Revenue and Customs v Dunwood Travel Ltd.

Under the Tour Operators’ Margin Scheme, the year-end calculation determines the true VAT liability for the preceding financial year. The liability arises in the first prescribed accounting period ending after that financial year. It is not an adjustment or recalculation of the provisional quarterly liabilities.

For limitation purposes, the relevant prescribed accounting period is therefore the period in which the year-end calculation ought to have been included. An assessment remains within time where it is made within three years after that period, even though the calculation gives credit for VAT paid during earlier quarters. The tax authority need not recalculate the earlier provisional figures before making the year-end assessment.

HM Revenue and Customs assessed Dunwood Travel Ltd for VAT under the Tour Operators’ Margin Scheme. The assessment, issued on 24 June 2004, related to the period 06/01 and included the year-end calculation for the financial year ending 31 March 2001.

The VAT Tribunal allowed Dunwood’s appeal. It held that the assessment was in substance an assessment of the four preceding quarterly periods and was barred by the three-year limitation in section 77(1)(a) of the Value Added Tax Act 1994. HMRC appealed. The principal issues were whether the assessment concerned the period 06/01 or the preceding quarters, and whether the provisional VAT figures had to be recalculated before being deducted from the year-end liability.

1. Appeal allowed. The Tribunal’s decision was set aside. The assessment dated 24 June 2004 for the period 06/01 stood.
2. The structure of the Tour Operators’ Margin Scheme distinguishes between provisional quarterly amounts and the final year-end liability. Under TL5 paragraph 1, the value of the relevant supplies is determined by the year-end calculation. Under TL5 paragraph 3, provisional amounts are accounted for in the quarters in which supplies are made. Under paragraph 4, the difference between the final VAT due and VAT already paid on provisional values is adjusted on the return for the first prescribed accounting period ending after the financial year.
3. The year-end calculation therefore produces the final liability. Earlier quarterly payments are payments on account and remain intact. The later calculation merely gives credit for those payments; it does not recalculate the earlier prescribed accounting periods.
4. For section 77(1)(a) of the Value Added Tax Act 1994, the prescribed accounting period concerned was 06/01. Dunwood’s return for that period was incorrect because it contained no figure based on the required year-end calculation. The assessment was therefore not time-barred.
5. There was no requirement to recalculate the provisional quarterly figures using the correct treatment of coach travel and the correct quarterly methodology. TL5 paragraph 4 refers to the amount of VAT actually paid on the provisional value, not the amount that would have been payable had the provisional calculations been correct. Any errors in the quarterly returns could separately have been assessed under section 73, subject to section 77, but that separate exercise was unnecessary.
6. Dunwood was ordered to pay HMRC’s appeal costs, assessed at £4,500. The Tribunal’s costs order was set aside, but HMRC sought no costs incurred before the Tribunal.

1. VAT Tribunal: Allowed Dunwood’s appeal, holding that the assessment was barred by section 77(1)(a) because it related in substance to the preceding quarterly periods.
2. High Court (Chancery Division): Allowed HMRC’s appeal, set aside the Tribunal’s decision, and upheld the assessment for period 06/01.