Pegasus Birds Ltd. v Customs and Excise

An assessment is made to the best of the Commissioners’ judgment where the officer makes an honest and genuine attempt to reach a reasoned assessment of VAT payable from the available material. Objective unreasonableness, error or failure to consider particular material does not by itself invalidate an assessment. An extreme error may, however, justify an inference that the officer was not doing their honest best.

The tribunal’s primary task is to determine the correct tax, with the burden on the taxpayer. Even a defective assessment need not be set aside automatically. The tribunal must decide whether the defect is so serious that justice requires discharge of the assessment, or whether justice can be achieved by correcting the amount.

The Commissioners assessed Pegasus Birds Ltd to £658,388 in VAT under section 73(1) of the Value Added Tax Act 1994. The assessment concerned undeclared sales of imported live birds and followed the director’s conviction for VAT offences.

After a 42-day hearing, the VAT Tribunal held that the assessments were wholly unreasonable and had not been made to the best of the Commissioners’ judgment. It set them aside, while provisionally estimating liability at about £27,000. Patten J allowed the Commissioners’ appeal, declared that the assessments had been properly made and remitted quantum to the same Tribunal.

The central issue in the Court of Appeal was whether objective unreasonableness or a failure fairly to consider relevant material was sufficient to invalidate an assessment, or whether the taxpayer had to establish the absence of an honest and genuine attempt to make a reasoned assessment.

1. Appeal dismissed except as to the costs before the Tribunal. Carnwath LJ gave the leading judgment. Chadwick and Waller LJJ agreed with the order. Patten J had applied the correct legal test and was entitled to declare that the assessments were made to the best of the Commissioners’ judgment.

2. The requirement in section 73(1) of the Value Added Tax Act 1994 is satisfied by an honest and genuine attempt to make a reasoned assessment of VAT payable from the material available. It does not impose a separate objective standard of reasonableness. The formulation in Rahman (No 2) [2002] EWCA Civ 1881 was binding. Earlier descriptions such as “wholly unreasonable” and references to Wednesbury principles must not be treated as independent tests.

3. An officer must approach the available material with an open mind. The officer may reject information after evaluating its credibility, particularly information supplied by a convicted fraudster. An assessment falling far outside reasonable bounds may support an evidential inference that the officer was not doing their honest best. Unreasonableness alone does not compel that conclusion.

4. The Tribunal found that the assessments were objectively unreasonable and that the officer had failed fairly to consider some material. It did not properly find that there had been no honest and genuine attempt to assess the tax. No allegation of bad faith had been properly advanced or put to the officer. The Commissioners had ample material for concluding that substantial evasion had occurred, although their estimate may have been greatly exaggerated.

5. The tribunal’s primary task is ordinarily to determine the correct amount of tax, with the burden resting on the taxpayer. A failure to satisfy the best-judgment requirement does not invariably nullify the entire assessment. The tribunal must consider the seriousness of the defect within the statutory scheme and decide whether justice requires discharge or can be achieved by correcting the amount.

6. The Tribunal’s observations that there was virtually no evidence of evasion before September 1994 were provisional and did not determine quantum. Patten J therefore properly remitted all assessment periods. His order awarding the Commissioners 80% of the earlier Tribunal costs was set aside. That costs question was remitted to the Tribunal for determination after the renewed quantum hearing.

1. Court of Appeal (Civil Division): By [2004] EWCA Civ 1015, dismissed the taxpayer’s appeal on the validity of the assessments but allowed it as to the costs before the Tribunal. Quantum and the Tribunal costs were to be determined by the same Tribunal.

2. High Court, Chancery Division: Patten J allowed the Commissioners’ appeal, declared that all assessments had been made to the best of their judgment, and remitted quantum to the same Tribunal. The taxpayer was ordered to pay the appeal costs and 80% of the Tribunal costs.

3. VAT Tribunal: After a 42-day hearing, held that the assessments were wholly unreasonable and not made to the best of the Commissioners’ judgment. It set them aside and gave only a provisional estimate of liability.

4. Earlier Court of Appeal proceedings: A limitation issue concerning some assessment periods had previously been disposed of in the same litigation at [2000] STC 91.