Security – requirement for; whether decision that security was requisite for the protection of the revenue was unreasonable; various factors considered; Value Added Tax Act 1994 Schedule 11 paragraph 4(2).

EDINBURGH TRIBUNAL CENTRE

	PAK NIN HO	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	       Respondents

			Tribunal:	 (Chairman)   J Gordon Reid, QC., F.C.I.Arb.,

Sitting in Edinburgh on Tuesday 2 September 2003

for the Appellant		Mr C Rumbles

for the Respondents	Mr B Haley

© CROWN COPYRIGHT 2003.

DECISION

Introduction
This is a security appeal which was heard on 2 September 2003.  The Appellant was represented by Charles Rumbles of the RCB Partnership, Edinburgh.  They are tax consultants.  He led the evidence of the Appellant and the Appellant’s wife, Yuk Chung Ho, known as Angela Ho.  Bernard Haley of the Respondents’ (“Customs”) solicitors’ office, Manchester, appeared on behalf of Customs.  He led the evidence of Mr Philip McCormack, a Customs official who has been a member of their VAT Security Team since 1996.  Both parties produced documents the authenticity of which was not challenged.

At the outset, Mr Rumbles informed the Tribunal that the Appellant’s command of the English language was limited.  Mrs Ho was in the same position.  Mr Rumbles proposed and Mr Haley agreed that Mr Richard Kook, of Alpha Translating, 17A Haddington Place Edinburgh, who was fluent in English and Cantonese, should act as interpreter.  The Tribunal accepted this proposal and Mr Kook, having been duly sworn, acted as interpreter in the course of the evidence of the Appellant and his wife.

Facts
There has been a Chinese restaurant at 23 Market Street, Galashiels, on and off since about 1982 when the Appellant acquired a twenty five year lease of the premises.  He ran the business there in partnership with one Lap Mil Lee.  This partnership lasted about two years.  The business was registered for VAT.  The Appellant then carried on the same business in partnership with another man.  This partnership endured until about 1987.  In about 1987, Mr Lee rejoined the partnership which continued trading until about 1990.  Throughout, the business was registered for VAT although it is not clear in whose name.  In 1990 the Appellant’s partners left the business.  He continued as a sole trader and was registered for VAT.  His business continued until about 1995.  In 1995, due to ill health, the Appellant either sublet the premises or assigned his tenancy interest to Pedro Wong.  At that point the Appellant ceased to be registered for VAT.  The VAT record of these businesses in which the Appellant participated between 1982 and 1995 was entirely satisfactory.  Mr Wong carried on business at the premises for about two years under the name Loon Fung Chinese Restaurant.  During some of that period, the Appellant worked part time for Mr Wong as a waiter.  At some point, Wong ceased trading for reasons which are unknown.  The Appellant reacquired his interest in the original lease of the premises or entered into a new lease with the landlord.  

In 1997, around June, the restaurant business began to be operated by Mrs Ho as a sole trader.  She may have had financial assistance from a cousin, Kam Ling Ho, who resided in Honk Kong.  On 17 July 1997, he executed a Power of Attorney in Honk Kong in Scottish form in favour of Mrs Ho.  One of the express powers conferred was To do any act which is required for the proper and efficient administration of managing the business of a licensed restaurant owned by me known as the Dynasty Restaurant, 23 Market Street, Galashiels.  Mrs Ho was aware of the existence of this document in 1997.  However, it was Kam Ling Ho who applied for registration of the business for VAT.  He was duly registered with effect from 7/6/97.  Nevertheless, it was Mrs Ho who took responsibility for the books and records of the business which traded under the name, The Dynasty Restaurant.  She cashed up each day, drew cheques, paid wages, bought the stock and signed VAT Returns which were prepared by Messrs Whitelaw Wells, Chartered Accountants, Glasgow.  She was also a waitress within the restaurant.  She had a bank account in her own name.  The liquor licence was in her name.  She paid rent direct to the landlord.  

Although Mrs Ho described Kam Ling Ho as her boss the state of the evidence was such that we can make no finding that he ever set foot in the premises, received one penny of income or profit or had anything at all to do with the running of the business, far less what his financial interest, if any, might have been.  The Appellant worked there as a waiter but took no part in the administration of the business.  There were two other waiters; they were not family members.  The business operated as a takeaway as well as a restaurant.  

Following a visit to the premises by Mr Small, a Customs official, in about February 2001, Customs considered that there was a serious under-declaration of sales, including a complete failure to account for any sales of takeaways.  Further investigations led to an assessment or assessments being made against Mrs Ho in the sum of £82,249.11.  These assessments are the subject of an appeal to this Tribunal which is pending.  In the meantime, Customs had decided that Kam Ling Ho should never have been registered.  This view was based upon documents exhibited or passed to Mr Small during his visit in February 2001.  He saw or was given bank statements showing that Mrs Ho had a bank account in her name trading as the Dynasty Restaurant.  He noted that Mr K L Ho resided in Hong Kong and that the liquor licence was in the name of Mrs Ho.  There was nothing to connect Mr K L Ho with the business.  The Power of Attorney was not exhibited to him or to Mr McCormack.  Customs cancelled K L Ho’s registration and compulsorily registered Mrs Ho with effect from 7/6/97.  Mrs Ho did not appeal against compulsory registration.  She ceased trading in or about February 2001 shortly after the visit from Customs.  She has not yet been deregistered.

The premises were closed until about late July or early August 2002, when the Appellant began trading as the China Palace Restaurant.  The Appellant still carries on business there as a sole trader of a licensed restaurant.  At some point the liquor licence was transferred to him.  He is responsible for the administration of the business.  His wife takes no part in that, but works there part time as a waitress and cleaner and answers the telephone.  The Appellant did not immediately register for VAT.  

In the latter half of 2002, papers were passed to Mr McCormack.  These included a report by Mr Small which was not produced.  Mr McCormack issued a Security Notice to the Appellant on 15/11/02 requiring security in the sum of £10,630.00 or £7,085 if monthly sums were to be submitted.  He considered that it was requisite to require security for the protection of the revenue.  His reasons were (i) family connection between the Appellant and Angela Ho, (ii) the Appellant took over the liquor licence seamlessly from his wife, (iii) the previous owner (Mrs Ho) had failed to account for all daily gross takings and had failed to account at all for takings from takeaways, (iv) the Appellant was the tenant of the premises and (v) the decision in Pinkdream Ltd (see below).  

However, at that stage the Appellant was not even registered for VAT.  By letter dated 23/12/02 to Customs, Mr Rumbles asserted that the Appellant’s turnover had not yet exceeded the VAT threshold.  Further correspondence ensued and the Appellant was compulsorily registered with effect from 1/1/03.  Another Security Notice was issued on 4/3/03 in identical terms to the earlier notice which it was said by Customs to supersede.  The reasons for issuing it were the same as before.  By letter dated 19/3/03 to Customs, Mr Rumbles complained about the way the matter was being handled and raised various points about registration and the security notice. 

By letter dated 28/3/03, in reply, a Customs Official, Margaret Greenlees, stated inter alia that registration with effect from 1/2/03 would be considered and that The historical trading at this business address, which has consistently been that of a Chinese restaurant, indicates departmental revenue is at risk.  At this stage, no other reason for the issuing of the Security Notice had been given by Customs.  In his reply dated 10/4/03, Mr Rumbles provided details of the Appellant’s weekly sales between 31/7/02 and 28/2/03, took issue with the quoted passage and requested a fuller explanation.  By letter in reply dated 23/4/03, Customs stated inter alia that Previous businesses operation from the same premises as your client, in the same circumstances have failed, resulting in considerable loss to the revenue.  It is the Commissioners belief that the reasons which caused failure also apply to your client and in these circumstances it is reasonable to require security.  In fact, on the material acknowledged by Customs to have been available to them at the date of the Security Notices, the only business which could be said to have failed was Mrs Ho’s business.  By letter dated 28/4/03 to the Appellant, Mr McCormack accepted the accuracy of the weekly sales figures provided by Mr Rumbles and intimated that the effective date of registration would be changed to 1/2/03.  He also noted that a VAT return had already been submitted for the period 1/1/03 to 28/2/03 and that any necessary adjustment should be made in the next return.  Since then, a subsequent VAT return has been submitted and the VAT due thereon paid.

Submissions
Mr Haley relied upon Mr McCormack’s reasons as noted above for the issue of the Security Notice.  He submitted that Mr McCormack had been influenced by Mr Small’s report; the main factors were that Mrs Ho had been running the business and built up VAT debt, the family relationship and the fact that the Appellant was the tenant of the premises.  The letters from Margaret Greenlees were not an accurate summary of the basis of Mr McCormack’s decision to issue the notice.  He drew the Tribunal’s attention to page 5 of the decision in Pinkdream Ltd LON/12557 9/8/94 (Chairman, Paul Heim).

Mr Rumbles submitted that the appeal was brought under section 83(l) of the 1994 Act.  The basis upon which the decision to require security was not given until the letter of 23/4/03.  The Tribunal should consider the facts known at the time the decision to require security was made in March 2003.  He complained that Mr McCormack relied on a report from a Mr Small but Mr Small had not given evidence and the report had not been produced.  The basis upon which the decision was made was not properly documented.  It had not been established in March 2003 that the Appellant had been involved in the running of businesses that failed.  The very opposite was the case.  Throughout the eighties and nineties when he traded alone or in partnership there had been no VAT problems at all.  Since resuming trading in the summer of 2002, he had complied with his VAT obligations.  Mr McCormack failed to take into account the Appellant’s good VAT record prior to 2003.  He was still the tenant after some twenty years.  Mr McCormack should not have been influenced by the Pinkdream decision, where the facts were quite different.  Mr Rumbles also referred the Tribunal to Ivey Construction Ltd v C&EC LON 18223 11/7/03 (Chairman John Walters), C&EC v Peachtree Enterprises Ltd 1994 STC 747, and C&CE v John Dee Ltd 1995 STC 941.  

Law
Ivey Construction contains, at paragraph 4, a succinct summary of the applicable law, based largely upon John Dee Ltd, which the Tribunal gratefully adopts.  The facts (see paragraphs 10 and 18) were materially different from the present appeal and need not be discussed.  The facts in John Dee Ltd and Peachtree Enterprises Ltd were also quite different.  

Decision
This was a most unsatisfactory Hearing.  The Tribunal was not impressed by the evidence led by either party.  The evidence of Mrs Ho and the Appellant was quite difficult to follow.  The Tribunal strongly suspected that their command of the English language was much better than they let on.  They appeared to understand many questions in English but persisted in answering in Cantonese despite requests from the Tribunal and Mr Rumbles to refrain from doing so as much as possible.  In addition, documents could have been produced by both parties which would have clarified many matters such as the history and chronology eg the lease documents relating to the premises and precisely what material was available to Customs when the Security Notices were issued.  One of the Appellant’s productions was a copy of a Power of Attorney bearing to be granted by K L Ho in favour of Mrs Ho.  It purported to give her power to run the business at 23 Market Street, Galashiels.  Although Mrs Ho said she was aware of the Power of Attorney, there was no evidence how she became aware of it or whether it was delivered to her.  There was no evidence that she ever exhibited it to a third party.  Likewise, there was no evidence of how, if at all, she accounted to K L Ho or whether she remitted any of the income of profits of the Chinese restaurant business to him during the period when she controlled the business.  Indeed, there was no evidence that K L Ho ever set foot in the premises or discussed the business with her.

Likewise, the material upon which Mr McCormack reached his decision was left in some obscurity.  He relied upon a report by Mr Small.  This was not produced.  He relied upon information provided by Mr Small.  Mr Small had apparently been shown or given by Mrs Ho various documents including banks statements showing she had a business bank account in her name trading as Dynasty Restaurant.  These were not produced and it was not even clear whether Mr Small had them in his possession or was merely shown them by Mrs Ho during his visit to the premises.  However, Mr Rumbles, in his cross examination of Mr McCormack did not dispute the existence of such bank statements.  The question of the bank account was not taken up with Mrs Ho by either party.  Mrs Ho was said to have signed VAT returns but these were not produced.  The assessment levied against her was not produced.  The basis upon which it was calculated was unclear.  Mr Haley did not put to either the Appellant or Mrs Ho that they were both in fact running the business together either in 1997-2001 or since the summer of 2002.  The Tribunal suspects that may have been the situation on the ground; it seems difficult to accept that the Appellant who had operated the business for many years should take a back seat and let his wife have sole control of the business.  Nor was there any obvious reason why Mrs Ho should cease to perform all the administrative duties she previously performed.  The Tribunal cannot, however, make findings based upon suspicion where these potentially relevant matters are not put to the witnesses.

On the material which appears to have been before Mr McCormack when he exercised his discretion to require the Appellant to find security for future VAT, the Tribunal considered that he acted unreasonably.  In our view, the family connection is neutral in this case; it says nothing about the need to protect the revenue of Customs from VAT.  The same is true about the transfer of the liquor licence.  There was no basis for drawing any inference adverse to the Appellant from the fact that Mrs Ho may have under-declared sales to a significant extent.  Mr McCormack had no material before him from which he could reasonably conclude that the Appellant was to any extent responsible for this under-declaration.  The Tribunal also has difficulty in understanding why the fact that the Appellant has been the tenant for many years, should suggest that there was a risk to the revenue which needed to be protected by security.  What is missing is material establishing or from which it can be inferred that the Appellant must have been involved in the running of the business in some way, or that other similar businesses at the same premises have failed leaving substantial unpaid VAT liabilities, so that it can be inferred that the new enterprise is at risk of failing too, that there is therefore a risk to Custom’s revenue, and that it is accordingly requisite for the protection of the revenue that security be given.  In the present appeal, there is no evidence and there does not appear to have been any material in the possession of Customs when the Security Notices were issued to suggest that any of the businesses operating the restaurant between 1982 and 1997 traded at a loss or ceased business leaving substantial debts.  Mr McCormack seems to have ignored the fact (of which he must have been aware when making his decision to require security), that when the Appellant was carrying on business at the premises as sole trader or in partnership, the Value Added Tax obligations appeared to have been complied with and there was no evidence that he traded at a loss in any capacity.  Customs submitted that this was neutral.  In the circumstances of this case, the Tribunal does not agree.  It was a significant factor which should have been weighed in the balance particularly as there was no evidence of the Appellant’s involvement in the administration of Mrs Ho’s business.  

Insofar as Mr McCormack was influenced by Pinkdream Ltd, he fell into error.  The Tribunal considers that the decision in Pinkdream Ltd was not relevant to the circumstances before Mr McCormack.  In that case, the business was the cut make and trim trade.  Six companies had preceded the appellant company at the same address and had carried on the same trade.  Each company had gone into liquidation after a few months owing substantial sums in VAT.  The trade was said to be a precarious one.  Each successive company was carrying on the same business because it was continuing the actual work on garments started by its predecessor.  In the present appeal, there was a gap of over a year between the close of Mrs Ho’s business and the commencement of the Appellant’s restaurant.  He was not continuing the work started by Mrs Ho.  Mrs Ho appears to be the only trader at the premises who ceased business leaving substantial debts.

In summary, the Tribunal considers that having regard to the material available to Mr McCormack when he issued the Security Notice in March 2003, Customs acted unreasonably in the exercise of their discretion conferred on them by paragraph 4(2) of Schedule 11 to the 1994 Act.  The appeal must therefore be allowed.

Mr Rumbles sought expenses in the event of success.  The Tribunal considers that he is entitled to expenses.  The Tribunal therefore directs, in terms of Rule 29(1) of the 1986 Rules (as amended) that Customs shall pay to the Appellant his expense of, incidental to and consequent upon this appeal as the same shall, failing agreement, be taxed by the Auditor of the Court of Session on a party and party basis.

J. GORDON REID Q.C. F.C.I.Arb.

CHAIRMAN

RELEASE:  17 SEPTEMBER 2003 

EDN/03/48