Revenue and Customs v Chamberlin

The Court of Appeal held that a duly signed VAT return made by a taxable person constitutes a self-assessed liability for VAT and can give rise to a debt sufficient to support a statutory demand, petition and bankruptcy order. The court treated boxes 1 and 5 of the prescribed return as a form of self-assessment under the VAT Act 1994 (notably ss.1 and 25) and the VAT Regulations 1995 (notably regulation 25 and regulation 40). It concluded that allegations of error in such returns fall to be pursued under the statutory correction procedure (regulation 35) or by the VAT appeal routes and that the bankruptcy court will not generally go behind those statutory procedures except in narrow, well‑established exceptions. Because the applicant had not established any ground existing on 9 September 2005 that would have shown the bankruptcy order ought not to have been made, the appeal was allowed and the Chief Registrar's rejection of annulment was restored.

Background and facts:

• Ms Marie Chamberlin, a solicitor practising asylum and immigration law, was registered for VAT and submitted periodic VAT returns showing sums due which she did not pay. HMRC served a statutory demand (22 April 2005) and presented a bankruptcy petition (26 May 2005). A bankruptcy order was made on 9 September 2005.
• The applicant made a first annulment application under s.282(1)(a) Insolvency Act 1986 which was dismissed by Mr Registrar Nicholls (7 December 2006). She made voluntary disclosures under regulation 35; the first (4 July 2006) was rejected on the merits and a later one (20 August 2009) was held out of time. Chief Registrar Baister dismissed a subsequent annulment application (he concluded the petition debt was based on the applicant's own returns). The deputy judge (David Donaldson QC, Chancery Division) allowed an appeal and annulled the bankruptcy order on the basis that under the legislation the returns did not give rise to a debt as submitted by HMRC. HMRC obtained permission to appeal to this court.

Nature of the application: An appeal by HMRC against the deputy judge's decision annulling the bankruptcy order; the central statutory provision for annulment was s.282(1)(a) Insolvency Act 1986 (annulment on grounds existing at the time the order was made).

Issues framed:

1. Whether a duly signed VAT return under the VAT Act 1994 and the VAT Regulations 1995 can give rise to a debt for the purposes of insolvency proceedings.
2. Whether the bankruptcy court may, in these circumstances, go behind the returns and decide on the substantive correctness of the VAT stated as due, or whether such disputes must be pursued under the statutory tax procedures (including regulation 35 and VAT appeal routes).
3. Whether any ground existing on 9 September 2005 justified annulling the bankruptcy order.

Court’s reasoning and conclusion: The court reasoned that the VAT Act and subordinate regulations impose a liability on the supplier and require periodic returns accounting for output tax; the return quantifies the liability and functions as a form of self-assessment. Where a return is alleged to be in error the statutory correction procedure (regulation 35) and the appeal route are the appropriate remedies. The longstanding practice that the bankruptcy court should not usurp specialist tax machinery was applied; exceptions are narrow and not made out here. Because the applicant had not established any ground existing on the date of the bankruptcy order to show it ought not to have been made, the deputy judge was wrong to annul the order. The Court of Appeal allowed HMRC's appeal and restored the Chief Registrar's order dismissing annulment.

Appeal allowed. The Court of Appeal held that VAT returns operate as self-assessments and can create a debt for insolvency purposes; errors in returns must be corrected by the statutory procedures (regulation 35 and the VAT appeal machinery), and no ground existing on 9 September 2005 justified annulment of the bankruptcy order.

Bankruptcy order made by Mr Registrar Rawson (9 September 2005). Applicant's annulment application under s.282(1)(a) dismissed by Mr Registrar Nicholls (7 December 2006). Chief Registrar Baister dismissed a later annulment application. Deputy Judge David Donaldson QC (Chancery Division) allowed the applicant's appeal and annulled the bankruptcy order (reserved judgment handed down 8 July 2010; reported at [2010] EWHC 2589 (Ch)). HMRC obtained permission to appeal to the Court of Appeal (permission granted by Jacob LJ). This Court allowed HMRC's appeal ([2011] EWCA Civ 271).