Pegasus Birds Ltd v Customs and Excise Commissioners [2004] EWCA Civ 1015

Van Boeckel defines best judgment; Pegasus Birds tells the tribunal what to do about it. Carnwath LJ ended the two-stage practice and redirected these appeals to the only question that matters: what is the correct amount of tax? The burden of answering it sits with the taxpayer.

The Case That Redirected Best Judgment Appeals

Van Boeckel tells you what “best of their judgment” means. Pegasus Birds tells the tribunal what to do about it, and the answer, for most practical purposes, is: not very much.

By 2004 a practice had developed in which appeals against s73 assessments were run in two stages. First the tribunal would decide whether the assessment had been made to best judgment. Only if it survived that hurdle would the tribunal go on to consider the amount. The consequence was that enormous effort went into attacking the officer’s conduct, with the substantive question, how much tax is actually due, left as an afterthought.

Carnwath LJ brought that to an end.

The Facts

Pegasus Birds Ltd traded in birds. Customs and Excise formed the view that its records did not reflect the full extent of its takings and raised assessments under s73 VATA 1994, constructed from the material available.

The company appealed. The litigation ran for a considerable period and generated multiple hearings, with a substantial part of the argument directed at whether the officer’s exercise of judgment had been adequate rather than at what the correct amount of VAT was. By the time the matter reached the Court of Appeal for a second time, the procedural history had itself become an illustration of the problem the Court set out to solve.

The Issue

How should the tribunal approach an appeal against an assessment said not to have been made to the best of the Commissioners’ judgment? In particular, is the validity of the officer’s judgment a threshold question to be tried separately, and what should the tribunal do if it concludes that best judgment was not exercised?

The Ratio and the Guidance

The four practical propositions

1. Find the tax. The tribunal’s primary task is to determine the correct amount of tax on the material properly available to it. The burden is on the taxpayer to displace the assessment and to establish the right figure.
2. Do not be diverted. In all but very exceptional cases the hearing should be about quantum. An attack on the officer’s state of mind at the time of assessment is a distraction from the statutory question.
3. A best judgment failure is not automatically fatal. Even where the tribunal finds the assessment was not made to best judgment, it retains the ability to direct the correct amount rather than discharge the assessment altogether.
4. Reserve the point for the exceptional case. Where the taxpayer wishes to run a best judgment challenge, the tribunal should consider at an early stage whether it is properly arguable, and should be prepared to case-manage it out where it is not.

Why this matters so much in practice

The combined effect of Van Boeckel, Rahman v Customs and Excise Commissioners (No 1) [1998] STC 826 and Pegasus Birds is that:

• the threshold for showing an absence of best judgment is very high: dishonesty, vindictiveness, caprice, a spurious estimate, or a wholly unreasonable figure;
• even clearing that threshold may not produce discharge of the assessment; and
• the taxpayer still has to prove the right number.

An appeal strategy built around criticising the officer therefore has a poor expected return. An appeal built around a credible reconstruction of the trade has a good one.

Obiter Dicta and Case Management Observations

• The remarks on procedure and proportionality. Carnwath LJ’s observations about the waste generated by protracted satellite disputes, and about the tribunal’s responsibility to manage them, are guidance on the conduct of proceedings rather than a determination of the appeal. They have nonetheless shaped how the FTT lists and directs these cases.
• The residual exceptional category. The Court did not close the door on best judgment challenges, and its description of when the point remains properly arguable is deliberately open-textured. That leaves room for argument in genuinely bad cases, which is why the point is worth preserving rather than abandoning.
• The relationship with the burden of proof. The statement that the burden rests on the taxpayer reflects the settled position rather than deciding it. The scope of that burden was revisited two decades later in HMRC v Sintra Global Inc [2025] EWCA Civ 1661, which held that a taxpayer who disputes an underlying liability as a defence to a penalty must also prove that case.

Practitioner Application

How to run the appeal

• Lead with quantum. Build the case around what the correct figure is: purchase records, supplier statements, till rolls and Z-readings, bank and card acquirer data, wastage and staff meals, seasonality, staffing levels, opening hours, comparable businesses.
• Get the working papers early. Ask for the officer’s calculation, source data, invigilation notes and any mark-up exercise, together with the notes of any visit. Most successful challenges rest on a flaw visible only there.
• Attack the methodology, not the officer. An unrepresentative invigilation day, a mark-up derived from the wrong product mix, extrapolation across a period with a different trading pattern, or an arithmetical error carried through are all quantum arguments. They are far more productive than alleging that the officer failed to exercise best judgment.
• Preserve the best judgment point without leading on it. Plead it where the facts genuinely support it, particularly where material supplied was ignored, but expect the tribunal to case-manage it if it looks like a makeweight.
• Check validity first. Time limits under s73(6), and s77 VATA 1994, and proper notification, are threshold points that defeat the assessment without any argument about judgment or quantum.
• Address the pay-or-deposit rule. Under s84(3) VATA 1994 the disputed VAT generally has to be paid or deposited before the tribunal will entertain the appeal, subject to a hardship application under s84(3B). This needs dealing with at the outset, not on the eve of the hearing.

Evidence that persuades tribunals

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