19576

VAT – Requirement to give security – Para.4(2)(a), Sch. 11, VATA 1994 –whether requirement reasonable – whether quantum of security required reasonable – Customs and Excise Commissioners v Peachtree Enterprises Ltd. [1994] STC 747 applied – Appellant had been involved as sole director in three companies which had failed owing VAT to the Commissioners – Appellant had been late in registering new business for VAT and had not paid all VAT due on time – Held requirement for security and quantum reasonable notwithstanding Appellant’s efforts to set up his new business on a more solid business footing – Appeal dismissed

LONDON TRIBUNAL CENTRE

	GARETH CARROLL trading as HOME IMPROVEMENT CO.	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S 
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	JOHN WALTERS QC (Chairman)
					JOHN N. BROWN CBE FCA

Sitting in public in London on 20 February 2006

The Appellant appeared in person

Mrs. P.A. Crinnion, Advocate, of the Office of the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This is an appeal against the requirement (notified by the Commissioners to the Appellant by a letter dated 22 July 2005) of security under paragraph 4(2)(a) of Schedule 11 to the VAT Act 1994 (“VATA”).  We have however directed an amendment to the notice of appeal – see: paragraph 11 below – which has the consequence that the Commissioners’ decision on a departmental review (notified by a letter to the Appellant dated 22 August 2005) to uphold requirement of 22 July 2005 is the subject of the appeal.  The appeal to this Tribunal lies under section 83(l) VATA, and the reasonableness of the requirement of security, including the quantum of security required, is in issue (Customs and Excise Commissioners v Peachtree Enterprises Ltd. [1994] STC 747). 
2.	Paragraph 4(2)(a) of Schedule 11, VATA reads as follows:
“(2) If they think it 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 …”
The facts
3.	The Appellant carries on business as a supplier and installer of conservatories from an address in Maidenhead.  He is registered for VAT with effect from 1 May 2004, although he did not formally apply for registration until 10 March 2005.  On that application, the Appellant stated that he expected to make taxable supplies of £450,000 in the next 12 months.  
4.	The Appellant had been involved previously with three limited companies which had failed to meet their liabilities to submit VAT returns and pay VAT due.  These were: Safeguard Home Improvements Limited (“SHI”), Safeguard Windows Limited (“SW”) and Premier Home Improvements Limited (“PHI”).  The Appellant was the sole director of all of these companies.
5.	SHI was incorporated on 12 March 1998 and applied for VAT registration on 1 October 2003.  The application stated an expected taxable turnover in the next 12 months of £350,000.  SHI was a supplier and installer of windows and conservatories. The VAT registration was backdated to 1 November 2000.  The first VAT return was due for the period from 1 November 2000 to 30 April 2004, but SHI failed to submit that return.  SHI was wound up on 20 May 2004 with a debt to the Commissioners outstanding of £30,274.  Anthony Joseph Carroll was recorded as being the Company Secretary of SHI.  In evidence, the Appellant confirmed that he is his brother.
6.	SW was incorporated on 20 June 1994 and applied for VAT registration on 16 December 1996.  The VAT registration was backdated to 12 March 1996.  The main business activity was the supplying and installing of windows and conservatories.  SW was wound up on 10 April 2002 owing a debt of £75,213 to the Commissioners.  Anthony Joseph Carroll was recorded as being the Company Secretary of SW.
7.	PHI was incorporated on 17 June 1993 and registered for VAT with effect from 8 November 1999.  Its main business activity was the supplying and installing of windows and conservatories.  It deregistered for VAT with effect from 20 February 2001, when PHI ceased trading.  The Commissioners are unable to confirm any debt due to them on the deregistration.  The Company Secretary of PHI was recorded as being a Mr. Alistair Cameron White.
8.	On 20 June 2005 the Commissioners sent a letter to the Appellant with the heading “Warning – Notice of a Potential Request for a Security Deposit”.  The letter invited the Appellant to contact the Commissioners in writing to give details of any information relevant to the decision whether or not to require a security deposit.  The Appellant sent no written response to this letter.
9.	On 22 July 2005 the Commissioners (Officer Mrs. L Andrews) issued to the Appellant a Notice of Requirement to give Security.  The level of security required was calculated by reference to the standard tax performance ratio, due to the absence of VAT returns.  The estimated turnover (annually, £450,000) as stated in the Appellant’s application for VAT registration was used to calculate the 6 month and 4 month estimate of tax due (the quantum of security required).  A tax performance ratio of 0.72 (appropriate to the type of business conducted by the Appellant) was used and figures of £14,000 (for 6 months’ estimated VAT liability) and £9,350 (for 4 months’ estimated VAT liability) were arrived at, and notified to the Appellant.
10.	On 19 August 2005, the Appellant faxed to the Commissioners his observations on their requirement to give security.  This faxed letter contained in general terms the factual basis of the arguments which he presented in evidence to this Tribunal. The letter in terms requested reconsideration of the decision to require security was treated by the Commissioners as a request for local reconsideration and gave rise to a reply from the Commissioners (Officer Mrs. S. Ogburn), dated 22 August 2005, which upheld the decision to require security.  That letter constituted a further appealable decision.
11.	The Appellant’s appeal, however, is, as stated above, against the decision contained in the letter of 22 July 2005.  Having regard (a) to the jurisdiction of this Tribunal in cases of requirement of security, which is to consider the reasonableness of the decision to require security having regard only to facts and matters which existed at the time the challenged decision of the Commissioners was taken (see: Peachtree Enterprises at p.751), and (b) the fact that the factual basis for the Appellant’s arguments resisting the requirement were contained (for the first time) in his letter of 19 August 2005, and (c) that both Mrs. Andrews and Mrs. Ogburn gave oral evidence to this Tribunal, we consider that it is necessary to direct an amendment to the Appellant’s notice of appeal, so that it is against the decision contained in the letter dated 22 August 2005 sent by Mrs. Ogburn.  We direct this amendment of our own motion pursuant to our power contained in rule 14(1) of the VAT Tribunals Rules 1986 for the purpose of enabling us to determine the issues really in dispute. 
12.	In his letter dated 19 August 2005 requesting reconsideration of the decision to require security, the Appellant wrote as follows:
“The Home Improvement Company [the Appellant’s current business] has been set up on a more solid basis than my previous business.  The reason for the failure of my previous business was large bad debt and excessive bank charges and interest.  Bank charges alone some days ran at £300-£400 per day.  I had a succession of bank managers, all of which offered no support.  In a period of 3 months at the end of 2003 I had four different bank managers all of whom had no authority to assist.  Contracts could not be completed and payments due to the company were never received.
The setting up of the new company has a more solid foundation due to the following.
1)	My father and brother both left their jobs in May 2004 to come help me run the company.  They not only manage but install a large amount of the work we now do.  Our contracts now run smoothly and stage payments are received on time.  Other contractors we use are now paid without the fear of the cheque being returned by the bank.  We are now able to have credit accounts on our products we use, something we did not have in the last year of the previous business.  This is attributed to the fact that I am now a sole trader and not a limited company.
2)	Since June 2004 we have a new bank manager, a Dave Wood Griffith, who works from the Slough Business Centre.  One of his (sic) first things he did was apologise to me and a number of other of (sic) his customers for the appalling way that the previous regime at the Slough Business Centre had treated some of their customers.  We have to date not had a single returned cheque on this business.  He is supportive and very impressed with how the business is run.
3)	My personal situation has changed.  I have given up my accommodation and moved back home with my parents.  This has enabled me to reduce my overheads and hence allow no strain on the business finances as it establishes.  I have for months being (sic) only taking expenses to make sure we use our finance is a positive way.  Also I am still paying off a loan for Safeguard which will run for another year or so.
4)	I am well aware of the reason for the security.  However, I feel in the early stages of this business it would put a massive strain on its finances.  A £14,000 deposit would in effect equal £75,000, 15% of total income.  It would put me back a year.
I would ask if I could to (sic) be given a chance to prove that I am not a liability.  If I were to default in future than I would understand that I was a liability and would than have to find this security.”
13.	The Appellant in evidence to the Tribunal confirmed the points made in his letter of 19 August 2005 quoted above.  
14.	Besides the requirement of security he contested the level demanded.  He said that his VAT liability in his present business ran at much less than £14,000 per quarter. [It should be noted that the Commissioners’ demand for £14,000 security was based on 6 months’ liability to VAT, not 3 months’.]  He put in evidence the VAT returns for the 08/05 and 11/05 periods.  They showed VAT due of £35,304 and £2,612 respectively.  
15.	The VAT return for the period 08/05 (which commenced on 1 May 2004) had a due date of 30 September 2005, but was not submitted until 27 November 2005.  This followed the service of a Notice of Assessment of VAT on the Appellant assessing VAT due for the period from 1 May 2004 (date of VAT registration) to 31 August 2005 at £51,000.
16.	The VAT of £35,304 shown due by the return for the 08/05 period was not sent with the return.  Instead a payment plan was agreed with the Commissioners.  (A default surcharge was also charged, and was paid.)   In evidence he said that £10,000 of this had been paid and £25,000 remained outstanding at that point of time.  The VAT due of £2,612 for the VAT period 11/05 had been paid. The Appellant accounts for VAT on the basis of cash received, rather than bills delivered, because his turnover is less than £750,000 a year.  
17.	Mrs. Crinnion, for the Commissioners, put it to the Appellant that he had at some stage been charging VAT using a VAT number from a deregistered company and that this had attracted the attention of the Joint Shadow Economy Team (“JOSET”).  The Appellant denied all knowledge of this.
18.	Mrs. Andrews, the author of the original requirement to give security in the letter dated 22 July 2005, gave evidence that she had the information about the Appellant’s involvement in SHI and SW (though possibly not PHI) when she issued the warning letter of 20 June 2005. She also had a note of JOSET’s suspicions about the Appellant’s use of a VAT number from a deregistered company.  The Appellant had telephoned in response to the warning letter and she had asked him to put his points in writing.  This he had not done, so she issued the letter requiring security on 22 July 2005.  As to quantum, in the absence of any VAT returns at that stage, she had used the estimated annual turnover of £450,000 stated in the application for VAT registration to work out the quantum of the security requirement in accordance with the Commissioners’ usual practice.  However she stated in evidence that having regard to the figures on the returns which had been submitted, the quantum of the security required would be adjusted downwards to £11,970 (for 6 months’ estimated VAT liability) and £7,950 (for 4 months’ estimated VAT liability).  The security requirement ignores the debt outstanding for VAT declared but not yet paid.  It is security required for future VAT liabilities.  She explained that if the Appellant elected to remain on a quarterly VAT accounting procedure, then the Commissioners would require security of 6 months’ estimated liability, but if he changed to a monthly VAT accounting procedure, only 4 months’ estimated liability would be required as security.
19.	Mrs. Ogburn gave evidence that she considered the points made by the Appellant in his letter dated 19 August 2005 before deciding to uphold Mrs. Andrews’s decision to require security.  She said that she did not consider that the matters mentioned in that letter would have any particular impact.  She noted that the Appellant’s brother who had come to help the Appellant run his new business had been the Company Secretary of  SHI and SW.  She could not be sure that the Appellant’s new bank manager had full knowledge of the failure of the previous businesses in which the Appellant had been involved.  She noted that the current business was the third business in which the Appellant had been involved which had been late in registering for VAT and she regarded that as an indication that the business was not being run prudently.  She noted that while the Appellant was paying off a loan for Safeguard (SHI or SW) he was not repaying any of the VAT lost by the Commissioners when those companies failed.
20.	Mrs. Crinnion handed up the Commissioners’ policy notice (700/52 – June 2005 edition) “Notice of Requirement to give security to Customs and Excise” drawing the Tribunal’s attention to the Commissioners’ commitment to review the requirement to give security within 12 months (if the trader makes monthly returns) or 2 years (if he makes quarterly returns), so that if the Appellant complies with his obligations in relation to VAT for the indicated period, then he could expect the requirement for security to be discontinued on review.
21.	The notice indicates that the security required would take the following forms: cash or bankers draft, or an approved bank or building society guarantee or a joint bank or building society account.
Decision
22.	On the basis (see: paragraph 11 above) that the appeal is against Mrs. Ogburn’s decision, dated 22 August 2005, to uphold Mrs. Andrews’s requirement for security, the Tribunal must consider whether Mrs. Ogburn’s decision was unreasonable in the sense that no reasonable panel of Commissioners properly directing themselves could reasonably have reached that decision.  In its consideration of this issue, the Tribunal cannot have regard to facts and matters arising subsequent to the taking of the decision (Peachtree Enterprises at page 751).  Therefore, although we can and do have regard to the points made by the Appellant in his letter of 19 August 2005, we cannot have regard to the figures disclosed by the VAT returns which he sent in on 27 November 2005 and thereafter.
23.	The basis of both Mrs. Ogburn’s decision and Mrs. Andrews’s decision is that the Appellant’s involvement with SHI, SW and PHI has shown that he cannot be relied on to ensure compliance with his VAT obligations in relation to the trade in which he operates.  His association with his brother in SHI and SW, and now in his current business is a further factor giving concern.  Furthermore he has been late in registering for VAT in his current business and also in relation to SHI and SW.  
24.	The factors which the Appellant mentioned in his letter of 19 August 2005 and on which he elaborated in evidence to the Tribunal were in essence these: he now has the full-time assistance of his father and his brother, he has a new and supportive (as opposed to, as he said, obstructive) bank manager, he is now saving money by living with his parents.  Whatever reassurance these factors might give to the Commissioners, the fact remains that the Appellant has been unable to comply with his VAT obligations in relation to his current business – the VAT registration was late and the VAT due has not been paid on time.  The Tribunal finds that the Commissioners have reasonable grounds for requiring security, particularly bearing in mind that the Appellant’s obligation is to account to the Commissioners for VAT received from customers, and not for VAT billed but not received. 
25.	 As to the quantum of the security required, this was based on the Appellant’s own estimated turnover, and is therefore prima facie reasonable. The Appellant has raised the point that the amount of security required would put a massive strain on the finances of the business.  This is, in effect, a submission that the amount of security required is disproportionate and “not merely harsh but plainly unfair”, as it was put in International Transport Roth GmbH v Home Secretary [2002] 3 WLR 344 at [26].  We note that Mrs. Andrews stated in evidence that having regard to the figures on the returns which had been submitted after Mrs. Ogburn’s decision had been made, that the quantum of the security required would be adjusted downwards to £11,970 (for 6 months’ estimated VAT liability) and £7,950 (for 4 months’ estimated VAT liability). We have considered whether on this basis we should hold that the quantum of security required by Mrs. Ogburn’s decision was disproportionate and therefore unreasonable – not merely harsh but plainly unfair.  We have concluded however, that although the requirement for security ought, as a matter of good administration, to be reduced to the figures mentioned by Mrs. Andrews in evidence, we should not hold that Mrs. Ogburn’s decision was unreasonable.  It was not unfair because it was based on the Appellant’s own estimated turnover, which was the only information before Mrs. Ogburn when she made her decision. 
26.	In these circumstances it would be wrong for us to conclude that no reasonable panel of Commissioners properly directing themselves could reasonably have reached the decision made by Mrs. Ogburn.  We accordingly dismiss the appeal.
27.	The result is that the requirement for security in the amounts of £14,000 (for 6 months’ estimated VAT liability) and £9,350 (for 4 months’ estimated VAT liability) stand.  While this Tribunal has no jurisdiction to direct the Commissioners to reduce their requirement for security in accordance with the adjustments referred to by Mrs. Andrews in evidence by reference to the figures on the Appellant’s VAT returns, we would expect them to do so as a matter of good administration (as we have said) and convenience to both sides.  If they decide not to do so, of course, the Appellant may have the basis for bringing another (and more successful) appeal to this Tribunal.     

JOHN WALTERS QC

CHAIRMAN
RELEASE DATE: 19 May 2006

LON/2005/0964

££Gareth Carrol (t/a Home Improvements Co) v  Revenue & Customs [2006] UKVAT V19576 (19 May 2006)