The Supreme Court’s recent decision in DCM (Optical Holdings) Ltd v HMRC [2022] UKSC 26 (DCM) restates Pegasus Birds Ltd v C&E Commissioners [2000] STC 91 and it brings two issues into focus:
the time limits on HMRC’s assessment powers; and
the inequality of arms between the taxpayer and HMRC when it comes to being fixed with knowledge.
On both points, the Supreme Court has given HMRC maximum leeway.
The facts of DCM are of little interest and require minimal exposition to flag the issues raised. In brief, DCM operated an optician business (Optical Express). Opticians, like cakes, feature heavily in the tax tribunal because there are myriad ways in which they can be sliced to give rise to different partial exemption results. For the avoidance of doubt, the ways in which a cake can be sliced have not, to my knowledge, featured in a VAT dispute. But give it time.
The dispute centred on the operation of DCM’s partial exemption method. Much litigation ensued concerning both input VAT and output VAT and the operation of the partial exemption methodology. By the time of the Supreme Court hearing, DCM maintained two challenges:
1. HMRC’s denial of input VAT claimed in a VAT return was ultra vires; and
2. HMRC was out of time to raise the assessment.
What is power?
Although the court accepted that there is nothing in the legislation granting HMRC an express power to refuse input VAT claims, it concluded that this was a necessary inference arising from HMRC’s general care and management powers.
That conclusion might be open to question. Section 73(2) of VATA 1994 treats the crediting and paying of a VAT credit as separate events. HMRC could make and assess a credit without making a repayment. The assessment liability would be set off against the input VAT credit, leading to the same result: HMRC would never pay the disputed amount.
This was not an option presented to the Supreme Court. Nevertheless, it has attractions. HMRC is not exposed to the risk of making a payment to a potentially rogue taxpayer, and the taxpayer has the protections of statutory time limits rather than the vaguer obligations imposed on HMRC under its care and management powers.
What is knowledge? Taxpayers are fixed with the knowledge they ‘should’ have concerning other people’s activities (see Kittel v Belgium (Case C-439/04) and Mobilx Ltd (in administration) v HMRC [2010] EWCA Civ 517.
When it comes to assessing taxpayers, HMRC has two years after a tax period plus another two years, provided it raises the assessment within one year of obtaining sufficient information to raise an assessment.
Rarely has the choice of a definite or indefinite article been so contentious. It isn’t ‘an’ assessment at all. It is ‘the’ assessment, and the difference matters.
DCM reaffirms with menace the decision in Pegasus Birds. It comes too close to being a get-out-of-jail-free card for HMRC.
HMRC will only fall foul of a time limit once it has actual knowledge of the information needed to make the precise assessment actually made. The test is subjective, and the opinion of an HMRC officer is only subject to challenge if it is so far off-kilter as to be Wednesbury irrational. How many subjective tests are left in VAT law? They’re gone because they leave too much scope to game the system.
Gaming the system breeds mistrust, and mutual mistrust in any regulatory system is not a good thing. HMRC needs to be given sufficient resources so that it doesn’t need to game time limits. Then it needs to be held to account.
Home >Articles > The judgment in DCM: one for the birds?
The judgment in DCM: one for the birds?
The Supreme Court has given HMRC maximum leeway.
The Supreme Court’s recent decision in DCM (Optical Holdings) Ltd v HMRC [2022] UKSC 26 (DCM) restates Pegasus Birds Ltd v C&E Commissioners [2000] STC 91 and it brings two issues into focus:
the time limits on HMRC’s assessment powers; and
the inequality of arms between the taxpayer and HMRC when it comes to being fixed with knowledge.
On both points, the Supreme Court has given HMRC maximum leeway.
The facts of DCM are of little interest and require minimal exposition to flag the issues raised. In brief, DCM operated an optician business (Optical Express). Opticians, like cakes, feature heavily in the tax tribunal because there are myriad ways in which they can be sliced to give rise to different partial exemption results. For the avoidance of doubt, the ways in which a cake can be sliced have not, to my knowledge, featured in a VAT dispute. But give it time.
The dispute centred on the operation of DCM’s partial exemption method. Much litigation ensued concerning both input VAT and output VAT and the operation of the partial exemption methodology. By the time of the Supreme Court hearing, DCM maintained two challenges:
1. HMRC’s denial of input VAT claimed in a VAT return was ultra vires; and
2. HMRC was out of time to raise the assessment.
What is power?
Although the court accepted that there is nothing in the legislation granting HMRC an express power to refuse input VAT claims, it concluded that this was a necessary inference arising from HMRC’s general care and management powers.
That conclusion might be open to question. Section 73(2) of VATA 1994 treats the crediting and paying of a VAT credit as separate events. HMRC could make and assess a credit without making a repayment. The assessment liability would be set off against the input VAT credit, leading to the same result: HMRC would never pay the disputed amount.
This was not an option presented to the Supreme Court. Nevertheless, it has attractions. HMRC is not exposed to the risk of making a payment to a potentially rogue taxpayer, and the taxpayer has the protections of statutory time limits rather than the vaguer obligations imposed on HMRC under its care and management powers.
What is knowledge? Taxpayers are fixed with the knowledge they ‘should’ have concerning other people’s activities (see Kittel v Belgium (Case C-439/04) and Mobilx Ltd (in administration) v HMRC [2010] EWCA Civ 517.
When it comes to assessing taxpayers, HMRC has two years after a tax period plus another two years, provided it raises the assessment within one year of obtaining sufficient information to raise an assessment.
Rarely has the choice of a definite or indefinite article been so contentious. It isn’t ‘an’ assessment at all. It is ‘the’ assessment, and the difference matters.
DCM reaffirms with menace the decision in Pegasus Birds. It comes too close to being a get-out-of-jail-free card for HMRC.
HMRC will only fall foul of a time limit once it has actual knowledge of the information needed to make the precise assessment actually made. The test is subjective, and the opinion of an HMRC officer is only subject to challenge if it is so far off-kilter as to be Wednesbury irrational. How many subjective tests are left in VAT law? They’re gone because they leave too much scope to game the system.
Gaming the system breeds mistrust, and mutual mistrust in any regulatory system is not a good thing. HMRC needs to be given sufficient resources so that it doesn’t need to game time limits. Then it needs to be held to account.
