Out-Law News 6 min. read

Nottingham Forest VAT assessment time-bar ruling a lesson for other taxpayers

The City Ground Nottingham

Photo by Robbie Jay Barratt - AMA/Getty Images

A recent ruling by the UK’s Upper Tribunal (UT) in a case involving a Premier League football club highlights the importance of record-keeping and disclosure in tax disputes, experts have said.

Sam Wardleworth and Bryn Reynolds of Pinsent Masons were commenting after the Upper Tribunal dismissed an appeal Nottingham Forest Football Club (NFFC) raised against the timeliness of a VAT assessment made by HM Revenue and Customs (HMRC) which landed it with a £345,000 tax bill.

Wardleworth said the case highlights how time limits which apply in relation to specific taxes – including VAT, landfill tax, and the aggregates levy – are less understood than time limits and assessment provisions contained in the Taxes Management Act 1970, which apply in most other UK tax contexts.

In this case, NFFC claimed HMRC’s VAT assessment was made out of time, because it came more than one year after HMRC had been given access to evidence enabling it to make such an assessment.

HMRC had disputed that claim, arguing that it was not until later – and within the 12-month window – that it had obtained sufficient evidence to make its assessment. The First-tier Tribunal (FTT) sided with HMRC and the UT has now dismissed all of NFFC’s grounds of appeal.

Wardleworth said: “The case shows how the burden of proof falls on the taxpayer, in the first instance, when challenging a VAT assessment under the one-year rule. If the taxpayer can make a case that on the face of it shows that the assessment was made out of time, the burden of proof will then flip back to HMRC to evidence otherwise.”

Reynolds said the disagreement that arose in this case could have been settled through better record-keeping practices.

“The interaction between the one, two, four and 20-year time limits for VAT assessment is complex to understand at the best of times,” Reynolds said. “It is particularly difficult when, as in this case, there appears to be a genuine disagreement as to the relevance of the information provided to HMRC.”

“Any disclosure process to HMRC should be carefully managed and appropriate copies kept of all documentation provided in case reliance is placed upon it later,” he said.

In this case, the dispute centred on activity in the spring of 2018.

On 16 April 2018, HMRC officer Geoffrey Bell visited NFFC to discuss how the business operated and what accounting systems were used. He visited the club again on 20 April 2018 to examine invoices and to download general ledger data. A back up memory stick containing data from NFFC’s older accounting system, Sage, was then collected by Bell on 9 May 2018.

On 11 May 2018, Bell emailed NFFC’s head of finance, John Taylor, indicating the accounting entries into which he wished to look on the newer Navision accounting system NFFC then operated. Bell emailed NFFC on 24 May 2018 to query a quarterly VAT return. NFFC changed its accounting software from Sage to Navision at some point, but it was not clear from the evidence when Navision started to be used and when Sage ceased to be used. Bell’s evidence was that he believed that the discrepancies in the VAT return were due to problems experienced by NFFC when it changed accounting systems from Sage to Navision.

Bell indicated that NFFC may have erred in its tax declarations. On 29 April 2019, HMRC assessed the club for VAT of £345,561 for the period covered by the quarterly VAT return in question.

NFFC appealed to the FTT. It claimed HMRC’s assessment had not been made within the time limit – the assessment should be made no later than one year after evidence of facts which are sufficient in HMRC’s opinion to justify making the assessment come to its knowledge.

HMRC contended that it had necessary knowledge of the facts on or after 9 May 2018, when Bell received the memory stick containing the Sage data. NFFC argued that HMRC had the necessary knowledge of the facts on 20 April 2018, when Bell downloaded the general ledger data – more than one year before the assessment was made, which it argued made HMRC’s 29 April 2019 assessment out of time.

On 25 August 2022, the FTT dismissed NFFC’s appeal. NFFC appealed to the UT on three grounds.

Before the UT, NFFC first argued that the FTT failed to apply the correct tests as set out in the relevant case law when reaching its decision. Second, NFFC claimed the FTT erred in its treatment of the burden of proof. Third, NFFC said the FTT’s conclusion that 9 May 2018 was best date on which HMRC had evidence of the facts sufficient in its opinion to justify the making of the assessment was perverse because there was no evidence to support that finding.

The appeal failed on all three grounds.

In relation to the first ground of appeal, NFFC said the FTT had failed to apply the correct test because it did not decide what evidence was sufficient to make the assessment, whether Bell’s opinion that the evidence did not justify making the assessment accorded with the so-called ‘Wednesbury standard’ of reasonableness established in UK case law, nor when the last piece of evidence was actually communicated to HMRC.

The UT disagreed. The UT highlighted that the FTT had disregarded the submissions made by both parties about the Sage data because they were unsupported. It concluded that this ground of appeal therefore must fail not because the FTT did apply the correct legal test but because the FTT was unable to determine the necessary facts in the absence of any evidence in relation to them. The FTT was forced to decide the case on the basis of who held the burden of proof because of this lack of evidence.

In respect of the treatment of burden of proof, the FTT had concluded that the burden fell on NFFC to show that the assessment was out of time and that NFFC had failed to discharge it. NFFC argued that the case law established in the Pegasus Birds case that the FTT cited in support of that position did not serve as authority for the proposition that the taxpayer bears the burden of proof on the issue of whether a VAT assessment is made out of time, since that point was not argued and was common ground in the case in question.

HMRC submitted that the case was clear on the point and should be accepted as binding authority for the proposition that the taxpayer bears the burden of proof. However, even if it were not, it pointed to a later decision of the Court of Appeal in the Lithuanian Beer case which it said does constitute binding authority on the point.

Prior to the appeal in this case, there had never been any challenge to the proposition that the taxpayer bears the burden of proof in an appeal where it is alleged that a VAT assessment was not made within the time limit. The UT accepted NFFC’s argument that the Pegasus Birds case law was not binding authority on this point but deemed the Lithuanian Beer case law was binding authority – even though the appellant in that case did not make any submission on burden of proof.

The UT said it made sense for NFFC to have the burden of showing that HMRC’s assessment was made outside of the time limits because the evidence of the facts which justified making the assessment would usually be in the taxpayer’s hands. When the taxpayer has met that burden of showing why the information provided was sufficient, the burden would then shift to HMRC to show why such evidence was not sufficient to justify making the assessment. In this case, the UT found that the taxpayer had not established such a case for there to be any shifting of the burden to HMRC.

The UT also agreed with the alternative argument raised by HMRC that even if the burden of proof had sat with HMRC, it would have discharged it.

In this regard, the UT highlighted Bell’s evidence that he obtained two sets of accounting data on two separate dates – the Navision general ledger data on 20 April 2018 and the Sage back-up of the accounting records on 9 May 2018 – and considered there was no suggestion that any other information or evidence of facts had led to the making of the VAT assessment. It further considered Bell’s emails and evidence after 9 May 2018, which it determined established a case that on the face of it showed the evidence justifying the assessment was contained in part in the Sage data received on 9 May 2018 and that the assessment was therefore made in time.

The UT said that the FTT would not have needed to resort to deciding the appeal by reference to the burden of proof in the first place if the parties had produced evidence of what was contained in the Navision and Sage records.

The UT went on to dismiss NFFC’s claims that the FTT’s conclusion that 9 May 2018 was best date on which HMRC had evidence of the facts sufficient in their opinion to justify the making of the assessment was perverse. It did so after determining that the fact the FTT did not make any positive finding of fact that HMRC had evidence of the facts sufficient to justify making an assessment on 9 May 2018 meant that case law NFFC cited could not therefore be relied on in the circumstances of this case.

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