[2009] UKFTT 251 (TC)

								TC00199

Appeal number LON/2008/2081

REQUIREMENT FOR SECURITY – Notice of requirement for security for tax – Whether material not referred to by Commissioners in making decision – Whether decision would inevitably have been the same – Appeal allowed – VAT Act 1994 Sch 11 para 4(2)(a)]

FIRST-TIER TRIBUNAL
TAX CHAMBER

	DADA RECORDS LTD	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (VAT)	Respondents

			TRIBUNAL: 	SIR STEPHEN OLIVER QC  

Sitting in public in London on 1 July 2009

D J Pryde, director, for the Appellant

Pauline Crinnion for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	The disputed decision of HMRC is contained in a letter of 28 August 2008.  This is a Notice of Requirement to give Security under Value Added Tax Act 1994 Schedule 11 paragraph 4(2).
2.	The Notice of Requirement required Dada Records Ltd (“Dada”) to give security in the sum of £22,000 if quarterly returns were to be rendered or £14,600 if monthly returns were to be rendered.  
3.	With effect from 1 August 2008 Dada registered for VAT as a company.  Its directors included Mr David Pryde who attended the hearing and presented Dada’s case.  The application form (for registration) described Dada’s activities as “retail, music, CD, books”; its anticipated twelve monthly turnover was stated as £950,000.
4.	Dada’s first VAT return was due on 30 September 2008.
5.	On 28 August 2008 HMRC’s Special Civil Investigations Department issued the Notice of Requirement against which this appeal has been made. The letter states the statutory authority for the requirement but gives no reasons for HMRC’s decision.  It states that if Dada wished HMRC to reconsider their decision, information that they wished to be taken into account should be brought to the attention of the issuing officer as soon as possible.
6.	David Pryde wrote on 19 September 2008 asking HMRC to reconsider their decision.  The letter explained the circumstances of the insolvency of a company called Fopp Ltd.  It went on to say:
“I now aim to open one or perhaps two independent shops of my own. The money is my own, and I’m working by myself and do not require credit or trade insurance. 
I can assure you that I am honest and trustworthy.  Aside from a property mortgage I do not have any debts, nor have I ever experienced personal or financial problems of any kind.
In short, I have bought everything in the shop with my own money, including stock, and will continue to do so.  Therefore, by definition I will always be spending more up front on VAT payable goods than my retail receipts including VAT.
If you require any further information or wish to meet and discuss the matter in more detail I am very willing to visit your office upon your request.”

7.	HMRC responded on 22 October 2008.  This letter explained that the Notice of Requirement to provide security had been served because Mr Pryde had previously been a director of Fopp Ltd which had been registered for VAT on February 2007 and deregistered on 1 May 2008 with a VAT debt outstanding of £1,162,428.  The letter goes on to say:
“As you are aware the Commissioners of HM Revenue and Customs may issue a Notice of Requirement for example if:
You have in your previous business or current business, failed to comply with your VAT obligations;
Other persons concerned in the current registration of your business are connected to past failures to pay VAT due.”

8.	HMRC’s letter of 22 October goes on to say:

“I am extremely concerned in this case that the business concerned was registered for such a short period of time, yet amassed such a large VAT debt.  As a director of a company I am sure you are aware of your responsibilities therein.  … I would now like to have a better picture of your current trading pattern … As it stands the Commissioners of HM Revenue and Customs are still of the opinion that a VAT security deposit should be provided.”

9.	In evidence, the writer (C Christian, an officer of HMRC) stated that when Dada had applied for registration her department had been notified about Fopp Ld of which Mr Pryde had been a director and which had owed a significant amount of VAT.  She had examined the available records of Fopp Ltd and decided, because Mr Pryde had been a director of Fopp Ltd, that Dada might be a risk to the Revenue.  On that basis the decision had been taken to issue the Notice of Requirement to Dada.
The law
10.	VAT Act 1994 Schedule 11 paragraph 4(2) provides:
“If they think it necessary for the protection of the Revenue, the Commissioners may require a taxable person, as a condition of his supplying or being supplied with goods or services under a taxable supply, to give security, or further security, for the payment of any VAT that is or may become due from … the taxable person … .”

11.	The Court of Appeal in Customs and Excise Commissioners v John Dee Ltd [1995] STC 941 allowed that company’s appeal holding that the tribunal had to consider whether the Commissioners had acted reasonably and had taken account of all relevant material; the tribunal, it said, had no power to substitute its own decision for the one reached on an incorrect basis save that it could dismiss an appeal where it was shown that, even if additional material had been taken into account, the decision would inevitably have been the same.  Neill LJ observed that the tribunal should “consider whether Customs had acted in a way in which no reasonable panel of Commissioners could have acted or whether they had taken into account some irrelevant matter or had disregarded something to which they should have given weight.”  In that case, it was concluded, that the Commissioners had failed to inquire into the company’s financial status, and it was not inevitable that, if this material had been considered, the result would have been the same.
The issues
12.	The hearing before me was conducted in a “turn up and talk” manner by both Mr Pryde for Dada and the representative for HMRC.  Fact finding was not easy and depended to a great extent on my own inquisitory approach and on the interjections of HMRC.  Mr Pryde’s presentation was far from lucid and his accounts of Fopp Ltd’s trading activities from 2005 until registration in 2007 were contradictory and vague.
13.	The issue, as I see it, is as follows.  HMRC’s decision, based on the information that they had when they took the decision on 28 August 2008, passes the first limb of the John Dee test; the Commissioners did not act in a way in which no reasonable panel of Commissioners could have acted.  But, moving on to the latter part of the test, did they disregard something to which they should have given weight?  And if they had taken such a factor or factors into account would their decision inevitably have been the same?  I turn now to address those two questions in the light of my findings. 
The facts
14.	The facts about Dada available to HMRC at the time of the decision were, as noted, that it intended to carry on a retail business from premises in Chiswick and that its turnover was expected to be £950,000 in a twelve month period.  Mr Pryde made the application for registration in his capacity as a director. 
15.	The only other fact that the deciding officer had available to her was that Mr Pryde had been a director of another company, i.e. Fopp Ltd, that had defaulted owing VAT of some £1.1m.  She admitted in evidence to having looked at the records relating to Fopp.  I infer that she knew (although this was not presented in evidence) that Fopp Ltd had been in the same trade category as Dada.  
Fopp Ltd
16.	Fopp Ltd was incorporated in October 1999. Mr Gordon Montgomery was a director.  Nothing is recorded that its activities from 1999 until 19 May 2005 when Mr Pryde’s appointment as a director of Fopp Ltd was notified to Companies House.  The three directors were, from then onwards, Gordon Montgomery, a Mr Hill and Mr Pryde. 
17.	Mr Pryde’s account of why he joined the Board of Fopp Ltd shows that he had initially approached Gordon Montgomery in the autumn of 2004.  Mr Pryde had been interested in buying Fopp’s business of retail sales of DVDs and other recordings.  They had not been able to agree a price.  Instead Mr Pryde agreed, in May 2005, to join Fopp Ltd and help managed its business.  Mr Pryde purchased some shares in Fopp Ltd.  
18.	According to Mr Pryde, Fopp Ltd’s turnover in 2005 had been in the region of £30m.  
19.	On 21 February 2007 Fopp Ltd applied for VAT registration as a retailer of DVDs, CDs and books.  The application form shows £58m as the anticipated twelve month turnover.  It records Fopp Ltd’s taxable turnover as having gone over the registration threshold in February 2006 and asked for registration from February 2007.
20.	Fopp Ltd’s supplier had been a company called THE.  THE was owned by EUK (a subsidiary of Woolworths).  By February 2007 Fopp Ltd had paid THE for purchases of Fopp’s Christmas stock of DVDs and CDs.  
21.	In February 2007 THE and EUK obtained a new and substantial customer.  For reasons that did not become apparent till much later and were not known by Mr Pryde at the time, THE and EUK were required to cut their credit limit for sales to Fopp from £3m to zero.  Credit for such sales could not longer be covered by the credit insurers of THE and EUK.  Fopp unsuccessfully sought other support for credit purchases.  It was left with only its bank overdraft.  Fopp Ltd, as a result lost its source of supply.
22.	Fopp Ltd’s VAT returns for 04/07 showed a total of output tax of £3.5m, input tax of £3.3m and tax due of £160,000.  Its return for 07/07 showed a total output tax of £1.6m, input tax of £650,000 and tax due of £1m.  
23.	By May 2007 when the VAT (on 31 May for the 04/07 period) was due for payment, Fopp Ltd’s business was (to use Mr Pryde’s expression) starved of stock.  The Board had considered its options and taken advice and could see no other way than to accept the appointment of an administrator/receiver appointed, according to an HMRC officer who attended the present hearing, by HMRC.  Administrative receivership started in late June, i.e some three weeks after Fopp Ltd’s VAT for the 04/07 period became payable.  From then on the disbursements of funds available to Fopp Ltd was out of the hands of the Board and lay with the receiver.
24.	According to HMRC’s Statement of Case Fopp “was extremely non-compliant”.  The VAT debt to HMRC was £1.16m.  On 1 May 2008 Fopp Ltd became insolvent and Ernst &Young were appointed liquidator.  

Conclusion
25.	Applying the John Dee test, was anything material available to HMRC at the time of the decision to which they should have given weight?  HMRC must have known the circumstances of Fopp Ltd’s trading history.  They had, according to the officer who attended the hearing, appointed the administrator/receiver.  They should have known that Fopp Ltd had been in default for some three weeks at the time when he was appointed.  They should have had information, from the reports produced to them in the course of the receivership and the insolvency, about the reason for that default.  HMRC must be taken to have known that, within three weeks of the 04/07 default, the Board of Fopp (which included Mr Pryde) had limited authority over how its funds were to be used.  HMRC knew, from the registration applications of both Fopp Ltd and Dada, that the former’s annual turnover was estimated as £58m where the latter’s was £950,000.  The sudden demise of Fopp Ltd within four months of its registration must have called aloud for an explanation.  The explanation regarding Fopp Ltd must have been available to HMRC through “their” receiver.
26.	For HMRC it can be said that Mr Pryde’s explanation of Dada’s business in his letter of 19 September 2008, that he would “always be spending more up front on VAT payable goods than any retail receipts including VAT”, might have been a cause for concern.  If it is understood as meaning that receipts will be less than purchases (as stated in the Notice of Appeal), it is not credible.  Even if that assertion had been available to HMRC when the decision was taken, it would not reasonably have been  a material consideration.  
27.	In summary I have concluded that, if HMRC had taken into account information available to them of Fopp Ltd’s demise and had compared Fopp Ltd’s estimated turnover with that of Dada, they would not inevitably have reached the decision they did.  It is not my function to exercise a fresh discretion.  I therefore allow the appeal.
28.	Appeal allowed.

SIR STEPHEN OLIVER QC

CHAMBER PRESIDENT
RELEASE DATE: 2 October 2009