20882

VAT – ASSESSMENT – 12 month time limit – when did evidence of facts to justify the assessment come to the Respondents’ knowledge – satisfied that the final piece of the puzzle was when the Officer received details of the other supplies on 23 October 2006 – assessment made within 12 months of when the Officer knew of the facts to justify the assessment – Appeal dismissed.

MANCHESTER TRIBUNAL CENTRE

KIDZ R US CHILDREN CENTRE LIMITED Appellant

- and -

HER MAJESTY’S REVENUE and CUSTOMSRespondents

Tribunal: MICHAEL TILDESLEY OBE (Chairman)

MARJORIE KOSTICK FCA CTA (Member)

Sitting in public in Birmingham on 5 September 2008

Doug Hildred of Sharman Fielding, Chartered Accountant, for the Appellant

Richard Chapman counsel instructed by the Solicitor of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

1

DECISION

The Appeal

  1. The Appellant was appealing against an assessment for VAT in the sum of £95,412 plus interest for the periods 02/04 to 11/04 (inclusive) and 02/06. The disputed amount was £94,740 since the Appellant agreed with the assessment of £672 for quarter 02/06.
  2. The amended witness statement of Mrs Williams, the assessing officer, was admitted in evidence. We refused an application from the Respondents for Mrs Williams to give evidence adding to her statement. The application took the Appellant by surprise. We decided that the Respondents had more than sufficient time to have its case ready for the hearing without the need to resort to applications on the day. We received a bundle of documents in evidence.

The Dispute

  1. The assessment related to the recovery of VAT mistakenly claimed by the Appellant as input tax on the purchase and refurbishment of a building. The dispute concerned whether the assessment had been made within the relevant statutory time limits. The specific issue in this Appeal was whether the assessment was made within one year after the facts to justify the assessment came to the knowledge of the Respondents. There was no argument on the merits and the quantum of the assessment.
  2. The issues in dispute were as follows:

(1)The date of making the assessment: 26 February 2007 (the Appellant); 2 February 2007 (the Respondents).

(2)The date when evidence of facts came to the Commissioners’ knowledge to justify the making of an assessment: 9 May or 4 November 2005 (the Appellant); 23 October 2006 (the Respondents).

The Law

  1. Section 73(6) of the VAT Act 1994 sets out the time limits in which an assessment must be made:

“An assessment under subsection (1), (2) or (3) above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided for in section 77 and shall not be made after the later of the following -

a)Two years after the end of 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,

But (subject to that section) where further such evidence comes to the Commissioners’ knowledge after the making of an assessment under subsection (1), (2) or (3) above, another assessment may be made under that subsection, in addition to any earlier assessment”.

The Facts

  1. The Appellant was registered for VAT on 17 June 2003.
  2. On 10 December 2003 the Respondents acknowledged the Appellant’s notification of an option to tax a property at 394 Gipsy Lane Leicester with effect from 26 June 2003.
  3. The Appellant purchased the property on 20 January 2004 at a cost of £310,000 plus £54,250 VAT.
  4. On 27 January 2004 the Appellant granted a lease for a term of 20 years of the property to Mr and Mrs Patel trading in partnership as Sunshine Nurseries. Mr and Mrs Patel owned 99 per cent of the issued share capital of the Appellant.
  5. The Gypsy Lane property was extensively renovated during 2004, and converted into nursery premises, which were occupied by Sunshine Nurseries in February 2005, accepting children for day nursery education.
  6. In the 02/04 VAT return the Appellant reclaimed VAT of £54,250 arising from the purchase of the Gypsy Lane property. In VAT returns 05/04, 08/04 and 11/04 the Appellant reclaimed a further £40,950 in VAT incurred on the renovation costs.
  7. On 8 February 2005, Mrs King conducted a routine inspection of the Appellant’s VAT records. Mrs King concluded that the Appellant’s grant of a lease to Mr and Mrs Patel trading as Sunshine Nurseries was caught by the anti-avoidance measure in paragraph 2(3AA) schedule 10 of the VAT Act. This had the effect of disallowing the Appellant’s option to tax, which in turn reclassified the supply of the lease to Sunshine Nurseries as an exempt supply.
  8. On 9 May 2005 Mrs King communicated her decision to Mr and Mrs Patel stating that

“5.1 The effect of both of my decisions is the same, namely that the grant of the lease in respect of 394 Gipsy Lane by the Appellant to Mr and Mrs Patel …… falls to be an exempt supply under Group 1 of Schedule 9, and that the Appellant is not entitled to credit for input tax on the purchase and subsequent refurbishment of the property.

5.2 If my understanding of the Appellant’s activities is correct at the time the Appellant applied for VAT registration its only intended supplies was the rent chargeable in respect of the lease of the Gipsy Lane property. As a result of the decisions given in this letter, any rent chargeable under the lease is an exempt, not a taxable supply. It follows that the Appellant was never in a position to make any taxable supplies, and therefore was not eligible to apply for VAT registration.

5.3 ………… If your name is deleted from the register …. Under the provisions of VAT Act 1994 section 73 you shall also be called upon to repay any amounts which you have claimed and be paid as deductible input tax”.

  1. On 27 May 2005 the Appellant requested a reconsideration of Mrs King’s decision. On 8 June 2005 the Appellant’s accountants elaborated on the grounds for reconsideration and Appeal stating amongst other things:

“This Appeal is specifically against the ruling that the Appellant is not in a position to make taxable supplies and your subsequent intention to delete its name from the register.

We would advise you that the Appellant purchased 394 Gipsy Lane, Leicester in January 2004, and has spent a long time refurbishing the property. The building is now in use, but please note that the Appellant is occupying part of the building for the purpose of making taxable supplies, and only part is occupied by Sunshine Nurseries.

Therefore we request the Commissioners to reconsider their decision of 9 May 2005 and agree that the Appellant is entitled to remain VAT registered with a measure of input tax recovery due to its own activities and also accept that the option to tax on the property is appropriate because of the above circumstances and the potential letting of part of the building to a third party”.

  1. On 18 July 2005 the Appellant’s accountants wrote a further letter informing the Respondents that a Sure Start children’s centre was being built adjacent to the property which would effectively shut down the nursery business operated by Sunshine Nurseries. The accountants then stated that

“The current status of the building is that only part of one floor, out of four floors, is presently being used for nursery education. Therefore less than 25 per cent of the property is being used for an exempt purpose and that is the maximum level that will be achieved, because due to the above developments exempt activity will shortly cease and the building will then be used solely for taxable purposes. We request that you take this additional information into account as the use of the building is now completely different to that which was envisaged by your ruling of 9 May 2005 and whilst its use for non-eligible purposes is now very low, it will shortly finish altogether”.

  1. On 13 October 2005 the Appellant’s accountants pointed out to the Respondents that three months had elapsed without a response to their letter of 18 July 2005.
  2. On 19 October 2005 Mr Crombleholme of the Respondents’ Central Region Appeals Team sought clarification of which decisions the Appellant was seeking reconsideration. Mr Crombleholme proposed a site visit by the local audit service to determine whether there was a valid option to tax, and if there was, whether it should be applied to the whole or part of the premises. Mr Crombleholme was of the view that the accountants’ letter of 18 July 2005 contained new information and should be evaluated in this context.
  3. On 4 November 2005 Mr Crombleholme upheld Mrs King’s decision that the Appellant’s option to tax did not apply to the grant of the lease to Sunshine Nurseries. Mr Crombleholme considered the accountants’ letter of 8 June 2005 as a statement of further intentions which were not notified at the time of registration, and may form the basis of a valid current day registration or prior registration application but not part of the application for registration made on 17 June 2003. Mr Crombleholme repeated his proposal of a site visit to ascertain the present position in respect of Gipsy Lane property. Mr Crombleholme concluded by stating that this was a decision that could appealed to the VAT & Duties Tribunal.
  4. On 24 November 2005 the Appellant’s accountants emailed Mrs King stating that they hoped that Mr Crombleholme would have taken into account the change in intention and the different use of the building in his reconsideration rather than being treated as a separate exercise. The Appellant was unsure of its position until it knew whether its registration for VAT based on the new circumstances would be granted. The accountants, therefore, considered that the best way forward was for the parties to meet at the Gipsy Lane property.
  5. On 3 February 2006 Mrs Williams who had taken over the case from Mrs King agreed to a site inspection on 17 February 2006. At that meeting Mrs Williams established that the Appellant’s original intention for the property was to rent it out to Sunshine Nurseries but the opening of the City Council nursery next door made it virtually impossible for the partnership to run a viable business. Further at the time of the disallowance of the option to tax, the Appellant had only incurred input tax that was attributable to the supply of the exempt lease to the partnership. Mrs Williams concluded the meeting by undertaking to approach the Respondents’ policy team for guidance but in her view the current VAT registration would probably be cancelled.
  6. Following the meeting, the Appellant’s accountants wrote a letter to Mrs Williams on 3 March 2006 to clarify the Appellant’s position and provide additional information. The following extracts are taken from the letter:

“As you are aware, there have been a number of alterations to the company’s plans over the past year, changes have been made and continue to be made. This includes particularly the Appellant’s always held intention to make taxable supplies, other than just renting out an opted property, and the change in circumstances forced upon it has merely accelerated this intention to diversify.

The Appellant’s VAT registration was granted in respect of intended taxable supplies of property. An option to tax was accepted, although this was subject to the proviso that it may not apply in certain circumstances, and your ruling was then made regarding the lease to Sunshine Nurseries.

Our preferred interpretation of the Sunshine’s Nurseries’ partial occupation of 394 Gipsy Lane is that the partnership did not take up all their rights under the lease. However, if we follow your interpretation of the position Sunshine Nurseries have granted the Appellant the right to occupy the first and second floors, and this would be a sub lease and an exempt supply.

As a consequence of this, as the Appellant has opted to tax the building, it is making taxable supplies of the rental of land and facilities when contracting with third parties but on the inputs side the associated supply is exempt. Accordingly whilst the company initially incurred input tax associated with the property, this is exempt input tax and the Capital Goods scheme prevents its recovery.

By this point we are trying to answer your concern that you could not see how making taxable supplies could justify the recovery of the property and renovation input tax. As you can see in the above circumstances it does not, as there is no directly attributable input tax to these supplies.

However, the fact remains that the Appellant is making taxable supplies, it always had the intention to make such supplies and will continue to do so.

It follows that the Appellant’s VAT registration is appropriate and it always has been, and the Appellant wishes to ensure that it continues to be registered”.

  1. On 8 May 2006 the Appellant’s accountants wrote another letter to Mrs Williams stating that it was incorrect to assume that the Appellant’s only intended taxable supply at the time of applying for VAT registration was the rental to the partnership. The other trading had always been planned and the Appellant did have an entitlement to be registered at the time of its application.
  2. On 17 August 2006 Mrs Williams advised the Appellant’s accountants that she was still awaiting a response from the Policy Team. In addition she requested from the Appellant details of all supplies made by it since its creation to enable the Respondents to reach a complete conclusion. The Appellant provided the requested information on 23 October 2006.
  3. On 2 February 2007 Mrs Williams sent a letter informing the Appellant’s accountants of the following:

“First I would draw your attention to Mrs King’s letter of 5 May 2005 in which she informed you the option to tax on the supply from your client to the nursery would disapply. We discussed this at our subsequent meeting with yourselves and your client and it was agreed there was no reason to dispute this decision. However this left your client in the position where no taxable supplies were being made and so the registration should be cancelled. You subsequently stated your client was making other taxable supplies and had always intended to do so. The Respondents have accepted your statement and assuming these supplies fall under the scope of VAT ……. have agreed to allow the registration to continue.

This then brings us to the subject of claims of input tax. As you accept your client was making supplies of exempt rent, they then become subject to the partial exemption rules ……. Also, both the building itself and the refurbishment are subject to the Capital Goods scheme

…… I enclose a schedule of the adjustments I shall be making based on these decisions and your client will shortly receive an official assessment of these amounts.

….. Should you have any queries regarding this assessment, please do not hesitate to contact me”

  1. The schedule enclosed with Mrs Williams letter dated 2 February 2007 set out the taxable and total turnover, taxable turnover expressed as a percentage of total turnover, input tax recoverable, under declaration and over declaration of tax, and any adjustment for the capital goods scheme for each VAT quarter from 11/03 to 05/05 in respect of the Appellant.
  2. Mrs Williams sent additional letters to the Appellant dated 2 and 7 February 2007 which adjusted the Appellant’s VAT returns for quarters 02/05, 05/05, 08/05, 11/05 and 08/06.
  3. The Respondents’ VAT Audit Report for the Appellant contained the following entry dated 14 February 2007 added by D Minshall:

“Having now discussed case with Geoff Bell and asked him to check calculations, letter and schedule. He agreed figures. MP inhibit set due to complexity of liability and no reason to believe trader intended to avoid tax. Calculation date set as when they provided us with final figures. Forwarded for countersignature”

  1. The notice of assessment (VAT 655) in the sum of £95,412 plus interest of £14,639.48 for periods 02/04, 05/04, 08/04, 11/04 and 02/06 was dated 26 February 2007. The notice was accompanied by a letter from Mrs Williams which stated that this notice replaced the assessment issued on 2 February 2007 which contained a transposition error.
  2. In a letter dated 2 July 2007 Mrs Williams explained that the assessment was subject to the Capital Goods scheme. Further it was not possible to ensure a fair apportionment under the scheme until the exact amounts of the other supplies made by the Appellant were known, which was not until 23 October 2006.

Reasons for Our Decision

First Dispute: Date when Assessment Made

  1. Section 73(1) of the VAT Act 1994 distinguishes between the making of an assessment and its notification to a taxpayer. The time limits specified in section 73(6) run from the making of an assessment not the date of its notification.
  2. There is no statutory procedure for determining when an assessment is made, which means that it is a matter to be resolved by the Respondents’ internal processes. Given this background Jonathan Parker LJ in Courts PLC v Customs and Excise Commissioners [2005] STC 27 concluded that it was not possible to arrive at a formula which would determine in every case whether or not an assessment has been made. The precise date for making an assessment may depend upon the particular facts of the case.
  3. Lawrence Collins J observed in Cheesman v Customs and Excise Commissioners [2000] STC 1119 observed that

“Assessment of VAT is an important step, and it is unsatisfactory that the process is not transparent, and not defined by legislation or even by clear administrative practice”.