20148

VALUE ADDED TAX – requirement for security – Appellant took over part of a business as a going concern – company secretary of the Appellant was a partner in the previous business which was a cash trader - the previous business had forty-two defaults and went out of business owing tax – the previous business also defaulted on a time-to-pay agreement and was the subject of a requirement for security – whether decision to require security was a reasonable decision – yes – appeal dismissed – VATA 1994 Sch 11 para 4(2)(a)

TIPTAP LIMITED
Appellant

-and –

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS
Respondents

TRIBUNAL : DR A N BRICE (CHAIRMAN)
MS H FOLORUNSO

Sitting in London on 17 April 2007

There was no appearance by or on behalf of the Appellant

Ms Pauline Crinnion, of the Office of the Solicitor for HM Revenue and Customs, for the Respondents 

© CROWN COPYRIGHT 2007

DECISION

The appeal
1.	Tiptap Limited, trading as Binaka Restaurant, (the Appellant) appeals against  a decision dated 9 October 2006 made by the Commissioners for Her Majesty’s Revenue and Customs (the Respondents)  The decision was to require the Appellant, as a condition of its supplying goods or services under a taxable supply, to give security (by guarantee or cash deposit) in the sum of £6,150 or £4,100 if monthly returns were submitted.

The legislation
2.	The decision was given under the provisions of paragraph 4(2)(a) of Schedule 11 of the Value Added Tax Act 1994 (the 1994 Act). Sub-paragraphs 4(2) and (4) provide:
 
“(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 … for the payment of any VAT that is or may become due from-
(a)	the taxable person … .”

(4)	Security under sub-paragraph (2) above shall be of such amount, and shall be given in such manner, as the Commissioners may determine.”

The issue
3.	What we had to decide was whether the decision of the Respondents to require security was a reasonable decision. 

Hearing in the absence of the Appellant
4.	When the appeal was called on for hearing there was no appearance by or on behalf of the Appellant. Mrs Crinnion, who appeared for the Respondents made an application that we should hear the appeal in the absence of the Appellant under Rule 26(2). Rule 26(2) and (3) provide:

“26(2)	If, when an appeal …is called on for hearing, a party does not appear in person or by his representative, the tribunal may proceed to consider the appeal …in the absence of that party.  

(3)	… the tribunal may set aside any decision or direction given in the absence of a party on such terms as it thinks just, on the application of that party … served at the appropriate tribunal centre within 14 days after the date when the decision or direction of the tribunal was released.”

The events before the hearing
5.	The decision was dated 9 October 2006 and the Notice of Appeal was lodged on 9 November 2006. The notice of the hearing was sent on 15 February 2007 and drew attention to the Practice Statement published on the Tribunal’s website about the postponement of hearings. With the notice of the hearing was sent a document entitled “Guidance for Tribunal Users on the Postponement of Hearings”. Paragraph 4 of that Guidance stated:

“Any application to postpone received within four working days of the hearing will only be granted in the most compelling circumstances eg serious illness or accident. In all other cases the application to postpone will be heard at the start of the hearing. Parties should be prepared to proceed with the hearing if the application is not granted. The Tribunal has power to hear an appeal or application in the absence of a party.”

6.	The day before the hearing (that is, on 16 April 2007), the Appellant’s representative telephoned the tribunal centre, and at 2.06 pm sent an email, applying for the hearing to be postponed. The email said that due to a severe gout attack the representative was unable to attend the hearing. He was a sole practitioner and did not have anyone suitable in the office who could attend. He had contacted his General Practitioner and if a sick note was given his wife would collect it and fax it to the tribunal centre. He had spoken to Mrs Crinnion of the Respondents. 

7.	On the same day (16 April 2007) Mrs Crinnion of the Respondents wrote to say that she had received a number of telephone calls from the Appellant’s representative and that she had received a copy of the email sent to the tribunal centre. The letter went on to say that Mrs Crinnion had suggested to the representative that the Appellant should come to present its appeal in person but had been told that that was not possible. Mrs Crinnion told the representative that if the hearing was postponed the Respondents would proceed to civil recovery immediately and that the Respondents wanted the appeal to stay in the list. 

8.	At 16.10 on 16 April the tribunal centre received a fax message which was a copy of a letter dated 16 April 2007 from a General Practitioner saying that the representative was suffering from acute gout and unable to follow his occupation and that the recommendation was that the representative should refrain from work for one week.  

The arguments 
9.	In support of her application that the appeal should be heard in the absence of the Appellant Mrs Crinnion told us that the Respondents had considerable concern about the financial position of the Appellant. The company secretary of the Appellant had been involved in a number of legal entities which, by August 2006, had substantial debts. The business had then been split in two, the Appellant taking one half. Since that date the Appellant had submitted no returns at all. Central assessments had been issued but had not been paid. The debt was increasing all the time and it was not possible for the Respondents to wait until the hearing was re-listed before commencing proceedings for civil recovery.  

10.	For the arguments of the Appellant we referred to the email from the representative dated 16 April 2007, and the letter from the General Practitioner of the same date, referred to above. 

Our decision on the application to hear the appeal in the absence of the Appellant
11.	In considering the arguments of both parties we formed the view that we had to balance the interests of the Appellant with the statutory need to protect the revenue. We knew that, if we were to hear the appeal in the absence of the Appellant, then the Appellant would have the right to apply to have our decision set aside under Rule 26(3). On the other hand we also knew that paragraph 4 of Schedule 11 of the 1994 Act gives the Respondents power to require security for the protection of the revenue and that any delay in the Tribunal giving a decision in this appeal increased the risk to the revenue. It was also relevant that the application to postpone the hearing had been made at a very late stage when the Appellant’s representative was still working to the extent that he was telephoning the Respondents. Finally we bore in mind that the witness for the Respondents had attended that day in order to give her evidence.  

12.	For these reasons we decided to hear the appeal in the absence of the Appellant knowing that the Appellant would have the right to apply to have our decision set aside under Rule 26(3).  

The evidence
13.	A bundle of documents was produced on behalf of the Respondents. Oral evidence was given on behalf of the Respondents by Ms Clare Bell, a Higher Officer of the Respondents. Ms Bell gave the disputed decision 

The facts
14.	From the evidence before us we find the following facts.

Before 1 August 1996
15.	Before 1 August 1996 Mr Mosharaf Hossain Samad was connected with two restaurants in Woking which were registered for value added tax. 

16.	The first restaurant was called the Vojon Restaurant and it was registered from 27 November 1986. It operated from premises at 2 St John’s Road, Woking. This business was a partnership of which Mr Mosharaf Hossain Samad was one partner. Its turnover was stated to be £168,000. This business ceased on 1 February 1995.

17.	The second restaurant was called the Binaka Tandoori Restaurant and it was registered from 1 February 1995. It operated from premises at 97 High Street, Woking. This business had two value added tax registrations. The first registration was a partnership of which Mr Mosharaf Hossain Samad was one partner and Mr Zahir Hossain Samad was the other. Its turnover was stated to be £217,000. The second registration was that of a sole proprietorship of  Mr Mosharaf Hossain Samad. The turnover was stated to be £696,000. Both registrations ceased on 1 August 1996. 

1995 to August 2006 - M H Samad and Partners 
18.	With effect from 1 January 1995 a business under the name of M H Samad & Partners was registered. The partners were recorded as Mr Mosharaf Hossain Samad, Mr Zahir Hossain Samad, Mr Mohammed Abous Samad, Mr Asrar Hossain Samad and Mr Mridul Hossain Samad. (Mr Asrar Hossain Samad and Mr Mridul Hossain Samad retired on 8 March 2005.) This business ran two restaurants, one was the Vojon Restaurant at 2 St John’s Road, Woking and the other was the Binaka Tandoori Restaurant at 97 High Street, Woking. Taxable turnover was stated to be £704,000.

19.	This business incurred forty-two default surcharges. Most returns were late and every payment of tax was late. Initially returns were late by a few days but in February 2004 the delay reached a peak of 218 days falling to 33 days in August 2005. Initially the tax was paid a few days late each time; in 1997 the delays increased and were in excess of 100 days each time; in 2003 the delay reached 789 days and then reduced so that it was 285 days in August 2005.  

20.	After August 2005 value added tax returns were not submitted for the accounting periods ending on 31 October 2005, 31 January 2006 or 30 April 2006 and centrally raised assessments were issued for these accounting periods. (A return was submitted for the accounting period ending on 31 July 2006.) As at 31 August 2006 the debt owed to the Respondents by this business was £12,102.21. This was made up of tax of £10,144.00 (being centrally raised assessments for the accounting periods ending on 31 January 2006 and 30 April 2006) and default surcharges of £1,958.21. This business also has a PAYE debt of £4,785.92 for the tax year ending on 5 April 2005. No PAYE has been paid for the tax year ending on 5 April 2007 and the amount estimated as payable for that year is approximately £2,800.   

21.	This business also defaulted on a time-to-pay agreement and three more requests for time to pay were rejected by the Respondents. The business was the subject of a requirement for security which progressed to the issue of a prosecution warning letter on 6 December 2005. Four warrants were issued against this business and the case was managed by the Respondents’ Civil Recovery Unit.

22.	On 14 August 2006 the business wrote to the Respondents to say that it had  ceased trading on 3 August 2006 and that its two restaurants were to be transferred to two limited companies, namely the Appellant and another company called Glenpath Limited (Glenpath). 

August 2006 – the Appellant and Glenpath 
23.	Glenpath was registered for value added tax with effect from 1 August 2006. It carries on business at the Vojon Restaurant at 2 St John’s Street Woking, Surrey. Its director is Mr Samia Islam Samad and Mr Zakir Hossain Samad is the company secretary. When registering for value added tax taxable turnover was stated to be £130,000. Glenpath has been required to provide security and has appealed but that appeal has not yet been heard. 

24.	The Appellant was also registered for value added tax with effect from 1 August 2006. It carries on business at the Binaka Restaurant at 18 High Street, Woking, Surrey In its application for registration for value added tax the Appellant was asked whether any of its partners or directors was involved in running any other business either as a sole proprietor, partner or director. The Appellant replied yes and mentioned M H Samad and Partners. The Appellant stated that its business bank or building society account was not yet opened. It went on to state that it had taken over the registered business of M H Samad and Partners as a going concern on 1 August 2006 and wished to be registered from 1 August 2006. .Mr Mosharad Hossain Samad signed the form as company secretary  The expected value of taxable supplies was estimated at £130,000. 

November 2006 – the disputed decision
25.	Ms Bell of the Respondents became involved in October 2006  She had before her the history of the businesses associated with Mr Mosharad Hossain Samad as outlined above. She was aware that the business of M H Samad and Partners, with which Mr Mosharad Hossain Samad was connected, had been late with rendering its returns and paying its tax forty-two times and that the delay on some occasions had been serious. She knew that the business of M H Samad and Partners had had considerable financial difficulties and that it had defaulted on a time-to-pay agreement. She also knew that the business had been the subject of a requirement for security and had then ceased to trade and had transferred one of its restaurants to the Appellant as a going concern at a time when money was still owed to the Respondents. Ms Bell also knew that a licensed restaurant was a cash trade which meant that, before a trader has to account to the Respondents for value added tax, it has received the tax from its customers. That meant that M H Samad and Partners should have been able to pay the tax due to the Respondents. Accordingly, Ms Bell gave the notice of requirement of security against which the Appellant appeals. 

26.	The amount of security required was based on the expected turnover stated in the Appellant’s application to register form of £130,000. The output tax, less the expected input tax, on that turnover amounted to £12,346 each year. Where quarterly returns were rendered it was normal to require six months security (£6,173.30 rounded down to £6,150) and where monthly returns were rendered it was normal to require four months security (£4,115.53 rounded down to £4,100).  

The events after the disputed decision
27.	On 7 November 2006 the Appellant’s representative wrote to the Respondents asking for a reconsideration of the decision to require security. That letter gave a history of financial difficulties which the partners of M H Samad & Partners had faced. The problems had begun when they spent a great deal of money on the Binaka Restaurant and doubled its size but the turnover did not expand as expected. In April 2004 that restaurant had been sold and value added tax arrears of about £145,000 had been paid out of the sale proceeds. More tax was paid in February 2005 by re-mortgaging the residence of one of the partners. Between April 2004 and August 2005 the partnership only operated the much smaller Vojon Restaurant and more tax arrears built up. Another Binaka Restaurant was acquired and started trading in August 2005. In May 2006 Mr Mridul Hossain Samad had re-mortgaged his residence and had paid £40,000 to reduce the tax arrears. However, there was still a deficiency of funds and money was owing by the partnership. In particular, the partnership bank was owed money and had cancelled the overdraft facility. Meanwhile, by October 2006 Mr Mosharad Hossain Samad had fallen into arrears with the mortgage on his house and his lender had started re-possession proceedings. The representative stated that he was trying to negotiate a small overdraft with the Appellant’s bank but it did not seem likely that that the bank would grant an overdraft to a new company unable to give any collateral security. The Appellant would be forced to close the business if it was forced to pay the security deposit to the Respondents. 

28.	This letter was considered by Ms Bell who formed the view that Mr Mosharad Hossain Samad, who was the company secretary of the Appellant, was in financial difficulties and that the business was not providing sufficient funds for his personal requirements. She also formed the view that it was unlikely that the bank would fund the Appellant’s business further. She noted the comments about the business carried on by M H Samad and Partners but was of the view that that business should never have been in arrears with its payments of tax as it was operating a cash business and would have received from its customers all the tax before it was obliged to pay the tax to the Respondents.

29.	Accordingly, on 13 November 2006 Ms Bell wrote to the Appellant and said that she was upholding the original requirement for security. 

The Appellant’s value added tax record
30.	Since registration in August 2006 the Appellant has not submitted any value added tax returns or paid any tax. Central assessments have been issued but remain unpaid. 

The arguments 
31.	In the absence of the Appellant we considered its notice of appeal which gave the following grounds of appeal:

“The requirement to put deposit will worsen the current cash flow crisis the business is going through, it may even have to shut down the business.” 

32.	We also considered the letter from the Appellant’s representative of 7 November 2006 requesting a local re-consideration. 

33.	For the Respondents Mrs Crinnion argued that the decision to require security was a reasonable decision at the date it was made. Mr Mosharad Hossain Samad, of the Appellant, had been a partner of M H Samad and Partners. That business was a cash trader but had defaulted many times. The Appellant also was a cash trader and should have the money each quarter to pay the tax which was due. The Appellant had not submitted any returns. 

Reasons for decision
34.	What we have to decide is whether the decision to require security was a reasonable decision when it was made, that is on 9 October 2006. In our view it was a reasonable decision. Mr Mosharad Hossain Samad of the Appellant was a partner in M H Samad and Partners, and took over part of the business of that firm, which had a very long history of defaults and went out of business owing tax to the Respondents. We have been impressed by the efforts made by the partners of M H Samad and Partners to pay the outstanding tax which efforts included the re-mortgaging of the homes of some of the partners. However, we accept the arguments of the Respondents that the tax should never have become outstanding in the first place because M H Samad and Partners was a cash trader and so received the tax from its customers before it had to pay it to the Respondents. 

35.	We have considered whether to recommend to the Respondents that they might like to re-consider their decision but have decided not to do so. It is clear from the letter of 7 November 2006 from the Appellant’s representatives that the Appellant is in financial difficulties and that it is unlikely to be able to obtain a bank overdraft. The fact that the Appellant has not rendered any tax returns, or paid any tax, since August 2006 indicates to us that there is a real risk to the revenue if the Appellant continues to trade. In our view the amount of security required of £4,100 (with monthly returns) is very reasonable.    

Decision
36.	Our decision on the issue for determination in the appeal is that the decision of the Respondents to require security was a reasonable decision. 

37.	That means that the appeal is dismissed. 

DR A N BRICE

CHAIRMAN

RELEASE DATE:16 May 2007

LON/2006/1191
11.05.07