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You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> Mathieson v Edinburgh Vat & Duties Tribunal Decision & Anor [1999] ScotCS 106 (6 May 1999) URL: http://www.bailii.org/scot/cases/ScotCS/1999/106.html Cite as: [1999] ScotCS 106, [1999] STC 835

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6 May 1999

The appellant carries on business as a confectioner, newsagent and tobacconist. She has been registered for value added tax (VAT) purposes since September 1978. This appeal relates to a claim made by her for interest on a repayment of approximately £13,900 made by the respondents, the Commissioners of Customs and Excise, in respect of a voluntary disclosure of output tax over-declared for the period from October 1981 to October 1994. The claim for interest was made under section 78(1)(a) of the Value Added Tax Act 1994, which provides that:

1. accounted to them for an amount by way of output tax which was not output tax due from him and which they are in consequence liable to repay to him,

By letter dated 26 February 1996 the respondents refused the claim for interest. The appellant appealed to the VAT and Duties Tribunal under section 83(s) of the 1994 Act. On 15 December 1997 the Tribunal issued a decision refusing the appeal. The appellant appealed to this court under section 11(1) and (7) of the Tribunals and Inquiries Act 1992, and the appeal was remitted to the Outer House under Rule of Court 41.44.

The issue upon which the appellant's claim for interest depends is whether the overdeclaration of output tax which she made between October 1981 and October 1994 was due to an error on the part of the Commissioners. The overpayment was the result of the way in which the appellant treated certain newspaper delivery charges in her VAT returns. It was not disputed that such delivery charges related to a zero-rated supply. In the event, however, the appellant treated them in such a way that she accounted for VAT on them at the standard rate. The error on the part of the Commissioners was alleged to have been made in advice given by an officer of Customs and Excise, a Miss Calder, to the appellant in December 1981 or January 1982. I shall return to the precise nature of the error in due course. It was not disputed that if erroneous advice was given by Miss Calder to the appellant, and the overpayment of output tax resulted from the appellant following that advice, the overpayment would be "due to an error on the part of the Commissioners" within the meaning of section 78(1)(a).

Appeal lies from the Tribunal to the Court of Session under section 11 of the 1992 Act only in point of law. In opening the appeal Mr Cullen accepted that before the Tribunal it was for the appellant to prove that there had been an error on the part of the Commissioners which resulted in the overpayment. He accepted, also, that in order to succeed in this appeal the appellant required to show that the Tribunal's decision depended on a finding of fact for which there was no evidence or which was inconsistent with the evidence or contradictory of it. That formulation of the test which the appellant has to satisfy was taken from Inland Revenue v Fraser 1942 SC 493 per Lord President Normand at 497-8, as approved in Edwards v Bairstow [1956] AC 14 per Lord Radcliffe at 35. In Fraser Lord Normand said:

In Edwards Lord Radcliffe said:

The appellant's position in the present case is that there was clear evidence given by the appellant and her husband on the critical point. There was no evidence capable of being regarded as contradicting them. There was no challenge to their credibility or honesty, beyond reference to certain documents, which were not relied upon by the Tribunal in its determination. The Tribunal's rejection of the evidence of the appellant and her husband therefore cannot be supported.

In order to understand the context in which the issue which falls to be determined in this appeal arises, it is necessary to take note of the special arrangements made for retailers to be assessed and account for VAT. At the material time the statutory basis for those arrangements was to be found in section 30(3)(a) of the Finance Act 1972 and the Value Added Tax (Supplies by Retailers) Regulations 1972. Under those provisions certain schemes were formulated. Their broad purpose was to mitigate the administrative burden which would be borne by the retailer if each and every retail transaction had to be individually vouched. The circumstances of the retailer and his business have a bearing on whether he may adopt any particular scheme. A retailer may, of his own accord, at the beginning of a financial year, adopt any scheme which is properly applicable to his circumstances. In the course of a financial year, he may change from one scheme to another only with the consent of the respondents. Two of the schemes are relevant for the purposes of the present appeal, namely Scheme D and Scheme B. In bare outline the operation of Scheme D may be described thus. The retailer calculates for each quarter the cost of zero-rated goods for resale, and the cost of standard rated goods for resale. From those figures the proportion of the total cost of goods for resale attributable to standard rated goods is then calculated. Output tax is then calculated by applying the appropriate VAT fraction to that proportion of daily gross takings. In similarly bare outline, under Scheme B the retailer first estimates the expected selling price of all zero-rated goods received for sale. Standard rated takings are then calculated by subtracting the figure so estimated from daily gross takings. Output tax is then calculated by applying the appropriate VAT fraction to the standard rated takings so calculated.

As is recorded by the Tribunal in its decision, the appellant used Scheme D until March 1981. At that stage, however, the appellant's husband (who attended to VAT administration on her behalf) came to the view that Scheme D was "particularly punitive". I understand that to mean that he considered that the use of that scheme resulted in overpayment of output tax. That was because the mark-up on zero-rated and standard rated goods was not in fact the same. In order to avoid the overpayment which would result from the application of Scheme D, Mr Mathieson devised a modification to the scheme which involved using a weighted mark-up for zero-rated goods. The Tribunal records that he started to work out output tax in that way without notice to the respondents.

It was at that juncture that Miss Calder became involved in the matter. According to the Tribunal, she paid a routine control visit to the appellant's premises in early December 1981. Miss Calder did not give evidence before the Tribunal, but her written report of visits on 1 and 2 December 1981 was produced. The Tribunal records that in it she indicated inter alia that she was satisfied that Scheme D was appropriate, and that she explained that the weighted mark-up could not be used. According to the Tribunal, at that stage discussion took place in the course of which:

It was in that aspect of the advice tendered by Miss Calder that the alleged "error on the part of the Commissioners" on which the appellant founds her claim for interest was identified.

Before examining in detail the arguments which were advanced by Mr Cullen in support of the appeal to this court, it is convenient to note the reasoning which the Tribunal adopted in its decision. The Tribunal found that, after the meetings in early December, Mr Mathieson adapted his proposals and discussed them with Miss Calder, who said that the proposals were similar to Scheme B, and recommended that he seek permission from the respondents to change to that scheme, pointing out, however, in her letter of 22 January 1982, that Scheme B could only be used if zero-rated sales did not amount to more than half of total taxable turnover, and that a weighted mark-up could not be applied. The Tribunal then quoted from the appellant's letter of 20 January 1982, in which she said:

After setting out that quotation, the Tribunal added a parenthetical comment in the following terms:

Since that comment contains the Tribunal's first reference to the scheme which the appellant sought to adopt in January 1982 as a "hybrid" scheme, and since that description is used repeatedly in the decision thereafter, it is as well to note at this stage that Mr Cullen's submission was that the Tribunal had fallen into serious confusion in treating the scheme proposed in the letter of 20 January as a hybrid scheme. Rather, he submitted, the scheme proposed was in all essentials Scheme B. I shall return to that matter in due course, and in the meantime return to my summary of the reasoning adopted by the Tribunal in its decision.

The Tribunal records (Decision, page 3) that it was Mr Mathieson's evidence that the arrangement proposed in his letter of 20 January was agreed by the respondents when Miss Calder spoke to him subsequently on the telephone, and that the evidence for the appellant was that at no time did Miss Calder or any other officer of the respondents tell her that delivery charges would fall to be treated differently under that scheme. The Tribunal goes on to state that the appellant insisted in using what it describes as "the hybrid arrangement". There was an unsuccessful appeal to the Tribunal against a decision to refuse a claim for repayment in respect of the period up to 1981, which was disposed of in May 1983. The Tribunal then goes on (Decision, pages 4 to 6) to quote from correspondence, including -

1. a letter from an officer of the respondents to the appellant dated 24 October 1983 in which the point was made that the appellant was ineligible to use Scheme B because her zero-rated turnover exceeded 50% of total sales;
2. a somewhat belligerent undated letter (understood to have been sent in November 1983) from Mr Mathieson to the respondents claiming to have received at a meeting on 28 September 1983, authority to use Scheme B despite the marginally excessive proportion of zero-rated turnover while (somewhat curiously) at the same time stating that he had never requested to use Scheme B;
3. a reply dated 20 January 1984 from the respondents, in which, following discussion, the schemes for which the appellant was eligible were enumerated and the appellant was asked to make her selection; and
4. the appellant's reply of 29 January 1984 confirming that her returns would be computed in accordance with the letter of 20 January 1982.

The Tribunal goes on to note (Decision, page 7) that the appellant proceeded to operate "her hybrid scheme" until 1994 when, prompted by a newspaper article, she took professional advice and made her claim for repayment of output tax overpaid.

At that point in its decision (pages 7 to 8) the Tribunal set out four findings in fact, the only formally expressed findings in fact in the decision. They were in the following terms:

Having made these few findings, the Tribunal went on to make certain comments about the burden of proof on the appellant, then continued (Decision, pages 8 to 10):

It is not disputed that, as the Tribunal recorded, Miss Calder advised the appellant that delivery charges could not be deducted in calculating gross turnover. That advice, viewed in isolation, was not erroneous. Whether, however, it was a complete and accurate answer to the question how delivery charges should be treated in the preparation of the appellant's VAT returns depends on the scheme which was being used. In the context of Scheme D, advice in those terms would be not only accurate but also sufficient, since output tax is calculated, under that scheme, by applying the VAT fraction to the proportion of turnover equal to the proportion which the cost of standard rated goods bears to the total cost of goods for resale. Under Scheme B, however, it is necessary not only to calculate gross turnover, but also to subtract therefrom the expected selling price of all zero-rated supplies. In operating that scheme, therefore, while it remains necessary to include the newspaper delivery charges in gross turnover, those charges then form part of the expected selling price of zero-rated supplies, and in that guise form part of the deduction from gross turnover which yields the net amount of standard rated takings by reference to which output tax is calculated. In the operation of Scheme B, therefore, advice that the newspaper delivery charges required to be included in total turnover, while accurate so far as it went, would be an incomplete and potentially misleading answer to a question about the proper treatment of such charges. Complete advice would include the additional point that the delivery charges, having been included in gross turnover, should also be included in the sum deducted as the expected selling price of zero-rated supplies.

In my view Mr Cullen was right to criticise as confusing the Tribunal's use of the term "hybrid scheme" to describe the scheme which the appellant in fact used from January 1982 onwards. It is clear that until March 1981 the appellant used Scheme D. From then until October 1981 she used an ad hoc scheme devised by Mr Mathieson, which involved modifying Scheme D by the use of a weighted mark-up for zero-rated goods. That scheme might accurately be called a hybrid scheme. The scheme proposed by Mr Mathieson in his letter of 20 January 1982, however, was in substance Scheme B, and could not accurately be called a hybrid scheme. That was accepted by Mr Young for the respondents. Although, as the correspondence shows, the respondents for a time disputed the appellant's eligibility to use Scheme B, on the ground that her zero-rated sales exceeded 50% of her total sales, the fact is that she did use that scheme. Indeed it was the combination of (i) the use of that scheme with (ii) the failure to include the delivery charges in the deduction of the expected selling price of zero-rated supplies that resulted in the overpayment. In operating the scheme, the appellant carried out the first stage of the calculation correctly by including the delivery charges in gross turnover, but fell into error at the second stage of the calculation by failing to include them in the deduction made in respect of the expected selling price of zero-rated supplies. The issue for the Tribunal was simply whether that error was the result of an error in the advice given by Miss Calder.

Mr Cullen submitted that a number of points made by the Tribunal in explaining its decision were beside the point. In particular, he submitted that finding (3) on page 7 of the Decision was irrelevant. Nothing turned on what notices the appellant had read, or what she had understood from them. Moreover, it had been no part of the respondents' case before the Tribunal that the appellant had caused confusion by "repeated refusal to conform to one of the recognised Schemes". There had been no such refusal and no such confusion. The respondents had all along understood that the appellant was operating Scheme B, albeit they disputed for a time her eligibility to do so. Further, it had been no part of the appellant's case that Miss Calder had been asked for, or should have tendered, further advice at a later date. The appellant's case related to the advice given at the end of 1981 and beginning of 1982 when the change of scheme was being mooted. Nor, finally, was there any relevance in the availability of professional advice which might, if it had been resorted to, have revealed to the appellant the error of the way in which she was making her returns. Much of the Tribunal's reasoning on page 9 of the Decision was thus misdirected. I did not understand Mr Young to dispute these criticisms. They were, in my opinion, well founded.

The crux of the Tribunal's decision can therefore be seen to be the conclusion that Miss Calder's advice related to Scheme D. Although it is said by the Tribunal to be a narrow point, there is no indication of the evidential material upon which that conclusion was reached. The Tribunal accepted that the question was asked: "What do I do with delivery charges?" It recorded that: "Mr and Mrs Mathieson maintained that Miss Calder's advice as to the treatment of delivery charges related to what has been referred to as their hybrid scheme". In construing that part of the decision, it must be remembered that what the Tribunal describes as the hybrid scheme was the scheme put forward in the appellant's letter of 20 January 1982, and that that scheme was (and was accepted by the respondents to be) in substance Scheme B. The Tribunal thus, in effect, recorded Mr and Mrs Mathieson's position in evidence as being that the advice given by Miss Calder related to Scheme B. To be able properly to reach the conclusion which it did, therefore, the Tribunal (a) had to have a sound basis for declining to accept Mr and Mrs Mathieson's evidence on that point, and (b) had to have other evidential material to support its conclusion that the advice was given in relation to Scheme D.

There is no discussion in the Tribunal's Decision of the credibility and reliability of Mr and Mrs Mathieson's evidence in this respect. There is, in the respondents' Answers to the Grounds of Appeal, an indication that the respondents dispute the reliability (or possibly the credibility) of the evidence of Mr and Mrs Mathieson to the effect that Miss Calder specifically mentioned that delivery charges were "subject to tax" or "VAT rated", under reference to the fact that that contention emerged in correspondence only at a late stage, but the point is not touched upon by the Tribunal in its decision, and Mr Cullen asserted that it had not been put to Mr and Mrs Mathieson in cross examination. Whatever the position may be about cross examination, I am of opinion that since there was no submission that that point affected their credibility and reliability more generally, it may be inferred that the Tribunal did not rely on it as ground for rejecting their evidence that Miss Calder's advice related to Scheme B. The court is therefore, in my opinion, entitled to infer that the Tribunal did not reject that evidence on the ground of its unreliability or incredibility.

Evidence the credibility and reliability of which is not disputed may still be rejected if there is a sufficient weight of contrary evidence. Mr Young's submission for the respondents was that there was sufficient evidence supporting the conclusion that Miss Calder's advice related to Scheme D to entitle the Tribunal to reject Mr and Mrs Mathieson's evidence. There was, of course, no oral evidence from Miss Calder. The witnesses who did give evidence for the respondents had, as the Tribunal recorded (Decision, page 7), "no personal knowledge of the events before 1984". The basis for the Tribunal's decision must therefore lie in the documentary evidence, and it was to that that Mr Young referred in his submission in support of the soundness of the Tribunal's finding that Miss Calder's advice related to Scheme D.

Mr Young submitted that Miss Calder's "Report on visit to trader" dated 1 and 2 December 1981 supported the Tribunal's view that Miss Calder's advice had related to Scheme D. The Report contained a note that she was "satisfied Retail Scheme D appropriate", with the qualification "but see iii)". That note appeared under the heading: "Purchases/Sales (periods 9/79, 6/80 and 9/80)". The cross reference to "iii)" was to a passage which began: "Trader had been using Retail Scheme D up till period 3.81", and went on to record Mr Mathieson's adoption of "'another' scheme". Although his calculations were not available, Miss Calder recorded that "it would appear to have been similar to Scheme E calculation". There are, in the papers produced, two copies of Miss Calder's report, in one of which the letter "E" in that passage has been changed to "B", but it is impossible to know whether that was a change made by Miss Calder. The report also contains a later passage which explains further Miss Calder's understanding of Mr Mathieson's departure from Scheme D. Close examination of that material leads me to the conclusion that the Tribunal's record (at page 1 of the Decision) is not quite accurate when it says: "She was also satisfied that Retail Scheme D, which was being used, was appropriate" (emphasis added). The same error is reflected in finding (1) - "the Scheme operated by the appellant at that time (Scheme D)". Miss Calder's satisfaction as to the appropriateness of Scheme D was expressed in the context of past use of that Scheme in periods prior to September 1980. It is clear that by the time of Miss Calder's visits, Scheme D was no longer the scheme which the appellant was using.

The Report contains no reference to discussion of the possibility of adopting Scheme B. In her letter of 22 January 1982, however, Miss Calder said that she was enclosing certain notices explaining Scheme B and went on to state: "This scheme was discussed on my visit". As Mr Young pointed out that letter was drafted by Miss Calder before she received the appellant's letter of 20 January, and therefore before she knew that the appellant was going to apply to use Scheme B. It is not clear whether it was sent out to the appellant before the appellant's letter was received, but there is a note dated 22 January 1982 attached to the Report of the December meetings, in which Miss Calder recorded receipt of the appellant's letter and her telephone call to the appellant "stating that if requirements of Scheme B are all met, Scheme B may be used for returns wef [i.e. with effect from] Jan. '82."

In my opinion, none of that material can be regarded as affording a proper evidential basis for the Tribunal's conclusion that Miss Calder's advice was given in relation to Scheme D. The reference to Scheme D being appropriate was made in the context of the historical use of that scheme in the period up to September 1980. The Tribunal was mistaken in treating Scheme D as the scheme which was in use at the time of the meetings in December 1981. It seems to me to be improbable that Miss Calder would have given advice tailored to Scheme D at the same time as recording that the use of that Scheme, albeit appropriate, had been abandoned by the appellant some nine months earlier. Be that as it may, there is in my opinion nothing in Miss Calder's contemporary report and correspondence which refers to advice about how newspaper delivery charges should be treated, and no positive support for the inference that the advice given on that subject was given in the context of Scheme D. On the contrary, it seems to me that Miss Calder's written records, if they do anything, support the evidence which the appellant and her husband gave. To put the matter at its lowest, it is clear that the context of any advice given was a discussion about which scheme the appellant should adopt. More specifically, it is clear from the letter of 22 January that Scheme B was the subject of discussion on 1 or 2 December. That letter provided further information about Scheme B and its applicability. It crossed with the appellant's letter of 20 January, and it is clear from her notes that Miss Calder treated the appellant's letter as a request to adopt Scheme B, and by telephone gave permission for that to be done, subject to caveats about eligibility. Objectively, therefore, it seems to me that the written material is, at worst for the appellant, neutral as to whether Miss Calder's advice related to Scheme B or Scheme D, and, at best for the appellant, supportive of the probable accuracy of her evidence and her husband's that the advice related to Scheme B. The written material is, in my view, incapable of being regarded as a body of evidence supporting the conclusion that the advice was given in relation to Scheme D. A fortiori it cannot, in my view, be regarded as supporting that conclusion so cogently as to justify the Tribunal's rejection on that account of the otherwise unexceptionable evidence to the contrary from Mr and Mrs Mathieson.

In that situation, I am of opinion that Mr Cullen's submission that the Tribunal's conclusion finds no adequate support in the evidence is well founded. The only evidence before the Tribunal was that Miss Calder's advice was given in relation to Scheme B. The Tribunal has stated no maintainable reason for rejecting that evidence. The finding that the advice was given in relation to Scheme D is therefore one which the Tribunal was not, in my opinion, entitled to make. It was only on the basis of that finding that the Tribunal was able to conclude that the overpayment was not due to error on the part of the Commissioners. If the advice was given in the context of Scheme B (or even, it seems to me, in the context of uncertainty as to which Scheme was to be adopted for the future), it was incomplete. It is not necessary for me to go so far as to uphold as a generality Mr Cullen's proposition that "incomplete advice is erroneous advice". It is sufficient for the disposal of this case that in answer to the question, "How do I treat [or what do I do with] delivery charges?" the response that they must be included in turnover is incomplete in a sense which makes the incomplete answer misleading. To be correct in relation to Scheme B, the answer would, in my opinion, have had to go on to explain that, although not deducted in computing gross turnover, delivery charges required to be included in the deduction made in respect of the expected selling price of zero-rated supplies. I am therefore satisfied that the result which the Tribunal reached was one for which there was no evidence, and was thus erroneous in law in the sense explained in Inland Revenue v Fraser and Edwards v Bairstow. Since I am also satisfied that the only conclusion which could properly be reached on the evidence was that the advice was given in relation to Scheme B, and was in that context incomplete to such an extent as to be erroneous, I am of opinion that there is no occasion for a remit to the Tribunal, and that it is open to me to substitute my conclusion that the appellant's claim for interest is well founded.

Mr Cullen also argued that the Tribunal had failed in a further respect properly to record the evidence given by Mr and Mrs Mathieson. The point is made in the first sentence of paragraph 1 of the Grounds of Appeal. It is that their evidence was that Miss Calder went further than merely saying that the newspaper delivery charges had to be deducted from turnover, but added the explanation that that was because VAT had to be paid on them. The respondents' position on that point is set out in paragraph 1 of their Answers to the Grounds of Appeal. They accept that in evidence Mr Mathieson said that Miss Calder advised that the delivery charges were "subject to tax", and Mrs Mathieson said that she was told that they were "VAT rated". In substance, it seems to me, the respondents thus accept that Mr and Mrs Mathieson gave evidence which might be interpreted as being that Miss Calder said that VAT had to be paid on the delivery charges. It was not disputed that advice to that effect, if given, would have been wrong. The respondents, however, explain that their position before the Tribunal was that Mr and Mrs Mathieson's evidence on this point did not accurately reflect what Miss Calder said. Their ground for maintaining that position is to be found in a letter written by Mr McInnes, one of the respondents' witnesses, on 20 March 1996, in which he said:

It is, in my view, unsatisfactory that this point is not discussed at all in the Tribunal's Decision. It is clear from the terms of the respondents' Answers that, with perhaps some dispute as to the precise words used, it is a matter of concession that Mr and Mrs Mathieson gave evidence that Miss Calder said something to the effect that the delivery charges were subject to VAT. Yet the Tribunal makes no reference at all either (i) to that aspect of Mr and Mrs Mathieson's evidence or (ii) to the view it took on the point that that evidence should be rejected on account of the delay in putting the contention forward. In the circumstances, if it had been necessary to deal with this aspect of the case, I would have taken the view that it was necessary to remit to the Tribunal to make supplementary findings on this aspect of the evidence. In the result, however, since I have come to the conclusion that the appeal falls to be upheld on the other ground argued, such a remit is unnecessary.

I am therefore minded to allow the appeal and find the appellant entitled to interest in accordance with section 78(1)(a) on the repayment of £13,900 which the respondents have made. I was advised, however, that the precise sum of interest to be paid remains to be confirmed. I shall therefore put the appeal out By Order, to enable parties to finalise before that hearing the calculation of the amount of interest. Once that has been done the appropriate interlocutor effecting final disposal of the appeal can be pronounced.