[2010] UKFTT 266 (TC)

TC00560

Appeal reference: TC/2010/0975
TC/2010/1206
VAT – security – failed group of companies replaced by two new businesses – original Requirement upheld on review but no evidence before the tribunal of the information taken into account by the review officer – appeal allowed

FIRST-TIER TRIBUNAL
TAX

 	
					SANLEO LTD	Appellants
& ZONIN RESTAURANTS LTD

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: 	Lady Mitting (Judge)
		Robert Barraclough (Member)
			
Sitting in public in Manchester on 26 April 2010

Charles MacMillan for the Appellants

Richard Mansell, instructed by the General Counsel and Solicitor to Her Majesty’s Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2010
DECISION

1.	The Appellant, Sanleo Ltd (“Sanleo”), appeals against a decision to issue a Notice of Requirement to give Security under Schedule 11, paragraph 4(2)(a) VAT Act 1994 dated 17 November 2009 and upheld on review by letter dated 22 December 2009.  The original Notice of Requirement required security in the sum of £56,840 if quarterly returns were submitted or £37,893 on monthly returns.  On review these figures were reduced to £39,424.60 on quarterly returns or £26,283.07 on monthly returns.
2.	The Appellant, Zonin Restaurants Ltd (“Zonin”) appeals against a decision to require security notified by letter dated 26 November 2009, again upheld on review by letter dated 22 December 2009. The security required was in the sum of £22,736 if quarterly returns were submitted and £15,157 for monthly returns.
3.	Although these were two separate appeals, the background facts were common to each; the same officer took the original decision and the same officer the review decisions and the evidence we heard was common to each.  We therefore deal with both appeals in the one judgment.
4.	On behalf of the Appellant we heard oral evidence from Mr. Lino Della Pesca, a director of both companies, and on behalf of the Commissioners from Mr. Andres Reeves, the officer who raised each of the original requirements.
5.	A Notice of Requirement had also been served on a third company, Prosecco Restaurant Ltd on 26 November 2009 but this company was liquidated on 2 February 2010, leaving a debt due to the Commissioners of £37,953.03 subsequently written off.
6.	Sanleo and Zonin were referred to Mr. Reeves by colleagues.  Mr. Della Pesca was the sole director of each; each registered for VAT on 3 September 2009.  As at 22 February 2010 neither company owed any VAT to the Commissioners.
7.	The case evaluation sheet revealed to Mr. Reeves that Mr. Della Pesca had been involved in four previous companies, all of which had gone into insolvency leaving substantial VAT arrears.  Tiggis Ltd had been registered for VAT from 1 December 1981 to 30 November 2009.  It went into administration on 9 October 2009 with a debt to the Commissioners, subsequently written off, of £69,813.67.  We were told the compliance record of this company had been good until the period 11/08.  The returns for 11/08, 02/09 and 08/09 were rendered but not paid.  The return for 11/09 was not submitted.
8.	Gioia (Leeds) Ltd was registered for VAT from 1 June 2007 to 7 July 2009.  This company went into administration on 26 February 2009 owing the Commissioners £36,348.60.  The first five returns for this company were repayment returns, the first tax due return being for 09/08.  This return was submitted on time and paid in full.  The returns for 12/08 and 3/09 went unpaid.
9.	Tiggis (St Annes) Ltd was registered for VAT from effect from 19 October 1981 to 11 September 2009.  This company went into administration on 11 September 2009 owing the Commissioners £167,721.69.  The returns from 07/08 on wards were submitted but apart from one small part-payment, they went unpaid.
10.	Tiggis (Bolton) Ltd was registered from 1 November 1984 to 30 November 2009.  This company went into administration on 11 September 2009 owing the Commissioners £21,504.91.  The return for 11/08 was submitted and although four payments were made, it was not paid in full.  The 02/09 return was submitted but went unpaid.  The 05/09 return was submitted and paid in full.  The 08/09 and 11/09 returns were submitted and went unpaid.
11.	All four of these businesses had been restaurants.  All were therefore cash businesses where the VAT would have been received but was not paid over.  It should also be noted in relation to all four companies that until 2008, the compliance record of each had been good.  Taking out the four restaurant businesses already referred to and Sanleo, Zonin and Prosecco, the evaluation sheet would also have revealed to Mr. Reeves that Mr. Della Pesca was a director of nine other companies dealing variously in the travel business, real estate and licensed clubs.  These companies had registered on various dates as early as 1987.  Some were still trading, some weren’t, but in each case the compliance record had been good. 
12.	Sanleo registered on 3 September 2009 and ran as a restaurant business in Preston, replacing in effect and trading from the same premises as that previously operated by Tiggis Ltd.  Zonin also registered on 3 September 2009, operating in Bolton as a successor to Tiggis (Bolton) Ltd.  Mr. Reeves explained that in relation to each of the two Appellant companies, he saw them as continuation businesses, cash businesses on which the VAT would already have been received and not paid over, and they were operated by the same director.  He believed this constituted a risk to the revenue and raised the Notices of Requirement.  Mr. Reeves accepted in cross-examination that he had had no contact with the administrators of the companies which would not be normal procedure, and had carried out no analyses or enquiries himself into why the companies should have failed.  It was put to him by Mr. MacMillan that these restaurants were in fact part of a “group” in the non-legal sense and asked whether Mr. Reeves had treated them as such.  Mr. Reeves’ response was that there was no group registration in place.  As far as he was concerned the four failed companies had been individual companies which had been registered separately and accounted separately, and his analysis was based on that separation and not on a group basis.  Mr. Reeves accepted that he took no steps to see Mr. Della Pesca before raising the requirement as he believed that he had enough information before him.  He was aware from the case notes that Mr. Della Pesca and his advisors had been keeping the Commissioners informed of the trading difficulties and that payment agreements had been reached but not adhered to.  Mr. Reeves was also asked if he had been aware of the valuations of freehold properties owned by the companies which, if a sale could have been achieved, would have been sufficient to cover debts both to the bank and to the Commissioners.  Mr. Reeves’ response was that he had been aware of the valuations but could not at the time of hearing remember the specifics.  When asked if he had been aware of the attempts that were being made to sell the properties he said that he was only aware of the valuations.  He did say that had the Time to Pay agreements been adhered to then there would have been no need for security.  When asked whether he had taken into account the previously good compliance record of the four companies he said that he had done and did not dispute that the record had been good, but as far as he was concerned the predecessor companies had failed to meet their VAT obligations and that outweighed the previously good record.
13.	Having raised the Notices of Requirement, Mr. Reeves had no further involvement in the case.  Having received the Notices, Mr. Della Pesca, through his accounts Messrs Whitehead & Aldrich wrote to the Commissioners requesting an independent review of the decisions by separate letters dated 27 November in respect of Sanleo and 4 December in respect of Zonin.
14.	In respect of Sanleo, the Commissioners were told that Sanleo was operating the Preston restaurant which had previously been operated by Tiggis Ltd which had traded for over 30 years, making considerable profits.  Tiggis Ltd had guaranteed the bank borrowings of its fellow subsidiary undertaking Tiggis (St Annes) Ltd and when this company went into administration in September 2009, the bank guarantee resulted in Tiggis Ltd becoming insolvent and going into liquidation.  It was pointed out that if Tiggis Ltd had not been called upon to honour this guarantee then the company would have had sufficient assets to repay all its creditors, including the Commissioners.  The letter went on to explain the reasons for the failure of what was called “the Tiggis group of companies”.  First, the group had incurred losses of approximately £1.2 million on the unsuccessful opening of a new restaurant in Leeds in May 2008.  The restaurant had been constructed between July 2007 and May 2008 on a new commercial and residential development.  However, due to the unexpected financial downturn there were no tenants for either the office accommodation or the apartments and hence no footfall from which to attract customers.  Due to the operating losses incurred by the Leeds restaurant the group began to experience difficulties in paying its VAT liabilities in August 2008.  The group arranged a Time to Pay agreement but was unable to adhere to it.  The reason given for this was that its bankers had placed the group into administration in September 2009.  It should be noted that although the letter to the Commissioners stated that it had been the Bank that had placed the group into administration, it was clarified at the hearing that it was in fact the directors who had done so.  The second reason for the failure of the group was that the St Annes restaurant which had traded profitably for many years had had an extension added to it in 2004 and additional staff houses were purchased at a total cost of £4.2 million.  To fund this the company borrowed £3 million from its bankers on monthly loan repayments of £25,000 for 15 years.  In its first three years of trading the enlarged restaurant had a turnover of over £2 million per annum and was able to meet its bank repayments.  However the economic downturn commencing in August 2007 reduced the turnover from £2 million to £1 million per annum.  Secondly the company had taken out a Base Rate Collar contract with its bank in August 2006 to guard against expected rising interest rates.  However when they fell the company was left paying an additional £8,000 per month to its bankers.  The letter went on to explain that due to the losses incurred by both the Leeds and St Annes restaurants, the group began to experience difficulties in meetings its VAT liabilities in August 2008.  The Time to Pay agreement was negotiated but could not be adhered to because of the bank placing the group into administration.  The group had requested a holiday for one year on its loan repayment but this had been refused by the bank.  Had it been granted it was Mr. Della Pesca’s view that an orderly disposal of the assets could have been arranged and the assets would have realised considerably higher amounts than those currently sought by the Commissioners.  For example the properties owned by the St Annes restaurant were valued by the bank in December 2006 at £5.5 million.  Having set out the reasons for the failure of the “group”, the letter to the Commissioners went on to explain that it was anticipated that the Sanleo restaurant would trade profitably and projected results were submitted for the year ended 21 August 2010.  The Zonin letter explained that the Zonin restaurant was operating the Bolton restaurant previously operated by Tiggis (Bolton) Ltd which had traded for over 25 years.  This letter blamed the failure of the “group” solely on the St Annes restaurant and explained the position as we have set out above.  There is no mention in this letter of the Leeds development.
15.	It fell to Mrs. S Ogburn to review the Requirements.  Her decision letters upholding the Requirements were in identical terms.  Her letter was short, stating that she had completed her review and was upholding the decision, although in the case of Sanleo the amount required was reduced as the company was running only one restaurant rather than the anticipated two.  We set out below the reasons given by Mrs. Ogburn, our reason for setting them out in full being that this is the only evidence which was before the tribunal relating to the review:
“My reasons for this are that the failure of previous associated businesses can be broadly attributed to the effect of inter company guarantees etc.  As a result of changes to the general economic situation those guarantees were called in.  Clearly if, as you suggest, the guarantor “had not been called to honour this guarantee” it would have altered the situation.  Those who act as guarantors must do so with the understanding that they may be called upon.  This is a normal hazard of trading for those who choose to operate in this way.  The terms of any lending arrangement were a commercial matter; acceptance of the collar arrangement was the choice of the directors.  My understanding is that the bankers had already tendered further support before the directors appointed administrators.  You mention that you believe the administrators are selling assets too cheaply, however I understand these assets were previously marketed by the group without success.  The group had been accruing significant debts and had used VAT to support the business.  I am not persuaded that the risk has been addressed and therefore security is still required.”
16.	In his oral evidence, Mr. Della Pesca gave a graphic description of the difficulties surrounding the Leeds development.  The group had been approached in 2007 by a developer to participate in the multi-use site which was to contain 1,100 residential apartments, 75,000 ft2 of office space, a Holiday Inn and a casino which was to be the largest in the UK outside London.  Mr. Della Pesca had been told that 90% of the apartments had been pre-sold off plan and that there was already a commitment for 800 employees to occupy the offices.  The group entered into an agreement to lease space in the development and spend £1.5 million fitting out a high-class Italian restaurant.  When the restaurant opened in June 2008 virtually none of the apartments or offices were occupied and the casino had failed to materialise.  The restaurant traded at a loss of £5,000 per week until it was closed in March 2009.  The effect of this was that by late 2008 the group was suffering cash flow difficulties and fell behind in its VAT payments.  The financial advisors kept HMRC in touch at all stages and a strategy was put in place to bring the liabilities up to date.  The strategy was dependant upon the group selling its freehold properties and leasing them back.  As the properties had been valued in excess of £5.5 million and the bank was owed some £3.5 million, there would have been adequate funds to meet all outstanding VAT liabilities.  However, because of the credit crunch, buyers could not be found at a realistic price and a sale proved impossible.  The bank put increasing pressure upon the companies and they eventually went into administration at the instigation of the directors.
17.	Mr. Mansell contended that the decision reached by the Commissioners had been a reasonable one given the previous conduct of Mr. Della Pesca and that the new companies still posed a risk to the Revenue.  Mr. Mansell highlighted the Leeds development and criticised the apparent lack of due diligence carried out.  He pointed out that what had been various solvent restaurants were hamstrung by the group loan agreement with the Bank and therefore once one of the companies got into difficulties they all did.  This however was an arrangement entered into by the directors of the companies and what happened was a normal hazard of trade and once a guarantee is given, if it is called in, a guarantor must be ready for its assets to be called upon.  Mr. MacMillan submitted first that it was wrong to look at the four companies individually because they did trade as a group, albeit not in a legal sense.  It was Mr. MacMillan’s contention that the sole reason for the failure of the group was the Leeds investment, all other issues being subsidiary and taken in isolation would not have had such a detrimental effect on the group.  He criticised Mr. Reeves for not undertaking further research before reaching his decision and maintained that insufficient cognisance had been given to the group’s efforts to realise their assets.  Specifically the administrator’s report to the creditors would have been available had Mr. Reeves chosen to look at it.  All in all the Commissioners had failed to understand the group’s structure, the relationship of the group with their bank and the strategies which were being put in place to settle the debts.  Had the Commissioners properly appreciated the situation, then taken in conjunction with Mr. Della Pesca’s very good track record stretching back over 40 years, Mr. MacMillan contended that the Commissioners could only have come to the conclusion that the two Appellant companies did not present any risk to the Revenue.  Mr. MacMillan put before the tribunal trading accounts for the two companies, which he maintained showed their current financial soundness and their ability to meet all future liabilities.
18.	The jurisdiction of the tribunal is supervisory only.  It is not open to us to substitute our own decision for that of the Commissioners.  We test whether or not the Commissioners have taken into account all relevant material or indeed whether they have taken into account something which is not relevant.  We look at the weight attached to such material and whether any error of law has been made.  In the light of all of this we then ask ourselves whether or not the decisions reached by the Commissioners are ones which no reasonable body of Commissioners could have reached.
19.	The tribunal is only able to look at facts and material which existed at the time the decisions were made.  For this reason we are not able to take any account of the current financial position of the two Appellant companies.  The only financial information in relation to each which was made available to the Commissioners were the financial projections put before Mrs. Ogburn.  We are also going to discount the attack that Mr. Mansell made in his submissions on Mr. Della Pesca’s due diligence.  There is no indication that due diligence was a matter considered by Mr. Reeves or Mrs. Ogburn.  Equally due diligence was never raised by Mr. Della Pesca in his evidence in chief or by Mr. Mansell in his cross-examination.
20.	It was accepted by Mr. Mansell that the tribunal was considering not only the original Notices of Requirement raised by Mr. Reeves but the entire decision making process, culminating in the review letter of Mrs. Ogburn.  It follows from this that we are looking at the complete process and have to be satisfied also that Mrs. Ogburn’s decision to uphold the Requirements was a reasonable decision, reasonably taken.  The problem which we the tribunal have is that we heard no evidence, either in written form or orally, from Mrs. Ogburn.  We raised with Mr. Mansell her absence and he agreed that she was not present, but told us that he had spoken to her.  He advised us that she told him that she “had considered all information put forward” and that she had also spoken to the administrator.  This is hardly acceptable evidence.  We have no idea what “all information put forward” consisted of.  We know that she considered in some detail the submissions put in by Mr. Della Pesca’s accountants because they are referred to in her review letter.  However in that letter she did not refer to any other material which she looked at or to any other reasons.  Considering the first decision, ie that of Mr. Reeves, we are satisfied that he took into account all relevant information which was available to him, which of course did not include the later submissions made by the companies.  He was clearly aware of the ongoing financial difficulties of the company.  We were told he considered the compliance record but believed it to have been outweighed by what he saw as two phoenix companies replacing the defunct company.  We cannot say his decision was one which no reasonable body of Commissioners could have made.  However we cannot say the same of Mrs. Ogburn’s decision for the simple reason that we do not know what matters she took into account.  Without hearing from her, it is quite impossible for the tribunal to be satisfied that her decision to uphold the Requirements was one which was reasonably taken.  Most importantly we have no idea what weight, if any, she attached to the previous good compliance record and how she balanced that against the failures, given her knowledge of the reasons for those failures.
21.	This was not only a problem for the tribunal.  We are fully mindful of the fact that the burden of proof is on the Appellant, but these two companies had no means of discharging that burden without the requisite knowledge.  This is not a case where the evidence does not exist or is highly confidential.  The material and the evidence is clearly in existence and could and should have been made available to the Appellant and to the tribunal.  Without such evidence we are unable to find that the decision reached was a reasonable one and the appeal is allowed.  There was no application for costs and no order is made.
The Respondents have a right to apply for permission to appeal against this decision in accordance with rule 39 of the Rules.  The parties are referred to “Guidance to accompany a decision from the First-Tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

LADY MITTING
JUDGE
Release Date: 14 June 2010