INPUT TAX — partial exemption — special method — trader makes taxable and exempt supplies and has “outside-the-scope” activities — construction of original special method — whether it permitted apportionment of all overheads to taxable and exempt supplies to exclusion of any outside-the- scope activities — no — whether it permitted relief for input tax on inputs directly attributed to outside-the-scope activities — no — whether method changed following visit of assurance officers such that both reliefs could be claimed — no
	ASSESSMENT — time limits — whether Commissioners had knowledge of sufficient facts to enable assessments to be made — yes — VAT Act S73(6)(b)
	ASSESSMENT — best judgment — whether misunderstanding of partial exemption method violated best judgment character of assessment — no — VAT Act S73(1)

LONDON TRIBUNAL CENTRE

 
 	
	HOSPITALITY TRAINING FOUNDATION	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	STEPHEN OLIVER QC (Chairman)
						JO NEILL ACA 	

Sitting in public in London on 25 & 26 September 2003  

Philippa Whipple, counsel, instructed by Haysmacintyre, accountants, for the Appellant
Rupert Baldrey, counsel, instructed by the Solicitor for the Customs and Excise for the Respondents

	© CROWN COPYRIGHT 2003

DECISION

1.	Hospitality Training Foundation (“the Foundation”) appeals against assessments comprised in a Notice of Assessment dated 2 December 2002 for £164,691 plus interest of £22,756.  The assessments are in respect of overclaimed input tax for the Foundation’s return periods 12/99 to 06/02.

2.	The Foundation is a company limited by guarantee and a registered charity.  Its main object is to promote and advance for public benefit the education and training of persons employed or intending to be employed in the hospitality, leisure, travel and tourism industries; to conduct research into matters relating to training in these industries and to publish such research for the public benefit.

3.	The Foundation used to be called the Hotel and Catering Trading Company Limited and used to trade under a group registration.  The Foundation started trading under its new name in May 1996.  It was registered for VAT from 2 July 1996 with a new VAT registration number.

4.	At all material times the Foundation and its predecessor have made taxable, exempt and “outside-the-scope” (otherwise known as “non-business”) supplies.  The Foundation’s business is divided into three sectors.  These are -
(I)	“HTF Plus” formally known as the National Trading Organization (“NTO”).  This has always generated a large proportion of outside-the- scope income representing grant-style government and EU funding, as well as standard rated income.
(II)	“Hospitality Awards Body” whose income is mostly exempt with some standard rated and
(III)	“Stonebow”. Whose income is standard rated and which does research for private commissions.
Those divisions with like classes of income existed in 1994.

5.	The VAT code provides that VAT incurred by a trader (such as the Foundation) on supplies used for the purposes of his business qualifies as “input tax” and may give rise to a credit.  Where a trader (such as the Foundation) makes both exempt and standard rated supplies, then the input tax directly attributable or apportionable to his business supplies has to be determined and only the VAT attributed or apportioned to his taxable supplies qualifies for credit against his output tax.  The code contains a standard method for these “partial exemption” purposes and allows the Commissioners to approve special methods for circumstances where they produce fairer and more reasonable results.  However VAT incurred on goods and services that are not used for business purposes is not input tax and the trader cannot recover it.  The relevant part of the code (VAT Act 1994 Section 24(5)) provides that VAT on goods and services used by a trader partly for business purposes and partly for non-business purposes, such as that on overhead costs, must be apportioned so that only so much as is referable to his business purposes is counted as his input tax; there is no express provision as to how that apportionment is to be carried out.

6.	The effective operation of the code requires that the attribution or apportionment of VAT incurred by a trader between business and non-business use is to be carried out at or before any partial exemption calculations under section 26 and the General Regulations are made.  However, despite the strict letter of the code, it is not in dispute that it had been widespread practice in the 1990’s for customs officers dealing with the VAT affairs of not-for-profit organisations making business and non-business supplies to allow a combined calculation rather than a two-stage process.  We heard evidence of this practice from Mr P A Salmon who had been employed by the Commissioners until 1997 working in the partial exemption branch in VAT policy directorate.  Meetings had taken place between representatives of the Commissioners and the Charities Tax Reform Group in 1995.  The practice of allowing combined calculations had been discussed.  A customs-approved note of the meeting was issued by Ernst & Young on 12 December 1995.  This in terms recognised the existence of the practice.  The note records the Commissioners’ acknowledgement that the combined calculation practice needed to be revised and replaced by proper two-stage calculations.  The note records the Commissioners’ recognition that revision could not take place overnight and that customs officers would over time re-negotiate the calculation methods with affected charities.  In this connection reference should be made to the tribunal decisions in The Labour Party v Customs and Excise Commissioners (2002) VAT Dec 17034 where the tribunal decided that the Commissioners had authority to make such combined agreements and to Greenpeace Limited v Customs and Excise Commissioners (2002) VAT Dec 16665 where a combined method was agreed and in place in 1994 and 1995.

7.	On 21 September 1994 the Hammersmith VAT Office Surveyor wrote to the Foundation’s predecessor.  We refer to this as “the 1994 letter”.  The 1994 letter refers to earlier correspondence.  It is evident from the letter that the Commissioners were aware that the predecessor of the Foundation was making outside the scope or non-business supplies.  The letter, as far as is relevant, reads as follows:

“With reference to your letter of 11 August regarding the proposal to use a revised special partial exemption method for the recovery of input tax incurred.

The method proposed in the letter has been considered and under Regulation 31(1) of the VAT (General) Regulation 1985, as amended, approval to use it has been granted.  The date of approval has been retrospectively granted from 1 April 1994.  Approval to use this special method is subject to the conditions set out below.

The method used to calculate deductible input tax is as follows:

           The total value of taxable supplies         .
The total value of taxable and exempt supplies

This ratios should be applied to the total input tax incurred, excluding non-deductible input tax such as business entertainment etc.

When making this calculation all supplies outside the scope of VAT must be excluded.  Also, any input tax directly attributable to outside-the-scope or non-business supplies must be excluded from the value of the input tax to which this ratio is to be applied.  The right to deduct input tax incurred against such supplies should be treated as a separate exercise.

The proposal to apply this ratio to discrete areas of business is likewise approved.  The single condition to this is that adequate documentation is maintained to support the calculations to arrive at the division of supplies and input tax relating to each area.

The approval is granted provided that the conditions detailed above are met in full.  The Commissioners of Customs and Excise reserve the right to review these arrangements and to cancel or modify them at any time.  You may apply for a change of method if the agreed method no longer produces a fair and reasonable recovery of input tax.  Any application for a change in method should be sent to this VAT office.”

8.	As we read the 1994 letter it expressly directs the exclusion from the denominator of the partial exemption fraction of any income derived from non-business supplies.  The statement that “input tax directly attributable to outside-the-scope or non-business supplies must be excluded” is misleading; “input tax” is the VAT incurred by the trader that relates to his taxable supplies.  Also misleading is the use of the expression “the right to deduct tax incurred against such supplies” where “such supplies” are non-business supplies.  However it is just about clear from the letter that the method it prescribes was not directed at the section 24(5) apportionment exercise of VAT on goods and services used partly for business purposes and partly for non-business purposes such as head office and overhead costs.  That was to be done “as a separate exercise”.

9.	The accounting staff at the predecessor company of the Foundation were not called to give evidence.  We were however supplied with its VAT return for the 09/94 period, i.e. the first period to which the 1994 letter applied and to the spreadsheet calculations supporting that return.  The spreadsheet shows that the tax on supplies used directly for conducting non-business activities, such as outside-the-scope research was deducted from the VAT incurred in the period.  The tax incurred on overheads of the predecessor company as a whole (e.g. head office costs) has been allocated to each sector according to the relative value of outputs in that sector.  The remaining tax was allocated to the specific sector where the particular goods and services were used.  Thus a single percentage fraction reflecting the value of taxable to non-taxable and exempt outputs of that particular section was applied to the tax to give the recovery rate.

10.	The return for the 09/94 period and the related spreadsheet shows :
(i)	A specific figure for tax borne on supplies used for outside-the-scope projects  has been excluded from the input tax “pot”.  This appears in the spreadsheet figures for “core work”, now described as NTO. 
(ii)	No apportionment of overhead inputs has been made to reflect non-business use. Moreover the spreadsheet shows that the balance of the pot of input tax has been apportioned in its entirety by reference to taxable and exempt supplies.

11.	The next step in the chronology is the registration of the Foundation for VAT on 2 July 1996.  Precisely how much information relating to the Foundation’s predecessor was included in the Foundation’s folder within the VAT office is not known.  Stephen Shilton (a Customs assurance officer who gave evidence) said that he had read the 1994 letter in preparation for the visit and inspection that took place on 23 and 24 August 2000; he said also that there had been a lot of correspondence in the folder.

12.	There are two issues where it will be relevant to decide what information the Commissioners had before them at or by the time of the August 2000 visit. One is whether the visiting (assurance) officers understood the methodology adopted by the Foundation and approved it, the other is whether they had sufficient information to enable them to make best judgment assessments.  In this context it will be relevant to determine whether the Commissioners were aware that the Foundation was providing services in return for its outside-the-scope income.  A letter from the Commissioners to the Department for Education and Employment dated 13 October 1997 is in point here.  This was passed to the Foundation by the Department in November 1997.  By way of background a large proportion of the income of the Foundation and of its predecessor relating to the NTO sector had been outside-the-scope of VAT; much of this was received by way of annual funding from the Department.  The letter from the Commissioners confirms that this, when it had been part of the annual funding contract, was outside the scope of VAT.  The latter describes these services as “the continuous work of a non-profit-making organisation in respect of its own aims and objectives”.

13.	Returns for 6/99, 9/99, 12/99, 3/00 and 6/00 were in evidence.  Also in evidence were spreadsheets that accompanied those returns and “trial balances” for the periods 12/99, 3/00 and 6/00.  It was not in dispute that the spreadsheets, which provide the audit trail linking the financial records to the VAT returns, had for all periods been lodged with the Commissioners with the VAT returns to which they related.  Each spreadsheet contained a line entitled “IT-less research out of scope project”: each entry in the line was a nought.  The spreadsheets do not show outside-the-scope income; they show, however, that all “input tax” on overheads has been apportioned between exempt and taxable supplies.  The calculations on the spreadsheets indicate that no apportionment of overhead inputs to reflect non-business use has been undertaken.

14.	The trial balances for the three periods specified above had specific entries for outside-the-scope income.  From those entries there could be deduced the ratio of outside-the-scope income to total income both as regards the NTO section and as regards all divisions.

15.	The evidence of Mr Stanton, the Foundation’s finance and technical director since 2001, was that the trial balances had been filed with the quarterly returns behind each spreadsheet.  Asked about the trial balances, Mr Shilton said he could not recall having seen them.  We think that he must have seen them, if not when he inspected the Foundation’s files in preparation for the August 2000 visit, then certainly in the course of that visit.  His audit report, to which we shall refer later, refers in terms to the trial balances and to their contents.  
 
16.	The August 2000 visit was made by two assurance officers and lasted for two days.  Mr Shilton had by then been engaged on VAT matters for 15 months.  The other officer had had several years of experience but is no longer with the Commissioners. The two assurance officers attended the Foundation’s premises.  They met a Mrs Joanna Wootton, the member of the Foundation’s staff responsible for VAT compliance.  The visit started with a discussion of the Foundation’s business.  The assurance officers were provided with the Foundation’s VAT returns, the supporting spreadsheets and other documents which, as we have found, included the trial balances. 

17.	Because of the division of the Foundation’s supplies into three sectors and the complexities arising from this a lengthy explanation was called for.  The officers had brought a summary sheet with them; this dealt with the partial exemption calculation for 1999/2000.  It contained no separate entries for outside-the-scope income; the only reference to outside-the-scope was the line (also found in the three then most recent spreadsheets) consisting of a row of noughts entitled “Input Tax-less research outside the scope projects”. A large part of Mr Shilton’s time was spent checking and reconciling the entries comprised in the calculations for the three sections of the Foundation’s activities.  Mr Shilton told us that he had not in the course of the visit, realized that VAT on overheads was all being apportioned to taxable and non-taxable supplies with the result that the Foundation was obtaining relief for VAT on purchases that would on a full apportionment basis relate to outside-the-scope supplies.  Mr Shilton said that he had not been aware that “a sizable chunk of outside-the-scope income had been coming into the Foundation”.  He had not, he said, been looking for outside-the- scope income.  Subject to detailed queries and allocations of income in the expenditure between the three sections, Mr Shilton explained that he had been “generally happy” with what the Foundation had been doing and he had been content that the Foundation had been complying with the terms of the 1994 letter.

18.	Mr Shilton’s “VAT Audit Report” of the first day’s visit (the report for the second day was unaccountably missing) records the following, among other factors that we now itemise.  The entries show that the Commissioners were (despite Mr Shilton’s assertion to the contrary) aware of outside-the-scope income.  The letter of 13 October 1997 shows that they knew that this was for continuing work on the Foundation’s part.  The entries erroneously described the method in the 1994 letter as “now the standard method”.  But that does not call in question Mr Shilton’s otherwise correct grasp of the operation of the method prescribed by the 1994 letter.  A further entry notes that Mrs Wootton “works from trial balances”.  The Audit Report goes on to record that the Foundation has been allocating “income received by each entity to standard rated, zero-rated and outside-the-scope … .  In parts allocated according to the percentage of turnover of each entity.”  In evidence before us Mr Shilton said that he had not been concentrating on the outside-the-scope side.  We cannot accept this.  His report shows that they were aware of outside-the-scope income and of the fact that an exercise had to be done to ensure that tax on inputs attributable or apportionable to outside-the-scope supplies was excluded.  In this connection we observe that the assurance officers had available to them the three most recent returns and supporting documents.  

19.	Another entry in the audit report states that the VAT declarations have been based on “accounts summary”.  The accounts revealed the presence of outside-the-scope income and its quantum.  Had Mr Shilton used this information it would have enabled him to deduce that some 10% of the income was outside the scope of VAT.

20.	Following the August 2000 visit Mr Shilton wrote to the Foundation on 27 November 2000. In this letter Mr Shilton points out that there were errors in apportionments of income within what he (admittedly wrongly) described as the standard method; Mr Shilton expressed the view (again conceded by the Commissioners to have been wrong) that there should have been direct attributions to taxable and exempt supplies.  All that remained to be done according to the letter was for the Foundation “to check the apportionment and provide evidence to show if payments reallocated (between the three sectors of the Foundation’s activities) are standard or zero rated”.  The letter shows that Mr Shilton was taking the terms of the 1994 letter as the Foundation’s partial exemption method; at the same time the letter raised no objection to the Foundation’s application of the relevant fraction to a single pot without first carrying out a business/non-business apportionment to determine the part of the overheads attributable to outside-the-scope income.

21.	At this stage it is relevant to express certain inferences drawn from our findings of primary facts and our understanding of the figures presented to us.  First, for none of the periods assessed has the Foundation carried out any direct attribution to determine what amount of VAT was incurred on services used wholly for non-business activities.  Nor has the Foundation carried out any apportionment in respect of services used partly for business and partly for non-business purposes.  It has actually claimed the entire amount of the VAT incurred by it on its non-business activities.  Second, the Commissioners, through the two assurance officers, conveyed to the Foundation their satisfaction that the Foundation  was using the method in the 1994 letter on a proper basis.  Third, had the Commissioners concluded that the Foundation was not operating that method properly they had all the information available to them to enable them to make best of judgment assessments for all periods up to 06/00.  We will revisit this third point when we deal with the “out of time” challenge.  We now revert to the chronology of facts.

22.	The Foundation’s VAT returns from 09/00 until 09/01 were made on the same basis as before.

23.	In December 2001 a further customs and excise visit took place, this time by Ms Marcia Arthurworry who gave oral evidence.  She was checking whether the Foundation was correctly accounting for VAT.  She had read the “folder” (the Commissioners’ records) including Mr Shilton’s report of the August 2000 visit.  She had not looked at the 1994 letter before her visit; this was because it had referred to a different registration number (i.e. the Foundation’s predecessor).  Ms Arthurworry interviewed Joanna Wootton who struck her as “not being clear about the Foundation’s VAT liabilities”.  Following further visits Ms Arthurworry concluded that the Foundation had not apportioned the tax on its inputs between outside-the-scope and taxable sales.  She did her own workings and asked the Foundation for its reworked calculations based on all the outside-the-scope projects carried out over the previous three years.  On 28 June 2002 the Foundation supplied these.

24.	On 2 December 2002 Ms Arthurworry assessed VAT for all periods from 12/99 until 06/02.  The assessment in its original form was raised on the basis that the Foundation was making use of the “standard method” but had failed to perform the following steps that are required as part of that method namely -
(i)	directly to attribute, so far as possible, input tax to taxable and exempt supplies;
(ii)	perform an initial apportionment of tax on inputs used directly attributable to outside-the-scope supplies  and
(iii)	perform an initial apportionment of tax on inputs that were used partly for making outside-the-scope supplies.
Following a review a letter of 3 February 2003 from the Commissioners accepted that the method agreed in the 1994 letter was and has at all time remained a special method which has not required any direct attribution to exempt supplies.

25.	The Foundation appealed.

Did Commissioners have power to agree a “combined method” and did the 1994 letter embody such an agreement?

26.	The Foundation argued that the Commissioners had power to agree a combined method that covered both (I) the apportionment of tax on inputs used (in whole or in part) for making outside the scope supplies and (II) partial exemption.  The argument goes on to contend that the 1994 letter contains an agreement to such a combined method.  Properly construed, say the Foundation, the 1994 letter requires tax on inputs directly attributable to outside-the-scope supplies to be excluded as a separate exercise from the partial exemption calculation.  The express reference in the letter to input tax “directly attributable to outside-the-scope supplies” is to be contrasted with the absence of any reference to input tax “indirectly attributable” or used in part for outside-the-scope supplies.  The necessary inference (it was argued) is that the method as approved included such overhead input tax within the partial exemption formula.  Moreover, it was pointed out, no direct attribution to exempt and taxable supplies is required within the special method under the 1994 letter (unlike the standard method now found in regulation 101(2)(d) of the General Regulations).  Also, it was argued, that the main objective was to arrive at a figure for recoverable input tax by means of a single combined calculation.  On this basis, it was argued, the 1994 letter sanctioned the inclusion of overheads used partly for outside-the-scope activities within the single fraction provided for.

27.	We accept that the Commissioners have power to agree the basis on which VAT incurred on goods and services partly used for business purposes and partly used for non-business purposes is to be apportioned; and we see no reason why, in appropriate cases, the basis for the apportionment should not be embodied in or combined with a special partial exemption method as happened in, for example, The Labour Party.  However an agreement, whether combined or limited to the business/non-business split of tax on inputs, will not determine the taxable person’s VAT liabilities if it is based on concession.  It may give him legitimate expectations as to how he will treated by the Commissioners.  But that is not the same thing as determining his strict tax rights and liabilities. The VAT code provides that VAT incurred on goods and services that are not used for a business purpose will not be input tax; the taxable person cannot recover it.  On the same basis VAT on the goods and services used partly for business purposes and partly for non-business purposes must be apportioned.  That is the effect of section 24(5).  In the scheme of things, the partial exemption calculations will be a separate and subsequent step in the computation of the taxable person’s VAT liability.  The consequence is that any agreement, whether written or “de facto”, purporting to operate as a combined method covering both the business/non-business apportionment and the partial exemption calculation will be concessionary and unenforceable before the VAT and Duties Tribunals to the extent that it allows a taxable person relief for input tax for VAT incurred on goods and services used wholly or partly for non-business purposes.

28.	In paragraph 8 above we have concluded that as a matter of interpretation the 1994 letter is confined in its application to the partial exemption calculation.  The key passage in the letter is obscurely worded; but, as we read it, the message that it manages to give is that any business/non-business apportionment made to determine the extent of “the right to deduct tax against such”, i.e. non-business, “supplies” is outside the ambit of the approval in the letter.  On that construction the terms of the 1994 letter do not concede a right to deduct input tax incurred on goods and services used wholly or partly for non-business purposes.  It follows any such subsequent return that has sought to exercise such a right will have been in error and a counteracting assessment will have been justified, unless the August 2000 visit changed things.

Did the conduct of the assurance officers amount to the implied or “de facto” approval by Commissioners?

29.	The Foundation’s next argument is that the assurance officers gave approval to the method employed to the Foundation in its returns at or as a result of their visit in August 2000.  Specifically the method employed by the Foundation claimed relief for tax on overheads used partly for outside-the-scope activities and for inputs which were directly attributable to outside-the-scope activities.  In the former case , it was pointed out, all the VAT returns since the 1994 letter made no apportionment of overheads to reflect non-business use; in the latter case the earliest returns (and certainly that for 09/94 which was in evidence) expressly made an exclusion for directly attributed inputs used in “research in out of scope projects”.  Later returns contained lines of noughts and by 06/00 the line had disappeared completely from the supporting spreadsheets.  The assurance officers had, at the visit, been shown the VAT returns for at least four periods in 1999 and 2000.  They had engaged in a searching conversation with Mrs Wootton of the Foundation; Mr Shilton noted that the Foundation had outside-the-scope income and discussed issues about allocations income to  various sections of the business.  The follow-up letter of 24 November 2000 made no comment about the apportionment of input tax.  On that basis, it was argued, Mr Shilton must have been aware that no initial apportionment of tax on inputs by the Foundation between business and non-business use had been made and no tax on inputs directly attributable to outside-the-scope activities had been excluded.  The Commissioners were, so the argument ran, fixed with knowledge of those factors and gave “de facto” approval.  

30.	The response of the Commissioners was that, even if the assurance officers approved the treatment actually applied by the Foundation (i.e claiming a deduction for all VAT attributable on business activities including directly attributable VAT on inputs)  this was inconsistent with the method described by the 1994 letter and by the standard method.  Moreover that treatment fell outside the ambit of any special method that the Commissioners, through the assurance officers, could have approved under regulation 102.  And in any event no such approval could have given retrospective effect.  The facts, said that the Commissioners, did not help the Foundation because there was no evidence that the assurance officers and Mr Shilton in particular were aware of or approved the treatment actually applied by the Foundation.

31.	The evidence satisfies us that the Foundation placed their cards faced up on the table throughout the visits of August 2000.  They took every practical step available to them to explain what had been happening.  The assurance officers were told about the existence of substantial outside-the-scope income and the Commissioners must be taken to have known (from the letter of 13 October 1997) that that income related to activities carried out by the Foundation in return.  The amounts of outside-the-scope income in the NTO Sector were evident from the Foundation’s accounts and trial balances which, we have found, were presented to the officers.  The two assurance officers were actively involved in an exercise lasting two days which was designed to assure both parties that the right amount of relief was being claimed for input tax.  We accept that the exercise was complex and detailed.  It was carried out against a background of the obscure wording of the 1994 letter.  Nonetheless it should, we think, have been clear to the assurance officers that the Foundation had been claiming relief for tax on overheads used partly for outside-the-scope activities and for inputs which had been directly attributed to outside-the-scope activities.  Also clear to the assurance officers from the evidence available to them should have been the amounts of overclaimed tax for each relevant accounting period.

32.	Having said that we are still bound to agree with the Commissioners.  The VAT code does not allow a relief for tax on inputs wholly or partly used for non-business purposes.  They have no power to approve a method that gives such relief.  Just as the 1994 letter could not give relief, so the actions or inactions of the assurance officers in the year 2000 were ineffective to give it.

33.	This problem would never have arisen if the 1994 letter had been more carefully worded.  It would never have continued if the assurance officers had in the year 2000 taken in the implications of facts freely available to them.  But as the law stands maladmistration and misdirection are not matters within the authority of this tribunal.  In fairness the faults are not all on one side.  At some stage in the later 1990s the Foundation seems to have claimed relief for tax on inputs directly attributable to its non-business activities; the 1994 letter, despite its inaccurate use of term “input tax”, specifically prohibits this.

34.	For those reasons we are against the Foundation in its argument on de facto approval.  The assurance officers did, we think, purport to give such approval.  But the purported effect of that approval had no legal consequence as regards the Foundation’s VAT liability under the VAT code.

Were assessments in time?

35.	The next argument advanced by the Foundation is that the assessments made on 2 December 2002 were out of time in relation to all periods up to and including 09/00.

36.	The rules are not in dispute.  The Commissioners must make the assessment within the time limits provided for in VAT Act Section 77 and not after the later of the following;
(a)	two years after the prescribed accounting period, or
(b)	one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge (Section 73(6)).
The assessment was made on 2 December 2002 in respect of accounting periods 12/99 to 06/02.  Under Section 73(6)(a) the Commissions may only go back two years, i.e. to accounting period 12/00.  The issue in relation to accounting periods 12/99, 03/00, 06/00 and 09/00 is whether the Commissioners are out of time under Section 73(6)(b).  This raises the question of when they had sufficient knowledge.

37.	 It is well established that the Commissioners will have “sufficient knowledge” when “the last piece of the puzzle has fallen into place”; see Aldous L J in Pegasus  v Customs and Excise Commissioners [2000] STC 91.  Whether a decision to assess to best of judgment can be sustained in any point of time depends on the guidelines given in Van Boeckel v Customs and Excise Commissioners [1981] STC 290 and, more recently, restated and clarified by the Court of Appeal in Rahman v Customs and Excise Commissioners [2003] STC 140.  The Commissioners have to consider fairly all material placed before them and unless the situation is one where no material is before them on which they can reasonably base an assessment, they are not required to  make investigations. The Commissioners’ adoption of a wrong methodology or a miscalculation in computing the amount of VAT payable will not invalidate the assessment, always so long as there has been an honest and genuine attempt to make a reasoned assessment of the VAT payable.

38.	The critical question for us to determine on the basis of the information before us is whether and when the Commissioners had the material before them to enable them to apply their own judgment to the Van Boeckel/Rahman standards as to the amount of tax properly due from the Foundation.  In approaching this we observe that constructive knowledge of facts not actually before the Commissioners will not amount to material before them upon which they can reasonably base an assessment.

39.	The “puzzle” here (to use Aldous LJ’s word) for each period is the determination of the tax on inputs of the Foundation not used for business purposes and the tax on inputs “used or to be used partly for the purpose of the business to be carried on by it and partly for other purposes” (see the words of section 24(5)).  The solution to that puzzle provides the answer to the question of what is the amount of tax properly due from the Foundation for each period.  The main exercise in solving the puzzle is the identification of tax on inputs used by the Foundation partly to make outside-the-scope supplies.  In the course of the two day visit the officers, according to the audit report, went through each allocation of income received by each entity to standard rated, zero-rated and outside-the-scope activities and then checked “inputs allocated according to the percentage of turnover of each entity”.  To enable them to carry out that exercise the assurance officers had available to them, for each period, figures of total income, both inside and outside the scope of VAT.  This was contained in the accounts and the trial balances. They saw from the spreadsheets that all tax on all inputs was being apportioned to taxable and exempt income.  They must therefore have had information before them on which to make the necessary apportionment.  The identification of tax on inputs used only for outside-the-scope supplies may have called for an invoice-by- invoice analysis.  Mr Shilton’s evidence and the record in the audit report indicates that such an analysis was possible; it was carried out to determine what inputs were attributable to each sector and which of those were attributable to taxable and to exempt supplies.  A fair appraisal of the information before them would, we think, have produced a figure for wholly non-business “inputs”.  As it was the figures were small and any resulting inaccuracy in the assessment would have been well within the tolerances permitted by the Van Boeckel/Rahman guidelines.  

40.	Completion of the puzzle for each accounting period was, we think, quite possible.  Once the section 24(5) exercise has been carried through, the next step is the partial exemption calculation.  Enough information was available to the Commissioners to determine the partial exemption percentages for each period; for these purposes figures of total income, taxable income and exempt income were all placed before the Commissioners at the August 2000 visit at the latest.  

41.	We note that Marcia Arthurworry wrote to the Foundation on 13 August 2002 stating that she thought “input tax relating to outside-the-scope sales is hidden within your total input tax figures. …  The previous officer could not have commented on figures that did not appear…” This passage appears to acknowledge that both she and Mr Shilton knew that the workings showed no non-business apportionment.  The obvious inference for her (and for Mr Shilton on the earlier occasion) to draw from that was no such apportionment was being undertaken.  This, coupled with the figures in the trial balances and the spreadsheets provided to Mr Shilton in August 2000, is, we think, sufficient information on which to raise the assessment.

42.	For those reasons we think that a fair consideration by the Commissioners of all the information before them at the time of the August 2000 visits would have enabled them to make an honest and genuine assessment of the VAT due from the Foundation for all the periods under consideration.  The assessments for the periods 12/99 to 09/00 inclusive were therefore out of time.

Best Judgment

43.	The Foundation challenged the assessments made by Ms Arthurworry in November 2002 on the grounds that they had not been made to the best of the Commissioners’ judgment.  First, because Ms Arthurworry had not seen the 1994 letter she had wholly misunderstood the original method approved in that letter.  In particular, she had failed to perceive that the approved method was a combined method which did not require any apportionment of overheads to outside-the-scope activities; and she had failed to perceive that that method did not require any direct attributions of input tax to taxable and to exempt supplies.  She had adopted a standard method (in relation to the NTO sector recalculations) and this had not only been wrong but conceded as such in the subsequent review letter.  Second, it was said, Ms Arthurworry had failed to listen to the explanations given to her by the Foundation.

44.	It is correct that Ms Arthurworry had not seen the 1994 letter when she made the assessments.  She had, however, seen Mr Shilton’s letter of 24 November 2000 which states – “Your special method as agreed on 1 April 1994 is now classed as the standard method…”.  It is agreed now that that was wrong.  On the other hand the 1994 letter states unequivocally that input tax “directly attributable to outside-the-scope or non-business income must be excluded” and Ms Arthurworry’s assessments have done that.  Then the 1994 letter (as we have construed it) requires an apportionment of VAT on overheads to outside-the-scope activities as a separate exercise.  It has, of course, been a matter of debate whether this latter exercise should have been conducted; moreover, because Ms Authurworry did not put her mind to the terms of the 1994 letter, she did not address its proper construction and application to the circumstances of the Foundation. Nonetheless, when we address the question to what amount of tax is properly due from the Foundation, we are driven by our construction of the 1994 letter to determine it on the basis that there should in all accounting periods have been (I) a direct attribution of “directly attributable” tax on inputs to outside the scope activities and (II) a separate exercise of apportioning tax on overheads to outside-the-scope activities.  On that basis the tax properly due will be tolerably close to the amounts actually charged in the assessments.  Indeed, as far as we are aware, no alternative figures have been advanced for the Foundation.

45.	To the extent that Ms Arthurworry failed to apply the 1994 letter and excluded from the partial exclusion calculations input tax directly attributable to taxable and exempt supplies, her assessments were wrong.  It was not suggested that that error alone violates the best of judgment character of the assessments as a whole.  It does not effect the area in dispute here and in any event it can easily be cured by our reducing the assessments as necessary. (In fact it appears that, if anything, this particular error has operated in the Foundation’s favour.)

46.	For those reasons we are against the Foundation on the best of judgment issue.

47.	We allow the appeals as regards to assessments for the periods 12/99, 03/00, 06/00 and 09/00.  We dismiss the appeal in relation to the assessments for the subsequent periods.

48.	We were asked to defer any consideration of costs until the parties had had an opportunity to consider our decision.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED

LON/03/0009