M & N Engineering Services Ltd v Customs & Excise [2004] UKVAT V18458 (08 January 2004)

VAT SECURITY  -  requirement for  -  poor payment record of appellant continuing from prior to giving of notices of requirement down to time of tribunal hearing -  perception of Customs that security required held to be vindicated  -  need for security borne out by the facts  -  requirement for 4 months’ security on monthly returns upheld 

MANCHESTER TRIBUNAL CENTRE

	 M & N ENGINEERING SERVICES LTD 	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

			Tribunal:	Mr M S Johnson (Chairman)
					Mr R Presho FCMA

Sitting in public in York on the 20th October 2003
Mr M Nuttell, director of the Appellant, for the Appellant
Mr C Owen, of the Solicitor’s Office of HM Customs and Excise, for the Respondents

	© CROWN COPYRIGHT 2003

DECISION
1.	There are before the tribunal for hearing 2 appeals against requirements by the Commissioners of Customs and Excise (“Customs”) for the appellant to give security for value added tax.  
2.	Under paragraph 4(2) of schedule 11 of the Value Added Tax Act 1994 (“the Act”), where it appears to Customs requisite to do so for the protection of the revenue, they may require a taxable person, as a condition of his supplying goods or services under a taxable supply, to give security of such amount and in such manner as they may determine for the payment of any VAT which is or may become due from him.  
3.	Written notice of such a requirement (“the first notice”) was given to the appellant by Customs on 18 June 2003.  A Notice of Appeal was served by the appellant in respect of that requirement on 25 June 2003.  A further written notice of requirement to provide security (“the second notice”) was given to the appellant by Customs on 30 July 2003.  The appellant served a Notice of Appeal in respect of that on 26 August 2003.  Both appeals were brought pursuant to section 83(l) of the Act, according a right of appeal to these tribunals against the requirements.   
4.	Notwithstanding rule 27(1) of the Value Added Tax Tribunals Rules 1986, we thought it appropriate that Customs should present their case first, so that the tribunal and the appellant should be clear as to the case that the appellant was called upon to meet.  We therefore directed accordingly, in accordance with rule 27(4)(as amended).
5.	The tribunal heard oral evidence from two witnesses.  The first witness, called by Customs, was Mr Martin Whitelegge, the officer of Customs responsible for giving both the first and second notices.  He was cross-examined by Mr Nuttell, representing the appellant.  The other witness from whom we heard was Mr Nuttell himself.  He was cross-examined by Mr Owen, representing Customs.  We also had the benefit of a folder of documents relevant to the appeal, handed in to the tribunal by Mr Owen.
6.	The following are the facts as we find them to be.
7.	The appellant was registered for VAT with effect from 19 May 1997 and has remained registered for VAT ever since. It trades from a unit in the Humberston Business Centre, Humberston, near Grimsby.  The business was initially under the sole directorship of Mr David Nicholson.  He remains the managing director of the appellant, and is responsible for the costing, pricing and client contact sides of the business.  Mr Nuttell was first employed by the business three years ago, and was appointed the company secretary and a director of the appellant on 15 April 2003, i.e. not long before the giving of the first notice.  Mr Nuttell is based in the workshop and his responsibilities include the appellant’s accounts.
8.	At the time Mr Nuttell became a director, the business of the appellant was financially stretched.  As at 18 June 2003, the date of the first notice, the appellant owed Customs VAT totalling £18,542.66, plus a default surcharge of £466.38, in respect of its accounting periods 01/03 and 04/03.  The first notice, formulated by Mr Whitelegge, took into account the appellant’s returns for those two quarters, plus the returns for the immediately preceding quarters 10/02 and 07/02, to arrive at a year’s total VAT of £25,083.24 due in respect of the business.   The requirement for security contained in the first notice was calculated @ £12,540.00, representing 50% of that figure rounded down, i.e. the amount of six months’ VAT.
9.	As well as the non-payment of the £18,542.66, Mr Whitelegge in giving the first notice took into account the appellant’s previous poor record for payment of VAT.  The appellant had experienced what Mr Whitelegge described to us as “enormous problems” in 2001.  Matters had got to the point where judgments had been obtained for unpaid VAT which Customs had enforced by instructing sheriff’s officers to levy distress.  An offer to pay the arrears had been accepted and agreed but had then been defaulted upon.  Enforcement had had to be resorted to on repeated occasions.
10.	The appellant traded through these difficulties and performed satisfactorily in 2002.  It paid its VAT due in respect of the four accounting periods ending in that year.  Regrettably, however, the appellant then again defaulted in 2003.  
11.	When the first notice was given, the officer serving it suggested to Mr Nicholson and Mr Nuttell various means of lessening their tax burden, including cash accounting and the making of monthly VAT returns.  The appellant agreed to make monthly returns thereafter as suggested.  The appellant has considered but has not adopted cash accounting.  We find that making monthly returns has made accounting for VAT easier for the appellant.  
12.	The willingness of the appellant thenceforth to make monthly returns resulted in Customs deciding that four months’ security rather than six months’ security for VAT should suffice.  They therefore gave the second notice, which required security calculated @ £8,360.00, i.e. two-thirds of £12,540.00.  The factual premises on which the second notice was based were the same as those of the first notice.
13.	The Notice of Appeal against the requirement in the first notice contained the following grounds of appeal:
“If we had to pay £12,540.00 as security to [Customs] we would find this seriously financially difficult to achieve.  Over the past year we have reduced our arrears from approximately £36,000 to zero with only our last return outstanding.  Considering our company has had a poor financial year we feel this is a big step in showing that we wish to get our VAT payments in order.  Also we have just changed our VAT returns to a monthly basis which should help to ease the situation.  As you will appreciate having reduced our arrears down and also having had a poor financial [year] you will understand how difficult financially it would be to penalise us further and would seriously jeopardise our company.  This is why we are requesting to rescind the decision to install a security payment.  
[On continuation sheet]  
“Just to state that in the future we will endeavour to comply to the monthly payments on time and to clear our last return payment within the next 3 months”.    
14.	The stated grounds in the Notice of Appeal against the requirement in the second notice were as follows:
“Over the last year we have reduced our arrears from approximately £36,000 down to nil with only our last return outstanding.  Considering the company had a poor financial year this shows our commitment to getting our VAT payments in order.  We have also recently changed to monthly VAT returns which should help to ease the situation further.  Having to pay the £8,360 security could seriously compromise the well being of the company and so we request that you reconsider your decision”.
15.	During the course of the tribunal hearing it transpired that it is not correct to say that the appellant’s arrears of VAT have been reduced to nil.  The appellant has never discharged its VAT liability in respect of the last quarter prior to the first notice, i.e. the quarter 04/03.  The sum of £9,327.67 has continued to be due to Customs from the appellant in respect of that quarter.  
16.	Mr Nuttell admitted that the appellant had been advised to pay that debt if it could by its accountants, Forrester Boyd of Grimsby.  Mr Nuttell told the tribunal that the appellant would like to pay the tax, but it was a question of how and when.  In that regard, the tribunal was told that the appellant’s cash-flow position was currently improving, and that the appellant’s best ever trading month had been September 2003.
17.	For Customs, Mr Owen submitted that both notices were properly issued in accordance with principle.  He reminded the tribunal of the decisions in C & E Comrs v John Dee Ltd [1995] STC 941 and C & E Comrs v Peachtree Enterprises Ltd [1994] STC 747.  Mr Owen asked the tribunal to find that the requirement in the second notice for four months’ security was appropriate.  He did not press the requirement in the first notice for six months’ security, in the light of the monthly returns agreed and operated since mid-2003.   He submitted that the quantum of the notices had been correctly calculated in the light of the admitted figures for the four quarters prior to the first notice.  
18.	For the appellant, Mr Nuttell submitted that the appellant had demonstrated that it was possible to have greater confidence in the future payment record of the appellant in the light of the successful introduction of monthly returns and payment of VAT.  The risk to the revenue was now minimal.  The position was different from that giving rise to the notices, which were no longer appropriate.
19.	In considering our decision in these appeals, we are conscious that Customs had had their fingers burnt previously in dealing with the non-payment of VAT by the appellant in 2001.  Although the position of the appellant improved in 2002, the VAT payment position of the appellant reverted to being a poor one in 2003.  It is particularly significant, we feel, that notwithstanding the easing of the position of the appellant by reason of the introduction of monthly VAT returns in 2003, the tax due in respect of the last quarter prior to the giving of the first notice has still not been paid.  
20.	The reason for that appears to us to be that the appellant would find difficulty in paying that sum, at least in a single payment.  The appellant has admitted that it has been advised by its accountants to pay the sum, but the sum has nevertheless not been paid.
21.	The perception of Customs that security was called for therefore appears to us to be an entirely reasonable one, on the facts we have found.  This is, indeed, a very clear case for four months’ security to be required, seeing that the VAT that has all along been outstanding from the appellant, since prior to the giving of the first notice, exceeds the amount of the security required by the second notice.
22.	As and when the outstanding VAT comes to be cleared, and the appellant demonstrates that it can be trusted not to fall again into a situation where there are chronic arrears of VAT, it may at that point be appropriate for security for VAT no longer to be required.  The view of the tribunal is that the appellant is some way from that position.  In the circumstances existing, the two requirements of Customs for security to be provided were entirely justified.
23.	Accordingly we dismiss the appeal against the requirement in the second notice.  As to the first notice, that is in reality superseded by the second notice, however as a matter of formality we direct that the first notice is to take effect in the same amount as the second notice, i.e. £8,360, but so that, of course, only one amount of £8,360 is due.  Subject to that, the appeal against the requirement in the first notice is also dismissed.

M S JOHNSON
CHAIRMAN
RELEASE DATE:
MAN/2003/0475
MAN/2003/0645