Case No: CH/2002/APP/0608
Neutral Citation Number: [2003] EWHC 2552 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 7th November 2003
Before :
THE HONOURABLE MR JUSTICE PATTEN
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Between :
 	THE COMMISSIONERS OF H.M. CUSTOMS AND EXCISE	Appellant	
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 	PEGASUS BIRDS LIMITED	Respondent	
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Alison Foster QC and Eamon Mc Nicholas (instructed by The Solicitor for Customs and Excise) for the Appellant
Eleanor Sharpston QC and Jeremy Woolf (instructed by Philippsohn Crawfords Berwald) for the Respondent
Hearing dates : 26 March to 2 April 2003 and 25 to 27 June 2003
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Judgment

Mr Justice Patten : 
Introduction
1.	This is an appeal by the Commissioners of Customs and Excise against a decision of the VAT and Duties Tribunal (Mr Theodore Wallace and Mr Cyril Shaw FCA) released on 7th June 2002. The issue before the Tribunal was whether an assessment to VAT notified to the Respondent Company, Pegasus Birds Limited ("Pegasus"), on 16th April 1997, and contained in a formal notice of assessment dated 14th May 1997, was made to best judgment. The Tribunal decided that it was not and allowed the Respondent’s appeal. The Commissioners now appeal to this Court on the basis that the Tribunal misdirected itself or at least misapplied the law as to what constitutes a failure to exercise best judgment. In the alternative they contend that if the Tribunal did correctly direct itself as to the law, there was no evidence to support the critical findings of fact upon which they based their own judgment. 
2.	The scale of the proceedings before the Tribunal is alarming. As recorded in the Tribunal’s decision, this was the second longest VAT appeal ever. It lasted some 42 days, spread over a period of eight months between May 2001 and February 2002. During the course of the hearing Mr Bakewell, the Customs officer who was responsible for the investigation and the subsequent assessment, was cross-examined for seven days. At various points in the proceedings challenges were made to the honesty and good faith of the investigation and assessment, although Mr Bakewell was ultimately accused of no more than intellectual dishonesty and a failure properly to consider material available to him which was said to be at odds with, and critical of, the assessment. The Commissioners were represented before the Tribunal by Mr Mc Nicholas of Counsel, and Pegasus by Mr Freeman of Messrs Horwath Clark Whitehill, who is a forensic accountant and produced a number of reports in support of the Respondent’s appeal. His costs alone are estimated to be in the region of £1m. The assessments in question covered the ten accounting periods from 1st January 1993 to 30th June 1995 and totalled £658,388. That assumes undeclared tax-inclusive sales of some £4.05m, compared with declared sales of a little under £0.9m. On these figures some 82% of sales were suppressed and off-record. Although not required to decide the matter in the light of their findings about best judgment, the Tribunal indicated that its own view on quantum was that there was a liability of no more than £27,000. Mr Freeman on behalf of Pegasus had sought to justify liability to VAT of between £3,000 and £6,000. 
Background to the Assessments and Procedural History
3.	On 8th October 1996 Mr Brett Hammond, the Director of Pegasus, pleaded guilty to various offences under ss.72(1) and/or 72(3) of the Value Added Tax Act 1994 ("the 1994 Act"). The particulars of the offences charged were that between 1st January 1993 and 24th May 1995 Mr Hammond and a Mr Eric Foster purchased live birds in Belgium and Holland and transported them to England, where they were sold for cash. The two Defendants were alleged to have failed to keep proper or complete records of the purchases and subsequent sales and to have failed to account for the VAT that became due. 
4.	The trial was set to commence on 8th October 1996. Mr Foster had pleaded guilty on 2nd October and Mr Hammond entered a guilty plea on the first day of the trial, on the basis of a document headed "Basis of Plea" which indicated an acceptance that there was evidence of a joint enterprise between Hammond and Foster, but gave notice that there would be a later "Newton Hearing" to determine the scale of Mr Hammond’s evasion by reference to 18 purchasing trips referred to in the opening note of the Crown. That note refers to a minimum of 18 known trips on which it was said that Mr Hammond must have purchased birds, none of which appears in the accounting records of Pegasus. The Basis of Plea document went on to indicate that at the Newton Hearing Mr Hammond intended to adduce evidence (including expert evidence) about the number and value of the birds involved. 
5.	In preparation for the trial the prosecution had obtained four reports (referred to as A-D) from Mr Colin Booker ACMA, who was to give expert evidence. Booker C (dated 30th April 1996) contained a calculation of the VAT evaded between January 1993 and May 1995 by both E & J Birds (the firm run by Mr Foster) and by Pegasus. Booker D (dated 6th June 1996) replaced Booker A and B, and contained an analysis of the contemporaneous trading records of Pegasus, including the so-called Money Taken sheets, till rolls, paying-in slips, VAT returns and worksheets, purchase invoices, cash books and bank statements. One of the points urged on the Tribunal by Mr Freeman and repeated in submissions before me was that Pegasus operated an established business which did record purchases and sales and did provide VAT returns. The assessments to VAT which were the subject of the appeal to the Tribunal were, as already indicated, based on an estimate of off-record sales, calculated by reference to trips made to the continent to purchase birds in which Mr Hammond is said to have participated, or at least been supplied through. Mr Booker did not, however, make factual assumptions of his own as to the number of those trips and the level of purchases. He relied upon various Trip Schedules prepared by Mr Bakewell and, on the basis of these, calculated what he considered was the likely measure of evasion. At the request of the prosecution he produced Booker C, containing his assessment of the amount of VAT avoided by both Pegasus and E & J Birds. It is calculated on an assumption of at least 165 trips between January 1993 and May 1995, with an average value of the purchases per trip of some £15,305.61. This produced total purchase costs for the period of £2,525,096, which he adjusted to £2,272,586 to take account of pre-sale mortalities. He then applied mark-ups of 159.61% for retail sales and 104.43% for trade sales. If all sales of the birds were trade sales, this would result in a sales figure for both businesses of £4,645,847 and a VAT liability of £691,935. If all sales were retail, the corresponding figures would be £5,907,679 and £879,718. 
6.	Mr Bakewell produced a statement dated 1st November 1996 in which he updated his Trip Schedule for purposes of the Newton Hearing. The statement was discussed with Prosecuting Counsel (Mr Seddon Cripps: now HH Judge Cripps) and approved by him. It contains a number of exhibits, including invoices obtained from foreign traders and invoices for the hire of vans and trailers. The Crown’s case for the trial (supported by the Trip Schedule in its original form) was that Mr Foster and Mr Hammond had been involved in 165 trips, resulting in VAT evasion of between £692,000 and £880,000, and although Mr Hammond had entered a guilty plea by reference to 18 specific trips, it is clear that this in no way bound the Crown or altered its own view of the scale of the evasion involved. Mr Bakewell therefore proceeded to calculate the amount of VAT avoided on the basis of the 165 trips, in sums ranging from £681,248 to £2,200,723, depending upon the average value of the consignments (£13,699 to £20,690) and the mark-ups applied (80-285%). He assessed Mr Hammond’s share of each consignment as 57%, based upon some invoices from a Dutch dealer named Kloeg, which broke down a particular consignment between "O" and "X". O was said to be a reference to Mr Hammond and X to be a reference to Mr Foster. Prior to the Newton Hearing, Mr Foster through his accountant agreed to a mark-up for calculation purposes of 150%. 
7.	The Newton Hearing was fixed for 17th February 1997. The trial judge (HH Judge Pontius) had indicated at a procedural hearing that for purposes of sentencing he needed a bracket rather than a precise assessment of the tax evaded and that the first bracket would be up to £50,000. Judge Cripps gave evidence to the Tribunal and described what happened at the Newton Hearing. Some of the Commissioners’ foreign witnesses who were to give evidence at the trial had been stood down following the guilty pleas. He was concerned about the evidence of foreign purchases available to him at the Newton Hearing but also wished to secure a custodial sentence. His view as a prosecutor was that, once a level of evasion of £50,000 was reached, any increase above that was unlikely to have anything but a limited effect on sentence. After discussion with Counsel for Mr Hammond, it was agreed that, for sentencing purposes only, Mr Hammond would accept that he was responsible for the evasion of VAT in a figure not exceeding £50,000. On this basis Mr Hammond was sentenced to 18 months’ imprisonment, which was later reduced to 12 months on appeal. 
8.	In these circumstances it was unnecessary for any evidence about the scale of the evasion to be called by the prosecution. Equally, no evidence was given by Mr Hammond or any admissions made by him beyond what was necessary for sentencing purposes. The Commissioners therefore obtained no further information from the Newton Hearing for the purpose of making their assessment of Pegasus to VAT, other than the agreement reached about mark-ups and the material contained in the two reports by Mr Freeman. The first of these is dated 30th September 1996 and was prepared for the main criminal trial. The second is dated 20th January 1997 and was intended for use at the Newton Hearing. In his first report Mr Freeman concluded that there was no real evidence of any off-record sales and that the Money Taken sheets (which Mr Booker considered to be indicative of a fraudulent system) were consistent with the annual accounts audited to 31st March 1994. These conclusions were of course negated by Mr Hammond’s plea of guilty. In his second report Mr Freeman calculated the level of VAT evaded to be between £13,000 and £16,000. These reports contain a number of specific criticisms of Mr Booker’s evidence, including the following: 
i.	his failure to take into account on-record purchases, including the zero-rated sales indicated in the Money Taken sheets; 
ii.	his failure to take into account and make deductions for on-record purchases of birds such as parrots which were imported as part of the consignment on the trips in question and were documented; 
iii.	the unrepresentative nature of trip 165 as a reliable indicator of value per trip. A reasonable average for a van-load of birds was said to be between £5,000 and £6,000; 
iv.	the number of trips undertaken which actually involved Mr Hammond or Pegasus. Only 18 trips were admitted, as opposed to the 165 claimed; 
v.	the lack of personal expenditure on the part of Mr Hammond or his wife consistent with evasion on the scale alleged. 
9.	As already indicated, the assessments were raised and notified to Pegasus in April 1997 by Mrs Skam of the Basildon VAT Office. Her letter of 16th April indicated that the assessment figure of £658,388 was based on a total of 166 trips between March 1993 and June 1995. Each trip was given an average value of £18,688, coupled with the agreed mark-up of 150%. The consignments were split 57/43 between Pegasus and E & J Birds on the basis of the Kloeg invoices. A Notice of Appeal against the assessments was lodged by Mr Freeman on behalf of Pegasus, dated 6th June 1997. In his accompanying letter Mr Freeman stated that the grounds of appeal were that the assessment was "excessive and not in accordance with information provided". Only £14,500 of unpaid tax was admitted. There was no express challenge to best judgment. But on 31st July Mr Freeman notified the Tribunal that he wished to rely on two additional grounds: (i) that the assessments were not made to best judgment in accordance with s.73(1) of the 1994 Act; and (ii) that the tax periods up to and including the quarter to 31st March 1995 were out of time. 
10.	The second issue about time limits was heard and rejected by the Tribunal in its decision released on 22nd October 1997. There were then unsuccessful appeals to the High Court ([1999] STC 95) and to the Court of Appeal ([2000] STC 91). A petition for leave was presented to the House of Lords and was refused on 29th June 2000. Pegasus (through Mr Freeman) then applied for the issue of best judgment to be decided as a preliminary issue, but withdrew this application at a directions hearing held on 16th October 2000. On 27th November 2000 Mr Freeman served what was described as an "Extended Notice of Appeal". In relation to the issue of best judgment, it sets out a series of allegations against Mr Bakewell, the relevant ones of which can be summarised as follows: 
i.	he was "perverse" in failing to take into account any of the specific matters set out in a statement from Mr Freeman dated 21st July 1997. This statement is an abridgment of Mr Freeman’s two earlier reports made for the trial and the Newton Hearing, and repeats the criticisms set out in paragraph 8 above; 
ii.	he was "perverse" in failing to take into account the accountancy evidence produced on behalf of Mr Hammond. "The assessing officer perversely maintained the substance of his original calculations in the face of compelling evidence and opinions that showed that he had to moderate to a serious degree the amount of calculated evasion"; 
iii.	there were only 18 trips involving Mr Hammond and the prosecution accepted this as the basis of the guilty plea; 
iv.	the average cost of the birds imported on each trip was based on a sample of three out of the 166 alleged trips and was excessive. A more reasonable estimate would be £5,000 to £6,000 per trip. In fact, as subsequently revealed at the hearing, the cost of purchases figure of £18,000 was based solely on trip 165 (made on 22nd May 1995); 
v.	Mr Hammond was only one of several customers of Mr Foster and not a partner of his in the illegal importation of birds. The 43/57 split was not justifiable, but was "perversely" maintained by Mr Bakewell; 
vi.	the calculations which formed the basis of the assessments took no account of the undisputed fact that the trips included cages and non-live imports (e.g. bird seed) which reduced the space available for live birds; 
vii.	the quantity of birds involved in the alleged off-record sales was beyond the operational ability of Pegasus. The assessment was 80 times more than any reasonable estimate of what could have been possible. 
11.	The directions given on 16th October 2000 were made on the basis that both issues on the appeal (i.e. best judgment and quantum) were to be dealt with at the same hearing. The evidence was accordingly directed to both issues. Mr Bakewell (whose conduct is central to the issue of best judgment) produced a composite statement of some 39 pages which was served on 30th May 2001. It exhibited his earlier statement of 1st November 1996 produced for the Newton Hearing, together with the Trip Schedule. I should mention at this stage that there were a number of procedural wrangles before the Tribunal concerning the late production of witness statements and disclosure. Mr Bakewell’s composite statement was not produced until the thirteenth day of the hearing (pursuant to a direction given on 11th May 2001) and there was late disclosure by the Commissioners of the unused material seized from Mr Foster and Mr Hammond during a raid in May 1995. There were some 40 boxes of this material, which were only produced during the hearing. There was no agreed timetable for witnesses prior to the hearing and no agreed bundle of documents. This clearly caused the Tribunal a considerable amount of justifiable irritation, which is evident in their decision. Equally, the Tribunal and Mr Mc Nicholas had to deal with a number of new issues raised by Mr Freeman, which undoubtedly lengthened the proceedings. I mention these points only to put on record that neither party has relied upon the procedural difficulties as relevant to the issues on this appeal. It is not therefore necessary to say anything further about the detail of them. I should, however, refer to one matter which resulted from the directions that both best judgment and quantum were to be dealt with at the same hearing. Included in the evidence were statements by a number of individuals (including at least ten overseas witnesses) which had been prepared for use in the criminal proceedings. This material was relevant to best judgment in the sense that it was available to Mr Bakewell at the time of the making of the assessment and was considered by him. But the Tribunal seems to have raised the question whether, because the statements had not been served on Pegasus in the appeal proceedings under Rule 21 of the Tribunal Rules, they should be admitted to prove the truth of their contents without the makers of the statements being called. The Tribunal ruled that the depositions of the overseas suppliers and the oral hearsay evidence of Mr Bakewell as to what they had said should be excluded on the issue of quantum. They were, however, admissible in relation to best judgment. Inevitably this had the consequence that when witnesses such as Mr Bakwell were examined about their assessment of matters such as the likely number of trips and the size of the consignments, they were able to give evidence of how they relied upon information provided by the overseas suppliers, but the Tribunal would not receive that evidence in relation to the issue of quantum to which it was also highly relevant. The failure to separate quantum and best judgment also had the consequence that the Tribunal embarked upon a fact-finding exercise (which it was bound to do in order to determine quantum) and had formed its own view of the correctness of the assessment when it came to consider the question of best judgment. This is not inherently objectionable, provided that the Tribunal does not allow its own determination of the facts to dictate its conclusions on best judgment. There are obvious difficulties here, and in paragraph 63 of its decision the Tribunal itself acknowledged that the difference between the evidence on best judgment and that on quantum had caused considerable problems during the hearing. Although (as I shall come to later) the parties to this appeal argue for different tests of what constitutes best judgment, Miss Sharpston QC (for Pegasus) rightly rejected any suggestion that the Tribunal could infer from the mere fact that it took a different view of the evidence, and therefore the correctness of the assessment, that the Assessing Officer had not been entitled to take a different view on the same material and had on that basis acted in good faith. The essential criticism of the Tribunal made by the Commissioners on this appeal is that the Tribunal fell into that very trap and failed to disentangle its own view of the likely scale of evasion from the question whether the Commissioners had exercised best judgment in coming to a different conclusion. 
The Course of the Hearing
12.	Although the issues of best judgment and quantum were both before the Tribunal at the hearing, it is clear that most of the argument and the cross-examination of Mr Bakewell was directed to the question of best judgment. That is evident from the Extended Notice of Appeal lodged by Pegasus in November 2000, which elaborates the case on best judgment over 11 out of its 12 paragraphs and restricts the appeal on quantum to a single sentence to the effect that the amount of VAT due was no more than £8,000. At the start of the hearing in May 2001 Mr Freeman also provided Mr Mc Nicholas with a document headed "Draft Legal Submissions", which was intended to put the Commissioners on notice of the case they had to answer. It takes issue with the assessments broadly speaking on the same grounds as are set out in the Extended Notice of Appeal: i.e. the number of trips, the 43/57% split, the size and value per consignment and the inability of Pegasus to have conducted off-record sales on the scale alleged. It also relies on a submission that Mr Hammond was not a co-venturer with Mr Foster, but merely became involved in the evasion of VAT as a necessary consequence of importing or purchasing birds which had been smuggled into the UK to avoid MAFF quarantine regulations. The document was prepared without sight of the Commissioners’ authorities and, despite its title, does not in fact contain any detailed submissions on the law. But in relation to the issue of best judgment it contains the following paragraphs: 
"The Rahman test
I have not yet studied this and at this date do not yet fully appreciate why there is a conflict between this and Wednesbury. I do not see any conflict based on the facts of this case.
I say that Mr Bakewell has acted vindictively, capriciously, and has made a spurious estimate or guess in which all the elements of honest judgment are missing. The assessments are wholly unreasonable. I have no evidence that he has acted dishonestly in respect of obtaining a monetary advantage."
13.	Mr Bakewell began his evidence in cross-examination on 30th May 2001 by re-asserting that he believed that he had made the assessments to best judgment having considered all the material in the case and that he stood by them. He was asked about his life and career before joining Customs and Excise and said that he had been interested in birds since childhood and had worked in Paris as the manager of the bird and reptile section of a large pet store. There then followed several days of cross-examination, during which he was asked about various matters, including the book-keeping at Pegasus, a control visit made by Customs and Excise in 1994, his observations of the Foster trips and the presence on them of an additional vehicle, his own visits to Pegasus’s shop and the relative sizes of Pegasus and E & J Birds. There was then a break in the evidence from June until September. 
14.	Prior to the resumption of the hearing there was an exchange of correspondence between Mr Mc Nicholas and Mr Freeman in which Mr Mc Nicholas raised the concerns of the Commissioners about certain investigations which had been or were being carried out by Pegasus into the background of Mr Bakewell. In a fourth supplementary statement Mr Freeman said that these investigations revealed that Mr Bakewell and Mr Hammond had lived within a radius of two miles of each other as boys and were both interested in birds. There was a possibility that they had known or at least met each other through a local bird club, but Mr Hammond in a statement could not recall whether this was in fact the case. On 2nd September 2001 Mr Freeman wrote to Mr Mc Nicholas in these terms: 
"Dear Eamon
Pegasus Birds LON/1997/814 + 00/1228
Allegation of Dishonesty
1. I regret that I have to give notice that I will be arguing this. The overriding suspicion remains the same as previously. There was a Cites/Endangered Species operation at the same time. When this failed the VAT investigation and prosecution had to be exaggerated in order to justify the wasted costs.
……….
4. I have expressed in other letters of today’s date severe reservations regarding the integrity and good faith of the investigation and the interviewing of witnesses. I do not see that I must set out all the detail as I will want to confront Bakewell with some of them on cross examination.
5. Some, albeit rather skimpy, evidence has come to light which implies that Bakewell met or knew of Hammond when they were boys. I make it clear that the evidence goes nowhere near supporting an allegation of malice. However, I would want to see clear evidence that Bakewell disclosed the fact that he had known Hammond when they were young to his superiors and that they authorised him to continue the investigation and prosecution."
15.	It is clear from this correspondence that the case being advanced by Mr Freeman at this stage was that the assessments made by the Commissioners through Mr Bakewell were essentially dishonest and were motivated either by the wasted costs issue referred to in paragraph 1 of the letter or by some longstanding animosity between Mr Bakewell and Mr Hammond which had existed since adolescence. When the hearing resumed on 3rd September, Mr Mc Nicholas raised before the Tribunal the issue of dishonesty referred to in his recent correspondence with Mr Freeman. Mr Freeman was asked by the Chairman whether he was now alleging mala fides. He said that he was alleging bad faith in the form of the CITES allegation, but disowned any suggestion that Mr Bakewell in some way profited from his conduct. He was also saying that the Commissioners had "deliberately and carefully" over-emphasised the importance of some evidence and ignored evidence to the contrary. 
16.	Following this exchange Mr Mc Nicholas produced overnight some written submissions setting out the authorities relied upon for the proposition that an allegation of dishonesty must be clearly pleaded prior to it being put to a witness in cross-examination, so that the witness and the party against whom the allegation is made should have a proper opportunity of knowing what the allegation is and of preparing to deal with it. Paragraphs 2.13 and 2.14 of the submissions read as follows: 
"2.13 For the avoidance of doubt the Commissioners submit that the allegations of dishonesty against Mr Bakewell and/or the Commissioners have no substance and the Tribunal should not allow them to be pursued so late into the case and with so little warning having been given to the Commissioners. The unfairness and prejudice to the Commissioners of allowing the allegations to be put at this late stage far outweighs any prejudice to the Appellant in not being able to pursue the allegations.
2.14 If, contrary to 2.13 above, the Tribunal is minded to allow the allegations to be put then they must be pleaded with particularity. It is understood that the Appellant has no objection to pleading the allegations, or at least part of them."
17.	On 4th September Mr Freeman repeated that Pegasus did have a strong suspicion that there was mala fides on the part of Mr Bakewell and the Commissioners. There was then a discussion as to whether, under the Tribunal Rules (which make no provision for pleadings as such), the Tribunal could direct an applicant to particularise allegations of dishonesty in the way that Mr Mc Nicholas was asking. In the event, after an exchange with the Chairman about what had to be proved in order to challenge best judgment, Mr Freeman indicated that he did not intend to pursue the CITES allegation and that point dropped away. But when Mr Bakewell resumed his evidence in cross-examination on 6th September, Mr Freeman began by asking him about his school career and whether he had met Mr Hammond at that time. Mr Bakewell said that he had not come across Mr Hammond until about 1991. The only possible purpose of this line of cross-examination was to establish an early link between the two men, relevant to the allegation of a dishonest motive in relation to the assessments. The evidence of Mr Bakewell resumed on 12th December, following the interposition of a number of witnesses including Mr Hammond. By then Mr Freeman had produced a further document entitled "Appellant’s Focus Regarding Best Judgment" dated 9th December 2001, the purpose of which was to show that the 1997 assessments did not satisfy either of the possible tests on best judgment canvassed on the appeal. The relevant parts read as follows: 
"1. The Appellant’s purpose is to show that the raising of the assessment in April 1997 fell firmly within one of the tests whereby the assessment could be found not to have been made to best judgment. These tests are currently well defined in case law as including dishonesty and malice. Reference has previously been made to both of these elements although without formal pleading. However, in case law equal weight is also given to capriciousness as well as the global tests that include that of being wholly unreasonable. The assessing officer, Mark Bakewell has, under Van Boekel, to consider fairly all the material before him.
2. It is undoubtedly the case that Mr Bakewell took exceptional pains both with respect to the evidence in this case both during the criminal trial and also during the VAT proceedings. However, on careful consideration of (a) the evidence, (b) the requirements of C&E at the date of making the assessment and (c) the likely mindset of Mr Bakewell at that precise date, the main issue that will be pleaded by Appellant is that of capriciousness. In essence, the making of the assessment was regarded as paperwork for internal purposes. It could have had any numbers on it.
……….
4. The decision to prosecute Mr Hammond and Mr Foster for VAT offences was clearly not that of Mr Bakewell alone. Likewise with the level of liability that was asserted. The course of the prosecution heavily involved Mr Bakewell but any decisions taken could not have been his alone. The Appellant considers that the prosecution was dishonest but that is neither a matter before this Tribunal nor a personal allegation against Mr Bakewell.
5. When one comes to the actual making of the assessment, the issues then become (a) what was the mindset of Mr Bakewell?, (b) what evidence did he take into account in making the assessment? and (c) was the end result wholly unreasonable? For the purpose of this note there is no need to go into further detail as to requirements.
……….
14. There will be a number of individual issues within this case that can only be explained by negligence or mala fides. An example is the interviewing of overseas witnesses such as Vanderfeesten. Where such alternatives are available, the Appellant will not assert mala fides. The Appellant cannot think of any essential issues that require an allegation of mala fides, i.e. that they cannot be made on an alternative basis.
……….
16. The Appellant, and Mr Hammond, have no intention of pursuing issues of mala fides in any other forum; it never has had any such intention as can be seen from the numerous attempts to find ways to settle this matter, the most recent being in October 2001. Nevertheless, I consider myself professionally obliged to reserve the position of the Appellant and Mr Hammond on this point."
18.	Mr Bakewell was cross-examined on 12th, 13th, 14th and 17th December. The cross-examination covered most of the points raised by Mr Freeman in his various statements and in the Extended Notice of Appeal in support of Pegasus’s case that the assessments were excessive in amount. I shall come to the detail of some of this later in this judgment. Consistently with the "Focus" document, most of the cross-examination was directed to putting to Mr Bakewell the reasons why he should have taken a different view of the evidence he had to consider. Dishonesty or a lack of good faith was not put to him in terms, except that at the very end of his cross-examination it was put to him that his evidence was not reliable and, to use Mr Freeman’s words, "could possibly be a lie". In his written closing submissions following the conclusion of the evidence, Mr Freeman analysed the key points in Mr Bakewell’s assessment of the scale of Hammond’s evasion, with references to extracts from the transcript. There are references in that document to evidence being ignored, but the submissions for the most part concentrate on the alleged weaknesses in the evidence and methodology relied on by Mr Bakewell and are directed to persuading the Tribunal to take a different view of the facts. Nowhere in this document is there any analysis of whether it was possible for Mr Bakewell to have taken a different view, or of the reasons he gave in cross-examination for doing so. In particular no express allegation is made of any conscious failure to pay due regard to any of the relevant material or any bad faith. 
19.	In his closing submissions to the Tribunal Mr Freeman said that, in relation to best judgment, the test of dishonesty was intellectual dishonesty, not financial dishonesty. During the course of this appeal Miss Sharpston was at pains to emphasise that whatever the position may have been at the outset of her client’s appeal before the Tribunal, it was made clear by the end that no allegations of dishonesty or conscious bad faith were being made. Mr Freeman confined himself to submitting that the assessment was capricious. Mr Bakewell had rejected contrary evidence out of hand and had taken no account of Mr Freeman’s reports. 
Best Judgment
 
20.	Article 22(2) of the Sixth Directive requires every taxable person to keep accounts in sufficient detail for VAT to be applied and inspected by the tax authority. This is given statutory effect by paragraph 6 of Schedule 11 to the 1994 Act and by the 1995 VAT Regulations (SI 1995/2518: regs 31 and 33). The Sixth Directive does not itself prescribe machinery for the collection of VAT, but instead Article 22(8) of the Directive provides that: 
"Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion, subject to the requirement of equal treatment for domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers."
21.	The 1994 Act deals with the evasion or non-payment of VAT by imposing penalties for mis-declarations of the tax and failures to keep proper records (see ss.63 and 69) in addition to the sanctions for the dishonest evasion of VAT contained in ss.60 and 72. When a taxable person fails to make returns or to keep the necessary or complete records, then the Commissioners are given power to assess the amount of VAT payable. Section 73(1) of the 1994 Act provides as follows: 
"Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him."
An assessment made in this way, like any other assessment, is subject to a right of appeal. Section 83(p) of the 1994 Act creates a right of appeal to the Tribunal in respect of:
"an assessment -
(i) under section 73(1) or (2) in respect of a period for which the appellant has made a return under this Act; or
(ii) under [subsections (7), (7A) or (7B)] of that section; or
(iii) under section 75;
or the amount of such an assessment."
A condition of the exercise of this right of appeal is that the amount of the assessment should have been paid, but this requirement may be waived in appropriate cases if the Commissioners or the Tribunal are satisfied that the Appellant would suffer hardship: see s.84(3). In the present case advance payment of the amount of the assessment was not insisted upon.
22.	On an appeal under s.83(p) the Tribunal has the power to reduce the amount of the assessment. Section 84(8) of the 1994 Act provides that: 
"Where on an appeal it is found -
(a) that the whole or part of any amount paid or deposited in pursuance of subsection (3) above is not due; or
(b) that the whole or part of any VAT credit due to the appellant has not been paid,
so much of that amount as is found not to be due or not to have been paid shall be repaid (or, as the case may be, paid) with interest at such rate as the tribunal may determine; and where the appeal has been entertained notwithstanding that an amount determined by the Commissioners to be payable as VAT has not been paid or deposited and it is found on the appeal that that amount is due, the tribunal may, if it thinks fit, direct that that amount shall be paid with interest at such rate as may be specified in the direction."
The Tribunal can also raise the amount of the assessment by giving a direction specifying the correct amount of VAT due: see s.84(5). In the present case, once the Tribunal had determined that the assessments were not made to best judgment and had therefore to be set aside, it was no longer open to it to determine or make any further directions about quantum and it did not do so. It is therefore common ground that this appeal turns solely on the question of best judgment.
23.	Before considering the authorities on best judgment it is necessary to make two preliminary points which are obvious from the terms of s.73(1) and the circumstances in which the power to assess falls to be exercised. The s.73(1) power only arises and can only be exercised when the person chargeable to VAT has failed to make the necessary returns or to keep the records required under the Act, or where those returns appear to be incomplete or incorrect. The degree of non-compliance may therefore vary from cases of deliberate and outright evasion to cases where returns are made but on an incorrect or inadequate basis. The material and information available to the Commissioners in making their own assessment will therefore vary according to the circumstances, but in every case, to a greater or lesser degree, they will have to deal with a trader whose records or returns are incomplete. This necessarily requires the Commissioners, as s.73(1) makes clear, to exercise judgment in making their own assessment of the amount of VAT actually due. The second point is that it is the Commissioners who are required to make the assessment to the best of their judgment. This is not intended to be, and cannot by its very nature be, a guarantee of accuracy. The Commissioners can do no more than bring to bear their own best assessment of what tax is due, on the basis of the information which exists and is available to them. If the trader is dissatisfied with the assessment, he can appeal to the independent Tribunal and put before it any arguments in favour of a reduction in the assessment which he has. The right to appeal on quantum is therefore a recognition by Parliament that the assessment may, by its very nature, be inaccurate or flawed, and the Tribunal is given power to adjust it accordingly. 
24.	The possibility of error in the making of a s.73 assessment has also been recognised in the authorities which consider what is required of the Commissioners of Customs and Excise in order to exercise best judgment. In Spillane v. Customs and Excise Commissioners [1990] STC 212, the Appellant had carried on the business of manufacturing and selling counterfeit sound-recording tapes. He had made no VAT returns at all nor kept any records. He also refused to tell the Customs officers whether he was selling the tapes wholesale or retail. An assessment was made, based on a selling price of £2 per tape, which was the maximum sale price justifiable on the information available. Subsequently additional information was obtained and the Commissioners reduced the assessment by some £40,000. The Tribunal rejected the contention that the original assessment was not made to best judgment, finding that the officer had done his best on the information then available and had acted in good faith. Simon Brown J dismissed the trader’s appeal. At page 218 he said this: 
" Those authorities require that the commissioners make a value judgment on the material before them and must do so honestly and bona fide, not arbitrarily, dishonestly, vindictively or capriciously. They must act on some material and reasonably base an assessment on it and not act ‘upon a whim or without any rational basis’ (see Schlimberger Inland Services Inc v Customs and Excise Comrs [1987] STC 228 at 235). It would, said Woolf J ([1981] STC 290 at 292) -
‘ . . . be a misuse of that power if the commissioners were to decide on a figure which they knew was, or thought was, in excess of the amount which would possibly be payable, and then to leave it to the taxpayer to seek, on appeal, to reduce that assessment.’
I do not accept for a moment that Mr Andrews’ assessment was inconsistent with that dictum. In a case of this sort where the taxpayer’s dishonesty deprives the commissioners of most of the critical information needed for a proper assessment, it is difficult indeed to exercise a proper judgment. Really in a case like this all that the commissioners know for certain is that there is a wide bracket represented at the top end by the very most which could possibly be payable if all the factual doubts were resolved against the taxpayer and at the bottom end by the least sum payable assuming the taxpayer were to succeed on all points. In such a case I see no possible reason why the commissioners should decide on some figure beneath the upper end of the bracket let alone why, as counsel for the appellant submits, they should carry out some averaging exercise, merely because of the likelihood that when on appeal the taxpayer comes to make his detailed case on the facts liability will be found to fall below that upper figure. On the contrary, it would seem to me in a real sense objectionably arbitrary to determine a figure below the top of the bracket."
25.	The authorities referred to by the learned judge begin with the judgment of Woolf J in Van Boeckel v. Customs and Excise Commissioners [1981] STC 290. That case concerned an assessment of the takings of a public house. There were no visits made to the premises and the manager was not interviewed. Instead the Commissioners based the assessment on the takings during a test period of five weeks. The Tribunal reduced the assessment to take account of pilferage alleged by the taxpayer, but held that the assessment was nonetheless made to best judgment. Woolf J dismissed the appeal. On the issue of best judgment he said this (at page 292): 
" The contentions on behalf of the taxpayer in this case can be summarised by saying that on the facts before the tribunal it is clear, so it is contended, that the assessment in question was not valid because the commissioners had taken insufficient steps to ascertain the amount of tax due before making the assessment. Therefore it is important to come to a conclusion as to what are the obligations placed on the commissioners in order properly to come to a view as to the amount of tax due, to the best of their judgment. As to this, the very use of the word ‘judgment’ makes it clear that the commissioners are required to exercise their powers in such a way that they make a value judgment on the material which is before them. Clearly they must perform that function honestly and bona fide. It would be a misuse of that power if the commissioners were to decide on a figure which they knew was, or thought was, in excess of the amount which could possibly be payable, and then to leave it to the taxpayer to seek, on appeal, to reduce that assessment.
Secondly, clearly there must be some material before the commissioners on which they can base their judgment. If there is no material at all it would be impossible to form a judgment as to what tax is due.
Thirdly, it should be recognised, particularly bearing in mind the primary obligation, to which I have made reference, of the taxpayer to make a return himself, that the commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to the best of their judgment, is due. In the very nature of things frequently the relevant information will be readily available to the taxpayer, but it will be very difficult for the commissioners to obtain that information without carrying out exhaustive investigations. In my view, the use of the words ‘best of their judgment’ does not envisage the burden being placed on the commissioners of carrying out exhaustive investigations. What the use of the words ‘best of their judgment’ envisage, in my view, is that the commissioners will fairly consider all material placed before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due. As long as there is some material on which the commissioners can reasonably act then they are not required to carry out investigations which may or may not result in further material being placed before them."
26.	The judgment of Woolf J was considered by the Privy Council in the case of Bi-Flex Caribbean Limited v. The Board of Inland Revenue (1990) 63 TC 515. This was an appeal from Trinidad and Tobago concerning assessments to income tax following a failure by the taxpayer to make returns. The relevant legislation required the assessments to be made by the Board "to the best of its judgment". At page 522 Lord Lowry said this: 
"The element of guess-work and the almost unavoidable inaccuracy in a properly made best of judgment assessment, as the cases have established, do not serve to displace the validity of the assessments, which are prima facie right and remain right until the taxpayer shows that they are wrong and also shows positively what corrections should be made in order to make the assessments right or more nearly right. It is also relevant, when considering the sufficiency of evidence to displace an assessment, to remember that the facts are peculiarly within the knowledge of the taxpayer."
The cases he referred to were the decision of Woolf J in Van Boeckel and an earlier decision of the Privy Council in CIT, United and Central Provinces v. Badridas Ramrai Shop (1937) LR 64 Ind App 102, in which Lord Russell of Killowen (at page 115) described the process of assessing tax to best judgment in these terms:
"The officer is to make an assessment to the best of his judgment against a person who is in default as regards supplying information. He must not act dishonestly, or vindictively or capriciously, because he must exercise judgment in the matter. He must make what he honestly believes to be a fair estimate of the proper figure of assessment, and for this purpose he must, their Lordships think, be able to take into consideration local knowledge and repute in regard to the assessee’s circumstances, and his own knowledge of previous returns by and assessments of the assessee, and all other matters which he thinks will assist him in arriving at a fair and proper estimate: and though there must necessarily be guess-work in the matter, it must be honest guess-work. In that sense, too, the assessment must be to some extent arbitrary."
27.	These authorities have most recently been considered by the Court of Appeal in the case of Rahman v. Customs and Excise Commissioners (No. 2) [2002] EWCA Civ 1881; [2003] STC 150. Following an investigation by Customs officers it was calculated that there was an under-declaration of takings by the trader, amounting to a shortfall in the VAT paid of £9,897 in the relevant accounting period. The officer notified the Appellant that she would treat VAT for earlier accounting periods as under-declared by the same proportion. An assessment was therefore made in the sum of £17,249 and during the appeal the Commissioners accepted that this should be reduced to £15,117. One of the members of the Tribunal dissented on the issue of best judgment and did not participate in the determination on quantum. Carnwath J set the decision aside and ordered a re-hearing before a differently constituted Tribunal. By the time of the re-hearing the Commissioners had accepted that there were errors in the calculation of the earlier assessment, including the double counting of purchase invoices and delivery notes, and agreed to reduce the assessment to £7,683. The Tribunal held that the Commissioners had nonetheless exercised best judgment in relation to the original assessment and confirmed it in the reduced amount of £7,683. The taxpayer appealed and contended that the concessions made by the Commissioners that there had been a miscalculation, including double counting, showed that the original assessment could not have been made to best judgment. Lawrence Collins J dismissed the appeal. He rejected the argument that the Tribunal should adopt the objective test of what a reasonably competent officer would have done when preparing the assessment on the basis of the material available. He said ([2002] STC 73 at [20]): 
"In my judgment the tribunal was right to follow the approach that a much stronger finding was required, for example, that the assessment had been reached dishonestly or vindictively or capriciously, or was wholly unreasonable."
28.	The Court of Appeal dismissed the taxpayer’s appeal from that decision. At paragraph [32] Chadwick LJ dealt with the taxpayer’s principal argument as follows: 
"The second limb to the taxpayer’s attack on the tribunal’s approach is based on the submission that ‘assessments more than double the VAT which should have been assessed on the material before Customs are not to best judgment’. It is said, in the skeleton argument prepared by counsel for the taxpayer, that where (1) the reduction in the assessments is made by the tribunal on the same material as that which was before the commissioners and (ii) the amount of that reduction is substantial (in this case the assessment was reduced by over 55%) it must inevitably follow that the commissioners’ assessment was not made to the best of their judgment. But non sequitur: on a true analysis all that can be said is that the fact that, on considering the same material, the tribunal has reached a figure for the VAT payable which differs from that assessed by the commissioners requires some explanation. The explanation may be that the tribunal, applying its own judgment to the same underlying material at the second, or ‘quantum’, stage of the appeal, has made different assumptions - say, as to food/drink ratios, wastage or pilferage - from those made by the commissioners. As Woolf J pointed out in Van Boeckel ([1981] STC 290 at 297), that does not lead to the conclusion that the assumptions made by the commissioners were unreasonable; nor that they were outside the margin of discretion inherent in the exercise of judgment in these cases. Or the explanation may be that the tribunal is satisfied that the commissioners have made a mistake - that they have misunderstood or misinterpreted the material which was before them, adopted a wrong methodology or, more simply, made a miscalculation in computing the amount of VAT payable from their own figures. In such cases - of which the present is one - the relevant question is whether the mistake is consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or is of such a nature that it compels the conclusion that no officer seeking to exercise best judgment could have made it. Or there may be no explanation; in which case the proper inference may be that the assessment was indeed arbitrary."
This seems to me to be a clear re-affirmation that an error in the assessment due to a miscalculation, or even a flaw in the methodology adopted, cannot vitiate the assessment on the basis that it was not made to best judgment, if there is an innocent explanation for the mistake and the methodology or interpretation of the material, even if defective, was nonetheless adopted as part of what Chadwick LJ describes as an honest and genuine attempt to make a reasoned assessment. It is not enough merely to show that the officer responsible for the assessment was negligent and in that sense fell below the standards to be expected of a reasonably competent officer faced with the same task. A fortiori it is not enough to show that the officer’s assessment of the amount of unpaid tax, or his view of the facts in dispute, was wrong. There has to be a conscious or irrational failure to place a reasonable interpretation on the evidence to hand.
29.	During the course of the hearing before the Tribunal Mr Freeman did, as I have described, seek to impugn the honesty of Mr Bakewell and the good faith of the investigation and the subsequent assessments. In his opening submissions he put his case in two ways. He said that the assessments failed to satisfy the test laid down in Wednesbury (Associated Provincial Picture Houses Limited v. Wednesbury Corporation [1948] 1 KB 223) in that Mr Bakewell had disregarded relevant material and had reached an estimate of undeclared takings which was wholly unreasonable. He also submitted that Mr Bakewell had acted "vindictively, capriciously and made a spurious estimate or guess in which all elements of honest judgment are missing". But those allegations of dishonesty or bad faith were dropped and replaced by the argument that Mr Bakewell was guilty of what was variously described as intellectual dishonesty or capriciousness. These terms were not further explained to the Tribunal and were, in the circumstances, misused. Capriciousness means a tendency to sudden or unpredictable changes of attitude, but it is used in the authorities I have referred to as denoting a decision made on a whim: in other words, a conscious lack of judgment. It is not an objective criticism. In the light of the abandonment of the case based on dishonesty, however, it is clear that Mr Freeman was not using the term in that sense. He linked capriciousness to intellectual dishonesty. Intellectual dishonesty is not a term used in any case on best judgment that I know of and has no certain meaning. I assume that Mr Freeman’s contrast of that term with dishonesty in the sense of mala fides indicates that it was intended to denote a lack of reasoning on Mr Bakewell’s part. But that could have a number of possible causes. 
30.	Ultimately, however, what matters is the test which the Tribunal chose to adopt. In its decision the Tribunal set out what it considered to be the test of best judgment as follows: 
"84. We are unable to accept that the test of best judgment is wholly subjective. Of course bad faith or vindictiveness are subjective being dependent on the state of mind of the assessing officer. However the question whether an assessment is capricious or a spurious estimate or guess or wholly unreasonable does not depend on the officer’s state of mind although it may or may not result from it. The apparent prominence given to the subjective aspect of best judgment in the two Rahman appeals has had the unfortunate result of an increased tendency to personalised attacks on assessing officers in appeals to the Tribunal by Appellants wishing to challenge best judgment.
85. It is clear from those decisions that the adjective "best" in best judgment is not in any sense superlative but is at most relative. Indeed it is clear from Rahman (No 2) that it is not even the judgment of "reasonably competent officer". Although the Commissioners are required to "fairly consider all material placed before them and, on that material, come to a decision which is reasonable" (see Van Boeckel), the Rahman approach is that standard of what is reasonable is anything which is not wholly unreasonable.
86. That however is not the whole picture. If the only question apart from bad faith is whether the result is wholly unreasonable, the requirement fairly to consider all material before them would be nothing but empty words. Such an approach would be difficult to square with the proportionality necessary under Article 1 of the First Protocol to the European Convention on Human Rights. Having collected a vast amount of material in the present case and having been presented with more by Mr Freeman, Mr Bakewell was under a duty to consider it all fairly and with an open mind. He was not in any sense obliged to accept everything put to him. He was however obliged to consider whether in the light of all the material the assessment made sense. In deciding whether he came to a credible conclusion the Tribunal must be entitled to consider his judgment in the light of the material before him. The judgment must meet some minimum standard in order to satisfy the balance between the end and the means which is necessary to satisfy Article 1 of the First Protocol, see Sporrong and Lön v. Sweden (1982) 5 EHRR 35 at para 61; it must not be arbitrary, cf. Aston Cantlow PCC. In reaching its decision in Georgiou the European Court specifically referred to the fact that the tribunal considered that the assessments were to the best of the commissioners’ judgment, see [2001] STC at page 90e."
31.	This decision predates the judgment of the Court of Appeal in Rahman (No 2). For the Commissioners Miss Foster QC submits that it misapplies the law on best judgment. The reference in the authorities to an assessment being "wholly unreasonable" is not intended to be, she says, a distinct test of an objective kind, nor a matter unconnected with the officer’s state of mind. It is simply a shorthand for saying that the officer has failed to do his honest best. The question to be answered in all cases is not simply whether the assessment is apparently excessive or wrong, but whether it represents (even if excessive or wrong) a genuine and honest attempt to assess the taxpayer’s liability on the material available. That question cannot be answered by reference to an objective test of the Wednesbury kind and is inconsistent with such a test. When making his assessment, the officer is of course required to base it on the material available to him and to fairly consider that material. It is difficult to see how his assessment could be a genuine and honest one, were he to do otherwise. But it is not enough merely to show that he took a mistaken view of the facts or made some other error of calculation or methodology. The Tribunal did not apply the test laid down by the Court of Appeal in Rahman (No. 2) and instead carried out a detailed critique of Mr Bakewell’s methodology and conclusions, based upon their own assessment of the evidence. Because they reached a different conclusion, they inferred from this that Mr Bakewell had not exercised best judgment. This, she says, is evident from two passages in paragraphs 232 and 250 of the Tribunal’s decision, where it sets out its conclusions on best judgment as follows: 
"232. In considering whether the Appellant has shown that the assessments were not made to best judgment we consider first the method of calculation and then consider whether the result is credible in the light of the material before the Commissioners and in particular Mr Bakewell. We consider this objectively. It is not however enough for the Appellant to show that the assessments did not reach the standard required of a reasonably competent officer, it must satisfy the Tribunal that the assessments were wholly unreasonable. We take this to mean that the assessments were outside the parameters of what could have been reasonable if all the material before the Commissioners had been fairly considered.
……….
250. Our conclusion is that far from the other evidence supporting the level of the assessments, every single indication shows the assessments to be wholly excessive. We conclude that the assessments were wholly unreasonable, being outside the parameters of the reasonable. All of the matters to which we have referred in the last five paragraphs were there for Mr Bakewell to consider. He either failed to consider them at all or failed to consider them fairly; he therefore failed to consider fairly all the material before him. We are driven to the conclusion that far from making any assumptions in favour of the trader (paragraph 194), Mr Bakewell closed his mind to any material which did not fit his case. The Appellant has satisfied us that the assessments were not to best judgment; there is no logical basis to uphold the assessment for any individual period."
32.	I shall come later in this judgment to consider whether (applying the correct test) there was any evidence before the Tribunal from which it could properly have concluded that Mr Bakewell did not exercise best judgment. But the first issue to determine is whether the Tribunal did in fact apply the right test. It seems to me that I am bound to apply the law as set out by the Court of Appeal in Rahman (No. 2), which explains the earlier authorities and lays down as the standard for the exercise of best judgment the test of whether the Commissioners, through their officers, made a genuine and honest attempt to calculate the tax due. For the reasons set out in the judgment of Chadwick LJ quoted above, the fact that the assessment is wrong and appears to the Tribunal to be objectively unreasonable is only the starting point. Conclusions to that effect do not justify finding that the assessment was not made to best judgment, unless the only explanation for the errors is that they were produced as part of something other than a genuine and honest attempt to calculate the amount of VAT. The principal difficulty about the Tribunal’s decision is that at no point did they ask themselves whether Mr Bakewell did his honest best. Instead they seem to have inferred that he (to use the words in paragraph 250) "closed his mind to any material which did not fit his case" from the fact that he reached conclusions which they considered to be wholly unreasonable. Bearing in mind that Mr Freeman had by then abandoned his earlier allegations of dishonesty and bad faith, that seems to me to be something of a non sequitur and, on my reading of Rahman (No 2), a misdirection. 
33.	Miss Sharpston seeks to meet these points in two ways. First, she submitted that for an assessment to be made to best judgment, it was not enough merely to show that the officer, however mistaken, had acted in good faith. That would create, she said, an impossible burden for the taxpayer to overcome and would be inconsistent with the references in the judgments of Woolf J in Van Boeckel and Carnwath J in Rahman v. Commissioners of Customs and Excise [1998] STC 826 to an assessment not being made to best judgment if it is wholly unreasonable. The Tribunal, she submits, adopted this test. To decide whether an assessment is wholly unreasonable, the Tribunal must review the evidence in detail to see where the parameters of what would be a reasonable conclusion lie. Having done this, they are then able to compare the officer’s conclusions with that assessment and to determine whether it lies outside the boundaries of what is justifiable. The Tribunal followed this course and concluded that Mr Bakewell’s assessment lay outside the parameters of the reasonable: see paragraph 250 of the decision. 
34.	In relation to the Court of Appeal’s decision in Rahman (No. 2) Miss Sharpston referred to paragraph 32 of Chadwick LJ’s judgment (quoted above) and in particular to the passage in which he says that the relevant question is "whether the mistake is consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; or is of such a nature that it compels the conclusion that no officer seeking to exercise best judgment could have made it". This extract, she submits, indicates that the "wholly unreasonable" test promulgated by Woolf J in Von Boeckel has been preserved. 
35.	Alternatively, as her second line of argument, Miss Sharpston submitted that Rahman (No. 2) was decided per incuriam because the Court of Appeal failed to take into account the impact of Article 1 of the First Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms 1950 ("Article 1") and the principles established under European Community Law governing respect for human rights, good administration, the right to a fair hearing, legitimate expectation and proportionality. At the start of the appeal I gave leave for the Respondent’s Notice to be amended to include these arguments as different or additional grounds for upholding the Tribunal’s decision. 
36.	I am not persuaded that on a proper reading of Chadwick LJ’s judgment a finding that the assessment was wholly unreasonable is sufficient to vitiate the assessment on grounds of best judgment, absent a finding that errors in the assessment were due to a failure to make a genuine and honest attempt to make a reasoned assessment. In the passage relied upon by Miss Sharpston Chadwick LJ was merely stating the alternative possible explanation for an erroneous assessment: i.e. not an honest and genuine attempt. He was not seeking to lay down an alternative test. The assessment under consideration in Rahman was based on double counting, which could justifiably be characterised as wholly unreasonable, but that did not amount in itself to a lack of best judgment. It follows that unless the decision in Rahman (No. 2) can be disregarded in favour of the principles of European law which Miss Sharpston relies upon, then there was a misdirection and misapplication by the Tribunal of the law in relation to best judgment. I turn, then, to those arguments. 
European Law
37.	Article 1 of the First Protocol of the ECHR provides as follows: 
" Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."
This requires that there should be a reasonable relationship of proportionality between the means employed and the end sought to be realised: see Hakanssen v. Sweden (1990) 13 EHRR 1 at pages 12-13. In Aston Cantlow PCC v. Wallbank [2001] EWCA Civ 713; [2002] STC 313 (now overruled by the House of Lords on the question of whether the PCC was a public authority within s.6 of the Human Rights Act 1998). Sir Andrew Morritt V-C referred to the need for the legitimate aim of taxation to be pursued by means which are not completely arbitrary or out of all proportion to their purpose. Similarly in Lindsay v. Customs and Excise Commissioners [2002] EWCA Civ 267; [2002] STC 588 (a case about the powers of Customs and Excise to confiscate vehicles used in smuggling) the Master of the Rolls at paragraphs [52] and [53] of the judgment said this:
"Human Rights
[52] The commissioners’ policy involves the deprivation of people’s possessions. Under art 1 of the First Protocol to the convention such deprivation will only be justified if it is in the public interest. More specifically, the deprivation can be justified if it is ‘to secure the payment of taxes or other contributions or penalties’. The action taken must, however, strike a fair balance between the rights of the individual and the public interest. There must be a reasonable relationship of proportionality between the means employed and the aim pursued (Sporrong and Lönnroth v Sweden (1982) 5 EHRR 35, para 61; Air Canada v United Kingdom (1995) 20 EHRR 150 para 36). I would accept Mr Baker’s submission that one must consider the individual case to ensure that the penalty imposed is fair. However strong the public interest, it cannot justify subjecting an individual to an interference with his fundamental rights that is unconscionable.
European Community law
[53] It does not seem to me that the doctrine of proportionality that is a well established feature of European Community law has anything significant to add to that which has been developed in the Strasbourg jurisprudence. There is, however, a passage in Paraskevas Louloudakis v Elliniko Dimisio (Case C-262/99) (2001) Transcript 12 July, which is helpful in the present context in that it is of general application. I quote from para 67:
‘Subject to those observations, it must be borne in mind that, in the absence of harmonisation of the Community legislation in the field of the penalties applicable where conditions laid down by arrangements under such legislation are not observed, the Member States are empowered to choose the penalties which seem appropriate to them. They must, however, exercise that power in accordance with Community law and its general principles, and consequently with the principle of proportionality.’ "
It is not therefore in dispute that in the field of taxation, as in other areas of governmental activity, the means must be proportionate to the end pursued and must strike a fair balance between the public interest in enforcing or collecting the tax and the right of the individual not to be unfairly penalised. But in relation to that, there will inevitably be a margin of appreciation allowed to the legislature in relation to the means prescribed. 
38.	In Georgiou and another (trading as Mario’s Chippery) v. United Kingdom [2001] STC 80 the taxpayer challenged a penalty assessment to VAT and contended, inter alia, that the way in which the assessment was reviewed by the Commissioners and the Tribunal constituted a violation of his rights under Article 1. The ECHR rejected these arguments and (at page 90j) said this: 
"The points raised by the applicants, in any event, concern the right of states to enact such laws as they deem necessary for the purpose of ‘securing the payment of taxes’ (see for example Gasus Dosier- und Fördertechnik GmbH v Netherlands (1995) 20 EHRR 403 at 434, para 60). In that case it was held that the legislature must be allowed a wide margin of appreciation and that ‘the Court will respect the legislature’s assessment in such matters unless it is devoid of reasonable foundation’ (see (1995) 20 EHRR 403 at 434, para 60). In the present case, the review machinery under the 1983 Act cannot be said to be devoid of reasonable foundation."
In relation therefore to Article 1, it is difficult to see how the machinery of collection, consisting of an assessment to best judgment coupled with a right of appeal to the Tribunal, can be said to contravene the principle of proportionality, and this was the view of the Court of Appeal in Rahman (No. 2). At paragraphs [37] and [38] of the judgment Chadwick LJ said this:
"[37] The fourth ground of attack on this issue is put thus: ‘If assessments more than double what they should have been are to best judgment, the legislation is unlawful and contrary to EC law.’ It is said that the legislation does not accord with art 22(8) of EC Council Directive 77/388 on the harmonisation of the laws of the member states relating to turnover taxes - common system of value added tax: uniform basis of assessment (the Sixth Directive). Article 22(8) requires member states to take measures which they deem necessary for the correct collection of the tax. It is said, also, that the legislation authorises an unlawful deprivation of property contrary to art 1 of the First Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms 1950 (the convention).
[38] In my view there is no substance in that fourth ground. It must be kept in mind that the power to make an assessment under s 73(1) of the 1994 Act does not arise unless the taxpayer has failed to make returns or to keep documents and afford facilities for verification, or unless the commissioners are satisfied that returns which have been made are incomplete or incorrect. If the VAT legislation failed to provide some machinery for the assessment of tax in those circumstances, the United Kingdom would, indeed, be open to the criticism that it had failed to implement art 22(8) of the Sixth Directive. If the power to assess under s 73(1) could be exercised arbitrarily, there would be force in the point that the legislative response was disproportionate in the context of art 1 of the First Protocol to the convention. But it is accepted that the power cannot be exercised arbitrarily; and the 1994 Act itself provides a means, by way of appeal, by which the correct amount of tax payable by the taxpayer can be ascertained. An assertion that the legislation must be contrary to the United Kingdom’s international obligations because an assessment, made in the exercise of best judgment, may be subsequently found to be substantially too high cannot be supported. The relevant question is whether an assessment which is subsequently found to be substantially too high can be an assessment made in the exercise of best judgment. That question has already been addressed in the context of the second ground of attack."
Although not referred in terms to the decision of the ECHR in Georgiou, the Court of Appeal held that the machinery of s.73, coupled with the right of appeal, satisfied the requirements of proportionality and must therefore have considered that the test of best judgment set out by Chadwick LJ as part of that machinery was not unreasonable or unconscionable in the sense described in the earlier authorities on proportionality. Miss Sharpston submits that this decision was reached without a proper consideration of the relevant European authorities or even the decision of the ECHR in Georgiou (which predates that of the Court of Appeal in Rahman (No. 2)). In any event she submits that the Protocol and the principle of proportionality supports the need for a more objective test of best judgment.
39.	Because the principles involved are not disputed, it is enough, I think, for me to summarise the main principles of Community law relied upon by Miss Sharpston for this purpose. I can do so under six main headings. 
(i) The application of the principles of EC law
40.	VAT is an EC tax derived from the Sixth Directive. In relation to the implementation of the VAT Directives by a Member State the fundamental principles of EC law apply. In Ali and Begum v. Commissioners of Customs and Excise [2002] V & DR 71 (another case on VAT penalties) the Chairman of the London Tribunal, Stephen Oliver QC, summarised the position as follows: 
" 59. VAT is governed by the Sixth Directive. Article 22(8) allows Member States to "impose other obligations which they deem necessary for the correct collection of tax." That brings the administrative and appeal procedures adopted by each Member State within the scope of the Sixth Directive. It was argued for the Appellants that that provision required each Member State to have in place an EC-compliant appeal system. In particular the Member State should have courts or tribunals with detailed procedural rules that safeguard the rights which individuals derive from EC law; and those rules should be no less favourable than those governing similar domestic actions (the principle of equivalence) and they should not render virtually impossible or excessively difficult the exercise of rights conferred by EC law (the principle of effectiveness). See cases such as Upjohn Ltd v Licensing Authority [1999] 1 WLR 927 at paragraph 32 on page 945.
60. It followed that even if Ferrazzini v Italy excluded obligations arising from VAT assessments and penalties from the scope of Article 6.1 of the Convention, the individual assessed could always rely on his Community rights. Those, it was argued, afford him a full and effective judicial protection of all his rights (and obligations) whether related to tax or otherwise; they do no limit the protection merely to "civil rights". On this basis the individual is entitled to a fair hearing before a fair and independent tribunal and within a reasonable time. Thus, the argument ran, even if I were wrong in my conclusion that Ferrazzini v Italy should not be applied by a United Kingdom Court in a VAT-related appeal, the Appellant would still be able to insist on an independent tribunal (eg one where the members were not appointed and removed by the Treasury) and should have access to an appeal before this Tribunal on the merits (ie where the Tribunal has the jurisdiction to substitute its own decision for that of the Commissioners).
……….
62. What the citations set out above do not establish is that an appeal on the merits is inevitably and always a required ingredient in the appeal procedures of a Member State. For the reasons I have given in paragraphs 53-58 in relation to the B I Imaging (security notice) appeal, I do not think that it is appropriate, in the legal system of the United Kingdom, for this Tribunal to have the power to substitute its own opinion for the policy decision of the Commissioners in matters concerning risk to the revenue. So far as the "independence" of this Tribunal is concerned, I have already concluded that it is sufficiently independent and impartial in the relevant sense to satisfy the requirements of Article 6.1. For the same reasons I think it satisfies the requirements of EC law."
41.	National legislation implementing an EC directive is, whenever possible, to be construed in a way that is compatible with EC law: see Marleasing SA v. La Comercial Internacional de Alimentacion SA [1990] ECR 1-4135. 
(ii) Fundamental rights under the Convention form part of the general principles of EC law 
42.	The protection of fundamental human rights is an integral part of the principles of EC law, and the ECJ has endorsed a liberal interpretation of legislation so as to accommodate this: see Nold v. Commission [1974] ECR 491; Marks and Spencer Plc v. Commissioners of Customs and Excise [2002] STC 1036 at paragraphs 73-77. 
(iii) The 1994 Act must be interpreted consistently with Convention rights
43.	The Commission as a public authority under s.6 of the Human Rights Act 1998 must give effect to primary legislation (in this case s.73 of the 1994 Act) in a way that is compatible with Article 1. The meaning of best judgment should be modified to take account of the EC principles of law relied upon. 
(iv) Good administration
44.	The taxpayer is entitled to rely upon procedural guarantees of good administration under EC law, including a duty of care in public administration and the right to be heard. An important component of the right to be heard is the right to have one’s argument taken into account. The right to be heard is a fundamental principle of EC law: see Hoechst v. Commission [1989] ECR 2859 at page 2923. In Belgium v. Commission [1986] ECR 2321 at page 2348 (a case on State aids) the ECJ said that: 
"it is appropriate to stress that, as the Court held in particular in its judgment of 13 February 1979 in Case 85/76 Hoffman-La Roche v Commission [1979] ECR 461, observance of the right to be heard is, in all proceedings initiated against a person which are liable to culminate in a measure adversely affecting that person, a fundamental principle of Community law which must be guaranteed even in the absence of any rules governing the procedure in question. The Court has consistently held that, in order to respect the principle of the right to be heard, the person against whom an administrative procedure has been initiated must have been afforded the opportunity, during that procedure, to make known his views on the truth and relevance of the facts and circumstances alleged and on the documents used by the Commission to support its claim that there has been an infringement of Community law."
Article 41.2 of the EC’s "Charter of Fundamental Rights" (although not a Treaty document and not legally binding) also recognises the right to make representations before a decision is made which adversely affects a person’s rights.
(v) Proportionality
45.	Apart from Article 1 this is also an established principle of EC law. To decide whether a provision complies with the principle of proportionality: 
"it must be ascertained whether the means which it employs are suitable for the purpose of achieving the desired objective and whether they do not go beyond what is necessary to achieve it. Furthermore, as the Court stated in its judgment of 21 February 1979 (Stölting, quoted above), if a measure is patently unsuited to the objective which the competent institution seeks to pursue this may affect its legality."
See Rau v. Commission [1987] ECR 1069 at pages 1125-6.
(vi) Legitimate expectations
46.	In Marks and Spencer (supra) the ECJ at paragraph 44 ([2002] STC at page 1059) said that: 
"In that connection, the court has consistently held that the principle of the protection of legitimate expectations forms part of the Community legal order and must be observed by the member states when they exercise the powers conferred on them by Community directives (see, to that effect, Hauptzollant Hamburg-Jonas v Krücken (Case 316/86) [1988] ECR 2213, para 22, Alois Lageder SpA v Amministrazione delle Finanza dello Stato (Joined cases C-31/91 to C-44/91) [1993] ECR I-1761, para 33, Belgocodex SA v Belgium (Case C-381/97) [2000] STC 351, [1998] ECR I-8153, para 26, and Grundstückgemeinschaft Schloßstraße GbR v Finanzamt Paderborn (Case C-396/98) [2000] ECR I-4279, para 44)."
Pegasus submits that Mr Freeman had provided extensive reports prior to the making of the assessment and had a legitimate expectation that the material would be properly and fully considered. 
47.	This summary of the principles of EC law which are relied upon does less than justice to the quality and comprehensive nature of Miss Sharpston’s presentation of the authorities. But she accepted that, though capable of exposition as separate rules, all the principles I have referred to could be summarised and bracketed as part of a general obligation on the part of the Commissioners as the revenue-collecting authority to act reasonably and fairly in carrying out their assessment of the tax due. A duty to act fairly involves, she submits, respecting the procedural safeguards such as the right to be heard. Looked at more widely, the machinery of assessment, coupled with the right of appeal, has to be judged in terms of proportionality, having regard to the consequences for the taxpayer of a wrong and excessive assessment which will remain binding on him unless he is able to set it aside or reduce it by challenging it on grounds of best judgment or quantum. This, she says, places a considerable burden on the taxpayer which can only be justified if the test as to what constitutes best judgment imports an objective criterion of reasonableness and is not merely dependent on the assessing officer acting honestly and in good faith. 
48.	As I indicated earlier in this judgment, the formula adopted by the Court of Appeal in Rahman (No. 2) as the test of best judgment accommodates an obligation on the part of the officer concerned fairly to consider all the material made available to him. A genuine and honest attempt to reach a correct assessment requires the officer to take those matters into account as part of his calculations. But I do not accept that honest mistakes and differences of view between the assessing officer and the taxpayer are enough to contravene the procedural safeguards inherent in the right to be heard and to have the tax fairly administered, nor that they render the assessment process as a whole disproportionate and unconscionable. 
49.	It is clear from the authorities cited to me that the application of the principles of EC law relied upon is essentially a pragmatic one, and that in order to determine whether the particular governmental process under consideration complies with the principles of good administration and proportionality, it is necessary to consider that process as a whole and to pay proper regard to the procedural safeguards (if any) which are built into the system. Miss Sharpston’s principal criticism of s.73, as interpreted by the Court of Appeal in Rahman, is that it places too high a burden on the taxpayer of proving the lack of a genuine and honest attempt to assess. If the standard of best judgment is an objective one based on proportionality, then the question will be whether the Commissioners acted reasonably in making the assessment they did on the material available. Questions of motive and good faith (or the lack of it) will be avoided in favour of an objective analysis of the merits of the assessment and whether reasonable steps were taken fully to inform that process on the basis of the material available. 
50.	The difficulty, however, about this argument is that it gives too little weight to the taxpayer’s right of appeal and to the role of the Tribunal. The right of appeal under s.83 of the 1994 Act has, in my judgment, to be taken into account when assessing the compatibility of s.73 with the principles of EC law under consideration. It provides an internal mechanism for correcting the assessment procedure. An appeal lies both on the issue of best judgment and on quantum. The Tribunal on an appeal against quantum is not in any way bound by the officer’s own assessment and is free to form its own view on the evidence presented to it. In cases of hardship, payment of the tax is postponed until after the appeal. If the taxpayer is able to establish that the assessment is unreasonable and wrong, then the appeal on quantum will succeed. If Miss Sharpston’s argument is correct, that might also be sufficient to show that the assessment was not made to best judgment. But the consequence of that would be to discharge the assessment and not merely to reduce it to the correct amount. Regardless of the correct test of best judgment, a taxpayer who appeals against the assessment under s.73 will be able to have it reduced merely by showing that it was wrong. Given that the purpose of s.73 is to enable the recovery of undeclared and unpaid VAT, I can see nothing obviously wrong or disproportionate about a system which allows the excessive assessments to be corrected in that way, but leaves the validity of the assessment intact. Miss Sharpston’s argument is not in truth directed to the taxpayer’s ability to reduce the assessment. That can be achieved under s.73 on an objective basis by an appeal on quantum. Her argument is that the taxpayer should be afforded the opportunity of discharging the assessment in toto merely by being able to show that it was unreasonably or mistakenly calculated, and that ss.73 and 83 contravene the principles of good administration and proportionality if an attack on the validity (rather than the amount) of the assessment requires proof that the assessment was arbitrary in the sense that it did not represent a genuine and honest attempt to calculate the tax due. 
51.	I have no hesitation in rejecting that argument. It seems to me that it ignores the realities of what s.73 is designed to deal with: i.e. cases where there has been an under-declaration or evasion of the tax and in which the Commissioners have to work from material that is often limited or even non-existent. I can see nothing unfair to that class of taxable person in a system which gives them a right to appeal against excessive assessments to an independent tribunal, but does not allow the validity of the assessments to be impugned except upon proof of a lack of good faith on the part of the Commissioners. The decision of the Court of Appeal in Rahman is fully in line with the sentiments expressed by Woolf J in Van Boeckel and Simon Brown J in Spillane and cannot be said to be disproportionate. It is a valuable and welcome re-affirmation that challenges to the validity of s.73 assessments on grounds of lack of best judgment should be rare. As it is, they are only too often pursued at great length and expense solely for the tactical reason that, due to the passage of time, the Commissioners will be unable to make new assessments for the same period if the assessments under challenge are set aside. At the end of his judgment in Rahman Chadwick LJ expressed the view that Tribunals should in most cases decide the issue of quantum and then consider whether to decide the issue of best judgment. He went on to say that even if the Tribunal found that the Commissioners had failed to exercise best judgment, it might nonetheless exercise the power contained s.84(5) of the 1994 Act to preserve the assessment in a different sum. Attractive as that latter solution is, it will only be available when the amount of the tax found to be due exceeds the assessment made. It will not therefore be of assistance in most cases where the assessment itself is found to be excessive and the Tribunal is then faced with having to decide on the taxpayer’s appeal whether it should also be set aside on the ground that it was not made to best judgment. I share the view of Chadwick LJ that the Tribunal should in all such cases assess quantum, but that it should only allow an attack on best judgment to be developed if it becomes apparent from the evidence on quantum that there is a real ground for such a challenge, based on a lack of good faith. The Tribunal should not hesitate to adopt a pro-active stance towards the management of the appeal on this issue. The adoption of the two-stage approach in this and other appeals leads to an artificial distinction between best judgment and quantum and to the unnecessary lengthening of the hearing. It also has the unfortunate and undesirable consequence (evident from the decision in this case) that no effective decision is made on quantum when that is, or ought to be, the essence of the exercise. 
52.	If the officer does his honest best to take account of the evidence and any representations that are put to him, then the procedural safeguard of the right to be heard is satisfied. I do not accept Miss Sharpston’s submission that, having considered the material provided by the taxpayer, the officer is required to disclose his proposed assessment to him before it is made and give him an opportunity of commenting on it. If that were right, the process would become endless. Nor can I see on what basis Mr Freeman can be said to have had a legitimate expectation that he would be consulted in that way. In these circumstances I am not persuaded that the test of best judgment, in order to render the process of assessment proportionate either under EC law or in accordance with Article 1, requires the importation of an objective test of some kind in the way which Miss Sharpston suggests. 
53.	It follows that I do not accept that the test of best judgment propounded by the Court of Appeal in Rahman (No. 2) is in any way inconsistent with Article 1 of the Convention or with the other principles of EC law which I have summarised. Nor do I believe that the Court of Appeal would have been persuaded to take a different view, had the full range of authorities been cited to it. A point of particular significance, as Miss Sharpston accepted, is that the ECHR in Georgiou must have accepted as proportionate the test of best judgment set out by Sir Louis Blom Cooper QC (sitting as a Deputy High Court Judge) [1995] STC 1101, who rejected the taxpayer’s appeal at first instance and whose formulation of the test was accepted with only minor amendments by the Court of Appeal. At page 1116 he set out the following propositions of law in relation to s.73: 
"(1) There is no statutory requirement on commissioners to investigate a case, but good administrative practice compels the acquisition of material sufficient to make an assessment. (The commissioners always have a discretion whether to make an assessment at all. But if they do it must be based on sufficient information (see Van Boeckel) ) (2) The totality of the information acquired must be taken into account, but the commissioners are fully entitled to disregard any material which they adjudge is of no assistance in making an assessment. It is the information upon which reliance is placed that must demonstrate that the amount of the assessment is ‘to the best of their judgment’. (3) The case law establishes that both ‘best judgment’ and the quantum of tax due are questions of fact to be proved on a balance of probabilities by the taxpayer. (4) Questions of quantum are issues of pure fact - namely, the true state of affairs. Assessment of tax due is a matter of informed guesswork. (5) The mere fact that the result of the assessment appears to be correct does not answer the question whether best judgment has been properly applied. Method of arriving at the assessment is always relevant to ‘best judgment’. Outcome of the assessment is not the exclusive test. (6) There is often more than one method of applying ‘best judgment’ to a particular assessment (see Seto). ‘Best judgment’ is not the equivalent of the best result or the optimum conclusion. It is a reasonable process by which an assessment is successfully reached. (7) ‘Best judgment’ is to be viewed objectively by the value added tax tribunal in two stages: first, it must decide what information, which was before the commissioners at the time of the assessment, was relied upon for making such assessment. Information acquired post-assessment cannot disturb the ‘best judgment’. It may be used non-evidentially merely as a means of arguable support to the commissioners’ assertion of ‘best judgment’. That stage is a question of fact for the tribunal; second, it must find out how the commissioners arrived at their assessment, e g, any computation of trading figures. (8) The tribunal must make a value judgment about the way in which the commissioners arrived at an assessment. This involves a reassessing process. Its function is supervisory and is not to be exercised at too high a threshold, but at a reasonable standard (see Schlumberger)."
Although those principles must now be read in the light of Rahman (No. 2), it is significant that the ECHR cannot have considered that propositions (2) and (6) offended against the principle of proportionality. I would in any event have felt myself bound to follow a recent decision of the Court of Appeal in which the issue of proportionality was expressly considered and decided. The result of this is that I remain of the view that the Tribunal misdirected itself on best judgment and misapplied the law.
Did Mr Bakewell Exercise Best Judgment?
54.	The remaining question is whether, on the Tribunal’s findings of fact and on the evidence before it, Mr Bakewell did exercise best judgment in the Rahman sense: i.e. did he make a genuine and honest attempt, on the material available to him, to assess the tax due. Pegasus submits that even if the Tribunal misdirected itself or misapplied the law on best judgment, it would, on its findings of fact, have reached the same conclusion on a correct application of the law. The Commissioners dispute that, but contend in the alternative that if the Tribunal’s findings disclose an absence of best judgment in the correct sense, there was no evidence on which it could properly have reached those conclusions. 
55.	I should mention at this stage that in the Respondent’s Notice Pegasus relies upon a number of additional factors such as the value placed on each trip and the mark-up of 150% as being wholly unreasonable and not therefore the subject of best judgment. These criticisms were rejected by the Tribunal and, for the reasons explained earlier in this judgment, the allegedly unreasonable nature of these matters is not in itself sufficient to make out a failure to exercise best judgment. I do not therefore propose to go behind the Tribunal’s findings on these issues. 
56.	As indicated earlier, the assessments were calculated upon four basic assumptions: 
i.	that there were 166 trips involving Pegasus; 
ii.	that each trip accounted for £18,508 worth of purchases; 
iii.	that 57% of those purchases should be attributed to Pegasus; and 
iv.	that a 150% off-record mark-up applied to those purchases. 
57.	In its conclusions on best judgment the Tribunal (at paragraph 243) described this method of calculation as having an initial appearance of logic, but also as being highly speculative. The figure of £18,508 is said in the same paragraph to be inflated and the 43/57 split based on the Kloeg invoices dubious. The assumption that Pegasus was involved in 166 trips is said to be unwarranted. Paragraph 243 sums up these findings as follows: 
"The assumption that each trip involved purchases by Pegasus of 57% of £18,508 even as an average was in our judgment unreasonable."
The Tribunal then (in paragraph 244) says this:
"If there was other evidence to corroborate sales of the magnitude assumed by the assessment, this might compensate for the defects in the methodology. We accept that quantification in a case of this type is always likely to be difficult. However the other evidence clearly points to the assessments being wholly excessive."
I turn, then, to examine the Tribunal’s treatment of the four main components of Mr Bakewell’s assessment and the other evidence which it refers to.
(i) Value of purchases per trip
58.	The figure of £18,508 is based on Mr Bakewell’s estimate of the cost of birds purchased on trip 165 (22nd May 1995) which was the last trip before the customs raid on 24th May. On 24th May 1995 (as described in paragraphs 92-99 of the decision) a driver was arrested and a clipboard was found with some instructions. These were to collect purchase items from some six foreign dealers. The driver (a Mr Daniel) had made a trip to Belgium on 22nd May and had been making weekly trips since 1993. Some of the invoices found at his home were for bird-food and cages. The £18,508 figure was made up of invoices from all six suppliers, and the Tribunal sets out in some detail how it was arrived at and what assumptions were made. In the case of the invoices expressed in Dutch florins, Mr Bakewell adopted an exchange rate of 2.3 florins to the pound, compared to a bank rate of 2.4823 florins. Mr Daniel was observed on 22nd May delivering boxes to Pegasus from the van which had been taken to the continent. Mr Bakewell also calculated the value of trip 159 (8th April 1995) as £18,613 and used it as a cross-check. Mr Foster’s accountants, Grant Thornton, prepared a schedule for the Newton Hearing. This showed 165 trips by Mr Foster between 1993 and 1995, at a range of values up to £15,525. Many of the trips were given a purchase value of less than £1,000. 
59.	The Tribunal (at paragraph 233) criticised the exchange rate used by Mr Bakewell and described the figure of £18,508 as inflated, given that one of the dealers (Van der Feesten) was paid by cheque and the purchase was not, therefore, off-record. It was accepted by Mr Mc Nicholas before the Tribunal to be the most robust figure available, i.e. one based on a trip for which the most evidence was available. The Tribunal concluded that it was not wholly unreasonable as a figure for trip 165. Mr Bakewell was cross-examined on this issue on 31st May 2001 and again on 17th December 2001. He explained that it provided, in his view, the best evidence of the value of a vanload and that, prior to the raid, he had no way of knowing the value of the earlier trips. On 31st December Mr Freeman questioned him about the correctness of using the £18,508 figure, based on one trip, as a multiplier for all 165 trips: 
"Q. But, in arriving at an average, do you say that to take one trip and multiply by 165, or any number, is a rational way of coming to this overall assessment?
A. Let me rationalise it for you, right? That particular trip seemed to me to be one of the smallest trips that took place. It is important, is purely and simply because we arrested Mr Hammond and Mr Foster, et cetera, the day after. But let us look at it. That was one van, neither Mr Foster nor Mr Hammond travelled. Normally when we would go out there would be at least two vehicles, sometimes three, plus a trailer. So from an observed point of view, it was a relatively minor trip. It seemed to have relatively minor significance to Mr Hammond and Mr Foster, because neither of them thought it was sufficiently important to travel in person. In an ideal world, we would have had more evidence for other trips, and obviously that would have made a less unassailable position for Customs. The fact is that is all we had because of the fact that everything else was destroyed.
Q. When you have had evidence of other trips, you have actually ignored it. I put that to you, Mr Bakewell.
A. No."
It was never put to him that this approach (even if wrong) did not represent an honest attempt to calculate the average value of each trip.
(ii) Trip numbers
60.	The Tribunal had to consider how many trips Mr Foster or Mr Hammond made and whether Pegasus was involved in all of those trips. On the first issue the Tribunal accepted that with one exception (trip 114) there was evidence to support a total of 165 trips and that there "was nothing unreasonable in assuming that either or both Mr Foster and Pegasus were involved in some 166 trips apart from some duplication". The only real issue was whether there was sufficient evidence to link Pegasus as well as Mr Foster to all 166 trips, as opposed to the 18 admitted by Mr Hammond at his criminal trial. As the Tribunal records, the main reason for linking Pegasus to all 166 trips was what has become known as the "six out of six theory". On the six occasions in 1994 and 1995 (1st September and 28th November 1994; 21st January, 21st March, 8th April and 22nd May 1995) when Mr Foster’s vans were followed, they delivered purchases to Pegasus. These were trips 107, 133, 139, 155, 159 and 165 on the Trip Schedule. Mr Bakewell’s evidence, contained in his composite statement prepared for the Tribunal hearing, was that: 
"On all of the occasions that Customs undertook surveillance of Foster’s known vehicles a further van was identified. On each and every occasion the vehicles went straight to Pegasus Birds and unloaded. Hammond was observed as present although not appearing on manifests on each occasion except the last where neither Hammond nor Foster travelled."
Mr Bakewell also noted on his Trip Schedule evidence which he considered linked Pegasus to all 166 trips. On one occasion a Pegasus employee was on the trip. On another occasion Mr Hammond was a foot-passenger on a cross-channel ferry on the same day. Telephone logs showed calls made to continental suppliers that morning and regular contacts with them by Mr Hammond from 1993. Mr Bakewell also referred to the stock he had seen on visits to Pegasus at the time of some of the trips. As part of his written submissions Mr Mc Nicholas said of the six observed trips:
"Customs officers followed vehicles and each time they went to Pegasus. The chances of that happening six times by chance if there were only ten trips in all must be astronomical, indicating . . . actually many more off-record trips going back to Pegasus than those Customs observed."
61.	Mr Freeman in his second report of 20th January 1997 said that there was no evidence linking Pegasus with most of the trips and that some support for this was provided by a diary kept by Mr Foster. This records sums owed by and to Mr Foster during 1995. The document was seized in the May 1995 raid. Mr Freeman submitted to the Tribunal that the diary showed that there was no joint enterprise between Mr Foster and Mr Hammond. It was put to Mr Bakewell during his cross-examination on 1st June 2001, but he said that he did not consider it to be a complete record. The Commissioners rely inter alia on the fact that trips 145 (7th February 1995) and 165 (22nd May 1995) are not referred to in the diary. The response to this is that trip 145 was an entirely on-record trip by Mr Hammond, when he bought some £15,525 worth of parrots from a dealer called Orni-Mondo. In relation to trip 165 it is said that Mr Foster did not have time to write his diary up before the raid on 24th May. 
62.	Mr Bakewell was cross-examined about trip numbers on various occasions during the hearing. He accepted that he had largely discounted evidence produced by Mr Ost (one of the continental suppliers) that Mr Hammond was invariably present. Mr Ost had described Mr Hammond (wrongly) as having long blonde hair. He also accepted that there was no direct evidence linking Pegasus to 54 of the trips. But he said that on every one of the six occasions (bar one) when the trips were observed, Mr Hammond was present, even though not referred to on the ships’ manifests, and on every one of these six occasions the vans unloaded at Pegasus. He said that it was his belief that on most trips other vehicles were involved, but that the Customs followed Mr Foster’s vans and not known Pegasus vans. The selection was therefore random. When it was put to him by Mr Freeman that he had what was described as an idée fixe that Mr Hammond was involved throughout, he said this: 
"Right, so every time we observed Mr Foster or Mr Foster’s drivers at Dover, every time, Mr Hammond was either there but not manifested anywhere or the vans went straight to Mr Hammond’s premises. Now, that is a simple question of logic; that if that happens every time, one has to assume that was the norm. If there had been cases when it had not happened, or it did not start happening until later on, maybe you would have a point, but the fact is I believe, then and now, that Mr Hammond and Mr Foster were involved throughout the entire indictment period in bringing in birds from Holland and Belgium off record and selling them off record. The evidence shows me that. It is nothing to do with my personal opinion about Mr Hammond, Mr Foster or anything else."
63.	The Tribunal concluded that it was unreasonable on the evidence before Mr Bakewell for him to have assumed that Pegasus was involved in 166 trips: see Decision paragraph 242. In reaching this conclusion it relied on the fact that Mr Ost’s evidence linking Mr Hammond to the Foster trips was unreliable and that the "six out of six theory" was flawed because on four occasions Customs officers knew in advance that Pegasus was involved and followed the Foster vans on these occasions for that reason. I do not accept that that necessarily robs the observed trips of their evidential value as an indication of the regularity of the involvement of Pegasus in the trips, but I am not concerned to resolve issues of that kind on this appeal. They are questions of fact for the Tribunal. What is important is that the Tribunal accepted Mr Freeman’s submissions on this point. These concentrated in detail on the various trips and on the evidence about Pegasus’s involvement. No reference was made by Mr Freeman in his submissions to the allegation that Mr Bakewell had a closed mind on the point. His attack was confined to challenging Mr Bakewell’s assumption that it was right to infer from the six observed trips that Mr Hammond and Pegasus had a regular involvement. The only part of Mr Freeman’s cross-examination specifically referred to was that on 17th December 2001, when the following exchange took place: 
"A. . . . I am just saying that every time we went out and it was not, you know these were not any particular reason that we went out. It was just we went out and did surveillance. On every occasion that we did surveillance that is what happened.
Q. I believe you have referred to that as a spooky coincidence.
A. It is rather. But obviously I do not think it was a coincidence.
Q. Do you regard that as establishing the MO, the modus operandi?
A. I think in conjunction with the other evidence, I think it gives a pretty good indication of the MO, yes.
Q. You referred to Occam’s Razor.
A. Yes.
Q. Am I right in assuming that what you mean by that is that because on the six occasions that you did observe Hammond was involved, what you are saying is that that implies he was likely to be involved on a lot more trips?
A. Just that in itself does imply that he was likely to be involved in a lot more trips. When you add it to the rest of the evidence that we obtained I think it makes it a racing certainty, but I was not referring to Occam’s Razor in relation to that.
……….
Q. Were these six trips chosen at random?
A. Those six trips related to occasions when we had the time to do it around other duties. "Oh, look we have got some capacity, what shall we do? Let us go and follow people on Operation Back Door". So there is a certain amount of randomness from, you know what Hammond and Foster was doing was not random insofar as we were concerned. It is just it was the only times we could do it with out other duties."
64.	In paragraph 240 of its decision the Tribunal said that it accepted Mr Freeman’s submissions and that it was driven to the view that Mr Bakewell was less than frank about the randomness of the observed visits. It is not clear what they meant by this, but it cannot be read as a comment on Mr Bakewell’s honesty in relying on the alleged randomness of the six trips, because that aspect of the cross-examination was not relied upon by Mr Freeman, and there is in any case no evidence which could support such a finding. It was never put to Mr Bakewell or suggested that the "six out of six theory" was some deliberate concoction which he knew to be deeply flawed. It was simply put to him that the evidence obtained from the six observed trips did not justify the inference which he had made. Similarly in paragraph 241 of its decision the Tribunal records that Mr Bakewell did not fairly consider Mr Foster’s diary. But again this cannot mean any more than that he gave it less weight than the Tribunal was itself prepared to do. No allegation of bad faith was put to him about his treatment of the diary, nor on the evidence could it be. He regarded it as unreliable and incomplete, whereas the Tribunal took a different view. The Tribunal was therefore right to confine its conclusion in paragraph 242 quoted above to saying that the assumption that Pegasus was involved in 166 trips was an unreasonable one on the part of Mr Bakewell. The Tribunal was entitled to take a different view of the evidence and to characterise Mr Bakewell’s contrary view as unreasonable. But that is not enough to establish a lack of best judgment and it is clear that the Tribunal could not have made such a finding, based on these conclusions, had it applied the Rahman test. 
 
(iii) The mark-up and the 57/43 split
65.	Mr Freeman accepted the 150% mark-up as reasonable (Decision paragraph 235) and I need say no more about it. That leaves the 57/43 split as the last of the four components to be considered. This was based on three pairs of Kloeg invoices in July and August 1994. Mr Kloeg said that the "O" invoices were Pegasus and the "X" markings denoted Mr Foster. As the Tribunal found, seven Kloeg invoices for six earlier and seven later trips contained no "X" or "O" markings. The Tribunal concluded (paragraph 114) that although "O" denoted Pegasus, it did not follow that all the purchases on the "O" invoices were for Pegasus alone. It was not, they said a consistent system. 
66.	Again I have no difficulty with these findings as such. It was for the Tribunal to decide whether the apportionment based on the invoices that were marked "O" and "X" was justified. But the Tribunal’s rejection of this aspect of Mr Bakewell’s methodology is not sufficient to challenge best judgment. Nor, to be fair, does the Tribunal appear to have based its decision on that point. There is no finding in paragraph 234 of the decision about a lack of good faith or even a lack of reasonableness. The Tribunal is content to record that it felt bound to give much less weight the reliability of the Kloeg invoices as a guide to the split between Pegasus and Mr Foster. This is simply a judgment on the issue of apportionment. It seems to me that Mr Bakewell was entitled to take a different view and that there was some evidence, in the form of the Kloeg invoices, to support that. During cross-examination Mr Bakewell said that the instructions to pack "X" and "O boxes were found at Pegasus. In these circumstances there is no basis on which to challenge his assessment of this evidence as not being to best judgment. 
Other Evidence
67.	Although the Tribunal accepted many of Mr Freeman’s criticisms of the four basic components in Mr Bakewell’s assessment, it is clear that it also attached a considerable amount of weight to other material which was relevant to a consideration of whether the assessments were reasonable. Again it is not necessary for me to deal extensively with the detail of these matters so much as the way in which the Tribunal approached the task of assessing Mr Bakewell’s own response to this material. 
68.	In summary the Tribunal took the view that evasion on the scale contemplated by the Commissioners’ assessment was beyond the ability of Mr Hammond and Pegasus. On Mr Bakewell’s calculations there were suppressed off-record sales of 80%, generating net sale proceeds of £2.6m. This would, the Tribunal said, have required a level of sophistication on the part of Pegasus which it did not believe it had. The Tribunal based these conclusions on a number of factors which were stressed by Miss Sharpston during the course of this appeal. Most significant were the control visit by Customs and Excise in January 1994, the extent of on-record sales by Pegasus and the level of documentation, including audited accounts; the size of its premises and the inability of the authorities to detect the large sums of cash which would have been generated from the sales, either in specie or in the form of the level of Mr Hammond’s personal expenditure. 
69.	The control visit took place on 5th January 1994 and was conducted by two officers. They spent an hour at the premises with Mr Hammond and then visited Pegasus’s accountants, Messrs Goldberg Chandler. The officers reported that most of the birds sold had been purchased in the UK. There were five staff at the shop and takings were reconciled and banked daily. The premises used by Pegasus comprised a small office, the pet shop and a café area. At Goldberg Chandler the officers inspected records of takings, sales and purchase day-books, sales and purchase invoices, till rolls and bank statements. They also traced export invoices. They concluded that there was no apparent reason to doubt the credibility of the business. If Mr Bakewell is correct, then for the three periods 03/93 to 09/93 covered by the control visit the output tax should have been £158,649 more than the £36,214 declared. This would have involved additional off-record sales of £906,560, compared with the £228,390 disclosed on the company’s returns. 
70.	Goldberg Chandler checked the documents inspected at their premises as part of their annual audit, with the exception of the till rolls. They also attended an annual year-end stock-take at the premises. They had certified that the accounts for the year to 31st March 1994 gave a true and fair view as at that date of the year’s profit. 
71.	The raid on 24th May 1995 also revealed sheets headed "Money Taken" for the period from 5th to 16th May 1995, when Mr Hammond was away on holiday. They recorded till takings, trade cheques and credit card receipts, together with monies paid out in cash or by cheque. For the twelve days they totalled a maximum of £23,520. 
72.	The Tribunal calculated that in order to generate sales on the scale contemplated by Mr Bakewell’s assessment, it would be necessary to turn over the entire stock held at the premises 31.3 times each year or every eleven to twelve days. The Tribunal accepted that turnover was higher and faster than shown in the audited accounts, but that it was not likely to have been five times higher and faster, as required. Put shortly, the sales which Mr Bakewell considered to have taken place would have involved a level of activity at the shop not witnessed by Mr Bakewell or supported by other evidence. Although some sales took place at fairs and exhibitions, the stock was initially delivered to Pegasus and there was no evidence of it being stored elsewhere. 
73.	As to Mr Hammond’s lifestyle, there was evidence that he owned a sports car and enjoyed foreign holidays, including a safari to Africa, but from the 40 boxes of papers seized during the 24th May raid, no evidence was revealed of hidden assets. 
74.	In his composite statement Mr Bakewell did not shrink from asserting his belief that there were substantial off-record sales by Pegasus. He said that the trade in wild birds imported into Europe from Africa was significantly off-record and that MAFF statistics suggested that only 10% of trade was documented. He accepted, however, that off-record birds were likely to have been sold as part of Pegasus’s general stock and not merely at off-site events such as exhibitions. He also accepted during cross-examination that some of his estimates of stock at Pegasus’s premises during his visits may have been inaccurate. But it was not put to him that his assessment (mistaken or not) was not honestly made or that he had deliberately or consciously failed to take into account the points about stock, turnover and the level of suppression which subsequently impressed the Tribunal. Indeed it is clear that the main thrust of Mr Freeman’s cross-examination of Mr Bakewell was to challenge the four components of his assessment and, in particular, the assumption that Pegasus was involved in all the 166 trips. The points about the on-record sales and the ability of Pegasus to suppress sales at the level required were largely presented to the Tribunal as a matter of submission by Mr Freeman as to why Mr Bakewell’s assessment could not be right. 
75.	This explains why the Tribunal in paragraph 250 of its decision was not able to make, and did not make, a finding based on the examination of Mr Bakewell, that he did in fact deliberately fail to consider relevant material before him. Instead it based its view of the way he conducted his assessment on an inference from the Tribunal’s own view of the evidence which was available to him at the relevant time. This is confirmed by its reference to the assessments having no logical basis. The points about turnover and the ability of Pegasus to suppress the required level of sales are undoubtedly powerful ones. But to conclude that Mr Bakewell closed his mind to any material which did not fit his case, merely from the fact that the assessments were, in the Tribunal’s own view, excessive or wrong, excludes the possibility of an honest mistake. This was not the subject of any consideration by the Tribunal. 
Conclusions
76.	I am satisfied, for the reasons given earlier in this judgment, that the Tribunal misdirected itself and misapplied the law on best judgment. I am also satisfied that its findings about the assessment, properly analysed, amount to no more than an acceptance of Mr Freeman’s submission that Mr Bakewell was wrong in the assumptions he made. That is not enough to establish that Mr Bakewell’s assessment was not made to best judgment, and insofar as paragraph 250 of the decision appears to suggest that there was some conscious failure by Mr Bakewell to take an honest and genuine look at the evidence, there was no material before the Tribunal, beyond the fact that it disagreed with his conclusions, on which that finding could be based. That is not a proper foundation for such a finding, and the Tribunal’s treatment of the evidence or the lack of it amounts to an error of law. There is no evidence that Mr Bakewell did anything but his honest and genuine best, however mistaken he may have been. The Tribunal’s determination that the assessment was not made to best judgment must therefore be set aside and the Commissioners’ appeal on that issue allowed. The challenge by Pegasus to best judgment fails. I shall remit the remaining undecided issue of quantum to a Tribunal to be determined. In the absence of agreement, I shall hear Counsel as to whether the issue of quantum should be decided by the same or a differently constituted Tribunal.