Revenue & Customs v BUPA Purchasing Ltd & Ors

An assessment under section 73(1) of the Value Added Tax Act 1994 determines the net amount of VAT due. Its input-tax and output-tax components are not separate statutory assessments, and the public-law reasons supplied for the assessment do not become unalterable parts of it.

Where the Commissioners reduce an assessment, they may revise its component calculation. They may offset previously unaccounted output tax against additional allowable input tax arising from the same transactions or series of transactions, even though the period for a supplementary assessment has expired. Public-law fairness, proper notice and a sufficient transactional connection remain safeguards. On an appeal, the tribunal may direct an increase under section 84(5) where the assessed net VAT is less than the correct amount; that power is not confined to computational errors.

The respondents used a group-exit scheme intended to obtain input-tax recovery while limiting output tax on onward supplies within the BUPA group. The Commissioners issued VAT assessments for sixteen monthly periods between April 1995 and July 1996. After the time for further assessments had expired, a revised legal analysis following [1998] STC 725 showed that the assessments required changes to both input-tax and output-tax components.

The VAT tribunal dismissed the respondents’ appeals. It held that the assessments had been made to the Commissioners’ best judgment and increased six assessments under section 84(5). Park J, in the Chancery Division, held that fresh assessments were required and that the tribunal could not increase them: [2005] EWHC 2117 (Ch); [2006] STC 388. The central issue was whether the Commissioners could change the legal and computational basis of an existing assessment after the statutory time limits, and whether the tribunal could then increase its amount.

1. Appeal allowed unanimously. Lady Justice Arden, with whom May and Auld LJJ agreed, held that the assessments remained valid and that the tribunal could increase them where the correct net VAT exceeded the amount assessed.

2. Under section 73(1) of the Value Added Tax Act 1994, an assessment is of the net amount of VAT due. Input tax and output tax are legally significant components, but neither is a separate assessment. The Commissioners’ obligation to provide reasons is a public-law obligation. Those reasons therefore do not form an immutable statutory element of the assessment.

3. Section 73(9) necessarily permits the Commissioners, when reducing the net amount assessed, to alter the input-tax or output-tax calculation producing that amount. The best-judgment requirement also implies a power to take account of an offsetting component error where the change concerns the same transactions or series of transactions. The Commissioners could not themselves increase the assessed net amount after the relevant time limit, but the time bar did not prohibit the permitted adjustment of components.

4. The contrary ruling in Ridgeon’s Bulk Ltd v Customs & Excise Commissioners [1994] STC 427 was overruled. It wrongly proceeded on the basis that input tax and output tax were separately assessed.

5. Section 84(5) was not confined to computational mistakes. Where an appeal establishes that the amount in an assessment is less than the VAT properly due, the tribunal may specify the correct higher amount. The tribunal’s power is limited by the amount properly due and by the appellate process, not by a further assessment time limit.

6. On the facts, the inclusion of items relating to different accounting periods was permissible because they concerned the same group-exit scheme and thus the same series of transactions. Any alteration remains subject to public-law fairness, including proper notice and protection against an abusive, irrational or wholly unrelated replacement assessment.

• Court of Appeal (Civil Division): allowed the Commissioners’ appeal and reversed Park J’s conclusion that fresh assessments were required: [2007] EWCA Civ 542.
• High Court (Chancery Division): Park J held that the revised basis required fresh assessments and that the tribunal could not increase the assessments: [2005] EWHC 2117 (Ch); [2006] STC 388.
• VAT tribunal: dismissed the taxpayers’ appeals, upheld the assessments as made to the Commissioners’ best judgment, and increased six assessments under section 84(5).
• High Court (Chancery Division): an earlier stage determined that output tax was recoverable in relation to the scheme: [2003] STC 1203.