DCM (Optical Holdings) Ltd v Revenue and Customs (Scotland) [2022] UKSC 26

DCM, an optical business, challenged HMRC's VAT assessment on time-bar grounds and disputed HMRC's power to reduce claimed VAT credits without formal assessment. The Supreme Court held the assessment was not time-barred and confirmed HMRC has implied power to verify and refuse unjustified VAT credit claims.

Facts

DCM (Optical Holdings) Ltd operated an optical business making both taxable and exempt supplies for VAT purposes. Following a 2003 settlement with HMRC regarding apportionment of consideration between taxable and exempt supplies, DCM failed to make voluntary disclosures as agreed. In 2005, HMRC conducted a visit and discovered discrepancies in DCM’s VAT accounting. HMRC issued a best judgment assessment on 20 October 2005 for under-declared output VAT covering periods from October 2002 to April 2005. Subsequently, between 2008 and 2013, HMRC made decisions reducing DCM’s claimed VAT credits below the amounts submitted in periodic returns.

DCM’s Arguments

DCM challenged the assessment on two grounds: first, that it was time-barred under section 73(6) of the Value Added Tax Act 1994 (VATA); second, that HMRC lacked statutory power (vires) to refuse to pay claimed VAT credits and instead reduce them without making a formal assessment.

Issues

1. Whether HMRC’s assessment of 20 October 2005 was made outside the statutory time limit under section 73(6)(b) of VATA.

2. Whether HMRC have power to refuse to accept a taxable person’s self-assessment claim for payment of a VAT credit while verifying the claim and to decide to pay a lower amount than claimed.

Judgment

Time Bar Issue

The Supreme Court upheld the Inner House’s decision, rejecting DCM’s time-bar argument. Lord Hodge confirmed the correct interpretation of section 73(6)(b), referencing established authority:

The evidence in question must be sufficient to justify the making of the assessment in question… The focus is also on the subjective opinion of the relevant HMRC official, which is a question of fact.

The Court found that HMRC only obtained evidence sufficient to justify the specific assessment at the 2005 visit, not earlier. The First-tier Tribunal had found:

We are wholly unable to see any material fact which was known to HMRC prior to 31 August 2005 which would have justified making the assessment earlier.

Vires Issue

The Court rejected DCM’s argument that section 25(3) of VATA mandated HMRC to pay whatever VAT credit a trader claimed. Lord Hodge stated:

It is implicit in section 25(3) of VATA… that the obligation on HMRC to pay a VAT credit arises only once it is established that the VAT credit is due. There must be a VAT credit due before HMRC are under the statutory obligation to pay. The obligation on HMRC to pay does not depend solely on the say-so of the trader.

The Court held that HMRC’s power and duty to verify claims and refuse unjustified payments is implicit in Schedule 11, paragraph 1 of VATA, which makes HMRC responsible for the collection and management of VAT. This implied power is necessary to make the statutory scheme work and is consistent with the principle of fiscal neutrality.

Implications

This judgment clarifies two significant aspects of VAT administration. First, it confirms that the time limit under section 73(6)(b) runs from when HMRC obtain evidence sufficient to justify the specific assessment actually made, not some hypothetical earlier assessment. Second, it establishes that HMRC have implied statutory power to verify VAT credit claims and refuse payment of amounts not properly due, without being limited to the express statutory mechanisms available. The decision reinforces HMRC’s collection and management powers while noting that taxpayers retain remedies through judicial review if HMRC act in a dilatory or disproportionate manner during verification.

Verdict: Appeal dismissed. The Supreme Court upheld the Inner House’s decision, confirming that the 20 October 2005 assessment was not time-barred and that HMRC had the implied power to refuse to pay VAT credits pending verification and to pay reduced amounts where claims were not justified.

Source: DCM (Optical Holdings) Ltd v Revenue and Customs (Scotland) [2022] UKSC 26