Cafe Blu Ltd v Revenue & Customs [2006] UKVAT V19725 (22 August 2006)

19725

SECURITY – restaurant – business with poor compliance record – was request for security reasonable – appeal dismissed

LONDON TRIBUNAL CENTRE

CAFÉ BLU LIMITED	Appellant

-	and –

THE COMMISSIONERS FOR
HER MAJESTY’S  REVENUE AND CUSTOMS 	Respondents

Tribunal:	 Nicholas Aleksander (Chairman)
Michael Sharp

Sitting in public in London on 27 July 2006

Mr S Jafri. a director of the Appellant, for the Appellant 
	
Mrs P Crinnion, Advocate, of the office of the Solicitor For HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The Appeal

1	The Appellant, Café Blu Limited ("the Company") gave Notice of Appeal dated 3 January 2006 against a Notice of Requirement to give Security under Paragraph 4 (2), Schedule 11 of the VAT Act 1994, issued on 6 December 2005.

The Issue

2.	The issue for the Tribunal was whether the Commissioners of HM Revenue and Customs ("Customs") had acted in a way in which no reasonable panel of Commissioners of 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 requirement on 6 December 2005. 

The Legislation

3.	Paragraph 4(2), Schedule 11, of the VAT 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

4.	The Tribunal heard evidence from Mr S Jafri, a director of the Appellant, from Mrs Lynn Andrews, a senior officer of Customs with the security team and from Mrs Kerry Smith, who was an officer with the security team at the relevant time.  A bundle of documents was presented to the Tribunal. 

The Facts Found

5.	The Company carries on business as restaurateurs with premises at Windsor, Virginia Water and Englefield Green.  The Company was registered for VAT with effect from 23 November 2002 and the registration remains extant, and the Company still trades.

6.	The Company acquired the premises at Windsor from the liquidator of Cashcastle Limited, which traded under the style "Café Bleu".  Ms Christine Land, a director of the Company, was a director of Cashcastle Limited.  Mr Jafri, a director of the Company, had been the company secretary of Cashcastle Limited under 1997, and had been a management consultant to that company.  Cashcastle Limited went into liquidation with effect from 10 October 2002, and at the date of the liquidation owed VAT of £321,193,01.

7.	The Company subsequently acquired premises at Virginia Water and Englefield Green.  The Company's cash flow position was tight, and in consequence was regularly late in filing its VAT returns and paying the VAT due.  The Company regularly sought "time to pay" agreements with Customs and was subject to the default surcharge regime.  On 18 May 2004, Customs issued a letter to the Company warning the Company that it was contemplating issuing a notice for security.  On 13 August 2004 a notice of requirement to provide security was issued by Customs to the Company requesting security of £64,900 if the Company continued on quarterly returns, or £43,250 if on monthly returns.  Following the issue of the notice, the compliance of the Company in filing its returns and paying its VAT improved, and the notice was withdrawn on 29 September 2004.

8.	In August 2005, the Company acquired premises in Englefield Green, following promises from its principal shareholders to make a capital injection to fund the new restaurant and working capital.  Mr Jafri proceeded with the acquisition on the basis of these promises, but the funds promised by the principal shareholders were never forthcoming.  One of the consequences was that cash flow became even tighter, and the VAT compliance of the Company deteriorated further.  Mr Jafri provided a £115,000 loan to the business, and did not take any salary or drawings (and lived on his savings and the wages of his partner – who was a manager of one of the restaurants).

9.	From September 2004 until November 2005, the Company was consistently late in filing its VAT returns and paying its VAT liability by the due date.  With only one exception, all VAT returns were late – from between 14 to 74 days.  The Company was always late in paying its VAT, with the delay in payment ranging from 26 to  90 days.  The Company was also within the default surcharge regime.

10.	On 16 August 2005, Customs issued a direction to the effect that the Company was required to submit VAT returns on a monthly basis.  

11.	In December 2005, in view of the poor compliance record of the Company, Mrs Andrews concluded that security was required from the Company to protect the revenue because: 

•	the Company had been late in filing its VAT returns on eleven occasions since the 05/03 period
•	the Company had been late in paying its VAT on twelve occasions since the 05/03 period
•	the Company had not been outside the default surcharge regime since 05/03, and was subject to the surcharge at the 15% rate

12.	Mrs Andrews also took into account the fact that the Company did not extend credit to its customers, and therefore was not in the position where it had to account for VAT on sales before it received payment.  

13.	Mrs Andrews therefore proceeded on 6 December 2005 to issue a Notice of Requirement for security under Schedule 11, paragraph 4(2)(a) of the Value Added Tax Act 1994.  The amount required, £39,550, was based upon the returns filed by the Company for the last 13 months of its trading.  The Notice was left by Mrs Smith in a sealed envelope at the Company's principal place of business in Windsor.  Mrs Smith then drove to the restaurant at Virginia Water, where she met Mr Jafri and gave him a copy of the Notice.  She also explained the requirements of the Notice, the consequences of failure to provide security, and the right of the Company to appeal.  

14. 	The Company requested further time to meet with its shareholders to discuss the Notice, and in view of the Christmas holidays, Customs agreed to the request.  On 3 January 2006, the Company lodged an appeal against the Notice.

15.	Since February 2006, the Company has made changes in its management team and has improved its profitability and cash flow.  Since February 2006, the Company has filed its VAT returns and paid its VAT on time (although the arrears from 2005, and amounts due to HM Revenue and Customs in respect of PAYE and national insurance remain outstanding).  It has exchanged contracts and is about to complete the sale of its Englefield Green premises, and its premises in Windsor are in the process of being sold.  The Company is proposing to enter into a Company Voluntary Arrangement with its trade creditors, and is in negotiation with HM Revenue and Customs in respect of its arrears of PAYE, national insurance contributions and VAT.  It proposes to make a substantial contribution to the arrears owed all creditors from the proceeds of sale of Englefield Green and Windsor, and pay the remaining balance over a period of three years.  Mr Jafri has agreed to subordinate his debt of £115,000 to the claims of the other creditors. 

Reasons for Our Decision

16.	The jurisdiction of the Tribunal in relation to security is strictly circumscribed.  Our role is to consider the reasonableness of the decision made by Customs on the exercise of their discretion.  We are required to restrict ourselves to deciding whether the Company has established that the decision arrived at by Customs was unreasonable or whether the decision was arrived at by taking into account matters which were not relevant or by ignoring matters which were relevant. We must restrict ourselves to considering facts and matters which were known when the disputed decision was made. The Tribunal cannot exercise a fresh discretion; the protection of the revenue is not the responsibility of the Tribunal.  

17.	Looking at the position when the Notice of Requirement was made, Mrs Andrews had in front of her a business with a poor compliance record.  Against this background we consider that the decision of Customs was reasonable.  

18.	The fact that the financial position of the Appellant may have improved since February 2006 is not something that we can take into account, as the improvement happened subsequent to the making of the Notice under appeal.  In this context we would note that Mrs Andrews stated in her evidence that she would be prepared to review the amount of the deposit in the light of the trading records of the Appellant taking into account the fact that it was trading from fewer premises.

Decision  
 
19.	Our decision on the issue for determination in the appeal is that the decision by the Customs, requiring the Company to give security, was a reasonable decision.  That means that the appeal is dismissed.

20.	Mrs Crinnion made no application for costs and we make no order.

NICHOLAS ALEKSANDER
CHAIRMAN

RELEASED: 22 August 2006

LON/06/0034