McNulty Offshore Services Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 04 April 1997 |
| Date | 04 April 1997 |
| Court | Value Added Tax Tribunal |
VAT Tribunal
(MAN/96/119) No. 14,824.
The following cases were referred to in the decision:
Abbey Life Japan Trust VAT(LON/91/1889) No. 11,205; [1995] BVC 503
British United Shoe Machinery Co Ltd VAT(1977) VATTR 187; (1977) 1 BVC 1062
C & E Commrs v Arnold VAT[1996] BVC 464
East End Dwellings Co Ltd v Finsbury Borough CouncilELR[1952] AC 109
Genius Holdings BV v Staatssecretaris van Financiën (Case 342/87)[1991] BVC 52
IR Commrs v Aken TAX[1990] BTC 352
Lamdec Ltd VAT(LON/90/1018) No. 6078; [1991] BVC 721
McGinty t/a Alton Transport VAT(LON/91/1880) No. 13,463; [1996] BVC 2412
Royal College of Obstetricians and Gynaecologists VAT(MAN/96/967) No. 14,558; [1997] BVC 2083
Sandell VAT(LON/91/1000) No. 9665; [1993] BVC 788
Securicor Granley Systems Ltd VAT(LON/89/695) No. 4575; (1990) 5 BVC 580
Tourick (RM) & Co VAT(LON/91/1938) No. 7712; [1992] BVC 825
Assessment - Zero-rated supplies incorrectly standard-rated - Recipient deducted "VAT" as input tax - Subsequent invalid output tax adjustment of VAT account by appellant - Assessment by Customs to correct account - Appeal settled by agreement under s. 85, Value Added Tax Act 1994 - Agreement required issue by appellant of credit note giving value - Agreement not adhered to by appellant - Second assessment issued by Customs - Effect of agreement - Whether assessment valid - Value Added Tax Act 1994, s. 73, 80 and 85 and Sch. 11, para. 2(10); Value Added Tax Regulations 1995 (SI 1995/2518), reg. 24, 32, 35 and 38.
The issue was whether the commissioners could issue a further assessment after the appellant had failed to comply with the terms of an agreement under s. 85, Value Added Tax Act 1994 in settlement of an appeal against an earlier assessment.
The appellant carried out fabrication work and repairs to oil rigs used in the North Sea by oil exploration companies. In the course of so doing it standard-rated certain supplies which should have been zero-rated (item 1 of Grp. 7 of Sch. 8 to Value Added Tax Act 1994). In June 1992 the error was discovered and the appellant purported to adjust its 06/92 and 09/92 returns to take account of the fact that its VAT account was by then in credit with the commissioners.
On 20 November 1992 the commissioners assessed for tax, interest and a penalty against which an appeal was entered. However, they consented to a hardship application so that the appellant retained the VAT in dispute. They then entered into a s. 85 agreement whereby the appellant accepted the assessment, but agreed to issue a credit note to C, the latter having claimed and been paid the input tax.
The appellant duly issued the credit note, but declined to give effect to it on the ground that C owed the appellant money as a result of work previously carried out. C promptly refused to adjust its VAT account while the appellant was unwilling to give credit for the moneys due under the credit note. The commissioners, whose powers were limited to refunding incorrectly charged VAT to the person who had charged it and not the recipient of a supply, had no alternative but to issue a second assessment.
The appellant contended that:
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(2) the effect of the s. 85 agreement was to discharge the first assessment;
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(3) the rules for adjusting a taxpayer's VAT account did not apply to the agreement, since they applied to "tax" and the disputed amount was never tax;
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(4) Customs could and should require an adjustment and they had done so in the terms set out in the s. 85 agreement;
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(5) it had complied fully with the requirements of the agreement and the fact that C rendered it ineffective by declining to adjust its VAT account was not its fault; and
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(6) Customs could not then reopen the matter by issuing a further assessment and, in any event, it was out of time.
The commissioners contended that:
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(2) the effect of the agreement was to uphold the first assessment without variation;
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(3) it was nevertheless accepted that VAT had been overcharged and this had to be remedied by the issue of a credit note and effect had to be given to it;
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(4) this could only be done through the statutory machinery for refunding overpaid tax to the appellant, C having recovered the VAT in question; and
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(5) as the appellant had not issued a valid credit note and thereby complied with the terms of the agreement they were entitled to make the second assessment for the amount of the credit note and this was in time.
Held, dismissing the company's appeal:
1. Although the appellant treated as standard-rated certain supplies which were later found to be zero-rated, it had retained the VAT and Customs were entitled to issue the first assessment.
2. The agreement provided for a credit note to be issued and such a note, valid in form, had been issued.
3. The rules for correcting errors applied even where VAT had been incorrectly charged rather than simply miscalculated.
4. However, these could not be complied with except by the issue of a proper credit note and the giving of value, in this case to C. Such a credit note had to represent a genuine entitlement to a refund or some type of offset.
5. The appellant never intended to refund to C the sum for which the note was issued or to offset it either against the value of future supplies to be made by C or currently due from it. Hence the credit note was invalid.
6. The appellant had failed to comply with the terms of the agreement so that "there had been paid … an amount which ought not to have been paid … or which would not been so paid … had the facts been known", thus entitling Customs to issue the second assessment, which was issued timeously.
[The tribunal set out the facts summarised above and continued as follows.]
62. Mr Soares' submissions took the following form. He invited us to discharge the second assessment, first because res judicata or issue estoppel applies within its terms by virtue of the agreement, the effect of which is to prevent the agreement being sustained; secondly, because the second assessment does not relate to a situation where there has been paid or credited to any person an amount:
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(a) as being a repayment or refund of VAT;
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(b) which ought not to have been so paid or credited; or
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(c) which would not have been so paid or credited had the facts been known, or been as they later turned out to be (see s. 73(2) of theValue Added Tax Act 1994 ["the 1994 Act"]);
and, thirdly, because in reality the commissioners allege that there has been a breach of the agreement which enables them to recover the penalty dealt with under the agreement. Consequently, he submitted that if the commissioners consider McNulty is in breach of the agreement they ought to bring an action for breach of contract seeking damages, rescission or specific performance. Fourthly, Mr Soares invited us to discharge the second assessment because, if the commissioners are alleging that McNulty is in breach of the agreement, and that enables them to assess for the penalty (which he maintained was dealt with under the agreement), then the assessment is out of time.
63. Of the first of his submissions, that of res judicataor issue estoppel, Mr Soares observed that by s. 85(1) of the 1994 Act where a person gives notice of appeal and before the appeal is determined by a tribunal, the commissioners and the appellant come to an agreement under the terms of which the decision under appeal is to be treated as:
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(a) upheld without variation; or
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(b) varied in a particular manner; or
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(c) as discharged or cancelled,
the like consequences shall ensue for all purposes as would have ensued if at the time when the agreement was come to, a tribunal had determined the appeal in accordance with the terms of the agreement (including any terms as to costs).
64. Mr Soares then made the following submissions about the nature of an agreement under s. 85 of the 1994 Act (hereinafter referred to as "a s. 85 agreement"):
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(2) that the section is a deeming provision, and thus one must take into account all necessary implications which arise from its deeming aspect although one may not be restricted to taking into account only such implications, East End Dwellings Co Ltd v Finsbury Borough CouncilELR[1952] AC 109 at p. 132.
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(3) that as "the like consequences shall ensue for all purposes as if the tribunal had determined the appeal", one must construe the agreement as if it were a tribunal decision, even though it is not in fact. (Mr Soares offered the following example of how the matter should be dealt with. It is like a clause often found in settlements providing for the intestacy rules to apply as if X had died, although he has not in fact done so.) A similar, but narrower, provision is to be found in s. 54 of the Taxes Management Act 1970. Such agreements are binding and cannot be left unenforced, IR Commrs v Aken TAX[1990] BTC 352 at pp. 356 and 362. The result of the agreement is that the parties became liable to comply with their obligations thereunder,Abbey Life Japan Trust VAT(LON/91/1889) No. 11,205; [1995] BVC 503
65. In particular, he submitted, it is not possible for B, where A is in breach of a deemed tribunal decision (both A and B being bound by it), to refuse to comply with his obligations under the decision. Thus, if the tribunal decides that A must pay B £100 and B must vacate the assessment, they must both comply with their obligations. If A pays the £100 but B does not discharge the assessment, A can take action to enforce the discharge. A cannot sue for the return of the £100.
66. The critical restriction in the parties' remedies results from the effective incorporation into the contract of the words "the like consequences shall ensue for all purposes as would have ensued … if a tribunal had determined the appeal in accordance with the terms of the agreement".
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(3) That the agreement is treated as if it...
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