19639

Requirement to give security for VAT - paragraph 4 Schedule 11 VATA 1994 - appeal under section 83(l) VATA 1994 against decision requiring security

LONDON TRIBUNAL CENTRE

	AQUARIUS ENTERTAINMENT LTD	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	Charles Hellier (Chairman)
Diana Wilson

Sitting in public in London on 15 June 2006

The Appellant was not represented

Pauline Crinnion instructed by the Acting Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This is an appeal against a decision of the Respondents to require the Appellant to give security for the payment of any VAT that is or may become due by it.
2.	The Appellant was unrepresented at the hearing. The tribunal centre had received communications from the advisers recorded as representing the Appellant that they were no longer acting for or advising them.
3.	The directors of the Appellant from 22 September 2005 were Mark Young, Paul Carew and Neville Mody. Mr Crinnion told us that before the start of the hearing she had had a telephone conversation with Mr Mody; Mr Mody had told her that Mr Carew was not contactable and Mr Young was out of the country, and that he himself did not intend to appear to represent the Appellant at the hearing.
4.	We decided to proceed to consider the appeal in the absence of any representation of the Appellant. In the absence of the Appellant the tribunal is not required to step into its shoes: to raise against the Respondents every possible issue and to cross examine its witnesses. Nevertheless the tribunal is entitled to test and examine critically the evidence and submissions made to it. That we sought to do at the hearing and in this decision.
5.	We heard oral evidence from Sarah Saunders, an officer in the Respondents’ security team, and had before us a bundle of copy documents. The statements of fact and inference of fact set out in the remainder of this decision are drawn from that evidence and those documents.
The appeal
6.	The appeal is under section 83(l) VAT Act 1994 against the requirement by the Respondents given in a letter dated 19 September 2005 and varied by a letter dated 2 December 2005 that the Appellant give security for VAT due.
7.	The letter of 19 September required security of £329,000 (or of £219,300 if monthly VAT returns were agreed to). The letter of 2 December 2005 reduced these figures to £162,750 and £108,500 respectively.
8.	A direction of the VAT tribunal made by on 24 January 2006 directed that the Appellant’s notice of appeal be treated as being amended to cover the reduced requirement. We therefore treated this appeal as relating to the decision which is reflected in the letter of 2 December 2005 that the Appellant give security as specified in that letter as well as that reflected in the earlier letter. Our enquiry therefore relates to those decisions and their circumstances.
9.	In John Dee Ltd v Customs and Excise Commissioners 1995 STC 941, the Court of Appeal held that in an appeal under the precursor of section 83(l) the question the tribunal had to examine was whether it appeared to the commissioners requisite to require security. The statutory language is now a little different and the question will now be whether the Commissioners “think it is necessary for the protection of the revenue” for the taxpayer to give security. In examining this question Neill LJ said that the tribunal will “consider whether the Commissioners had acted in such a way in which no reasonable panel of Commissioners could have acted, or whether they had taken into account as some irrelevant matter or had disregarded something to which they should have given weight. The tribunal may also have to consider whether the Commissioners have erred on a point of law.”
10.	Thus we direct our enquiry in this appeal to the facts surrounding the decisions to require security.
The evidence of Mrs Saunders
11.	Mrs Saunders was the author of the letters of 19 September and 2 December 2005. Mrs Saunders told us that in making the decision to require security she took into consideration the following information:
(1)	the Appellant applied to be registered for VAT with effect from 1 November 2004 (which was amended to 28 October 2004). Its application form stated that its business was that of a Bar and Restaurant and that it estimated that it would make taxable supplies of £3m in the 12 months after application.
(2)	the directors of the company had been:
(a)	Neville Mody from 4 February 2004 to 2 September 2005 and from 22 September 2005 onwards;
(b)	Paul Carew from 4 February 2004 to 2 September 2005 and from 22 September 2005 onwards;
(c)	Mark Young from 4 February onwards;
and Jonathan Alexander and Jonathan Sanders in the period 2 September 2005 to 22 September 2005. These details had been obtained from the Registrar of Companies’ records.
(3)	Mr Mody, Mr Carew and Mr Young had been directors of companies which had been put into insolvent liquidation in which the Commissioners had been unsecured and unsatisfied creditors:
(a)	Mr Young and Mr Carew were directors of, and Mr Mody was company secretary of Skydawn Ltd, a company which went into liquidation on 23 March 2005. The Statement of Affairs (and the Commissioners’ records) showed the Commissioners were owed a debt of £209,663.08 which was not paid. The company’s business was that of an operator of a wine bar and night club.
(b)	Mr Carew and Mr Mody were directors of Camody Leisure Ltd which operated a licensed restaurant. The company went into liquidation on 11 March 2005. The Commissioners were owed a debt of £69,614.65 which was not paid.
(4)	Mr Young was a director, and Mr Mody company secretary of Premium Entertainments Ltd, a company whose business was operating a bar and restaurant. This company had VAT returns outstanding for the quarters ending April, July and October 2005 (the October 2005 information being available only at the time of the 2 December letter). Assessments had been issued which were unpaid;
(5)	the Appellant had submitted a VAT return for the period ending November 2004 but had not submitted VAT returns for the quarters ending February, May and August 2005.
(6)	Assessments had been issued to the Appellant in respect of the periods for which no VAT returns had been received. Default surcharge notices had also been issued;
(7)	a letter had been sent to the company on 2 August 2005 warning it that security would be sought unless returns were submitted and VAT paid promptly. On 4 October 2005 Baker Tilly had written enclosing an authority from the Appellant authorising Customs to disclose information to them in relation to the VAT affairs of the Appellant, and had written a second letter lodging an appeal against the requirement as to security and indicating that they were reviewing VAT management with their client and hoping to resolve matters shortly. Nothing else was heard from them.
12.	On the basis of this information Mrs Saunders considered that tax was at risk: the company had failed to submit VAT returns and to pay VAT, and its directors were associated with other companies which had defaulted on their VAT payment obligations.
13.	Mrs Saunders told us that the information before her about the relevant companies’ directors was obtained from the Registrar of Companies as were the Statements of Affairs in the liquidation of the companies. Records of VAT outstanding were provided from the Commissioners’ own records.
14.	It seems to us that on the basis of the information before Mrs Saunders on 19 September 1005 and 2 December 2005, it was not unreasonable for her to consider that it was necessary to require security for the protection of the revenue.
15.	We asked ourselves whether, in relation to this issue, Mrs Saunders had taken into consideration any irrelevant matters. None of the matters she had considered appeared to us to be irrelevant.
16.	We asked ourselves whether Mrs Saunders had failed to take into account any relevant matters. We asked Mrs Saunders whether the mere fact of the liquidation of the associated companies was enough for her concern. She replied that it was her practice to consider the reasons for liquidation where that information was available. In the case of Skydawn it had gone into liquidation shortly after commencing business and in the case of Carmody Leisure it had gone into liquidation shortly before the review conducted by Mrs Saunders took place. If tax collection was to be protected it was necessary to move quickly. She had not therefore begun an investigation into whether there were benign  reasons for the insolvency. We concluded that in the circumstances she had not failed to take into account any relevant matters.
17.	We reached these conclusions both in relation to the time of the letter of 19 September and in relation to the time of the letter of 2 December 2005.
18.	We then considered the amount of security required by the Commissioners.
19.	Mrs Saunders told us that this had been calculated for the 2 December 2005 letter in the following way. The expected turnover for the 12 month period following registration was stated to be £3m on the Appellant’s registration application form. The Commissioners maintained records of the average proportion of a business’s output VAT which would be matched by input VAT. These statistics were maintained by reference to the type of business and its geographical area. They therefore provided a means to estimate the annual net VAT liability of a business. For a bar and restaurant business in the Appellant’s area the statistical records indicated that 38 percent of the output tax would be matched by input tax. The estimated annual net tax liability would thus be:
171/2% x 62% x £3m = £325,500
20.	Where quarterly returns were submitted, the return was required to be submitted 1 month after the quarter end. Allowing for normal delays and administration, the Commissioners would be at risk for 5 months’ tax where payment was made relatively timeously.  Given that security was sought where problems with collection had arisen, the practice was to seek security for 6 months’ tax. This security was thus sought for:
1/2  x £325,500 = £162,750
21.	If monthly returns were submitted, the maximum exposure of the Commissioners would be less and security for only 4 months’ tax would be sought.
22.	There seemed to us to be nothing unreasonable in this approach, nor was there any indication that matters had been taken into consideration which were irrelevant.
23.	However, in relation to the letter of 19 September 2005 the turnover figure had been taken to be £6m rather than £3m. This was a mistake which arose because of a software fault. As a result, in making the 19 September decision, the Commissioners took into account an irrelevant matter, namely, an incorrect estimate of the Appellants’ turnover. That resulted in a requirement for security which in our view exceeded that which was reasonable in the circumstances. It therefore seems to us that in relation to the requirement in the letter of 19 September 2005, the Appellant’s appeal must be allowed.
24.	No such mistake however was made in the 2 December calculations and they cannot in our view be impugned on the basis that any irrelevant matter was taken into consideration.
25.	We asked ourselves however whether any relevant matter had not been taken into consideration. We noted that the Appellant had submitted a VAT return for its first VAT period. The Commissioners’ record of that return showed outputs of £210,351 and inputs of £1,010,906. It was thus a repayment claim. We were not told that repayment had not been made.
26.	We asked Mrs Saunders whether she had considered these figures in making her decision. She said she had not. That was because the first VAT return of a business would generally be unrepresentative of future returns: the output tax would only be for part of the 3 months period, the input tax could reflect the indirect capital and stocking-up costs of the business which would not be incurred in future periods. Had the business been running for a year or so, and had there been returns for a longer period, she would of course have considered them.
27.	We agree with Mrs Saunders that input tax in the first return may well be anomalous and would be likely to be irrelevant to future periods. But the outputs for that period would, it seems to us, be potentially relevant. Had the outputs been £10m then it would have suggested a much greater potential credit exposure for the Commissioners than that based on £3m of sales for the 12 month period. That would have been relevant to the level of security reasonably necessary.
28.	Likewise, if the declared outputs had been substantially smaller than expected on the basis of the business’s estimate, further consideration might have been reasonable. Whilst however we accept that the declared outputs in the first period may be anomalous, it seems to us that they are relevant to the Commissioners decision and should have been considered - even if the effect of considering them would not affect the Commissioner’s decision in this particular matter.
29.	The Appellant’s first return was for the period of just over a month from 28 October to 30 November 2005. The outputs were £210k. Had that represented a full month’s trade then the outputs for the year would have been £2.5m rather than £3m. It seems to us that when the establishment of the business, the expected growth and Christmas sales were taken into account this suggests that an estimate of £3m for the whole year is about right. 
30.	We find therefore that had the information in the return been taken into account it was inevitable that the Commissioners would have reached the same decision as to the level of security.
31.	We detected no error of law in the Commissioners’ decision.
32.	As a result we dismiss the Appellants’ appeal against the requirement for security contained in the letter of 2 December 1995.
33.	Our decision was unanimous.

Charles Hellier

CHAIRMAN
RELEASE DATE: 28 June 2006

LON/2005/1031

££Aquarius Entertainment Ltd v  Revenue & Customs [2006] UKVAT V19639 (28 June 2006)