DCM (Optical Holdings) Ltd v Commissioners for His Majesty’s Revenue and Customs (Scotland)

For the time limit in section 73(6)(b) of the Value Added Tax Act 1994, the relevant assessment is the assessment actually made, not a hypothetical earlier assessment. The one-year period begins when HMRC obtains the last item of evidence which, in the relevant officer’s opinion, is sufficient to justify that assessment. The knowledge required is actual knowledge.

HMRC also have an implied power to verify a claimed VAT credit, withhold payment during reasonable and proportionate verification, and reject the claim wholly or partly. The obligation to pay under section 25(3) arises only when a credit is established to be due. The power follows from the statutory scheme and HMRC’s responsibility for the collection and management of VAT. Its exercise remains subject to public law control and statutory appeal.

DCM, the representative member of a VAT group operating an optical business, appealed concerning output VAT. The first issue arose from an assessment issued in October 2005 for periods beginning in October 2002. DCM contended that the assessment was barred by the one-year limit in section 73(6)(b) of the Value Added Tax Act 1994. The second issue concerned HMRC’s decisions between 2008 and 2013 to reduce VAT credits claimed in DCM’s repayment returns.

The First-tier Tribunal dismissed DCM’s appeals: [2018] SFTD 333. The Upper Tribunal allowed its appeal on time bar but dismissed its vires appeal: [2019] STC 147. The Inner House restored the First-tier Tribunal’s conclusion on time bar and also rejected the vires challenge: [2020] CSIH 60; [2020] STC 2125.

The Supreme Court had to decide when the section 73(6)(b) period began and whether HMRC could withhold, verify and reduce a claimed VAT credit without using one of the express statutory mechanisms advanced by DCM.

1. Appeal dismissed unanimously. Lord Hodge gave the judgment, with which Lord Reed, Lord Sales, Lord Hamblen and Lord Stephens agreed.

2. Section 73(6)(b) of the Value Added Tax Act 1994 concerns the assessment which HMRC actually made, rather than a hypothetical assessment which it might have made earlier. The relevant opinion is the subjective opinion of the assessing officer about whether the available evidence is sufficient to justify that particular assessment. The knowledge required is actual knowledge. Subject to review for perversity analogous to Wednesbury unreasonableness, time begins when the last item of evidence sufficient to justify the assessment comes to HMRC’s knowledge. The principles stated in Pegasus Birds Ltd v Customs and Excise Commissioners [1999] STC 95 and affirmed on appeal in [2000] STC 91 were correct.

   The First-tier Tribunal had found that HMRC could not know what DCM was doing without seeing its records. The figures needed for the assessment were obtained during the visit of 31 August and 1 September 2005. The October 2005 assessment was therefore in time. It was unnecessary to decide whether each VAT return constituted a unitary assessment embracing both input and output tax.

3. HMRC have an implied power and duty to conduct a reasonable and proportionate investigation into the validity of a claimed VAT credit. They may take a reasonable time to verify it and may then refuse the claim wholly or partly. Section 25(3) requires payment only after a VAT credit has been established to be due. A trader’s return does not by itself create the statutory obligation to pay.

4. The power is also implicit in HMRC’s responsibility under paragraph 1 of Schedule 11 for the collection and management of VAT. The express powers in section 25(6), paragraphs 4(1) and 4(1A) of Schedule 11, and regulation 35 of the Value Added Tax Regulations 1995 do not exhaust HMRC’s powers. The implied power enables the statutory scheme to secure payment or repayment of the correct amount.

5. The different treatment of payment and repayment traders was justified. A payment return identifies tax prima facie due to HMRC, whereas a repayment return asserts an unadmitted claim against HMRC. Expeditious and proportionate verification is compatible with fiscal neutrality and EU law, provided any economic disadvantage caused by extended withholding can be remedied.

6. A trader remains protected by public law. Dilatory or disproportionate verification is amenable to judicial review. An adverse decision concerning chargeable VAT or allowable input tax may also be appealed under section 83(1)(b) or (c). HMRC’s decisions reducing DCM’s claimed credits were therefore within their powers.

1. United Kingdom Supreme Court: Dismissed DCM’s appeal on both time bar and vires: [2022] UKSC 26.
2. Inner House of the Court of Session: Allowed HMRC’s appeal on time bar and dismissed DCM’s appeal on vires: [2020] CSIH 60; [2020] STC 2125.
3. Upper Tribunal (Tax and Chancery Chamber): Allowed DCM’s appeal on time bar but dismissed its appeal on vires: [2019] STC 147.
4. First-tier Tribunal: Dismissed DCM’s six appeals: [2018] SFTD 333.