DCM (Optical Holdings) Ltd v Commissioners for HM Revenue and Customs
| Jurisdiction | Scotland |
| Judge | Lord Hodge,Lord Reed,Lord Sales,Lord Hamblen,Lord Stephens |
| Judgment Date | 12 October 2022 |
| Neutral Citation | [2022] UKSC 26 |
| Court | Supreme Court (Scotland) |
[2022] UKSC 26
Lord Reed, President
Lord Hodge, Deputy President
Lord Sales
Lord Hamblen
Lord Stephens
Appellant
Julian Ghosh KC
David Welsh
(Instructed by Harper Macleod LLP (Glasgow))
Respondent
David Thomson KC
Ross Anderson
(Instructed by Office of the Advocate General for Scotland)
Heard on 8 February 2022
Lord Hodge ( with whom Lord Reed, Lord Sales, Lord Hamblen and Lord Stephens agree):
This appeal raises two questions relating to the powers of HM Revenue and Customs Commissioners and formerly HM Customs and Excise Commissioners in relation to the administration of Value Added Tax. For simplicity I refer to both as “HMRC”. The first question is whether HMRC were, in the circumstances of this case, subject to a statutory time bar under section 73(6) of the Value Added Tax Act 1994 (“ VATA”) which invalidated their assessment of the amount of output tax for which the taxable person was accountable. The second and more significant question is whether HMRC have power to refuse to accept a taxable person's self-assessment claim for payment of a VAT credit while they verify the claim and to decide at a later date that they are only prepared to pay a lower amount than it claimed in the self-assessment.
The appeal proceeds on a point of law from the First-tier Tribunal. It comes to this court with the permission of the Inner House of the Court of Session in Scotland granted on 11 December 2020.
As is well-known, VAT operates in large measure by self-assessment. The trader submits periodic self-assessment returns to HMRC, which usually involve prescribed accounting periods of one month or three months, stating in relation to the relevant period (a) its calculation of the output tax due on its taxable supplies and (if the taxable person is obtaining supplies into Northern Ireland) acquisitions from EU member states, (b) the tax reclaimed on purchases and other inputs for which it claims credit, and (c) its mathematical calculation of the difference between (a) and (b), giving rise to a net sum due to either HMRC or the trader. The form also discloses the tax-exclusive value of outputs and inputs and (if the taxable person is supplying from or acquiring goods and services into Northern Ireland) of supplies to and acquisitions of goods and related services from EU member states for the period. The two questions in this appeal are concerned with the administration by HMRC of VAT in the context of this system of self-assessment.
It is sufficient to set out briefly the factual background which I have drawn from the findings of fact by the First-tier Tribunal.
The taxpayer is DCM (Optical Holdings) Ltd (“DCM”) which has carried on principally an optical business under the name of Optical Express, specialising in the sale of dispensed spectacles and the provision of refractive eye surgery. DCM is registered in a VAT group with ten corporate bodies. The group has accounted for VAT under a single registration number. DCM acts as the representative member of the VAT group. It is a partially exempt business for the purposes of VAT as it has both taxable supplies and exempt supplies. The taxable supplies in issue in the appeal related to the supply of frames, lenses, accessories, EC despatches of laser equipment, cosmetic dental kits and “Careplan”, which involved the provision of after-sale care of spectacles. The exempt supplies were of dispensing services, eye tests and laser surgery. Because DCM made both taxable and exempt supplies to its customers when dispensing and selling spectacles its VAT liability and its entitlement to recover input tax was calculated by reference to a partial exemption method authorised by section 19(4) of VATA which provides:
“Where a supply of any goods or services is not the only matter to which a consideration in money relates, the supply shall be deemed to be for such part of the consideration as is properly attributable to it…”
HMRC provided guidance on the proper attribution or apportionment of the consideration paid by the customer for the two distinct supplies. This guidance was set out in HMRC's VAT Information Sheet 08/99: “Opticians: Apportionment of charges for supplies of spectacles and dispensing”. The guidance was not legally binding, but counsel has accepted throughout the proceedings that it binds HMRC. It set out two methods of apportionment which opticians could adopt. The first was Full Cost Apportionment (“FCA”), which is described in Annex A of the Information Sheet; the other was Separately Disclosed Charges (“SDC”), which involved the optician making and disclosing to its patients at the time of supply the separate charges for the taxable and exempt supplies and thus the VAT charged on the taxable supplies. HMRC viewed SDC as involving a relaxation of the strict statutory position. If the requirements of SDC were not met, the optician had to use FCA.
DCM and HMRC have been in dispute for several years since 1998 over questions of both output tax and input tax, but the six appeals which the First-tier Tribunal determined related to questions concerning the accounting for output tax. This appeal is accordingly concerned only with two questions relating to output tax. The appeals before the First-tier Tribunal were concerned with (a) a disputed assessment for under-declared output VAT which was issued to DCM on 20 October 2005 for the prescribed accounting periods starting with October 2002 and ending in April 2005, which gives rise to the time bar challenge, and (b) the disputed decisions between 2008 and 2013 by which HMRC reduced the VAT credits which DCM had claimed, giving rise to the vires challenge.
Between 1998 and 2001 DCM and HMRC negotiated about agreeing a method of apportioning the consideration for dispensed spectacles in accordance with section 19(4) of VATA. After HMRC raised a “best judgment” assessment in April 2001, DCM appealed that assessment to the First-tier Tribunal. Shortly before the hearing of the appeal, HMRC and DCM reached a settlement set out in HMRC's letter of 3 June 2003 in which it was agreed that (a) three notices of assessment covering the VAT periods April 1998 to January 2001 would be recalculated on the basis that 36% of the consideration received for the dispensed spectacles related to a taxable supply and 64% to an exempt supply, and (b) for the tax periods between April 2001 and April 2003 DCM would voluntarily disclose any output tax under-declared on the same basis. In their letter HMRC made it clear that the 64% figure related only to the periods from April 1998 to April 2003 and that for the future “a fairer and more reasonable method to calculate the dispensing costs for the optometrist” was expected. HMRC stated that if DCM intended to use the SDC method it should provide to them a copy of the receipts issued to its customers.
DCM withdrew its appeal. Thereafter, contrary to the undertaking given in the 2003 settlement, no voluntary disclosures were ever made by or on behalf of DCM in relation to output tax. No explanation for that omission has ever been offered. HMRC visited DCM on 27 October 2003 and disagreed with DCM's assertion that it was operating the SDC method because they had seen a receipt which did not identify which supplies were subject to VAT and which were exempt. On 25 November 2003, PwC wrote to HMRC to seek approval of DCM's sales receipt and order confirmation, giving the impression that they were enclosing copies of actual historical receipts whereas it became clear in the course of evidence before the First-tier Tribunal that the submitted documents were merely proposed samples. Officers from HMRC met DCM on 29 January 2004 to discuss the use of the SDC method. The meeting ended in deadlock because HMRC said that DCM had to have FCA in place from 1 May 2003 until SDC could be agreed. DCM's position was that it had a method of SDC in place and that HMRC were proposing only minor changes to it. In further correspondence PwC asserted that DCM had had SDC in place since May 2003, whereas evidence before the First-tier Tribunal revealed that DCM's receipts did not disclose the dispensing charge until February 2004. No actual receipts were produced to HMRC until the appeal before the First-tier Tribunal.
At a visit to DCM's premises on 31 August and 1 September 2005 HMRC Officers Boyle and O'Pray met with DCM and for the first time obtained access to DCM's VAT account. That account contained detailed calculations of input tax and output tax. It disclosed not only that DCM had not adopted the method which PwC had represented they had for the apportionment of residual input tax between taxable and exempt supplies (with which this appeal is not directly concerned) but also that DCM had not adopted an acceptable SDC methodology in relation to output tax. DCM had applied differing percentages in different quarters as representing the proportion of the sale of dispensed spectacles that was treated as taxable. The HMRC officers told DCM that as there had been no approval for its method of SDC, DCM would have to recalculate VAT for the periods July 2003 to January 2004. HMRC, observing that the 2003 settlement had not been honoured, decided on the following day to issue a best judgment assessment applying the 36:64 apportionment to the periods October 2002 to January 2004. They also recalculated the input tax. HMRC issued that assessment on 20 October 2005. DCM challenged the assessment. By letter dated 25 January 2006 HMRC informed DCM of their decision to maintain the disputed assessment for under-declared VAT. The output element of the assessment was the subject matter of appeal 1 before...
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