SECURITY – Notice of requirement – Reasonableness – Previous company liquidated leaving substantial debt due to Commissioners – Previous company and Appellant under common control – Previous company had long history of defaults – Whether requirement reasonably made – Yes – Appeal dismissed – VAT Act 1994 Schedule 11 para 4(2)

LONDON TRIBUNAL CENTRE

	STIRLING INTEGRATED MANAGEMENT SYSTEMS LTD	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	STEPHEN OLIVER QC  (Chairman)
						SHEILA WONG CHONG FRICS				

Sitting in public in London on 7 July 2003

Malcolm Yuill, director, for the Appellant

Clive Palmart, advocate, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	Stirling Integrated Management Systems Ltd (“SIMS”) appeals against the decision of the Commissioners contained in a letter of 24 September 2002.  The decision is a notice of requirement to give security under VAT Act 1994 Schedule 11 paragraph 4(2).  

2.	SIMS was registered for VAT with effect from 1 August 2002.  Prior to that its only role had been to act as registered owner of an access control system called the SIMS system.  The name SIMS Ltd had been chosen to protect the name of the system.

3.	Malcolm Yuill and his wife have at all times owned all the shares in SIMS.  Malcolm Yuill is director and his wife is company secretary.  SIMS has been trading from Stirling House, 17 Wealden Place in Sevenoaks.  It has been involved in the installation of access control security systems, which it carries out for clients as principal, and the management and maintenance of existing security systems, which it conducts as agent for Malcolm Yuill (who has always contracted for the maintenance directly with the client).  

4.	Seven weeks after SIMS was registered for VAT, i.e. on 18 September 2002, a company called Stirling Security Installation Ltd (“SSI”) held a meeting under section 98 of the Insolvency Act 1986 at which a liquidator was appointed.  SSI had been owned as to 21,000 out of 30,000 issued ordinary shares by Malcolm Yuill and his wife.  Malcolm Yuill had been a director until 31 March 2001 and his wife had been company secretary.  SSI’s business had been that of installing and maintaining access control systems.  It had traded from Stirling House, 17 Wealden Place in Sevenoaks and had done so for some years.  Until the end of 2000 turnover had exceeded £2 million.  From late in 2001 turnover dropped and it suffered a £180,000 loss in the year 2001.  Two officers of Customs and Excise, which claimed (as it turned out) some £157,000, attended the meeting and reported back.  Their notes of the meeting were provided by Linda Andrews, a Customs officer with responsibility for security in the southern region of England.  She looked at the reasons behind the insolvency.  She became aware that Malcolm Yuill had been a director of Stirling Security Group Ltd (a holding and group management company) and of Stirling Maintenance Ltd (a company carrying on investigations and security activities), both of which had traded between 1996 and 1998 from 17 Wealden Place, Sevenoaks.  Linda Andrews was advised that, although the full information about those two companies’ VAT affairs was not available, there appeared to be VAT debts at the time of deregistration.

5.	Linda Andrews ascertained that SIMS had been in receipt of 68 default surcharge notices.  The records showed it to have been in default for every period (initially three month periods and latterly one month periods) from 6/95 until 8/02.  She understood that Malcolm Yuill had signed SIMS’ VAT returns. 

6.	Based on the facts that –

(i)	all the companies controlled by Malcolm Yuill appeared to have the same address, 

(ii)	SSI and SIMS carried on the same business, 

(iii)	Malcolm Yuill appeared to have been (a) director of SSI and, on the strength of the fact that he had always been SSI’s highest earner, the person with controlling influence over SSI and (b) director of SIMS, 

(iv)	Malcolm Yuill had made the VAT returns for both companies,

(v)	SIMS had had a bad compliance record and

(vi)	SIMS had gone into liquidation owing the Commissioners £157,000,

Linda Andrews formed the view that SIMS was a risk to the “revenue” and issued a request to provide security.  The amount of the security was £13,950.  This took the taxable turnover from the amount of turnover declared in SIMS’ application for registration, being £360,000.  The output tax on that is £53,617 and, after applying a “standard tax performance rate” of 3.6, the net output tax liability for that year was calculated at £41,961.  This resulted in £13,987 being the tax potentially at risk for a trader with SIMS’ characteristics making monthly returns.  Accordingly the notice of requirement was issued requiring security of £13,950 on the basis that SIMS made monthly returns.

7.	SIMS appealed.  The notice of appeal explained that Malcolm Yuill had ceased to be a director of SSI in March 2001 and that SIMS was being run on a tighter financial rein with reduced overheads; moreover, the notice of appeal says, Malcolm Yuill and his wife had invested £40,000 in SIMS.

8.	We had to decide whether the decision to require security of £13,950 was unreasonable in the sense that no reasonable panel of Commissioners properly directing themselves could reasonably reach that decision.  To enable us to interfere with the decision it would have to be shown that the Commissioners took into account some irrelevant matter or disregarded something to which they should have given weight.  

9.	Malcolm Yuill put the case for SIMS with care and moderation.  He challenged the decision on the grounds, first, that the Commissioners had not properly directed themselves as to the circumstances leading to SSI’s insolvency.  He pointed out that he had not been a director since March 2001 when he had retired to live in Portugal, returning each month to see how SSI was performing as an investment.  A cause that had precipitated the cashflow crisis of SSI had been a payment made by SSI of £87,000 to a sub-contractor in respect of what turned out to have been faulty work installing a security system; SSI had then had to spend a large amount in putting the fault right without being able to recover from the sub-contractor.  To try to remedy the cashflow deficiency, SSI had sold its assets to a finance company and leased them back thereby releasing capital.  Malcolm Yuill challenged the Commissioners’ note of this transaction apparently obtained from the section 98 meeting. The Commissioners’ note recorded that the lease back had been, not to SSI, but to another company which had then lent the assets on to SSI.  We prefer Mr Yuill’s account. We see no conceivable reason why a transaction of sale and lease back should involve a beneficial lease back to a third party company.  It would not be in the finance company’s interest to lease back to a company whose capacity to pay the rent was unknown.  And why should such a company make a gratuitous loan of assets which it was paying good money to hire in?  We see the transaction as a genuine and straightforward attempt to get SSI out of its cashflow problems.  

10.	Malcolm Yuill pointed out that the Commissioners had not co-operated with his attempts to save SSI.  He said that he had sold his house and had been ready to put £40,000 into SSI if the Commissioners would ease their demands for outstanding tax and accept payment in a more orderly way.  Linda Andrews was not aware of those negotiations, as we understand the position; Malcolm Yuill had, so far as she was aware, not made any concrete proposals to the Commissioners about a time to pay framework.  

11.	The Commissioners’ assumption that Malcolm Yuill had done SSI’s VAT returns is, we think, wrong.  We accept his evidence that the VAT returns were the responsibility of his accountant daughter. Then Malcolm Yuill challenged the apparent use by the Commissioners of the information that Stirling Security Group Ltd and Stirling Maintenance Ltd had ceased business owing VAT to the Commissioners. Here we accept his challenge. There is no sufficient evidence to establish any loss of VAT from those companies.

12.	Malcolm Yuill went on to argue that the Commissioners should have given weight to the fact that he had ceased to be a director of SSI in March 2001.  The response of the Commissioners was that, whether a director or not, Malcolm Yuill had continued to attend meetings and had been drawing the largest salary from SIMS.  We think that he was, despite his retirement, still exerting substantial control over SSI.

13.	Malcolm Yuill admitted that SIMS was still employing the same staff who had been employed by SSI before its insolvency.  This, he said, was the result of his decision to make SIMS the successor trader, so as to protect their employment.  

14.	It seems to us that the Commissioners correctly appraised the situation here.  Malcolm Yuill was, with his wife, in share holding control of SSI.  He had, according to his evidence, personally guaranteed SSIs’ borrowings from its bank. His regular visits indicate that he was maintaining  a large measure  of control over SSIs.

15.	We recognize that some of the matters taken into account by the Commissioners were wrong or irrelevant.  But there were nonetheless two inescapable considerations behind the Commissioners’ decision to issue the notice of requirement.  These were first the stark fact that SSI, a company trading from the same address as SIMS with the same staff and the same business activities, had gone into liquidation owing the Commissioners over £150,000.  We fully accept that Malcolm Yuill and his wife made considerable personal sacrifices to keep the business going despite SSI’s liquidation and for the purpose of preserving the jobs of SSI’s staff.  He has however been closely involved in an insolvency which has resulted in a loss of a large amount of money to the Commissioners and it must be reasonable for them to see SSI as a possible risk to the Revenue.

16.	SSI’s liquidation and its indebtedness to the Commissioners do not stand alone, however. Its compliance record has been extraordinarily bad. As we have already observed, it was late with every VAT payment from 1995 until 2002.  In some cases it was nearly a year late. That factor must, we think, be a highly relevant consideration and strongly reinforces the reasonableness of the decision to require security from SIMS.

17.	For all those reasons we think that the Commissioners reasonably required  security of £13,950 from SIMS for the protection of the revenue. We therefore dismiss the appeal.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED:

LON/02/942