trial had been that that Mr Foster and Mr Hammond had been involved in numerous trips, resulting in VAT evasion of between £692,000 and £880,000. That case was to have been supported by reports prepared by Colin Booker ACMA, who would have given expert evidence for the Commissioners, based on his analysis of a mass of documentation obtained by them in the course of their investigations. Subsequently, following the guilty pleas and prior to a "Newton" hearing fixed for 17th February 1997, it was agreed that, for sentencing purposes only, Mr Hammond would accept that he was responsible for the evasion of VAT in a figure not exceeding £50,000. (This was accepted by the Crown for largely practical reasons which were explained by their then prosecuting counsel in evidence to the Tribunal.) In these circumstances it was unnecessary for any evidence to be called on either side about the scale of the evasion. Mr Hammond was sentenced to 18 months' imprisonment, which was later reduced to 12 months on appeal.
  6. Formal VAT assessments were raised and notified to Pegasus in April 1997. The assessments covered the ten accounting periods from 1st January 1993 to 30th June 1995 and totalled £658,388. The covering letter of 16th April 1997 indicated that the assessment figure was based on an assumed total of 166 trips between March 1993 and June 1995. Each trip was given an average value of £18,688, and coupled with the agreed mark-up of 150%. The consignments were split 57/43 between Pegasus and E & J Birds. The officer principally responsible for preparing the assessments was Mr Bakewell.
  7. A Notice of Appeal against the assessments was lodged by Mr Freeman (the accountant acting for Pegasus) dated 6th June 1997. In his accompanying letter Mr Freeman stated that the grounds of appeal were that the assessment was "excessive and not in accordance with information provided". Only £14,500 of unpaid tax was admitted. There was no express challenge to best judgment. But on 31st July Mr Freeman notified the Tribunal that he wished to rely on two additional grounds: (i) that the assessments were not made to best judgment in accordance with s.73(1) of the 1994 Act; and (ii) that the tax periods up to and including the quarter to 31st March 1995 were out of time. (The latter issue has since been disposed of separately by this Court: [2000] STC 91.) On 27th November 2000 Mr Freeman served what was described as an "Extended Notice of Appeal", claiming that Mr Bakewell had been "perverse" in failing to take account of various matters contained in Mr Freeman's earlier reports, and making a number of detailed criticisms of the assessment.
  8. Following a hearing spread over 42 days, between May 2001 and February 2002, the Tribunal gave its decision on 17th June 2002, in a document running to 68 pages. It concluded that the assessments were "wholly unreasonable" and not therefore to "best judgment", and that they should be set aside on that ground (para 249). In view of that finding, it indicated that the other question of quantum was "not strictly relevant". However, in what it described as "a very rough estimate", and accepting Pegasus's case that there had been no evasion before September 1994, it indicated that it would have found the total liability to be "around £27,000" (as compared to more than £600,000 claimed by the Commissioners) (para 250-7). Following a separate hearing on costs in December 2002, the Commissioners were ordered to pay 75% of Pegasus' costs on the indemnity basis.
  9. On 7th November 2003 Patten J upheld the Customs' appeal on the grounds that the Tribunal had applied an erroneous test of "best judgment". He gave a separate judgment on 21st November 2003, dealing with consequential issues, including the form of order and costs. By the order entered on 29th January 2004, it was declared that, applying the correct test, all the assessments had been made to best judgment. The "matter" was remitted to the same Tribunal for the determination of quantum. Pegasus was ordered to pay the costs of the appeal, and 80% of the costs before the Tribunal.
  10. Grounds of appeal

  11. Pegasus now appeals to this Court from the order of Patten J. The grounds of challenge, as summarised by Miss Sharpston are:
  12. i) Mr Justice Patten erred in law in holding that the requirement to make an assessment to the "best of their judgment" is wholly subjective and that it is not possible to mount a "best judgment" challenge even if the assessment is wholly unreasonable or disproportionate;

    ii) Even if he was correct in concluding that the Tribunal applied the wrong test, he was wrong to conclude that the assessments were made to best judgment. He should either have dismissed the appeal or remitted it to the Tribunal to reconsider whether the assessments were made to best judgment;

    iii) Even if he was correct in concluding that the Tribunal applied the wrong test, he acted unreasonably in remitting the six assessments for the periods ending before September 1994 to the Tribunal. The Tribunal has already made a clear and adequately reasoned finding of fact that no tax is due in relation to this period. Remitting those six assessments merely results in unnecessary costs being incurred and is not consistent with the CPR overriding objectives.

    iv) Even if he was correct in allowing the appeal, he was wrong to make an award of 80% of the Tribunal costs and all the High Court costs in favour of the Commissioners.

    "Best of their judgment"

    Statute

  13. The term "best of their judgment" is derived from section 73(1) of the 1994 Act:
  14. "Where a person has failed to make any returns required under 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." (emphasis added)

    It should be noted that the shorthand "best judgment", as used in some of the cases, may be misleading, if it is taken to imply a higher standard than usual. The statutory words "to the best of their judgment" are used in a context where the taxpayers' records may be incomplete, so that a fully informed assessment is unlikely to be possible. Thus the word "best", rather than implying a higher than normal standard, is a recognition that the result may necessarily involve an element of guesswork. It means simply "to the best of (their) judgment on the information available" (Argosy Co v IRC [1971] 1 WLR 514, 517 per Lord Donovan).

  15. Section 83 provides:
  16. "Subject to section 84, an appeal shall lie to a tribunal with respect to any of the following matters..."

    There is then set out a series of actions, decisions, and other matters arising under the Act listed under paragraphs (a) to (z). Paragraph (p) is as follows:

    "An assessment -
    (i) under section 73(1) or (2) in respect of a period for which the appellant has made a return under this Act....
    … or the amount of such an assessment."
  17. A condition of the exercise of this right of appeal is that the amount of the assessment should have been paid or deposited, but this requirement may be waived in appropriate cases (as in this case) if the Commissioners or the Tribunal are satisfied that the Appellant "would otherwise suffer hardship" (s.84(3)(3A)). Although that provision is not in issue before us, Miss Foster accepts that it must be interpreted in such a way as to avoid possible conflict with Article 6 of the Convention (right to a fair hearing).
  18. Section 84 contains "further provisions relating to appeals". Subsection (5) provides that where, on an appeal under section 83(p), it is found that the amount in the assessment is too low, the Tribunal may give a direction specifying the correct amount. Subsection (8) provides for the repayment of any amount paid or deposited under subsection (3) if it is found on the appeal that "the whole or any part of any (such) amount… is not due".
  19. Generally, the burden lies on the taxpayer to establish the correct amount of tax due:
  20. "The element of guess-work and the almost unavoidable inaccuracy in a properly made best of judgment assessment, as the cases have established, do not serve to displace the validity of the assessments, which are prima facie right and remain right until the taxpayer shows that they are wrong and also shows positively what corrections should be made in order to make the assessments right or more nearly right." (Bi-Flex Caribbean Ltd v Board of Inland Revenue (1990) 63 TC 515, 522-3 PC, per Lord Lowry).
  21. There is no express provision defining the Tribunal's powers where an assessment is found not to be "to the best of their judgment".
  22. Rahman (No 1)

  23. In Rahman v Customs & Excise Commissioners [1998] STC 826, I drew attention to phrases used by Woolf J in the leading case under this Act (Van Boeckel v Customs & Excise Commissioners [1981] STC 290) and in previous authorities in other tax contexts, to explain the effect of the "best of their judgment" requirement:
  24. "The passages I have underlined show that the Tribunal should not treat an assessment as invalid merely because they disagree 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 those tests are indistinguishable from the familiar Wednesbury principles ([1948] 1 KB 223). Short of such a finding, there is no justification for setting aside the assessment." (p 835)
  25. In Rahman (1) it was common ground between the taxpayer and the Commissioners that the Tribunal should adopt a "two stage approach", which I described thus:
  26. "… the practice is to consider these cases in two stages: (1) consideration whether the assessment was made according to the "best judgment of the Commissioners"; if not, the assessment fails, and stage (2) does not arise; (2) if the assessment survives stage (1), consideration whether the amount of the assessment should be reduced by reference to further evidence or further argument available to the Tribunal…" (p 476)
  27. Before me, Mr Barlow for the Commissioners had supported the practice as a discipline for officers, which was well understood and gave rise to little difficulty in practice. I expressed my concerns:
  28. "I accept the importance of the discipline, and I also acknowledge the desirability of not upsetting established practice without good reason. In principle there is nothing wrong in the Tribunal considering the validity of the assessment as a separate and preliminary issue, when that is raised expressly or implicitly by the appeal, and, as part of that exercise, applying the Van Boeckel test. There is a risk, however, that the emphasis of the debate before the Tribunal will be distorted. If I am right in my interpretation of Van Boeckel, it is only in a very exceptional case that an assessment will be upset because of a failure by the Commissioners to exercise best judgment. In the normal case the important issue will be the amount of the assessment. The danger of the two-stage approach is that it reverses the emphasis…" (p 836, emphasis added)
  29. In that case, the two-stage approach was applied in such a way that one of the Tribunal, having dissented from the chairman's correct decision (as I found) on the best judgment issue, then wrongly regarded himself as having no further part to play in the consideration of the amount of the assessment. I held that the case had to be remitted to the Tribunal. I concluded:
  30. "This case illustrates the dangers of an over-rigid adherence to the two-stage approach. I do not wish to diminish in any way from the importance of guidance given by Woolf J to inspectors 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 into account not only the Commissioners' judgment but any other points that are raised before them by the appellant." (p 840)

    Rahman (No 2)

  31. The latter passage was in terms adopted by Chadwick LJ in this Court in Rahman (No 2) [2003] STC 150, para 42. I share his surprise (see para 17) that the Commissioners, having succeeded before me on the best judgment issue and failed only on the issue of amount, had apparently acquiesced in a form of order under which both aspects were relitigated before the Tribunal. However, it gave this court the opportunity to give further guidance on the correct approach.
  32. Chadwick LJ (para 5) noted that the wording of section 83(p) reflected "the two distinct questions" which may arise where an assessment purports to be made under section 73(1):
  33. "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 for which the taxpayer is accountable."

    Having referred with approval (para 31) to my judgment in Rahman (1) and that of Dyson J to like effect in McNicholas Construction Co v Customs & Excise [2000] STC 553, he addressed the taxpayer's submission that because the tax due had been found to be less than half the amount of the assessment, the assessment could not have been to "best judgment" (para 32). He regarded that as a "non-sequitur":

    "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 Woolf J pointed out in Van Boeckel ([1981] STC 290 at 297), 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." (emphasis added)

    That formulation of the "relevant question" was part of the ratio of the decision in that case; it is binding on us, and on the Tribunal in future cases.

  34. In the light of that authoritative statement of the law, I would caution against attempts to refine or add to it, by reference to individual sentences or phrases from previous judgments. In Rahman (1), as already noted I listed a number of phrases used in earlier cases as "examples", to illustrate that the test was higher than was being submitted by the taxpayer. I added that the tests were "indistinguishable from the familiar Wednesbury principles". In retrospect, I think the reference to Wednesbury principles was unhelpful and a possible source of confusion, and may raise as many questions as it answers (see the comments of Neill LJ in John Dee Ltd v Customs & Excise [1995] STC 941, 952; and of the Tribunal in W H Smith Ltd v Customs & Excise [2000] V&DR 1 para 124). Another phrase (used by Woolf J in Van Boeckel) referred to the obligation of the commissioners "fairly (to) consider all material placed before them". As a general proposition that is uncontroversial. However, it should not be seen as providing a separate and sufficient test of the invalidity of the assessment, nor as justifying lengthy cross-examination to establish whether the relevant officers have in fact looked at all the available material. Even the term "wholly unreasonable" (also used in Van Boeckel) may be misleading if it is treated as a separate test, rather than as simply an indication that there has been no "honest and genuine attempt" to make a reasoned assessment.
  35. Consequences of breach

  36. Even if it is established that there has been a breach of the "best of their judgment" requirement in relation to some element of the assessment, it does not follow in my view that the whole assessment should be set aside. We were not referred to any case where this issue has been considered in the higher courts, no doubt because in none of the reported cases in those courts was a finding of breach upheld.
  37. This point was touched on, but not decided, in Rahman (2). Chadwick LJ (para 44-45) referred to the powers of the Tribunal following a finding that the assessment had not been made to best of their judgment:
  38. "… 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." (para 45)
  39. Before us, Miss Foster did not seek to rely on section 84(5) as giving such a power. With respect, I think she was right not to do so. Although the subsection applies in terms to an appeal in respect of "any" of the matters referred to in section 73(1) (thus apparently applying whether the appeal is against the assessment itself or against the amount), the trigger is a finding that the amount "specified in the assessment" was "less than it ought to have been". Thus, it is of no direct relevance where the complaint is that there was no valid assessment at all, or that the amount in the assessment is excessive. On the other hand, the existence of the power to increase the assessment, whatever the nature of the appeal, is some indication of the width of the Tribunal's powers, in pursuit of "the underlying purpose" to ensure that the correct tax is paid.
  40. Mr Woolf, following on this issue, submitted that, where it is shown that any aspect of the assessment is vitiated under the Rahman (2) tests, the Tribunal has no discretion; it must set it aside. However, this approach takes no account of the development of modern principles of administrative law, under which the traditional distinctions between "void" and "voidable" have largely been eroded (see e.g De Smith, Woolf and Jowell: Judicial Review 5th Ed para 5-048). There is no general rule that a decision arrived at in breach of administrative law principles is of no effect; the consequences of the breach must be looked at in the context of the particular statutory scheme (see e.g., in another context, R v Wicks [1998] AC 92). Mr Woolf's submission is not helped by his reference to Pawloski (Inspector of Taxes) v Dunnington [1999] STC 550.) In that case, it was held that the validity of a direction making an employee liable to PAYE tax could be challenged in the defence to tax collection proceedings. However, there was no right of appeal against the direction, and the only issue was whether the challenge had to be by judicial review (see p 557f). The case does not assist in construing the scope of the Tribunal's powers under the statutory appeal created by section 83(p).
  41. As has been seen, the Act lays down certain preconditions for the making of an assessment; requires the assessment to be made to the best of their judgment; and provides a right of appeal to the Tribunal against either the assessment or the amount. Although the Tribunal's powers are not spelt out, it is implicit that it has power either to set aside the assessment or to reduce it to the correct figure. There is no doubt that an appeal to the Tribunal, rather than judicial review, is the appropriate remedy if there are grounds for treating it as of no effect (Harley Development Inc. v CIR [1996] 1 WLR 727). Thus in Argosy (see above) the assessment was set aside, because, under the relevant statute, it was a precondition of making an assessment that the commissioner should "be of the opinion" that the taxpayer was liable to pay tax. The commissioner made no attempt to explain how he had formed that opinion, in the face of clear evidence that any assumed profits would have been "swamped" by previous trading losses ([1971] 1 WLR at 516).
  42. Where, however, the complaint in substance is not against the assessment as such, but is that the amount has not been arrived at by "best of their judgment", I see nothing in the statute or in principle which requires the whole assessment to be set aside. Clearly much will depend on the nature of the breach. We were told by Miss Foster that the Commissioners would not seek to defend an assessment which was arrived at dishonestly in any respect. That is understandable as a matter of public policy. However, the issue facing the Tribunal is unlikely to be so clear-cut. Fortunately in this country, sustainable allegations of actual fraud or corruption on the part of public officials are likely to be very rare indeed. What is much more likely is an allegation that, in "the heat of the chase" of an apparent wrongdoer, the officers concerned have, consciously or unconsciously, cut corners or closed their minds to relevant material. Defining the boundaries of "dishonesty" in such cases is notoriously difficult (cf Twinsectra Ltd v Yardley [2002] 2 AC 164, 170).
  43. In my view, the Tribunal, faced with a "best of their judgment" challenge, should not automatically treat it as an appeal against the assessment as such, rather than against the amount. Even if the process of assessment is found defective in some respect applying the Rahman (2) test, the question remains whether the defect is so serious or fundamental that justice requires the whole assessment to be set aside, or whether justice can be done simply by correcting the amount to what the Tribunal finds to be a fair figure on the evidence before it. In the latter case, the Tribunal is not required to treat the assessment as a nullity, but should amend it accordingly.
  44. European authorities

  45. Before leaving this topic, I should say something about the use of European authorities, having regard to the emphasis given to them in Miss Sharpston's submissions to the Judge and to us. It is of course trite that VAT is a tax derived from a European Directive, and that accordingly relevant principles of European law must be taken into account in interpreting and applying the English code. Furthermore, under the Human Rights Act 1998, we must also take account of the European Convention of Human Rights, and any relevant Strasbourg jurisprudence.
  46. However, European authorities, like domestic authorities, are of little assistance unless they are concerned with the same subject matter, or can be relied on to demonstrate some relevant legal principle of general application. In the latter case it is particularly important that the requirement of the Practice Direction is observed to state "the proposition of law that the authority demonstrates, and the parts of the judgment that support that proposition" ([2001] 1 WLR 1001 paras 8.1, 9.3). Unless that discipline is observed, much time and expense will be wasted on analysing complicated authorities which either have no relevance to the case in hand, or, if they do, merely illustrate principles which are uncontentious. Indeed, if a principle truly is one of general application, it may often be demonstrated more convincingly, succinctly and economically by reference to one of the standard textbooks on European law (cf my comments on the use of textbooks in common law cases: CEL Group Ltd v Nedlloyd Lines UK Ltd [2002] EWCA Civ 1716).
  47. With respect to Miss Sharpston, the present case demonstrated the importance of this discipline. None of the many cases cited in her Skeleton seemed to me to help in any way in the resolution of the critical issue before us. She referred in particular to two ECJ decisions: "Eugen Nöelle" v Hauptzollamt Bremen-Freihafen [1991] ECR I-5163; and Case T-62/98 Volkswagen AG v Commission ECR II-2702. Both related to entirely different subject-matter. The former concerned the Commission's choice of "reference countries" when determining "normal value" for the purpose of anti-dumping legislation. Advocate-General Van Gerven referred to the task of the Court when reviewing the observation by the decision-maker of the principles of good administration, including the duty of care and to provide reasons (p I-5186-7), and the Court reaffirmed that even a wide administrative discretion was subject to review by the Court to –
  48. "… verify whether the relevant procedural rules have been complied with, whether the facts on which the choice is based have been accurately stated and whether there has been a manifest error of appraisal or misuse of powers…" (p I-5203)
  49. None of that would come as a surprise to an English administrative lawyer. Miss Sharpston, as I noted her submissions, relied on the European cases as showing that European principles of good administration impose "a greater duty to look at the material than is discernible from the English authorities". However, it was unclear to me what those cases added to the ordinary duty of a decision-maker to take reasonable steps to inform himself of relevant material (see e.g Secretary of State v Tameside BC [1977] AC 1014, 1065B per Lord Diplock). In any event, Nöelle throws no light on how and by what tribunal, as a matter of domestic procedure under the VAT legislation, the review is to be carried out, and with what practical consequences.
  50. The second case (Volkswagen) touches on the question of the consequences of breach, although again in a quite different context, and as an incidental aspect of a complex report running to over 130 pages. The case concerned enforcement action taken by the Commission in respect of an alleged concerted practice contrary to Article 85. The Court held, that it had a duty "to examine whether the Commission incorrectly assessed the facts…", and for that purpose to ascertain whether it had "gathered sufficiently precise and consistent evidence to give grounds for a firm conviction that the alleged infringement took place" (para 43). It was held that the decision contained "errors of assessment" in relation to certain aspects (paras 72, 169), but on others the Commission had rightly found an infringement of Article 85(1). The consequence was that the decision was "annulled" in part (para 198), and the amount of the fine "in the exercise of the Court's unlimited jurisdiction" was reduced (para 346).
  51. Miss Sharpston also relied on a section of the judgment in which the Court dealt with a plea that the Commission had wrongly leaked information about the investigation to the press (para 279ff). The Court observed:
  52. "It is settled case-law that an irregularity of the type found above may lead to annulment of the decision in question if it is established that the content of that decision would have differed if that irregularity had not occurred." (para 283)

    The plea was rejected because the irregularity had made no difference to the result.

  53. Miss Sharpston relied on this case as European support for the proposition that a finding that the amount of the assessment was "wholly unreasonable" in any respect must result in its annulment. Apart from the general point that the subject-matter was quite different, there seem to me to be at least four obvious answers. First, the passage says "may" not "must". Secondly, the context was one in which the primary obligation was on the Commission to adduce the relevant facts, rather than (as here) on the taxpayer to provide the information to enable him to be taxed correctly. Thirdly, if relevant, the judgment would prove too much. It is not, and could not on the authorities, be seriously argued that any "irregularity" or "error of assessment" will lead to the complete annulment of a section 73 assessment. The argument is concerned solely with a failure described as "wholly unreasonable", and the issue is what that means. Finally, the fact that the decision was flawed in certain respects in the Volkswagen case did not result in the proceedings failing altogether, but simply in the reduction of the fine to the level thought appropriate by the Court.
  54. Miss Sharpston also referred us to the decision of the ECHR in Giorgiou v United Kingdom [2001] STC 80, which followed the Court of Appeal decision in Giorgiou v Customs & Excise to which I have already referred. In the context of its discussion of Article 1 of the First Protocol, the Court rejected a complaint that the UK system did not require the Tribunal to apply the "best judgment" test when reviewing the assessment. It commented shortly:
  55. "… the tribunal found as a fact that the commissioners had reviewed the assessments to the best of their judgment. Accordingly, the applicants cannot claim to be a "victim" of a violation of the convention with the meaning of art 34 in this respect." (p 90)

    Miss Sharpston sought to persuade us that the ECHR must be taken as having impliedly adopted the summary of the law relating to "best judgment" given in that case by Sir Louis Blom-Cooper QC in the High Court ([1995] STC 1101, 1116; a summary "provisionally" accepted by this Court as "an accurate and working summary of the law": [1996] STC 463, 475j). That submission echoed part of the present Tribunal's reasoning; it said

    "… The judgment must meet some minimum standard in order to satisfy the balance between the end and the means which is necessary to satisfy Article 1 of the First Protocol, see Sporrong and Lön v Sweden (1982) 5 EHRR 35 at para 61; it must not be arbitrary, cf. Aston Cantlow PCC. In reaching its decision in Georgiou the European Court specifically referred to the fact that the tribunal considered that the assessments were to the best of the commissioners' judgment, see [2001] STC at page 90e." (Decision para 86)"

    With respect to both, I do not think the European Convention and cases under it add anything to the effect of the English cases. As to Georgiou, the Strasbourg Court made no reference to the High Court's summary, and had no reason to do so, nor to concern itself with the detail of the test.

    Guidance to the Tribunal

  56. In the light of the above discussion, I would make four points by way of guidance to the Tribunal when faced with "best of their judgment" arguments in future cases:
  57. i) The Tribunal should remember that its primary task is to find the correct amount of tax, so far as possible on the material properly available to it, the burden resting on the taxpayer. In all but very exceptional cases, that should be the focus of the hearing, and the Tribunal should not allow it to be diverted into an attack on the Commissioners' exercise of judgment at the time of the assessment.

    ii) Where the taxpayer seeks to challenge the assessment as a whole on "best of their judgment" grounds, it is essential that the grounds are clearly and fully stated before the hearing begins.

    iii) In particular the Tribunal should insist at the outset that any allegation of dishonesty or other wrongdoing against those acting for the Commissioners should be stated unequivocally; that the allegation and the basis for it should be fully particularised; and that it is responded to in writing by the Commissioners. The Tribunal should not in any circumstances allow cross-examination of the Customs officers concerned, until that is done.

    iv) There may be a few cases where a "best of their judgment" challenge can be dealt with shortly as a preliminary issue. However, unless it is clear that time will be saved thereby, the better course is likely to be to allow the hearing to proceed on the issue of amount, and leave any submissions on failure of best of their judgment, and its consequences, to be dealt with at the end of the hearing.

    The present case

    The course of the Tribunal hearing

  58. I have already referred to the scope and result of the proceedings before the Tribunal. In order to understand the enormity of the task which faced the Tribunal, and to put its conclusions in context, it is necessary to refer in a little more detail to its comments on the course of the hearing.
  59. The Tribunal noted that apart from its exceptional length, the case had exhibited a number of unusual features. One was the fact that the assessments assumed undeclared tax-inclusive sales of £4.05m compared with declared outputs of just under £0.9m, implying suppression of nearly 82% of sales. Another was that, unlike most cases in which the Commissioners have very limited material when making assessments, in this case they had a large volume of material obtained for the criminal trial, much of which was not adduced in evidence before the Tribunal.
  60. The order for directions made in October 2000 had included provision for exchange of statements of case, and lists of witnesses and documents, and for the production by the Commissioners of a common bundle of documents for the hearing. Unfortunately, compliance with letter or spirit of that order was limited on both sides. Mr Freeman, as already noted, had served an "extended notice of appeal" in November 2000, including various allegations against Mr Bakewell, though not of bad faith.
  61. No single statement in response was served by the Commissioners before the hearing. The evidence of their principal witness, Mr Bakewell, was in the form of eight statements produced for the purposes of the criminal trial. It was not until the thirteenth day of the hearing, following a specific direction, that a composite statement by Mr Bakewell was produced (Decision para 30).
  62. The presentation of documents seems to have been chaotic. A particular problem was the failure of the Commissioners, in spite of a number of requests, to disclose written material which had been seized from Mr Hammond and Mr Foster in 1995. It was not produced until, following the intervention of the Tribunal during the hearing, "the respondents produced 40 boxes, which the appellant had to sort out during the hearing…." (para 35). The Tribunal observed that the retention of these documents had been unlawful, and "was a major contribution to the length of the hearing." (para 37). The Tribunal noted also that the Commissioners had failed to produce a common bundle of documents for the hearing as directed:
  63. "Since there were probably in excess of 10,000 pages of documents, many of which were duplicated under different references, this caused great difficulty at the hearing and also contributed to its length." (para 38).

    The notebooks of the relevant officers, including Mr Bakewell, were not produced until the hearing. The Tribunal commented:

    "… they should have been listed since without them the officers would have quite been unable to give evidence of the detailed events up to eight years ago which were recorded in them." (para 40)
  64. The Tribunal's view was that these failings by the Commissioners made a substantial contribution to the length of the proceedings:
  65. "…On most of the initial 17 days in May and June the Tribunal sat at 10.00am and did not rise until 5.00pm in an attempt to keep to the timetable agreed. Given the ambit of the dispute and the difficulty both sides experienced in selecting relevant material, this proved impossible. Mr McNicholas complained that Mr Freeman kept raising new matters. To a considerable extent this was due to the Respondents withholding material until such a late stage." (para 40)
  66. One consequence of the defective preparation was serious confusion about the use to be made of evidence and other material from the criminal proceedings. Some 90 statements had been served by the Customs in the criminal proceedings, including seven statements by overseas suppliers. These had all been available to the Commissioners at the time of the assessments, and therefore were in principle relevant in considering their validity under the "best of their judgment" test. However, most had not been the subject of formal notices under the relevant rules, to enable them to be produced as evidence before the Tribunal.
  67. During the course of the hearing, the Tribunal heard submissions as to whether it should admit in particular the depositions by overseas witnesses, or allow hearsay evidence as to what they had said. It ruled against the Commissioners, on the grounds that the evidence was "highly contentious", and "would have added substantially to the length of the hearing which had already taken 16 days". It commented:
  68. "This difference between the evidence on best judgment and that on quantum caused considerable problems during the hearing and undoubtedly was a major factor in its length. The burden of proof is of course on the appellant. However neither member of the Tribunal can remember another case when the Commissioners have not produced in evidence important parts of the material on which the assessment was based." (para 63)

    Bad faith

  69. It is important to re-emphasise that the taxpayer's Extended Grounds of Appeal before the Tribunal contained an allegation of "perversity", but none of dishonesty or bad faith. In spite of some vacillation on the part of Mr Freeman before the Tribunal, and even by Counsel in this Court, that remains the position. Patten J summarised his understanding of Mr Freeman's position:
  70. "During the course of the hearing before the Tribunal Mr Freeman did… seek to impugn the honesty of Mr Bakewell and the good faith of the investigation and the subsequent assessments…. But those allegations of dishonesty or bad faith were dropped and replaced by the argument that Mr Bakewell was guilty of what was variously described as intellectual dishonesty or capriciousness…. Intellectual dishonesty is not a term used in any case on best judgment that I know of and has no certain meaning. I assume that Mr Freeman's contrast of that term with dishonesty in the sense of mala fides indicates that it was intended to denote a lack of reasoning on Mr Bakewell's part. But that could have a number of possible causes." (para 29)

    Patten J clearly understood, on the basis of Miss Sharpston's submissions, that no allegation of dishonesty or bad faith was being sustained before him.

  71. Surprisingly, however, the Skeleton lodged in this Court on behalf of Pegasus contained an apparent attempt to revive an allegation of bad faith. It suggested that Patten J had been misled by "an inaccurate concession made by the Appellant's counsel during exchanges on the final afternoon of the hearing…" However, following an exchange with the Court, this part of the Skeleton was deleted, and Miss Sharpston properly and unequivocally accepted that she could not pursue any allegation that the assessments were made in bad faith.
  72. The appeal to this Court

  73. The first two grounds of appeal (see above) turn on the correct interpretation of the "best of their judgment" principle, and its application to this case. The third and fourth grounds are directed to the form of the order.
  74. "Best of their judgment" – the present case

  75. The Tribunal's understanding of its task (formed before the decision of this Court in Rahman (2)) is apparent from the following passages. Having considered the relevant authorities, including my judgment in Rahman (1), it said:
  76. "We are unable to accept that the test of best judgment is wholly subjective. Of course bad faith or vindictiveness are subjective being dependent on the state of mind of the assessing officer. However the question whether an assessment is capricious or a spurious estimate or guess or wholly unreasonable does not depend on the officer's state of mind although it may or may not result from it…. Although the Commissioners are required to 'fairly consider all material placed before them and, on that material, come to a decision which is reasonable' (see Van Boeckel), the Rahman (1) approach is that (the) standard of what is reasonable is anything which is not wholly unreasonable.
    That however is not the whole picture. If the only question apart from bad faith is whether the result is wholly unreasonable, the requirement fairly to consider all material before them would be nothing but empty words. Such an approach would be difficult to square with the proportionality necessary under Article 1 of the First Protocol to the European Convention on Human Rights. Having collected a vast amount of material in the present case and having been presented with more by Mr Freeman, Mr Bakewell was under a duty to consider it all fairly and with an open mind. He was not in any sense obliged to accept everything put to him. He was however obliged to consider whether in the light of all the material the assessment made sense. In deciding whether he came to a credible conclusion the Tribunal must be entitled to consider his judgment in the light of the material before him…." (para 84-6)
  77. Having examined the evidence in detail, the Tribunal returned to this subject in a section headed "Conclusion as to best judgment":
  78. "232. In considering whether the Appellant has shown that the assessments were not made to best judgment we consider first the method of calculation and then consider whether the result is credible in the light of the material before the Commissioners and in particular Mr Bakewell. We consider this objectively. It is not however enough for the Appellant to show that the assessments did not reach the standard required of a reasonably competent officer, it must satisfy the Tribunal that the assessments were wholly unreasonable. We take this to mean that the assessments were outside the parameters of what could have been reasonable if all the material before the Commissioners had been fairly considered."
  79. It then expressed its conclusions on the various elements of Mr Bakewell's calculation. It had serious criticisms to make of a number of aspects, including the figure of £18,508, which it regarded as "clearly inflated" though not "wholly unreasonable" (para 233); and the 57/43 split, which it described as based on assumptions which were "wholly unclear" and in one respect "simply wrong" (para 234). The most serious criticism was made of the assumption as to trip numbers. The Tribunal accepted that it was not unreasonable on the evidence to attribute 166 trips to "either or both of Mr Foster or Pegasus"; the issue was whether it was reasonable to attribute all trips to both (para 238-9). The Tribunal understood the main basis for attributing all the trips to Pegasus to be the "assertion" that Mr Foster's vans had been followed six times, and that each time they went to Pegasus. However, the Tribunal rejected this assertion, accepting Mr Freeman's contention that –
  80. "… there was no coincidence at all since on at least four occasions Customs officers knew that Pegasus was involved in advance which was the very reason why they followed…"

    It mentioned other occasions when Mr Bakewell "kept observation outside Pegasus' premises without success…", commenting –

    "We are driven to the view that Mr Bakewell was less than frank on this aspect." (para 240)

    It also referred to Mr Foster's diary as "cogent evidence" that Mr Hammond was not involved in seven trips between January and March 1995, adding:

    "Whatever Mr Bakewell did consider, we do not accept that he fairly considered Mr Foster's diary." (para 41)
  81. The Tribunal concluded:
  82. "250. Our conclusion is that far from the other evidence supporting the level of the assessments, every single indication shows the assessments to be wholly excessive. We conclude that the assessments were wholly unreasonable, being outside the parameters of the reasonable. All of the matters to which we have referred in the last five paragraphs were there for Mr Bakewell to consider. He either failed to consider them at all or failed to consider them fairly; he therefore failed to consider fairly all the material before him. We are driven to the conclusion that far from making any assumptions in favour of the trader (paragraph 194), Mr Bakewell closed his mind to any material which did not fit his case. The Appellant has satisfied us that the assessments were not to best judgment; there is no logical basis to uphold the assessment for any individual period."
  83. Patten J held that these passages disclosed an error of law, tested by reference to Rahman(2):
  84. "… For the reasons set out in the judgment of Chadwick LJ quoted above, the fact that the assessment is wrong and appears to the Tribunal to be objectively unreasonable is only the starting point. Conclusions to that effect do not justify finding that the assessment was not made to best judgment, unless the only explanation for the errors is that they were produced as part of something other than a genuine and honest attempt to calculate the amount of VAT. The principal difficulty about the Tribunal's decision is that at no point did they ask themselves whether Mr Bakewell did his honest best. Instead they seem to have inferred that he (to use the words in paragraph 250) 'closed his mind to any material which did not fit his case' from the fact that he reached conclusions which they considered to be wholly unreasonable. Bearing in mind that Mr Freeman had by then abandoned his earlier allegations of dishonesty and bad faith, that seems to me to be something of a non sequitur and, on my reading of Rahman (No 2), a misdirection." (judgment para 32)
  85. He discussed the detailed criticisms made of Mr Bakewell's reasoning. On the number of trips, he commented:
  86. "In paragraph 240 of its decision the Tribunal said that it accepted Mr Freeman's submissions and that it was driven to the view that Mr Bakewell was less than frank about the randomness of the observed visits. It is not clear what they meant by this, but it cannot be read as a comment on Mr Bakewell's honesty in relying on the alleged randomness of the six trips, because that aspect of the cross-examination was not relied upon by Mr Freeman, and there is in any case no evidence which could support such a finding. It was never put to Mr Bakewell or suggested that the "six out of six theory" was some deliberate concoction which he knew to be deeply flawed. It was simply put to him that the evidence obtained from the six observed trips did not justify the inference which he had made. Similarly in paragraph 241 of its decision the Tribunal records that Mr Bakewell did not fairly consider Mr Foster's diary. But again this cannot mean any more than that he gave it less weight than the Tribunal was itself prepared to do. No allegation of bad faith was put to him about his treatment of the diary, nor on the evidence could it be. He regarded it as unreliable and incomplete, whereas the Tribunal took a different view. The Tribunal was therefore right to confine its conclusion in paragraph 242 quoted above to saying that the assumption that Pegasus was involved in 166 trips was an unreasonable one on the part of Mr Bakewell. The Tribunal was entitled to take a different view of the evidence and to characterise Mr Bakewell's contrary view as unreasonable. But that is not enough to establish a lack of best judgment and it is clear that the Tribunal could not have made such a finding, based on these conclusions, had it applied the Rahman test." (para 64)
  87. Overall he concluded:
  88. " I am satisfied, for the reasons given earlier in this judgment, that the Tribunal misdirected itself and misapplied the law on best judgment. I am also satisfied that its findings about the assessment, properly analysed, amount to no more than an acceptance of Mr Freeman's submission that Mr Bakewell was wrong in the assumptions he made. That is not enough to establish that Mr Bakewell's assessment was not made to best judgment, and insofar as paragraph 250 of the decision appears to suggest that there was some conscious failure by Mr Bakewell to take an honest and genuine look at the evidence, there was no material before the Tribunal, beyond the fact that it disagreed with his conclusions, on which that finding could be based. That is not a proper foundation for such a finding, and the Tribunal's treatment of the evidence or the lack of it amounts to an error of law. There is no evidence that Mr Bakewell did anything but his honest and genuine best, however mistaken he may have been…." (para 76)

    Discussion of grounds (1) and (2)

  89. The task of this Court is made easier by the parties' agreement that we should confine ourselves to the question whether Patten J was correct to find that the Tribunal erred in law in the test it applied. This makes it unnecessary for us to consider whether, even if the Tribunal's understanding of the test was correct, its conclusions on the facts were sustainable. This issue was raised by the Commissioners in the appeal from the Tribunal, but Patten J found it unnecessary to deal with it. It was renewed without objection by an amended notice of appeal. It is agreed that, if we reverse Patten J's decision on the legal test, the case should be remitted to him to deal with this aspect of the appeal on the facts.
  90. In summary the question is whether it was sufficient, as the Tribunal thought, to find that the assessment, viewed objectively, was "wholly unreasonable", or that there had been a failure fairly to consider all the relevant material; or whether, as the Judge held, it was necessary to find or infer that there had been no "honest and genuine attempt" to arrive at a reasoned assessment. In view of my earlier discussion of the principles, I hope I shall be forgiven for expressing my conclusions relatively briefly.
  91. If the question were simply whether there was a breach of the requirements as explained in Rahman (2), I would agree with the Judge that there was not. The Tribunal, of course, was not to be blamed for seeking to apply criteria which it extracted from the previous judgments (including my own). However, the result must be judged by reference to the law as now stated in the Court of Appeal. It was unfortunate that an allegation of dishonesty, even if only "intellectual dishonesty", was allowed to persist in the submissions to the Tribunal, and without clarification or adequate particulars. The charge in the extended notice of appeal was not of dishonesty but of "perversity". I have been troubled, as was the Judge, by the Tribunal's conclusion that Mr Bakewell "closed his mind to any material which did not fit his case…" A deliberate decision by an officer not to consider relevant evidence, in order to mask the truth, would be dishonest. However, the allegation was not put in that way, either in the notice of appeal, or in cross-examination. The Tribunal's comment on Mr Bakewell's lack of "frankness" on one aspect (which is in any event challenged by Mr Mc Nicholas) was not directed to the making of the assessment as such. Overall, it found that the assessment were "wholly unreasonable", and that Mr Bakewell had failed "fairly or at all" to consider some of the relevant material. However, that is not the same as a finding that there was no "honest and genuine" attempt at the time of the assessments.
  92. In any event, whatever the correct interpretation of the Tribunal's findings, I am quite satisfied that this was not an appropriate case for the assessments to be set aside. The background was a serious fraud on the Customs, to which Mr Hammond had pleaded guilty. There was no doubt that an assessment to VAT was appropriate. The burden was on Pegasus to show what was the correct amount. The Commissioners were entitled to be highly sceptical of any information coming from a convicted fraudster. They took the view that the fraud was on a much larger scale than Mr Hammond had admitted. They had plenty of material on which they could reasonably do so, even if their view of the amount can now be seen as unrealistically exaggerated. In those circumstances, they were entitled for the purpose of the assessments to take a broad view of the evidence. They were not required, at the assessment stage, to conduct a meticulous examination of all the evidence in the criminal trial, such as was conducted over 42 days before the Tribunal.
  93. Against that background, in my view, it was wrong for the Tribunal to allow the "best of their judgment" issue to dominate the proceedings. The warning I gave in Rahman (1) against reversing the emphasis of the proceedings seems to have been ignored. It created unusual problems in this case, where, through no fault of the Tribunal, there was such a confusing discrepancy between the evidence relevant to each issue. The hearing would have been much more manageable if attention had been directed to the admissible evidence relevant to fixing the correct amount of tax. It was particularly unfortunate that at the end of this process the Tribunal failed to make a conclusive finding as to the correct amount, so that the real issue still remains undetermined.
  94. These conclusions are sufficient to dispose of the first two grounds of appeal. The Judge applied the correct test. Applying that test he was correct to hold that the assessments were properly made. He was also right to reject the application to remit the "best of their judgment" issue to the Tribunal to redetermine (a point renewed in this Court by an amended notice of appeal). If the object of this suggestion was to give the taxpayer a chance to pursue an allegation of bad faith which it failed to advance in the first hearing, it was wholly misconceived. An appeal on law cannot be used to enable the appellant to make a new case on the facts. In any event, for the reasons I have given, a favourable finding on the "best of their judgment" issue would not entitle the taxpayer to have the assessments set aside.
  95. Consequential matters

  96. Ground (iii) raises the question whether the Tribunal should be treated as having made a definitive finding that no tax was due for the periods before September 1994, so that remitter is inappropriate.
  97. The Tribunal noted that Mr Hammond denied any evasion before that date, and that, in spite of the scale of the Customs operation, "virtually no evidence was put before the Tribunal on which to infer evasion before September 1994" (para 251). It made no express finding on that point, although the remainder of its observations on quantum was directed only to the later periods. The Judge saw "the obvious attractions" to the taxpayer of "starting from the position at which the Tribunal left off", but declined so to order. He said:
  98. "… it seems to me that it would not be right, and I am not satisfied that I have jurisdiction, in a case where the Tribunal has not assessed or determined the appeal on quantum, either to determine myself or send it back to the Tribunal with some kind of direction which ties the hands of the Tribunal and requires it to abide by what are necessarily provisional findings of fact…." (Second judgment para 11)

    He saw no alternative but to remit all the assessments for determination, adding:

    "It would then be for the Tribunal to decide whether and to what extent it is necessary on the material before it to reopen each and every aspect of the quantum appeal."

    He rejected an application by the Commissioners for the appeals to be remitted to a different tribunal, and there is no appeal against that aspect of the order.

  99. Although I have sympathy with the taxpayer's position, I see no answer to the Judge's reasoning. It would have been open, in my view, for the Tribunal to make alternative findings on quantum, in case it were found wrong on the "best of their judgment" issue; but it did not do so. The Tribunal's comments on the period before September 1994 were not expressed as a determination. Nor were they part of the reasoning leading to the conclusion on the "best of their judgment" issue. They were clearly provisional, as the Judge said. Miss Sharpston was unable to provide any authority for the contention that in such circumstances the Judge could have treated them as definitive, or used them as the basis for deciding the matter himself.
  100. Ground (iv) challenges the Judge's decision on costs, both in the Tribunal and in the High Court. The award of costs in the High Court followed the event, and I can see no basis for questioning it. I have more difficulty with the Judge's decision on the costs in the Tribunal. Clearly the Tribunal's own award could not stand when its decision was reversed. Therefore, it is unnecessary for us to consider Miss Foster's criticisms of the indemnity basis of the award. However, that does not mean that we should ignore the criticisms which led to that award, the most serious of which related to the withholding of substantial material until after the beginning of the hearing (Tribunal's decision on costs para 47). Nor can we ignore the fact that, if the Tribunal's provisional view on quantum is ultimately upheld, Pegasus will have achieved substantial success by reducing estimates from over £600,000 to £27,000.
  101. The Judge was invited by Miss Sharpston to defer the issue of costs until the Tribunal's final conclusion was known, or to remit it to the Tribunal until that event. He declined to take either course. He commented that it would be wrong to "delegate" to the Tribunal the determination of costs in the light of his judgment. He considered further that "in deciding to press for a determination" on the best of their judgment issue, Pegasus "took upon itself the risk" that if it won that issue before the Tribunal but lost on appeal, there might have to be a further hearing of quantum; and that the focus was "necessarily directed" to whether the propriety of the assessment rather than the extent of the tax evasion.
  102. Although this Court is always reluctant to interfere with the exercise of the Judge's discretion on costs, I am unable to accept this reasoning. As I understand it, Pegasus did not "press for" a decision on the "best of their judgment" issues in advance of a decision on quantum. It abandoned its request for a preliminary hearing. The hearing was concerned with both issues. It was the Tribunal which decided to make no formal decision on the issue of quantum. In any event, in remitting the matter to the same Tribunal, the Judge clearly recognised that much of the material and evidence used for the earlier hearing, and the Tribunal's appreciation of it, would be relevant to the renewed hearing. The order appears to take no account of that fact. Nor can I understand why it was thought inappropriate to remit the issue of costs to the Tribunal. The fact that the Tribunal would have to take account of the judgment is no more an obstacle in relation to a decision on costs than on substance. On the contrary, the Tribunal would be in a much better position than the Judge to form a view of the appropriate order as to costs in the light of the whole course of the hearing before it, and the ultimate result.
  103. Conclusion

  104. In conclusion, I would allow the appeal against the Judge's order in relation to the costs before the Tribunal. I would substitute an order remitting that matter to the Tribunal to be determined at the end of the renewed hearing. On all other points I would dismiss the appeal.
  105. Lord Justice Chadwick :

  106. I agree that we should make the order proposed by Lord Justice Carnwath. But, in the circumstances that this appeal may be said to turn on a passage in my judgment in Rahman (trading as Khayam Restaurant) v Customs and Excise Commissioners (No 2) [2002] EWCA Civ 1881, [2003] STC 150, I think it appropriate to add some observations of my own.
  107. Section 73(1) of the Value Added Tax Act 1994 confers on the Commissioners of Customs and Excise power to assess the amount of VAT due from a taxable person. The power is exercisable (i) "where a person has failed to make any returns required under this Act . . . or to keep any documents and afford the facilities necessary to verify such returns" or (ii) "where it appears to the Commissioners that such returns are incomplete or incorrect". In the exercise of the power the Commissioners may assess the amount of VAT due from that person "to the best of their judgment".
  108. At the risk of stating the obvious, the power conferred by section 73(1) can be exercised only for the purposes for which it is given; that is to say it can be exercised only for the purposes of assessing the amount of VAT due to the best of the Commissioners' judgment. To purport to assess an amount of VAT due from a taxable person which is not the amount due to the best of the Commissioners' judgment is an improper exercise of the power. That is not in dispute. The issue raised by this appeal is whether, in the exercise of the section 73(1) power, more is required of the Commissioners than an honest and genuine attempt to make a reasoned assessment of the VAT payable, on the basis of the material then available to them. Is it enough, as the judge held, that the officer through whom the Commissioners act in making the assessment "does his honest best"; or is there some objective standard against which the assessment must be measured so that, if the officer fails to attain that standard, there has been no proper exercise of the power to assess and the assessment must be treated as if it had not been made?
  109. In reaching their conclusion that there had been no proper exercise of the power to assess conferred by section 73(1) of the Act in the present case the Tribunal reminded themselves of the meaning given to the words "best of their judgment" by Mr Justice Woolf in Van Boeckel v Customs and Excise Commissioners [1981] STC 290, at page 292:
  110. "What the words 'best of their judgment' envisage . . . is that the Commissioners will fairly consider all material placed before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of the tax which is due."

    The Tribunal had in mind, also, the observations of Mr Justice Carnwath (as he then was) in Rahman v Customs and Excise Commissioners [1998] STC 826, at page 835, and of Mr Justice Lawrence Collins in Rahman v Customs and Excise Commissioners (No 2) [2002] STC 73, at paragraph [20]. At paragraph 85 of their judgment the Tribunal directed themselves that:

    "Although the Commissioners are required to 'fairly consider all material placed before them and, on that material, come to a decision which is reasonable' (see Van Boeckel), the Rahman approach is that the standard of what is reasonable is anything which is not wholly unreasonable."

    The correct approach, as they thought, was to measure the assessment that had been made by the officer against an objective standard of reasonableness; but to accept that the assessment would meet that standard unless it could be said to be "wholly unreasonable".

  111. Adopting that approach, the Tribunal held that the assessments made by the Commissioners' officer, Mr Bakewell, in the present case did not meet the objective standard required. So those assessments were not assessments of the amounts of VAT due from the taxpayer company "to the best of [the Commissioners'] judgment". The Tribunal's conclusion is expressed in paragraph 250 of the decision, which Lord Justice Carnwath has set out in full. That paragraph includes the sentence:
  112. "We are driven to the conclusion that . . . Mr Bakewell closed his mind to any material which did not fit his case."
  113. For my part, I would accept that an assessment made on behalf of the Commissioners by an officer who had, consciously or unconsciously, "closed his mind" to any material which did not fit his case, would not be an assessment of an amount due to the best of their judgment. The exercise of judgment, based on the evaluation of material, requires that the task be approached with an open mind. That does not, of course, mean that the officer is required to accept all that the taxpayer tells him; or to accept that all of the material that the taxpayer produces is genuine. As Lord Justice Carnwath has observed, in the present case the Commissioners were entitled to be highly sceptical of information coming from a convicted fraudster. The officer is entitled to reject material on the basis that, on evaluation, he does not regard it as credible; but he must not reject material on the basis that, before evaluation, he has closed his mind to the possibility that it might be credible.
  114. There was no direct evidence, in the present case, that Mr Bakewell had "closed his mind" to material which did not fit his case. The Tribunal reached the conclusion which they did on the basis of their finding that "the assessments were wholly unreasonable, being outside the parameters of the reasonable". Unless implicit in that finding, there was nothing to support a conclusion that Mr Bakewell did not approach his task, as he was required to do, with an open mind; or that he did not make an honest and genuine attempt to assess the amount of VAT properly due from the taxpayer.
  115. It is important to keep in mind that it does not follow, necessarily, that an assessment which is "wholly unreasonable, being outside the parameters of the reasonable" is not, nevertheless, the result of an honest and genuine attempt to assess the amount of VAT properly due from the taxpayer. All that can be said is that an assessment may be so far outside the bounds of what would have been reasonable that it calls into question whether there was, indeed, an honest and genuine attempt to assess the amount properly due. It is open to a tribunal to find that it is so unlikely that an experienced officer of Customs and Excise, seeking to make a proper assessment of the VAT properly due, would have made an assessment in the amount that he did that the proper inference to draw is that, in making that assessment, he could not have been doing his honest best. But that is an evidential inference from the facts; it is not a finding that because (although doing his honest best) his assessment fell below an objective standard of reasonableness, he failed to exercise the power to assess to the best of his judgment as a matter of law.
  116. In reaching his conclusion that the Tribunal had misdirected themselves and adopted the wrong approach Mr Justice Patten held himself bound by the decision of this Court in Rahman (No 2). He was plainly correct to hold himself bound by that decision: the question on this appeal is whether he was correct in his understanding of what had been decided by this Court.
  117. At paragraph 28 of his judgment the judge referred to observations in paragraph [32] of my judgment in Rahman (No 2). At paragraph 32 of his own judgment he said this:
  118. "For the reasons set out in the judgment of Chadwick LJ quoted above, the fact that the assessment is wrong and appears to the Tribunal to be objectively unreasonable is only the starting point. Conclusions to that effect do not justify finding that the assessment was not made to best judgment, unless the only explanation for the errors is that they were produced as part of something other than a genuine and honest attempt to calculate the amount of VAT. The principal difficulty about the Tribunal's decision is that at no point did they ask themselves whether Mr Bakewell did his honest best."

    Although on a strict analysis of paragraph [32] of my judgment in Rahman (No 2) it can be seen that I was addressing a submission made in the particular context of that case, the judge was right to treat my observations as having a wider reach. In particular, he was right to derive the proposition stated in the second sentence of the passage which I have just set out from what I had said in that judgment.

  119. In Rahman (No 2) the Tribunal had made their own assessment of the correct amount of VAT due from the taxpayer. They had reduced the Commissioners' section 73(1) assessment by about 50%. The submission that I was addressing in paragraph [32] of my judgment in that appeal was to the effect that, where there has been a substantial reduction by the Tribunal in the assessments made by the Commissioners on the same material, it must inevitably follow that the Commissioners' assessment was not made to the best of their judgment. In rejecting that submission I said this:
  120. "[32] . . . 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. . . . 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."
  121. Rahman (No 2) was a case where the wide discrepancy between the section 73(1) assessment made by the Commissioners and the assessment made by the Tribunal on appeal, on the same material, required some explanation. As appears from that passage, I suggested that, in cases of that nature, the explanation might be that the Tribunal had made different assumptions from those made by the Commissioners; or it might be that the Commissioners had misunderstood or misinterpreted the material which was before them, adopted a wrong methodology or made a miscalculation in computing the amount of VAT payable from their own figures. The explanation, in that case, fell into the latter category; and it was in that context that I observed that the relevant question was whether the mistake was consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or was of such a nature that it compelled the conclusion that no officer seeking to exercise best judgment could have made it.
  122. In relation to cases where the explanation for the discrepancy was to be found in the different assumptions made by the Commissioners and the Tribunal, I had said this:
  123. "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".

    Taken out of context, that sentence might appear to suggest that I was accepting that there was an objective standard of reasonableness against which the assumptions made by the Commissioners were to be measured; so that an assessment made on the basis of assumptions which did not meet that standard was not properly made under the power conferred by section 73(1) of the Act. But I am satisfied that that would not be a proper reading of that sentence in the context in which it is set.

  124. The sentence which I have just set out is, perhaps, no more than a statement of the obvious. The fact that the Tribunal, in making their own assessment of the VAT properly due, has thought it right to reject the assumptions as to food/drink ratios, wastage or pilferage on which the Commissioners' section 73(1) assessment was based – and to make different assumptions as to those matters – cannot, of itself, lead to the conclusion that the Commissioners' assumptions were unreasonable; a fortiori, that those assumptions were "wholly unreasonable" in the sense that they were outside the margin of discretion inherent in the exercise of judgment in these cases – a phrase used by Mr Justice Dyson in McNicholas Construction Co Ltd v Customs and Excise Commissioners [2000] STC 553. All that can be said from the fact that the Tribunal has adopted assumptions which differ from those adopted by the Commissioners is that the Tribunal have preferred their own assumptions.
  125. But, of course, the Tribunal may choose to make a finding that the assumptions made by the Commissioners were wholly unreasonable; as they did in the present case. The question, then, is whether it follows from that finding that the Commissioners did not make the assessment "to the best of their judgment". That is, in substance, the same question as the question which I addressed in Rahman (No 2) in the context in which it arose – an admitted miscalculation in computing the amount of VAT due arising from a double counting of purchase invoices and delivery notes. As I have said, it was in that context that I observed that the relevant question was whether the mistake was consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or was of such a nature that it compelled the conclusion that no officer seeking to exercise best judgment could have made it. The relevant question is much the same where the tribunal has found that that the assumptions made by the Commissioners were wholly unreasonable; in that context the question is whether, in the particular case, the making of wholly unreasonable assumptions by the officer compels the conclusion that he was not doing his honest best. That, I think, is what Mr Justice Dyson had in mind when he said, in McNicholas ([2000] STC 553 at 581, paragraph 76), that:
  126. "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 the commissioners did not apply best judgment . . ."
  127. In reaching the conclusion, in Rahman (No 2) and on the present appeal, that it is enough that the officer through whom the Commissioners act in making the assessment "does his honest best", I have sought to construe section 73(1) of the Act in the sense which sits most easily within the statutory framework. There are two elements in the statutory scheme which seem to me to be of particular relevance. First, it is a pre-condition to the exercise of the power to assess under section 73(1) that (i) there has been a failure to make returns, keep records or afford facilities for inspection, or (ii) it has appeared to the Commissioners that returns which have been made are incomplete or incorrect; that is to say (in the usual case), that the normal process of self assessment to VAT has broken down. Second, an assessment under section 73(1) of the Act engages, and is subject to, the appeal provisions in section 83(p).
  128. Section 83(p) of the Act provides for an appeal to a VAT tribunal "with respect to . . . an assessment . . . under section 73(1) . . . or the amount of such an assessment". As I sought to point out in paragraph [5] of my judgment in Rahman (No 2), the reference in section 83(p) of the Act to both "the assessment" and "the amount of the assessment" reflects the two distinct questions which may arise where an assessment purports to have been made under section 73(1): "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".
  129. In paragraph [6] of my judgment in Rahman (No 2) I pointed out that the first of those questions itself contained two elements:– (i) whether the pre-condition to the exercise of the power is satisfied and (ii) whether the assessment made by the Commissioners was made "to the best of their judgment". In paragraphs [43] and [44] of my judgment in Rahman (No 2) I said this:
  130. "[43] . . . 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.
    [44] 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. . . ."
  131. It seems to me necessary to ask whether, given the statutory framework, there is any good reason why Parliament should have intended there to be engrafted upon a power to assess the amount of VAT due "to the best of their judgment" some objective standard against which the assessment must be measured. Why should it not be enough, in this context, that the Commissioners, through their officer, make an honest and genuine attempt to make a reasoned assessment of the VAT payable? If, doing his honest best, the officer makes an assessment which turns out to be wrong, the Tribunal can substitute their own assessment on appeal. Why should it have been thought necessary to introduce the additional requirement that the assessment be measured against an objective standard; so that, if the officer (despite doing his honest best) fails to attain that standard, the tribunal must hold that there has been no proper exercise of the power to assess, the assessment must be treated as if it had not been made, and there is no basis (because there is no existing assessment) upon which the tribunal can substitute their own assessment of the correct amount? I have not been persuaded that there are satisfactory answers to those questions.
  132. It is for those reasons that I agree with the judge that the Tribunal misdirected themselves as to the proper approach to the "best of judgment" requirement; and, accordingly I would dismiss the appeal on that point.
  133. In those circumstances it is unnecessary to decide what consequences would have followed from a finding that an assessment had not been made to the best of the Commissioners' judgment. In Rahman (No 2) I suggested, at paragraph [45] of my judgment, that a Tribunal might take the view, in such a case, that the proper course was to discharge the assessment; but that, even in a case of that nature, the Tribunal could give a direction specifying the correct amount. I suggested that such a direction could have effect under section 84(5) of the Act. Lord Justice Carnwath has explained why that section is of no direct assistance. He has found another route to the same end, which I gratefully adopt. But I suspect that the point, which does not arise in this case, is unlikely to arise in practice. In a case where the Tribunal finds that the Commissioners have made no honest and genuine attempt to assess the amount of VAT properly due, the Commissioners are unlikely to seek to uphold the exercise of the power and the Tribunal is unlikely to be persuaded that justice does not require that the assessment be set aside. And, as I said in Rahman (No 2), the cases in which a finding of no honest and genuine attempt can be made are likely to be rare.
  134. In paragraph [44] of my judgment in Rahman (No 2) I suggested that, in cases where the Tribunal had material before them from which they could see why the Commissioners made the assessment that they did and it was not apparent on the face of that material that the power to assess had not been exercised in accordance with the 'best of judgment' requirement, the tribunal would be well advised to concentrate on the question "what amount of tax is properly due from the taxpayer?"; taking the material before them as a whole and applying their own judgment. . . ." That was not the course adopted in the present case. In the present case, the Tribunal concentrated on the "best of judgment" requirement; and reached no conclusion on the question what amount of tax is properly due from the taxpayer.
  135. If I may say so with diffidence, the approach suggested in paragraph [44] of my judgment in Rahman (No 2) has the advantage that it is the more likely to achieve the underlying purpose of the legislative provisions – to ensure that the taxable person accounts for the correct amount of tax. The advantage of that approach is borne out by what, on any view, must be regarded as the unsatisfactory outcome of the Tribunal's decision, after a hearing extending over 42 days in the present case, not to reach a conclusion on the question what amount of tax is properly due from the taxpayer.
  136. In the circumstances of this case I cannot think that it would be right to remit the issue of best judgment to the Tribunal for a further hearing, for the reasons which Lord Justice Carnwath has given. I agree, also, with his conclusion in relation to the costs of the hearing before the Tribunal. The question by whom those costs should be borne should be revisited in the light of the eventual determination of the amount of VAT properly payable.
  137. Lord Justice Waller

  138. I agree that the appeal should be dismissed for the reasons given in both judgments.
  139. ORDER: Appeal dismissed, save there is an allowance of the appeal in relation to costs; the appellants to pay 60% of the respondent's costs of the appeal; no stay in relation to the costs of the appeal, but there will be a stay in relation to all other costs orders pending the decision of the Tribunal; a general stay until mid-September; permission to appeal to the House of Lords refused to both sides.

    (Order not part of approved judgment)


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