HM Revenue & Customs v Dunwood Travel Ltd

Under the Tour Operators Margin Scheme, the annual adjustment in the first prescribed accounting period after a financial year is a fresh calculation of VAT due for that earlier financial year. The relevant accounting period for the three-year assessment limit in section 77(1)(a) of the VAT Act 1994 is therefore the adjustment period, not the four quarters in which provisional amounts were accounted for. The calculation may use the correct figures after year end and deduct VAT already paid. It is unnecessary to recalculate each provisional quarterly amount before assessing the adjustment. The same approach applies to repayment of VAT overpaid on provisional figures and to interest.

Dunwood Travel Ltd, a tour operator subject to the Tour Operators Margin Scheme, was assessed for VAT attributable to the quarter ending 30 June 2001. The assessment included an annual adjustment for the preceding financial year, during which provisional VAT calculations had been made incorrectly.

The VAT Tribunal allowed Dunwood’s appeal, holding that the adjustment related to the earlier quarters and was out of time. Mr Justice Mann allowed HMRC’s appeal, set aside the Tribunal’s decision and restored the assessment. The Court of Appeal considered which prescribed accounting period was concerned for the purposes of the three-year limitation in section 77(1)(a) of the VAT Act 1994.

The Court of Appeal, in the judgment of Lord Justice Rix with Sir John Chadwick and Lord Justice Laws agreeing, dismissed the appeal and upheld HMRC’s amended assessment of £17,260.85 for the period 6/01.

1. The statutory basis of the scheme was section 53(1) of the VAT Act 1994, the Value Added Tax (Tour Operators) Order 1987 and section 12 of TOMS notice 709/5, which had the force of law through TL5.
2. TL5 distinguished the provisional calculations made during the four quarters of a financial year from the annual adjustment made in the first prescribed accounting period ending after that year. Under paragraph 4, the adjustment was the difference between VAT due on the year’s supplies and VAT already paid provisionally.
3. The fifth-quarter adjustment required a new calculation under the full or simplified formula. The prescribed accounting period concerned for section 77(1)(a) was therefore the fifth quarter, not the preceding four quarters. The assessment was consequently within time.
4. It was unnecessary to recalculate each provisional quarterly amount. The correct approach was to calculate the year-end figure using the correct information and deduct sums already paid. Requiring a review of earlier periods would conflict with the purpose of the limitation provision. A claim for repayment of VAT overpaid on provisional figures, and the related interest position, followed the same analysis.
5. Customs & Excise Commissioners v Laura Ashley Ltd [2003] EWHC 2832 (Ch); [2004] STC 635 was not in point.

• Court of Appeal (Civil Division): dismissed Dunwood’s appeal and upheld the amended assessment: [2008] EWCA Civ 174.
• Chancery Division: Mr Justice Mann allowed HMRC’s appeal from the VAT Tribunal, set aside its decision and restored the assessment on 26 February 2007.
• VAT Tribunal: allowed Dunwood’s appeal on 19 May 2006, holding that the assessment was out of time.