18915 
VAT – SECURITY – REQUIREMENT FOR  -  matrimonial breakdown  -  failure of business partnership between spouses  -  marriage difficulties not shown to be cause of failure of business  -  requirement for security reasonable and justified on basis that failure of previous business apparently commercial  -  appeal dismissed  

MANCHESTER TRIBUNAL CENTRE

 
 	
	 GB (UK) LEISURE LTD 	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal: 	Michael Johnson (Chairman)
Gilian Pratt

Sitting in public in York on 22 November 2004

Mr D Butler, director of the Appellant, for the Appellant

Mr R Mansell, of the Solicitor’s office of H M Customs and Excise, for the Respondents

	© CROWN COPYRIGHT 2005
DECISION
1.	In this appeal the Appellant is challenging a requirement of the Commissioners of Customs and Excise (“Customs”) to give security for value added tax under paragraph 4(2)(a) of Schedule 11 of the Value Added Tax Act 1994.  That requirement was contained in a notice served on the Appellant dated 12 May 2004 (“the notice”).  The notice required the provision of security to Customs by guarantee or cash deposit in the sum of £10,500 in the case of quarterly value added tax returns, alternatively £7,000 in the case of monthly returns.
2.	The Appellant company has appealed on the following grounds:
a)	That it is a new company which does not have funds of the size mentioned available;
b)	That the company’s value added tax returns have been completed and paid in time;
c)	That the company’s bookkeeping, returns, wages and payments are completely processed by its accountants; and
d)	That to take money out of the company’s business at this time would seriously affect its cash-flow, notwithstanding the willingness of the company to adjust to monthly VAT returns. 
3.	In an appeal of this nature, as was emphasized to the tribunal by Mr Mansell, who appeared for Customs, the function of the tribunal is to consider whether Customs have acted reasonably and have taken account of all relevant material.  The tribunal has no power to substitute its own decision for that of Customs, save that an appeal may be allowed where it is clear that the decision of Customs on reconsideration would inevitably have been the same .   It follows that the facts and matters of a given case as they existed at the date of the decision by Customs to require security are what the tribunal needs to consider.
4.	Oral evidence was given to the tribunal on behalf of Customs by Mr Martin Whitelegge, a senior officer of Customs from their Security and Insolvency Team in Chesterfield.  He was cross-examined by Mr Butler, representing the Appellant, who gave oral evidence on behalf of the Appellant.  Mr Butler was in turn cross-examined by Mr Mansell.  Additionally the tribunal has had the benefit of a bundle of documents relevant to the appeal, prepared by Customs and handed in by Mr Mansell.     
5.	We find the following facts.
6.	Mr David Butler and his ex-wife Mrs Bernadette Katherine Butler formerly ran the Swallow Inn public house, Caistor Road, Swallow, near Lincoln, in partnership.  That business (“the old business”) was registered for VAT from 1 July 1998 until 1 August 2003.  It incurred substantial arrears of unpaid VAT, which as at 31 August 2002 stood at £49,023.86.
7.	Until the end of August 2002, Mr Butler was to some extent involved in the running of the old business.  He had no such involvement after August 2002.  He and his ex-wife officially separated in 2001.  She was left with the old business. The amount of VAT owed by the old business escalated after the cessation of Mr Butler’s involvement to a sum in the region of £70,000 by the time that the old business failed.  Mr Butler accepts responsibility for the financial affairs of the old business while he was involved, but not after he left.  
8.	The Appellant currently carries on the business of running The Coach House & Seasons Restaurant, Field House Road, Humberstone, Lincolnshire (“the new business”).  The new business has been registered for VAT since 22 December 2003.  Mr Butler directs the new business and Ms Carole Atkinson is company secretary.  The former Mrs Butler has not been involved in the running of the new business.
9.	Departmental case workers within Customs noticed the link between the old business and the new business in the person of Mr Butler.  They brought it to Mr Whitelegge’s attention that Mr Butler was involved in both.  Mr Whitelegge looked into the facts relating to the old business, with a view to a possible requirement to provide security in respect of the new business.  
10.	Mr Whitelegge noted, as we find to have been the case, that the old business had been compliant with its VAT obligations for the first year of trading, but had after that experienced difficulties in making VAT payments.  Payments and tax returns had been delayed .   Mr Whitelegge further gleaned that Mr Butler had continued to be involved with the old business until the end of August 2002.  Mr Whitelegge was content to approach the matter on the basis of the indebtedness of the old business as at that time.
11.	Mr Whitelegge observed that, when applying to be registered for VAT in Form VAT 1, the Appellant had estimated its taxable supplies for the first 12 months of trading at £200,000.  The Appellant’s first VAT return and payment of the tax shown as due were made in time.  It is correct to say that the new business was not in default of its VAT obligations at the date of the notice.
12.	The notice followed a letter from Customs to the Appellant dated 21 April 2004, whereby the Appellant was given advance information of the intention to require security in the alternative amounts mentioned in paragraph 1 above.  That letter, a copy of which we were shown, invited the Appellant to provide any information which the Appellant might feel to be relevant in influencing the decision whether or not security should be required.  Mr Butler told the tribunal that he had not seen that letter, but it appears to have been sent, whether or not it was in fact received.  In our view nothing turns on the receipt of that letter, as the notice itself invited the Appellant to bring to the attention of Customs any information thought by the Appellant to be relevant to the provision of the security.  We find that the Appellant took no step in that regard, other than to issue notice of appeal, which was received by the tribunal centre on 7 June 2004 .   
13.	Customs are able to estimate the likely amount of output tax due, after deducting input tax, in the case of a business of the kind operated by the Appellant having an estimated taxable turnover of £200,000 over 12 months.  The net tax due over that period was estimated by Customs at £21,000.  £10,500 therefore represents 6 months’ tax potentially due, and £7,000 represents 4 months’ such tax.
14.	Mr Whitelegge was able to note, and the tribunal notes, that the amount of tax paid by the Appellant in respect of its first VAT accounting period from commencement of trading until 31 March 2004 – a period of just over 3 months – was £7,768.78.  This in our view shows that the assumption made in the notice as to the likely tax due was one which in actual fact was favourable to the Appellant.  We are unconvinced that the Appellant could not find the amount of the security required, although of course we accept that, if the new business were to be forced to cease trading, its employees would be left redundant . 
15.	It is to his credit that Mr Butler, by dint of selling personal assets, has played his part in the total discharge of the debts of the old business, including the tax arrears.  Former business partners are of course personally liable in law for the debts of failed partnership businesses.  Mr Butler claims to have shouldered his share of financial responsibility for the old business, so that outstanding issues of liability are now between him and his ex-wife, rather than between Mr Butler and Customs. 
16.	On behalf of Customs, Mr Mansell reminded us of the scope of our jurisdiction in this kind of appeal, citing the authorities referred to in the footnote to paragraph 3 above and the tribunal decision of Rosebronze Ltd v Commissioners of Customs and Excise (VAT Decision 1668).  Mr Mansell submitted that the officer considered all the relevant facts, concentrating in particular on the level of indebtedness of the old business between 2000 and 2002.  He submitted that the decision to require the security sought was entirely proper and reasonable and that the appeal should be dismissed.
17.	Mr Butler submitted that Customs were aware of the matrimonial difficulties between him and his ex-wife and the fact of their separation.  That was bound to have had an effect on trading, he said.  The marriage and the old business went hand-in-hand – they failed together.  Mr Butler said that he took responsibility for the old business but that the new business had no such problems.  He had paid all his debts to Customs, but could not afford the amount of the security sought.  He did not want to leave the employees of the new business out of a job.  He asked us to allow the appeal.     
18.	We can well understand Mr Butler’s point that he was not responsible for the high level of indebtedness of the old business at the time it failed.  Moreover this is not a case where Customs have been left with tax arrears owing and no prospects of recovery.  On the contrary, Mr Butler has played his part in discharging the debt to Customs.  That circumstance and the fact that he has been concerned in an awkward divorce involving the realization of his personal assets entitle him to the sympathy of the tribunal.   
19.	Customs have however made it clear that the requirement for security has been based upon the position of the old business at the time that Mr Butler ceased to be involved with it.  In other words, Customs have not weighed subsequent difficulties with the old business in the balance in considering his case.  We find that approach to have been both correct and fair.   
20.	In our view the key to this appeal is that, for some two years prior to the final severance of Mr Butler from the old business, and especially in 2000/01, it had already had a poor VAT compliance record.  No doubt matrimonial difficulties were being experienced between the partners during that period.  However – and we find this to be crucial – Mr Butler did not explain to Customs’ satisfaction or at all how any such differences may have impacted on the compliance record of the old business.  Indeed it remains unclear to the tribunal what impact there might have been.  
21.	We therefore think that it was reasonable on the part of Customs to approach this case on the basis that Mr Butler was partly responsible for the conduct of a prior business which, during the period of his involvement, had run up a large unjustified sum of arrears of VAT.  We find that there was no information available to Customs to explain the non-compliance of the old business for VAT on any footing other than commercial inefficiency.  
22.	We conclude that Customs were properly concerned that the new business, although not so far in default, might go the way of the old business under Mr Butler’s direction and fail to account for all the tax due in future.  We can see that the Appellant may have difficulty in providing security of £7,000 , on the basis that it is agreed that monthly VAT returns are made, but that difficulty in our view only goes to emphasize the need for the security, because if the money were readily available, to that extent the security would be less likely to be called upon.  From the information available to the tribunal, the security required is in fact less than 3 months’ worth of the VAT for which the new business has been accountable.
23.	Both in principle and in respect of the amount of security sought, we therefore hold that the requirement for security in this case was in order.  There is as we see it no effectual challenge to the requirement available to the Appellant.  An important question for the Appellant in due course will be whether the security continues to be needed.  That is a future question, dependent upon the performance of the new business.  In relation to this appeal, that is not a matter with which the tribunal is now concerned.
24.	This appeal is therefore dismissed.  No application for costs was made, and none are awarded.

MICHAEL S JOHNSON
CHAIRMAN
RELEASE DATE: 21 January 2005

MAN/2004/0295