Customs and Excise v Pegasus Birds Ltd.

An assessment under section 73(1) of the Value Added Tax Act 1994 is made to best judgment where the Commissioners make a genuine and honest attempt to assess the tax due on the material available to them. The assessment need not be accurate, and an error in calculation, methodology or factual assessment does not by itself invalidate it.

The taxpayer must show more than that the assessment was excessive, wrong or objectively unreasonable. The assessment must be shown to have been arbitrary, capricious, vindictive, dishonest, or otherwise to have resulted from a failure to make an honest and genuine attempt. The Tribunal’s separate jurisdiction to determine quantum is important: disagreement with the assessment belongs ordinarily to the quantum appeal.

The Commissioners appealed against a decision of the VAT and Duties Tribunal, which had allowed Pegasus Birds Ltd’s appeal against assessments totalling £658,388 for ten VAT accounting periods between January 1993 and June 1995.

The assessments were based on estimated undeclared sales arising from alleged continental bird-importing trips. The Tribunal found the Commissioners’ methodology and assumptions excessive and concluded that the assessments were not made to best judgment. The central issues were whether the Tribunal had applied the correct legal test and, if so, whether its findings were supported by evidence.

1. Appeal allowed. The Tribunal’s determination that the assessments were not made to best judgment was set aside. The issue of quantum was remitted to a Tribunal.
2. Section 73(1) of the Value Added Tax Act 1994 applies where returns or records are absent, incomplete or incorrect. The Commissioners must exercise judgment on the information available. The statutory language does not guarantee accuracy, because the assessment process necessarily involves estimation.
3. Following Rahman v Customs and Excise Commissioners (No. 2) [2002] EWCA Civ 1881; [2003] STC 150, the controlling question is whether the Commissioners made a genuine and honest attempt to calculate the tax due. An assessment may be mistaken, excessive or based on defective methodology without ceasing to be an assessment to best judgment.
4. The Commissioners must fairly consider the material placed before them, but they need not accept every item of evidence or conduct exhaustive investigations. A conscious or irrational failure to give reasonable consideration to the available evidence may invalidate the assessment. Mere negligence, miscalculation, a different view of the facts, or an objectively unreasonable result is insufficient without more.
5. The Tribunal misdirected itself by inferring that the assessing officer had closed his mind to contrary material from the fact that the Tribunal disagreed with his assumptions about the number and value of trips, the allocation of purchases and the level of sales. The evidence supported, at most, a finding that the officer was wrong. It did not support a finding that he had failed to make an honest and genuine attempt.
6. The statutory appeal structure is compatible with proportionality and applicable European and Convention principles. The taxpayer may challenge the amount objectively on quantum, while the validity of the assessment is challenged only on the more limited best-judgment ground. The Tribunal should normally determine quantum first and should manage best-judgment challenges restrictively.

• High Court (Chancery Division): The Commissioners’ appeal was allowed on best judgment. The undecided quantum issue was remitted to a Tribunal.
• VAT and Duties Tribunal: The Tribunal’s decision released on 7 June 2002 allowed Pegasus’s appeal against the assessments.