19410
VAT - SECURITY– Protection of Revenue –Company Director involved in other companies which had poor records of VAT compliance – three of the companies owed considerable sums in VAT – two of which had gone into liquidation – the Appellant company in the same business as the other companies with the same trading address as the two previous companies owned by the director – Appellant company not yet trading – Appellant company set up for a specific contract – the steps taken by the Appellant to minimise financial risk occurred after the issue of the Notice for Security – not relevant to the reasonableness of the decision - Whether Respondents’ actions in requiring a security reasonable –Yes- Appeal dismissed- VAT ACT 1994 Schedule 11 p 4(1).

MANCHESTER TRIBUNAL CENTRE

	A & T Systems Ltd	Appellant 

	- and -

	THE COMMISSIONERS FOR 
	HER MAJESTY’S REVENUE and CUSTOMS	 Respondents

			Tribunal:	MICHAEL TILDESLEY OBE (Chairman)
					MOHAMMED FAROOQ (Member)

Sitting in public in Birmingham on 7 November 2005

Anthony Thomas Cavanagh,  Director for the Appellant Company

Richard Mansell, Advocate HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2005

DECISION
The Appeal

1.	The Appellant was appealing against a Notice of Requirement to give Security in the sum of  £2,580 issued on 21 February 2005.
2.	The ground of Appeal was that
“That this is a new company and we only started trading end of March 2005. Therefore we do not at present have the funds to deposit this amount. We would propose that Revenue and Customs review the situation in a couple of months i.e. June/July to enable us to hopefully accumulate some funds so that we can pay a deposit.”
The Issue to be Decided
3.	Mr Cavanagh was the sole director and employee of the Appellant company, which was involved in the business of electrical work and fibre optic installation. Mr Cavanagh set up the company to undertake a large contract from the Ministry of Defence, which had informed Mr Cavanagh that his company was one of five contractors chosen to carry out the contract expected to be let early in 2006. The Appellant company was dormant pending the award of the contract. Mr Cavanagh had been a director of four other companies engaged in the same trade as the Appellant company. The four previous companies had poor records of VAT compliance with three of them having outstanding VAT debts. The Respondents considered that the Appellant company posed a risk to the protection of the revenue because of the involvement of Mr Cavanagh, whose previous companies had a track record of non-compliance with VAT requirements. Mr Cavanagh was contesting the imposition of the security because the Appellant company was not trading and had no funds to meet the security. 
4.	The issue for the Tribunal was whether the Respondents had acted reasonably in imposing the security for the protection of the revenue. Thus we have to decide whether the Respondents acted in a way in which no reasonable panel of Commissioners for HM Revenue and Customs could have acted, or whether they had taken into account some irrelevant matter, or disregarded something to which they should have given weight when imposing the security requirements. In exercising this jurisdiction we must limit ourselves to considering facts and matters, which existed at the time the challenged decision to require a security was taken.
The Legislation
5.	Paragraph 4(2), Schedule 11, of the Value Added Tax Act 1994 provides that

“If they think it is necessary for the protection of the revenue, the Commissioners may require a taxable person, as a condition of his supplying or being supplied with goods or services under a taxable supply, to give security, or further security, for the payment of any VAT that is or may become due from –

a) the taxable person, or
b) any person by whom or to whom relevant goods or services are supplied.”
The Evidence
6.	We heard evidence from:
(1)	Anthony Thomas Cavanagh, the sole director of the Appellant company.
(2)	Ian Pumfrey, Senior Officer for HM Revenue and Customs, who issued the Notice of Requirement for Security.
7.	We were presented with a documents bundle from the Respondents.
The Facts Relied upon by the Respondents for the Notice of Security
8.	Mr Cavanagh, the sole employee and director of the Appellant company, had been involved in four previous companies which had track records of non-compliance with VAT. The previous companies carried on the same kind of business as the Appellant company. Two of the previous companies, CAV Electrical Ltd and Chedcrest Ltd traded from the same address as the Appellant company. The table below sets out the details of the VAT non-compliance for the previous companies.
Company
Incorporation
Date	VAT Liability	Details of Returns	
CAV Electrical Ltd
27/1/03	£37,075.36	12 outstanding monthly VAT returns.
Significant delays when return and payment made. The highest for return was 109 days; payment 141 days	
Chedcrest  Ltd
1/3/01 – 19/9/03	£75,116.29
Insolvent: Written Off	4 outstanding quarterly VAT returns.
	
Rainbow Systems (Beeston) Ltd
17/8/98 - 30/10/02	£18,569
Insolvent: Written Off	7 outstanding quarterly VAT returns	
A & T Systems
15/05/00 – 01/12/01 	Nil	Submitted 7 VAT returns, all but one was late. Maximum delay was 132 days.  Payments were also late on 5 occasions. Maximum delay 116 days.	

9.	The requested security of £2,580 was calculated by estimating the Appellant’s net liability for 12 months VAT.  The estimate was based on the projected turnover for the Appellant company as declared in its application form for VAT registration.  The twelve month net liability was divided by three to give the amount of security that represented four months net liability for VAT, which was the security required for registered persons submitting monthly returns. 
The Appellant’s Evidence
10.	Mr Cavanagh explained that two of his previous companies, CAV Electrical and Chedcrest had got into difficulties because they were tied into a substantial contract with a building firm, which renovated bars and restaurants. The building firm did not pay its sub-contractors on time. As a result of the problems with the building firm Mr Cavanagh was advised by his accountant to place Chedcrest into voluntary liquidation. Mr Cavanagh has decided not to take any more contracts with the building firm, which in his view will remove the principal risk of financial instability for his new company. The Appellant company’s sole business will be the contract with the Ministry of Defence, which should provide a more reliable revenue stream than the building firm. Mr Cavanagh did not intend his new company to trade pending the award of the contract from the Ministry of Defence.
11.	Mr Cavanagh denied responsibility for the financial affairs of  Rainbow systems. This was Mr Cavanagh’s first corporate venture, which he went into with a Mr Basford. Unfortunately they fell out with Mr Cavanagh leaving the company. Mr Cavanagh did not appreciate that he should have resigned his directorship when he left. The first A & T systems had a better record of VAT compliance than Mr Cavanagh’s other companies because he tried to insulate it from the contract with the building firm 
12.	Mr Cavanagh accepted that the main cause of his previous companies’ failures to comply with the VAT requirements was that he used VAT revenue to pay other debts.
Reasons for Our Decision
13.	Our starting point is to consider whether Mr Pumfrey acted in a way in which no reasonable panel of Commissioners for HM Revenue and Customs could have acted, or whether he took into account some irrelevant matter, or disregarded something to which he should have given weight when imposing the security requirement for the protection of the revenue on the Appellant company on the 21 February 2005. In exercising our jurisdiction we must limit ourselves to considering facts and matters, which existed at the time the challenged decision to require a security was taken. We are unable to substitute our own discretion for that of the Commissioners. Our task is to decide whether the decision of Mr Pumfrey was reasonable.
14.	Mr Pumfrey’s decision was based upon the involvement of Mr Cavanagh in four previous companies, which had track records of non-compliance with VAT. Three of which owed considerable sums of VAT with two of those companies going into voluntary liquidation. The previous companies carried on the same kind of business as the Appellant company. Two of the previous companies, CAV Electrical Ltd and Chedcrest Ltd, traded from the same address as the Appellant company. We consider that Mr Pumfrey was correct in giving weight to these facts when imposing the security. In our view they were relevant in assessing the Appellant’s risk to the protection of the revenue. 
15.	 Mr Cavanagh pointed out that the Appellant company was not trading because he was awaiting the contract from the Ministry of Defence. Further, Mr Cavanagh took steps to minimise the financial risks to his new company by not contracting with the building firm whose poor record of payment had contributed to the collapse of his other companies. The steps taken by Mr Cavanagh to minimise the financial exposure of the Appellant company occurred after Mr Pumfrey’s decision to impose the security. Therefore, these steps were not a relevant consideration for our assessment of the reasonableness of Mr Pumfrey’s decision because we were restricted to considering the circumstances at the time of the issue of the notice for security. Mr Pumfrey was, in our view, entitled to take prompt action on the registration of the Appellant company when faced with the prospect of Mr Cavanagh setting up a new company carrying on the same trade from the same address as two of his previous companies, which had outstanding, VAT debts in excess of £100,000. 
16.	Mr Cavanagh accepted that in his previous companies VAT revenues had been used to meet other business debts. This added weight to the Respondents’ view that  Mr Cavanagh’s involvement in the Appellant company posed a significant risk  to the protection of the revenue. We noted that the Appellant company had submitted no VAT returns since registration. Nil returns were required where a company was not trading.  
17.	 We find no evidence that Mr Pumfrey took into account some irrelevant matter or disregarded something to which he should have given weight in coming to his decision on the 21 February 2005.
18.	For the reasons set out above we have decided that the issue of the Notice of Security dated 21 February 2005 on the Appellant company was reasonable. We, therefore, dismiss the Appeal. We make no order for costs.

MICHAEL TILDESLEY

CHAIRMAN
RELEASE DATE: 30 November 2005

MAN/05/329
££A & T Systems Ltd v Revenue and Customs [2005] UKVAT V19410 (30 November 2005)