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Key points
- The difficulty in discerning the nature of a VAT assessment.
- Was a notification of liability an assessment?
- An assessment does not have to be in any particular form.
- Whether an assessment has been made is an objective decision.
- Could parliament really have intended to give taxpayers a right of appeal, but not give them some signal as to when that right arises.
What is an assessment for VAT? I thought I knew, but now I don’t. Indeed, it may well be that the only people who do know the answer to this question are the Court of Appeal judges who can recognise an assessment when they see one.
There is an obvious snag with this, namely that if HMRC raises an assessment, it must notify the taxpayer so they can then appeal against it. Of course, the taxpayer must do this within 30 days of the assessment being notified to them. However, if the taxpayer cannot discern what an assessment is, that renders this as a somewhat hollow right.
My confusion is caused by the Court of Appeal decision in Aria Technology Ltd v CRC [2020] EWCA Civ 182.
The Aria Technology case
To recap the underlying facts of the case, Aria Technology is involved in the retail and wholesale trading of computer components and peripherals. The wholesale deals involved purchasing central processing units (CPUs) and flat screen monitors from UK suppliers for resale to customers abroad.
In its VAT return for the July 2006 accounting period, input tax of £1,513,316 was claimed. After setting part against output tax, a repayment of £445,156 was claimed.
In October 2008, HMRC informed the company of its decision to deny input tax of £758,770.
To start at the end...
Although a little unusual, let me start at the end of the Court of Appeal’s judgment, where Lord Justice Singh says:
‘As I understood it from the hearing before us, the difficulty has arisen because it was mistakenly thought within HMRC that an assessment could not be issued where a VAT return had not been “processed”. It should be a simple matter in practice of ensuring that, in circumstances such as these, the fact of assessment is internally recorded within HMRC and a notice of assessment is given as well.’
This seems to me to be saying that the officer deliberately did not make an assessment because he mistakenly thought that he had no power to do so. But, if so, it surely follows that he could also not have made a decision to assess because he believed he had no power to assess. ‘Curiouser and curiouser’ – because the Court of Appeal decided that the officer did indeed make an assessment even though he believed that he had no power to do so.
So how come? The company submitted its VAT return and HMRC wished to disallow some of the input tax claimed. It wrote to the company under a heading ‘Notification of decision to deny input tax’. This said:
‘Accordingly your right to deduct the input tax claimed in respect of those transactions is denied. This decision affects input tax of £758,770 claimed on the purchase of computer chips in the period 07/06 … A further letter showing the corrected amount of VAT now due in respect of period 07/06 is enclosed. You have the right of appeal against this decision to the VAT and Duties Tribunal and any appeal must be made within 30 days of the date of this letter.’
The accompanying letter was headed: ‘VAT return for period 1 May 2006 to 31 July 2006’ and said: ‘As you have been notified, HMRC consider that the amount shown should properly be amended as follows … The reasons for this are detailed in my letter to you dated 6 October 2008.’ This accompanying letter went on to state that the taxpayer had the right of appeal.
The relevant principles
In his judgment, Singh LJ said that the following relevant principles could be derived from the authorities.
- 'There is no statutory definition of “assessment”. It is a general legal act on the part of the commissioners constituting their determination of the amount of VAT that is due.
- There is no particular formality required by either statute or regulations.
- There is no magic in the use of any particular form, for example one headed “notice of assessment”. A notification of an assessment can be contained simply in a letter. It can also be contained in more than one document.
- The question of whether an assessment has been made or not is to be determined on an objective analysis. The decision maker’s state of mind cannot alter that objective fact.’
The reasonable reader
Having set out the above principles, Singh LJ went on to amplify these as follows.
‘The test is exclusively an objective one; how would the document or documents said to record an assessment be understood by the reasonable reader? It is essential to the fair administration of the tax system that a taxpayer should be able to know with certainty whether or not an assessment has been made of an amount of VAT due from him. There would be very considerable uncertainty if the question whether an assessment had been made were to depend on the subjective intentions and beliefs of individual officers of HMRC.’
All that may be true, but there is surely even greater uncertainty if whether an assessment has been made is to depend on the understanding of the reasonable reader. I regard myself as a reasonable reader, but I would not have realised that the two letters constituted an assessment. Indeed, I suspect I would have thought ‘The officer has got it wrong in thinking there is a right of appeal against his decision; I need to wait for the notice of assessment to arrive before I have something that I am statutorily entitled to appeal against.’ So, clearly, I am not a reasonable reader at all. Who is? I wish I knew. Could parliament really have intended to give me a right of appeal, but not give me some signal as to when that right arises?
Conclusion
The answer to the above question is probably that the intention of parliament is no more relevant than the intention of the HMRC officer. It is only if something appears irrational to the courts that they need to wonder what parliament had in mind. What I find sad is that the Court of Appeal sees no irrationality in a proposition that a taxpayer’s rights should depend on how the ‘reasonable reader’ would interpret a letter or couple of letters.
Of course this was a VAT case, but what about direct tax?
TMA 1970, s 30A does not define an assessment either. Like the VAT legislation it simply requires notice of any assessment to be given to the taxpayer. Accordingly, it is hard to see that this ‘reasonable reader’ test will not apply equally to income tax and other direct taxes.
