VAT is under the care and management of the Commissioners of Customs and Excise. However, Customs does not make the law, except in narrowly defined circumstances - Parliament does. This may come as a surprise to some businesses and to some VAT officers.
In its role in managing and administering the tax, Customs has a duty to ensure that the correct tax is collected at the correct time.

This is achieved by requiring businesses to submit and pay periodic VAT returns. These returns may be monthly, quarterly or annual, and in exceptional circumstances other periods may be agreed. Businesses are then obliged to ensure the returns are complete and accurate and are submitted by the due date.

Assessments

Customs monitors the submission and payment of returns and carry out examination of some returns and inspections of some businesses to ensure that the returns are accurate. Where a business fails to submit a return, or where Customs considers a return is incorrect, an assessment may be raised showing what Customs believe to be the true liability.

If the assessment has been made in the absence of a return, the receipt of a return will normally displace the assessment. However, if the assessment has been issued because Customs considers the return to be incorrect, more involved procedures are needed to attempt to displace the assessment.

Customs has the power to raise an assessment where it is considered that the return is incomplete or incorrect, but any assessment must be made to the best of its judgement. It is now generally accepted that Customs is not required to exercise outstanding judgement, but must not act in a vindictive or capricious way.

Provided Customs has some material on which to base an assessment and acts in an honest way, an assessment is valid in principle.
Assessments must be made within the time limits prescribed. This allows an assessment to be issued within two years from the end of the VAT period, or within 12 months of evidence of the facts, sufficient in the opinion of Customs to justify the making of the assessment, whichever is the later.

 Assessments can only be made for errors falling in VAT returns ending in the three years before the date of the assessment, but if Customs alleges evasion or fraud, assessment for arrears of tax can be made for the previous 20 years.

Provided, therefore, an assessment is made to best judgement and is made within the prescribed time limits it is valid. The question, which then arises, is whether it is for the right amount, and the burden of proof on any challenge to the assessment is on the appellant.

Appeals
Once an assessment for an incorrect or incomplete return has been issued, the recipient has a period of 30 days in which to lodge a formal appeal, although in practice there is normally some flexibility in this deadline. An alternative approach is possible and if a request is made to Customs for a reconsideration of the assessment, provided Customs can confirm in writing within the 30-day period that this will be done, the time limit in which to appeal will be extended to a date to be given after Customs has completed its review.

In all cases where an appeal is lodged, and in those cases where a request is made for a reconsideration of an assessment, the assessment and the arguments in support or against it should be reviewed by an officer who is independent of the officer who raised the assessment. In many cases this is now done by an office that is independent of the assessing office.

Either lodging a formal appeal to the tribunal or making a request to Customs for a reconsideration of an assessment should result in a thorough review of it by Customs before matters progress to a hearing before the tribunal. One reason for lodging an appeal is that Customs is obliged to pay reasonable costs incurred by a business consequent to an appeal if the assessment is subsequently withdrawn. Many businesses do not wish to commit themselves to the appeals process earlier than necessary and prefer to exhaust the reconsideration route before deciding on whether to take the matter forward to the Tribunals.

The tribunal is the VAT and Duties Tribunals and is run by the Department for Constitutional Affairs with the Inland Revenue Special Commissioners. The Tribunals is independent of Customs. The Tribunals is an informal "court" and decisions are reached by the tribunal chairman. It is not, however, an arbitration service and is perhaps closer to a magistrates' court in its operation and procedures.

Once an appeal has been lodged, Customs must respond by providing a formal Statement of Case. This is usually prepared by its in-house solicitors' office and sets out its reasons for making and maintaining the assessment. If the matter is not settled and proceeds to a formal hearing, the parties must produce the necessary documentary evidence to support their contentions. In some more complex cases, witness statements may be necessary and the Tribunals may call the parties to a preliminary hearing to agree on the progress of the substantive hearing - this is often called a pre-trial review.

Customs will often be represented by a solicitor from its own solicitors' office and in simple cases may use a specially trained Customs officer. However, in complex or significant cases Customs will usually be represented by a barrister, perhaps even a QC.

The appellant may be represented by anyone - in simple matters it is quite common for the business owner to appear and in this case the tribunal chairman will ensure he or she is not unfairly disadvantaged by lack of experience in such proceedings. Many businesspeople are daunted by the prospect of presenting a case before the Tribunals and will engage their accountants, solicitors, or specialist tax consultants to appear on their behalf. Again, in the more complex matters barristers will usually be engaged.

There is no direct cost associated with making an appeal itself, although a number of factors must be born in mind. First, the law requires the appellant to pay or deposit the tax demanded in the assessment prior to the hearing as a condition of the appeal proceeding. In cases where this would cause financial hardship it can be waived.

The main financial issue for most businesses is the cost of representation. Even the simplest hearing requires a degree of preparation and in many there can be substantial amounts of correspondence or evidence, which needs to be collated and presented before the tribunal - this can be a time-consuming exercise and expensive if professional advisers are engaged.

As with much litigation it is usual for the winning party to claim their costs from the loser. In VAT appeals, Customs has said that it will not ask for costs in simple or straight forward cases, but will ask for costs where it is successful in cases which it considers to be complex, involved or to be vexatious.

If you become involved in an appeal, it is a good idea to establish at an early stage if Customs will ask for costs if you lose. If you win Customs is obliged to pay reasonable costs - sadly, this means expenditure is looked at critically and any non-essential costs will be excluded and quite often the level of costs will be challenged.

At the hearing itself, the parties will sit on opposing sides of the courtroom. The tribunal chairman and any supporting member will sit at the head of the Court and there will be seating at the rear for the public or any other observers. Tribunal hearings are held in private only in exceptional circumstances, and although it is most unusual for a member of the public to attend it is common for other advisers to attend a case that has a general interest.

Any hearing that is held in public will be reported and again these reports are published.
In normal appeals the appellant or his representative will open the proceedings by presenting his case, making reference to the relevant legislation, the case law and presenting the appellants documents and examining his witnesses. Witnesses appear under oath and are usually required to enter a witness box at the front of the court.

Customs can cross-examine the witnesses, but not until the appellant has finished presenting his case does Customs present its own case. It follows a similar format to the appellant and the appellant can cross-examine Customs' witnesses. When all the arguments have been made, all the evidence produced and witnesses examined, Customs will sum up its case. Once this has been done the appellant can sum up his case.

The tribunal has wide powers over the conduct of an appeal and can direct the proceeding in a particular way and it is quite common for the tribunal chairman to intervene and ask questions of either advocate or of the witnesses.

Simple cases can take half a day, but complex ones can run for weeks. Once everything has been presented to the tribunal, the chairman will give his decision. This decision is almost always "reserved" - provided in writing some weeks later after the chairman and any members have considered the evidence and reviewed the relevant legislation.

Appeals against the decision of the tribunal can be made only on the basis that the tribunal is wrong in law, not on the facts. Appeals against the decision of the tribunal are made to the High Court and can proceed from there to the Court of Appeal or even to the House of Lords. Because VAT is an EU tax, appeals can be referred at any stage to the European Court of Justice in Luxembourg if there is a compelling EU law point to address.

As can be seen, the appeals process can become a lengthy and costly exercise. While simple cases may be settled in a matter of months at little cost by a litigant in person, complex issues can run for 10 years and cost more than £100,000 if they proceed through all the possible appeal stages.

Steve James is an associate director with London-based Chiltern Plc, one of the UK's leading firms of tax advisers. jamess@chilternplc.com.

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