DCM (Optical Holdings) Ltd v Revenue and Customs (Scotland) [2022] UKSC 26 (12 October 2022)
Citation:DCM (Optical Holdings) Ltd v Revenue and Customs (Scotland) [2022] UKSC 26 (12 October 2022).
Subjects invoked: 81. 'Tax - Transactional taxes'.
Rule of thumb:For tax cases, does time bar run from date of constructive knowledge or actual knowledge? For most cases, time-bar runs from date of constructive knowledge of a claim, however, for tax cases, it is the opposite, and time-bar for HMRC runs from date of actual knowledge i.e. time bar is more lax & lenient for HMRC than it is for people at large in UK society.
Background facts:
This case invoked the subject of transactional taxes, namely VAT. This case invoked the principles of ‘actual’ and ‘constructive’ knowledge of VAT underpayments.
The facts were very simple. Optical express supplied some goods & services in its stores which were VAT exempt from VAT, medical advice with lenses & frames, as well as some other goods which were not VAT exempt, cleaning products for lenses etc. HMRC informed Optical Express that they thought they had some evidence suggesting they had underpaid on VAT, expressly stating they ‘thought something was wrong’, and that they were opening a full investigation. After a number of years HMRC finished their investigation and then raised a legal action against Optical Express for underpaid VAT.
Optical Express argued that HMRC’s case against them was time-barred. Optical Express argued that under the Value Added Tax Act 1994, S73, if HMRC had ‘knowledge’ of underpayment of VAT then the action for payment had to be raised within 1 year or it was time-barred. Optical Express produced the letter from HMRC stating they thought they had underpaid VAT, and stated that over a year passed before the case was raised meaning that the action was time-barred. HMRC argued that they had ‘constructive’ knowledge at that point, but not ‘actual’ knowledge. HMRC argued that when they sent that letter stating they thought ‘something was wrong’ they had not fully gone through the Optical Express accounts to have ‘actual’ knowledge of the full illegal arrangement Optical Express were doing. HMRC argued that by their construction of the term ‘knowledge’ in the Act, with this being ‘actual’ knowledge and not ‘constructive’ knowledge, they were within time-bar.
Judgment:
The Court upheld the arguments of HMRC. The Court affirmed that the exact meaning of ‘knowledge’ in the VATA 1994 was the key aspect of the debate. The Court then affirmed time-bar in VAT tax cases the 1 year time-limit runs from the point of ‘actual knowledge’ of the breaches of the law, and not ‘constructive knowledge’ of the breaches of the law. HMRC’s case against Optical Express was not time-barred.
People should be aware that in general personal injury or commercial law cases, time bar runs from the date of ‘constructive’ knowledge, rather than ‘actual’ knowledge, so tax is unique in its more lax time-bar rules for HMRC, and Optical Express did have a fair point. However, it is HMRC who are collecting in tax for the Judges themselves, and the running of the Courts generally, the armed forces, immigration, police, the NHS etc, and for the welfare of the entire country of Britain generally, and there is an underpinning purpose behind all tax legislation in favour of tax being collected if someone has been deemed to legally owe, and this purpose has to be taken into account in interpreting all legislation, so it is extremely difficult to beat HMRC in a tax statutory interpretation case in Court if HMRC can provide any sort of even moderately persuasive legal argument about why a statute should be interpreted in their favour.
Ratio-decidendi:
‘29. HMRC are a creature of statute and their powers are set out in statute either expressly or by implication. The power to verify a return is recognised in section 73(1) of VATA. There is no express power to refuse to meet a claim for payment by a repayment trader until the process of verification is completed or to amend a repayment return on completing the verification process. The power to do so, if it exists, must arise by implication. DCM argue that there is no such implication. I disagree… 43… the correction ordered by HMRC is not subject to any statutory time limit… 45… This does not mean that a taxable person is left without a remedy if HMRC’s verification is not expeditious or proportionate. It has long been established that HMRC are subject to the rules and principles of public law and they are amenable to judicial review’, Lord Hodge
Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.