Commissioners of Customs and Excise v Pegasus Birds Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Carnwath,Lord Justice Chadwick,Lord Justice Waller |
| Judgment Date | 27 July 2004 |
| Neutral Citation | [2004] EWCA Civ 1015 |
| Docket Number | Case No: C3/2003/2717 |
| Court | Court of Appeal (Civil Division) |
| Date | 27 July 2004 |
[2004] EWCA Civ 1015
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
Lord Justice Waller
Lord Justice Chadwick and
Lord Justice Carnwath
Case No: C3/2003/2717
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
Introduction
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.
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.
The proceedings so far – summary
On 8 th 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 1 st January 1993 and 24 th 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.
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 17 th 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.
Formal VAT assessments were raised and notified to Pegasus in April 1997. The assessments covered the ten accounting periods from 1 st January 1993 to 30 th June 1995 and totalled £658,388. The covering letter of 16 th 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.
A Notice of Appeal against the assessments was lodged by Mr Freeman (the accountant acting for Pegasus) dated 6 th 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 31 st 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 31 st March 1995 were out of time. (The latter issue has since been disposed of separately by this Court: [2000] STC 91.) On 27 th 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.
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.
On 7 th 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 21 st November 2003, dealing with consequential issues, including the form of order and costs. By the order entered on 29 th 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.
Grounds of appeal
Pegasus now appeals to this Court from the order of Patten J. The grounds of challenge, as summarised by Miss Sharpston are:
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
The term "best of their judgment" is derived from section 73(1) of the 1994 Act:
"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) .
Section 83 provides:
"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."
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) .
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