18841

Value  Added Tax – Incorrect Returns including under and over-declarations – subsequent failure to make Voluntary Disclosure and restricted claim for repayment of “input” tax – circumstances in which sums repayable to taxpayer – whether set off competent in respect of earlier (and otherwise time-barred) under-declarations in terms of Section 81 (3A) VATA 1994 (as amended). 

EDINBURGH TRIBUNAL CENTRE

	LAING THE JEWELLER LTD	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	       Respondents

			Tribunal: 	(Chairman)	Mr Kenneth Mure, QC
					(Member)	Ian M P Condie, CA

Sitting in Edinburgh on Monday 11 October 2004

for the Appellant		Mr Stuart Bruce

for the Respondents	Mrs Joanna Clark, Shepherd & Wedderburn WS

© CROWN COPYRIGHT 2004.

DECISION

Introduction
In this Appeal the Appellant was represented by Mr Stuart Bruce.  The Respondents were represented by Mrs Joanna Clark.  The factual aspects were not in dispute.  A Statement of Agreed Facts for the Parties was lodged and no evidence was led.

The circumstances in which this Appeal arises may be summarised as follows.  The Appellant in its three monthly Returns for the four periods ending  05/98 to 02/99 under-declared the amount of VAT due.  In the Return for the period ending 11/00 the Appellant compensated for the under declarations, which totalled £61,751, by reducing in Box 4 of the Return the value of deductible input tax by that amount.  The Respondents were unaware of this as the Appellant had not followed the prescribed procedure for correcting under declarations exceeding £2,000, viz such an under-declaration should have been intimated to the Respondents by way of Voluntary Disclosure (see Document 17).  In July 2002 an officer of the Respondents made an investigation of the Appellant’s Returns and discovered a pattern of over and under-declarations of VAT for an extended period resulting in a net overdeclaration.

As at that date an assessment to VAT in respect of the periods 05/98 to 02/99 would have been timed-barred considering that over three years had elapsed.  The Respondents in their Notice of Assessment and Over declaration to the Appellant dated 7 August 2002 (Document 10), and in so far as relating to the period 11/00, restricted the repayment due to £44,720 by deducting the said under-declarations of £61,751.  In resisting the Appeal the Respondents rely on the terms of Section 81 (3A) VATA 1994 for making this deduction.  There is, however, no express reference to that deduction in the Notice.

There are produced also internal records of the Appellant (Documents 7 and 8) reflecting and showing the irregularities in their VAT records over an extended period.  Also there is a Schedule prepared by the Respondents’ investigating officer (Document 9).

The Legislation
Sections 25/26 VATA 1994 direct basically that a taxpayer must account to Customs & Excise for output tax due less input tax for the particular three month period.  These provisions reflect Articles 11, 17 and 22.5 of the Sixth Directive.  More particularly Sections 81(3) and (3A) VATA 1994 provide:-

 “(3) Subject to subsection (1) above, in any case where-
(a)	an amount is due from the Commissioners to any person under any provision of this Act, and
(b)	that person is liable to pay a sum by way of VAT, penalty, interest or surcharge,
the amount referred to in paragraph (a) above shall be set against the sum referred to in paragraph (b) above and, accordingly, to the extent of the set-off, the obligations of the Commissioners and the person concerned shall be discharged.

(3A) Where-
(a)	the Commissioners are liable to pay or repay any amount to any person under this Act, 
(b)	 that amount falls to be paid or repaid in consequence of a mistake previously made about whether or to what extent amounts were payable under this Act to or by that person, and 
(c)	by reason of that mistake a liability of that person to pay a sum by way of VAT, penalty, interest or surcharge was not assessed, was not enforced or was not satisfied,
any limitation on the time within which the Commissioners are entitled to take steps for recovering that sum shall be disregarded in determining whether that sum is required by subsection (3) above to set against the amount mentioned in paragraph (a) above”.

Subsection (3A) was added by Section 48 (1) FA 1997 with effect from 18th July 1996.

Regulation 35 of the VAT Regulations (1995/2518) provides:-

“Where a taxable person has made an error-
(a)	in accounting for VAT, or 
(b)	in any return  made by him, 
then, unless he corrects that error in accordance with regulation 34, he shall correct it in such manner and within such time as the Commissioners may require”.

This applies in the case of errors exceeding £2,000 (cf Regulation 34).

The Facts
The account summarised in the Introduction is not controversial.  In addition the Statement of Agreed Facts for the Parties provides :-

1)	The Appellant carries on the business of jewellers from premises at Rowan House, 70 Buchanan Street, Glasgow, G1 3JE.
2)	The Appellant was originally registered for the purposes of VAT under Registration Number 259 6811 22 with effect from 1 April 1973.  It was subsequently deregistered with effect from 1 December 2002 at which time it became a member of a Group Registration: 806 3292 38 (although this has no bearing on the issues in dispute for the purposes of this Appeal).
3)	During the periods ending 05/98–02/99, the Appellant underdeclared VAT amounting to £67,751.  The said net under-declaration of VAT was due to a mixture of under-declarations of output tax and overclaims of input tax.  Reference is made to Document 7 in the Bundle.
4)	The Appellant corrected this error by way of an adjustment to the VAT declared due for the period ending 11/00.  The Appellant did this by reducing the VAT allowable amount for Box 4 by the sum of £61,751 from £529,759 to £468,008.  
5)	On 17 July 2002, an Officer of Customs & Excise visited the Appellant at which time he was advised (amongst other things) that a reconciliation of the Appellant’s VAT liabilities for the periods 05/99 to 02/02 had been undertaken which had revealed that the Appellant had made a substantial net overdeclaration of VAT (comprising a mixture of overdeclaration and under-declarations of VAT).  The Appellant advised the Officer of the basis for the alleged net overdeclaration and produced detailed Schedules in support.  The Officer proceeded to check and verify the same.
6)	Part of the alleged net overdeclaration related to the sum of £61,751 which the Appellant had previously adjusted in Box 4 of the return rendered for the period ended 11/00.
7)	Following a detailed consideration of the Appellant’s reconciliation, the Respondents advised the Appellant by way of Notice of Assessment(s) and Overdeclaration(s) dated 7 August 2002 (Document 10 in Bundle) that the net amount due from the Respondents in relation to the total net overdeclaration calculated by the Appellant had been recalculated as £197,794, by (amongst other things) reducing the overall net overdeclaration by £61,751.
8)	It is agreed that the adjustment of £61,751 which was made in the Appellant’s original VAT account for period 11/00 should not have been made by the Appellant.
9)	On 13 May 2003 the Appellant’s Representative wrote the Respondents in relation to the Notice of Overdeclaration requesting that the Respondents reconsider their decision to refuse the Appellant’s calculation of overdeclaration to extent of the said sum of £61,751.  Reference is made to Document 11 in the Bundle.
10)	 On 9 September 2003 the Respondents wrote to the Appellant’s Representative confirming their decision to refuse the Appellant’s request.  Reference is made to letter dated 9 September 2003 at Number 12 of the Bundle.
11)	 On 9 October 2003 the Appellant’s Representative wrote to the Respondents intimating their intention to appeal to the VAT and Duties Tribunal.  Reference is made to letter dated 9 October 2003 at Number 13 of the Bundle.
12)	 It is agreed that the figurework shown on Document 8 of the Bundle, headed “Summary of Net VAT”, is correct including the figurework for period 11/00.
13)	 It is agreed that, in respect of period 11/00, the Appellant had overstated output tax by the variance between the “Actual Submissions” in Box 3 (£603,222) and the “Revised Submissions” in Box 3 (£317,745), reduced by only £142 for scale charges, i.e. by an overstatement of £285,335.
14)	 It is agreed apart from the “Schedule of Net VAT” and its supporting documentation, the Appellant did not write to the Respondents to make voluntary disclosures concerning the periods reported in the Respondents’ Notice of Assessment(s) and Overdeclaration(s) dated 7 August 2002. (Document 10).
15)	It is agreed that the “Schedule of VAT Return/Revised VAT Account Differences” (Document 9) was prepared by the visiting officer, Mr Reid, on 29 July 2002 following his visit to the Appellant.
16)	 It is agreed that the sum of £135,214 in period 11/00 was paid by the Appellant to the Respondents and the refund of £197,794 paid by the Respondents to the Appellant.
17)	It is agreed that the present Appeal has arisen following the appointment of the firm of BDO Stoy Hayward as auditors and that the said firm was not auditors during the periods covered by the Commissioners Notice of Assessment(s) and Overdeclaration(s) or earlier”.

Submissions For The Appellant
Mr Bruce invited us to allow the appeal.  His argument is set out in a Note which was lodged at the start of the Hearing.

He referred us also to the terms of the correspondence exchanged between the parties (Documents 11,12 &13).

His argument may be summarised as follows.  The Respondents were bound to make assessments on the basis of the correct amount of output tax due and under deduction of the correct amount of input tax allowable for each individual period.  That is the requirement of UK domestic law and also Community Law.  Extensive reference was made to case-law in support of this proposition but this aspect was not controversial and we do not comment on it further.  In relation to the period 11/00 the Notice (Document 10) does not follow this requirement, he claimed.  The correct amount of input tax for that period has not been deducted in as much as it has been restricted to the extent of £61,751 – viz the under-declarations for the four periods 05/98 to 02/99.  That, Mr Bruce submitted, was a contravention of the terms of the VATA Ss 25-26 and the Sixth Directive.  There has not been a “set off”; rather the Respondents’ approach represented an incorrect aggregation of input and output tax errors.  The Respondents had chosen in making the assessment for 11/00 to introduce incorrectly the extraneous deduction of £61,751 which related to other periods.  That was incorrect. 

Mr Bruce addressed us on the correct interpretation of Section 81(3) and (3A).  Only when liabilities have been determined can “set-off” apply.  This course had not been followed in the present case.  In relation to subsection (3A) he submitted that it should be interpreted strictly and in particular that there had to be the same “mistake” to satisfy the cumulative requirements of the provision.  There were two different mistakes, he argued, in the present case, which should be viewed as distinct although they were for the same amount, viz £61,751.  The error and correction of the Return for 11/00 was distinct from the errors in the earlier Returns 05/98 to 02/99.

Also, Mr Bruce argued, there had not been proper notification of the exercise of “set-off”.  The inclusion of the under-declaration of £61,751 in the calculation of liability for a subsequent period should be viewed as a nullity.  It was moreover time-barred.

Submissions For The Respondents
Mrs Clark urged us to refuse the Appeal.  She submitted that the Respondents had accepted the Appellant’s claim in its Return for 11/00 subject to a statutory “set-off” in terms of subsection (3A) of £61,751.  That, she argued, did not infringe EEC or Domestic Law.  In the Appellant’s Returns in the year ending February 1999 there had been a series of errors resulting in a total under-declaration for that amount.  While the Appellant purported to rectify the balance due in the Return for 11/00 the Respondents were unaware of any irregularity until 2002 by which date over three years had expired.  In terms of Regulation 35 where a sum exceeding £2,000 is found due the taxpayer should make a Voluntary Disclosure (see Document 17).  The Appellant should have done this in November 2000 and this course would have alerted the Respondents in time.

Mrs Clark submitted that the Notice of Assessment and Overdeclarations (Document 10) is intended simply to show the net position as a result of the investigation and review of the Appellant’s VAT records.  It falls to be read in conjunction with the Returns and other documentation.  It records in the entry for 11/00 the giving effect to the “set-off” in terms of subsection (3A) of £61,751.

Mrs Clark submitted that the “set-off” in terms of subsection (3A) was mandatory.  The calculation in the Notice in respect of the period 11/00 reflected this deduction.  The provision, she argued, was apt in the present case.  The Respondents acknowledged their liability to pay the Appellant in terms of the Return for 11/00.  The “mistake” for the purposes of the subsection was in the Appellant’s restricting the figure of input tax in Box 4 of the Return instead of making a Voluntary Disclosure.  Subsection (3A) was apt in the case of a closely connected cross-liability, as here, of output and input tax.

If the Appeal were allowed Mrs Clark argued, the Appellant would benefit from its unilateral error.  It would give them an unfair tax advantage.

Decision
The primary issue for determination is whether the Respondents were entitled to restrict the VAT repayable to the Appellant to the extent of £61,751 being the total of the under-declarations for the four periods 05/98 to 02/99.  In effect were the Respondents time-barred from doing so or was this obstacle overcome by the provisions of subsection (3A).

The correct interpretation of this subsection is vital.  We understand that it has not been considered judicially before.  There is a consideration of it in Document 18, an extract from a C&E practice manual, but that is not, of course, definitive.  The party responsible for the requisite “mistake” is not identified or limited.  “Mistake” is not defined.  It is not in dispute that for the purposes of paragraph (a) the Respondents were under a liability to repay certain sums to the Appellant.  In particular the under-declaration of input tax wrongly inserted in the 11/00 Return fell to be repaid.  We consider for the purposes of the cumulative provisions of the paragraphs that a “mistake” resulted from the Appellant’s deciding not to report their earlier under-declarations for the four periods referred to by way of Voluntary Disclosure but instead to deal with this liability by reducing incorrectly in Box 4 of their Return for 11/00 the amount of input tax.  Thus liability to make a repayment by reference to the correct amount of input tax arose.

There was no Voluntary Disclosure.  Instead, an incorrect figure for that period was entered in Box 4.  Had the Appellant followed the proper course of volunteering the earlier under-declarations in about November 2000, the Respondents would not then have been time-barred in making assessments in respect of these.  Because of the “mistake” the Respondents were unaware of these until their investigation in July 2002.  We consider that in terms of the provisions of the Subsection the Respondents were thus enabled to disregard considerations of time-bar in relation to the “set-off” for these earlier periods.  

We consider it sufficient for our Decision to view as the “mistake” the Appellant’s failure to follow the correct procedure as at the lodging of the 11/00 Return.  However, there is no definition of “mistake” in the context of these provisions.  We consider it strongly arguable that it could extend to the whole course of conduct of the Appellants i.e. in submitting the Returns earlier with the under-declarations totalling £61,751 as well as their actings in respect of the 11/00 Return.  It follows that we reject the argument of the Appellant to the effect that there were two distinct “mistakes”, albeit for the same amount, and thus the “same” mistake did not arise to satisfy the cumulative requirements of the subsection.

We considered also whether the requirement had been satisfied of determining in respect of each Return period the balance produced by setting the input tax recoverable in respect of that period against the corresponding amount of the output tax.  This approach was followed, we consider, in the Notice of Assessment and Overdeclaration (Document 10).  Special considerations arise in relation to the period 11/00 in respect of which a repayment of £44,720 is specified as repayable.  This is a net figure after the deduction of £61,751, the total of the under-declarations.  We do not consider that this approach infringes a requirement of determining a net balance of VAT referable to the particular period.  This calculation is, we think, obvious when viewed in the context of the Appellant’s own records (Documents 7 and 8).  Moreover, subsection (3) requires that a “set-off” be made.  Given the incorrect course adopted by the Appellant in completing the return for 11/00 and the requirement in terms of subsection (3A) to disregard time-bar, we consider the course adopted by the Respondents appropriate.  It reflects, of course, the liability volunteered by the Appellant.

Accordingly, for these reasons the Appeal is refused.

Expenses 
Mrs Clark indicated that the Respondents did not seek expenses in the event of their being successful.  Accordingly no award is made.

Finally, we would thank both Mrs Clark and Mr Bruce for their detailed and helpful submissions.

MR KENNETH MURE, QC

CHAIRMAN

RELEASE:  22 NOVEMBER 2004

EDN/03/97