20302

Vat – Requirement to give security for payment of VAT – Schedule 11 VATA 1994

LONDON TRIBUNAL CENTRE

G J OXLEY, J G JANZEN & A A G JANZEN	           Appellants

-	and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

Tribunal:	CHARLES HELLIER (Chairman)
SHEILA EDMONDSON FCA

Sitting in public in London on 29 June 2007

Mrs G J Oxley for the Appellants 

Mr J Holl instructed by the Acting Solicitor for HMRC for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	This is an appeal against a decision of the Respondents to require the Appellants to give security for the payment of VAT that is or may become due from them.

2.	The Respondents are given power to require such security by paragraph 4 Schedule 11 VATA 1994 which, as relevant to this appeal, provides:-

“(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 …

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

3.	Section 72(11) VATA 1994 provides that a person who makes supply made in contravention of paragraph 4(2) shall be liable, on conviction, to a penalty.

4.	Section 83(l) provides that an appeal lies to the tribunal with respect to the requirement of any security under paragraph 4(2) of Schedule 11.

5.	In John Dee Ltd v Customs & Excise Commrs [1995] STC 941, the Court of Appeal held that the tribunal’s jurisdiction under the predecessor of this section was essentially supervisory.  The tribunal has to examine whether it appeared to the Commissioners to be requisite to require security: in so doing the tribunal should consider whether the Commissioners acted in a way which no reasonable panel of commissioners could have acted, whether they had taken into account some irrelevant matter or had disregarded something to which they should have given weight, and whether they had erred on a point of law.  But the tribunal’s jurisdiction did not extend in such an appeal to exercising a fresh discretion to determine whether or not security should be required or what its amount should be.

6.	In Customs & Excise Commrs v Peachtree Enterprises Ltd [1994] STC 747 the High Court held that in exercising its jurisdiction under the predecessor of section 84(2) the tribunal was limited in assessing the reasonableness of the decision to require security to considering facts and matters existing at the date of the decision and known to the decision maker.  Dyson J noted that if other material comes to light or into existence which the taxpayer considers requires a modification of the decision the taxpayer may ask the Commissioners to reconsider and that the Commissioners had a duty to reconsider in the light of fresh material.  If appropriate the taxpayer could appeal against that reconsidered decision but such material was not relevant in an appeal against the earlier decision.

7.	Thus we have to consider, in the light of the material available to the Commissioners when they made the decision, whether the Commissioners acted in a way in which no reasonable panel of Commissioners could have acted, whether they took into account some irrelevant matter, whether they disregarded something to which they should have given weight, or erred on a point of law.

8.	The decision under appeal was notified to the Appellants in a letter dated 13 November 2006.  In it the Commissioners, through their officer Clare Bell, notified the Appellants that security in the sum of £63,701.84 was required as a condition of the Appellants making any taxable supply (or in the sum of £53,201.84 if the Appellant agreed to submit monthly VAT returns).  The Commissioners letter indicates that the security could be given by a cash deposit or by a bank, insurance company or guarantee society guarantee.

9.	Following a letter from the Appellants on 22 November the Respondents wrote on 7 December confirming the requirement for security in the same amounts.  The appeal is taken as being against this decision as well.

The Evidence

10.	Mrs Oxley gave oral evidence; Clare Louise Bell, the Respondents’ officer gave sworn oral evidence; we had before as a bundle of copies of various documents including correspondence between the parties and VAT returns; and there were produced to us during the hearing copies of other VAT returns and draft accounting statements for the business.

[There are two comments we should make on the evidence.  First the accounting statements were somewhat incomplete: they lacked a balance sheet and any report from the accountants, and did not always add up.  It would have been more helpful if better statements had been available.  Second, Miss Bell took with her into the witness box various bits of paper which were not in the bundle before us.  Generally it is better if witnesses do not have before them anything not available to the tribunal or documents which may prompt their evidence.  In the circumstances we did not consider however that Miss Bell’s evidence was to be accorded less weight on this account.]

Findings of Fact

11.	The following information was known by the Commissioners at 13 November and 7 December 2006:-

(1)	The Appellants are a family partnership (sister, brother and sister-in-law and, until 2005, the parents of the brother and sister) engaged in a hotel business.

(2)	Until August 2004 they owned one hotel only, the Ventnor Towers Hotel.

(3)	In August 2004 they bought a second hotel, the Melbourne Ardenlea Hotel.

(4)	Although the Appellants were already VAT registered in respect of the business conducted at the Ventnor Towers Hotel, they were allocated a separate VAT registration number in respect of the business at the Melbourne Ardenlea Hotel, and made separate VAT returns (with different quarterly VAT periods) in respect of it until 1 January 2006 when the returns for the two hotels were merged.  As a result the last separate return for the Melbourne Ardenlea was that for the quarter ended 31 December 2005 (the 12/05 quarter) and the first return encompassing the activity for both hotels was that for the quarter ended 31 January 2006 (the 01/06 quarter) although this return included only one month of the activity of the Melbourne Ardenlea.  The following returns (04/06 onwards) were for the whole business.

(5)	The Appellants’ business is seasonal.  Their busy months are in the summer period; in the winter months by comparison their VATable supplies are very small, and a hotel may be closed from time to time in that period.  This is reflected in their returned VAT liabilities:

					Ventnor Towers Returns

	Nov, Dec 04 & Jan 05  		  3,086
	Feb, Mar & Apr 05			  4,754
	May, June & July 05			19,454
	Aug, Sept & Oct 05			19,762

The Melbourne Ardenlea returns exhibit a similar pattern.

(6)	The Appellants’ VAT compliance record since 2003 has not been good:-

(i)	in 2003 all VAT payments in respect of the Ventnor Towers were made late, and three of them more than 84 days late;

(ii)	in 2004 all VAT payments in respect of the Ventnor Towers were made late and two of them more than 135 days late.  In the same year both of the VAT payments for the Melbourne Ardenlea Hotel were made late;

(iii)	in 2005 all the VAT payments in respect of the Ventnor Towers were made late and three of them more than 93 days late and two of the payments in respect of the Melbourne Ardenlea were made more than 5 months late;

(iv)	in 2006 the 04/06 payment for the combined hotels was unpaid at 13 November (and 7 December) and the 07/06 and 10/06 payment were a few days late.

(7)	A compliance officer’s visit to the Appellants in March 2006 resulted in two additional assessments: the first for £8,520 (including interest) in respect of various errors, and the second for £14,697 in respect of an apparent discrepancy between the turnover as shown in the audited accounts and the turnover recorded on the VAT returns.

(8)	In August 2006 the Appellants sold the Ventnor Towers Hotel.  As a result from that time onwards their VATable supplies related only to the Melbourne Ardenlea Hotel.

(9)	On 19 May 2005 the Commissioners had notified the Appellants of their decision that the Appellants give security pursuant to paragraph 4 Schedule 11 VATA 94 in the amount of £18,100. The Appellants had not immediately provided this sum (or a guarantee for it) and the Respondents had commenced prosecuting them under Section 72(11) VATA. The Appellants made a deposit of the £18,100, three days before the date set for the magistrates court hearing.
	
12.	On 13 November 2007 the Appellants had unpaid tax due of £36,480.72 which the Respondents records showed to be made up as follows:-

	10/05 Return (balance unpaid)		  4,192.10
	April officer’s assessment	  8,520.92
	Second officer’s assessment	14,697.78	23,218.70
	04/06 Return					  7,389.74
							34,800.54
	Interest assessed				      571.48
	Default Surcharges				  1,108.46
							          0.24
	TOTAL					36,480.72

But at that date the 07/06 return had been delivered and the related tax of £36,271.02 had been paid.  Further tax payable in respect of periods prior to 10/05 was shown as paid.  We note the following points:-

	(i)	whilst the sum outstanding was large only ⅓ related to tax declared 		due on returns;

(ii)	the April 2006 assessments formed the substantial majority of the outstanding amount. As noted below the Appellant disputes the second of those assessments but this was not known to the Commissioners at 13 November or 7 December;

(iii)	the Appellant had paid £18,100 in response to the Commissioners first requirement to provide security.  This had been allocated to a number of additional liabilities by the Commissioners. The Appellants were not clearly informed of the method of allocation. The Appellants’ perception therefore of the amounts outstanding and their source may have been different, although there should have been no misconception as to the total tax outstanding.  The Appellants, in their letter seeking reconsideration dated 22 November 2006, estimated the liability before offset of the £18,000 as £41,000.  But in this estimate they had failed to take into account interest and default surcharges and the first April assessment of £8,520.92.  Those additional amounts bring the total outstanding up to some £54K before offset of the £18K.

13.	The Respondents’ decision to require security and the confirmation of that decision on 7 December were made on their behalf by Miss Bell.  In concluding that security should be required she took into account the following issues:-

(i)	the Appellants’ payment record both in respect of the Ventnor Towers and the Melbourne Ardenlea;

	(ii)	the VAT outstanding;

(iii)	the fact that the Appellants business was a “cash business” so that despite the receipt of the money to pay the VAT by the Appellants from their customers the VAT had not been paid;

(iv)	on 7 December 2006, the Appellants’ representation in Mrs Oxley’s letter of 22 November 2006 that the 10/06 and 04/06 liabilities would be paid in the week following the date of that letter; and 

(v)	the additional VAT assessments made following the compliance visit in March 2006.

14.	In relation to the amount required by way of security Miss Bell calculated it thus.  She took the net VAT liabilities on the returns for the periods 10/05, 01/06, 04/06, and 07/06 from the Ventnor Towers registration (these comprised the activities of Ventnor Towers only for 10/05, and for the first two months of 01/06; and the activities of both hotels for the period from January 2006 to July 2006).  She then calculated an average 6 months and 4 months liability (respectively £31,494 and £20,996) and added this to the outstanding VAT of £32,251 to give requirements of:-

	(i)	£63,701 if the Appellant continued to submit quarterly returns; and

	(ii)	£53,201 if the Appellant agreed to submit monthly returns.

Miss Bell chose the Ventnor Towers return figures (which included the activity of Ventnor Towers as well as the Melbourne Ardenlea) rather than older returns for the Melbourne Ardenlea business only despite the fact that at the time of the decision the Ventnor Towers business had ceased because the hotel had been sold.  That was because she did not have available to her a full 12 months’ returns for the Melbourne Ardenlea: she had 09/04, 12/04, 06/05, and 09/05 but not 03/05 and because these returns were older than those she used.  Without a full 12 months’ returns her figures would not take into account the seasonality of the business.

15.	From Mrs Oxley’s evidence we also found the following facts although these were not known to the Commissioners at the time they made their decisions:-

(i)	the Melbourne Ardenlea is worth about £1.1m; it is subject to a mortgage securing a loan of about £730K; the business has an overdraft of about £80K (although this varies with the seasons).  The net assets of the business are therefore about £290K;

	(ii)	the bank has also taken security over the partners’ homes;

(iii)	the business made a loss of some £60K in the year to 30 April 2006, will make a small loss for the year to 30 April 2007, and is expected to make a profit in the year to 30 April 2008;

	(iv)	turnover for the year to 30 April 2007 was about £550K;

(v)	the discrepancy between the accounting turnover and the VAT returns noted by the Respondents’ officer at the central visit and which resulted in the assessment for £14,697 is likely to have arisen because of an accounting error in which capital put into the business by the Appellants was accounted for as part of gross takings;

(vi)	the sale proceeds of the Ventnor Towers were used to pay the VAT arrears which had arisen on the Ardenlea account;

(vii)	the presentation to the Appellants of the manner in which payments had been allocated to liabilities by the Respondents was confusing and later letters from the Respondents failed adequately to clarify the picture; 

(viii)	the Appellants did not intend to fail to pay their VAT liabilities; they were late in payment because they allocated available funds to the business demands and had overstretched themselves then they acquitted the Melbourne Ardenlea, but they intended to pay in full in due course;

(ix)	a large part of the continuing business of the Appellants, the business of the Melbourne Ardenlea, was with coach tour operators.  Payments by the larger operators were not made speedily: payment was made following the delivery of an invoice.  Individual customers might pay by cheque, credit card or cash but they did not represent the majority of the business.
	
The parties’ submissions

16.	Mrs Oxley makes the following points for the Appellants:-

(i)	because the Appellants are partners and individually liable to the extent of their personal assets and are not sheltering behind a limited company the Respondents’ risk is lower;

(ii)	the Appellants have always paid the tax due even if it has been paid late.  The Respondents are not at risk of tax being evaded;

(iii)	the Appellants are intending to remortgage the Melbourne Ardenlea, but they have been told that they need 3 years audited figures before they can do this successfully hence they have had to wait to get funds;

	(iv)	the amount of the security requested is excessive.

17.	Mr Holl says that the VAT compliance history of the Appellants indicated that there was a risk to the revenue that tax would not be recovered.  He says that the Commissioners took into account all relevant information in the possession and did not give undue weight to irrelevant matters.  He says that the figures used to compute the security required were the best available at the time even though for part of the period used the figures relating to the Ventnor Towers were included notwithstanding that it had been sold.

Decision

18.	For the reasons set out at the start of this decision our task in this appeal is limited.  We have to ask only whether the Respondents’ decision was reasonable in the sense there described.  We cannot substitute our view of a more reasonable result if we have one.

19.	It seems to us, although these matters are strictly not relevant to our decision, that the Appellants’ accounting is somewhat haphazard.  The accounts presented to us did not add up and mistakes appear to have been made in the turnover figures in the formal accounts.  VAT compliance has taken a back seat and we got the feeling that it would “done tomorrow” and that everyone hoped it would be OK in the end.  Mr Holl noted that the Appellants could take advantage of the cash accounting scheme or the monthly VAT accounting scheme each of which would reduce the burden upon them.  We thought that if the Appellants could get a grip on these issues and tighten up their act a lot of their problems might disappear (not the least a large cost in default surcharges).

20.	Whilst we accept that the Appellants have no intention to evade their VAT liabilities, we do not find that knowledge of that intention was available to the Respondents when their decision was made.  Even if it were available it would not eliminate the risk of loss of revenue because even the most honest may find that their business fails.  Mrs Oxley says that VAT liabilities were eventually paid, but delay in payment can in our view reasonably give rise to an apprehension that the business is in difficulties or otherwise may not in the future be able to meet its liabilities.

21.	Mrs Oxley points to the difference between individual taxpayers (all of whose assets are on the line) and those who shelter behind a limited company.  It seems to us that this is too general a proposition.  The risk of loss will depend upon the situation of the individuals and of the company.  A large well capitalised company may well present less risk than an individual with large credit card debts.  The issue in each case is what information about the taxpayer was known to the Respondents and whether they used that information properly and reasonably to evaluate the risk of loss of revenue.  In this case there was not information available to the Respondents to indicate that the Appellants would be good for the money.

22.	There are two potential criticisms of the Commissioners’ decisions we should consider in more detail.  The first relates to the returns used to calculate the annual net VAT amount.  The second relates to the question of whether the Appellants’ business is a cash business.

23.	The Respondents calculated the net VAT liability for a year from the 10/05 to 07/06 returns from the Ventnor Towers registration.  These returns included the results of both the Ventnor Towers and the Melbourne Ardenlea but the ongoing activities of the business after the date of their decision, and the exposure of the Commissioners to risk of lost revenue related only to the Melbourne Ardenlea business since the Ventnor Towers was sold (to their knowledge) in August 2006.  In taking these figures it might be argued that the Respondents had adopted an unreasonable approach or taken into account irrelevant matters namely the business of Ventnor Towers.

24.	The returns used encompassed the results of both hotels for the period 1 January 2006 to 31 July 2006 and the results of the Ventnor Towers only for the period 1 August 2005 to 31 December 2005.

25.	Miss Bell told us that a 12 month period was necessary in order to take account of the seasonal nature of the Appellants business.  We agree that that was a correct and reasonable approach.

26.	We also agree that it would have been difficult to use the incomplete 12 month return for the Ardenlea Hotel for the periods 09/04 to 09/05 because of the absence of the 03/05 return.

27.	Our preference would have been to use the Ardenlea’s returns with an estimate for the missing period, but we do not think that Miss Bell’s approach was outside the set of reasonable methods of calculating or estimating tax at risk.  The Ardenlea’s turnover was higher than that of the Ventnor and the related VAT liabilities higher too.  The returns she used had the lower Ventnor results for 1 August 2005 to 31 December 2005 but both hotels results the later seven months which included one of the higher turnover quarters.

28.	If the statute required an estimate of six months liability to be determined, then we might have found her approach unreasonable; but it does not.  Effectively it requires the Commissioners to determine an estimate of the tax which is at risk.

29.	Where quarterly returns are rendered the value of six months’ liability approximates to that risk, but the question for us is not whether an accurate calculation of six months’ risk has been made but whether a reasonable estimate of the risk has been made on the information available.  Whilst the method Miss Bell used might be said to produce a figure greater than 6 months’ tax risk for the Ardenlea business it does not seem to us to be an unreasonable estimate of the tax at risk.

30.	Neither do we believe that by considering the results of the Ventnor Hotel in the period 1 August 2005 that an irrelevant consideration had been given undue weight.  Those results were capable of being a proxy for at least part of the results of the Ardenlea for that period, and were therefore not irrelevant.

31.	The second potential criticisms of Miss Bell’s decision lay in the fact that she had taken into consideration her belief that the Appellants’ business was a cash business in which cash was received soon after the VAT point for the relevant supplies.  Miss Bell explained that in her view the Commissioners were at greater risk of losing Revenue from a cash business than they were from a credit business where the business had defaulted in its VAT payments.  That was because the business had had the cash to pay the VAT and had used or could use if on making other payments and therefore would not have future receipts out of which to meet VAT payments.

32.	This approach may be attacked in two ways.  Firstly as we have noted above the Appellants’ business is not principally a cash business.  This was unknown to the Respondents at the time of their decision but there does not appear to have been information available to the Respondents at the time that the converse was the case.  The Respondents assumed that because it was a hotel business it would receive payment when or shortly after the supply was made.  It could be argued that, to the extent that that assumption was not justified the Respondents took into account irrelevant factors.

33.	It seems to us that this attack could not be sustained.  The Respondents took into consideration the fact known to them that the Appellants’ business was a hotel business.  That was unobjectionable.  They then reasoned that it was a cash business.  Many hotels will be.  There must have been a reasonable chance that this hotel business was.  If the Respondents’ conclusion is viewed in that manner it was not unreasonable; and it seemed to us that there is no difference in substance between that view and the more direct way it was put by Miss Bell in evidence.

34.	The second criticism is as to whether the Respondents’ apprehension of a greater risk from a defaulting cash business rather than a defaulting credit business is reasonable.  We would not draw the same conclusion.  It seems to us that the risk of default in a credit business may be greater than the risk in a cash business: the business will need greater working capital to finance its activities and have a greater exposure to risk of bad debts.  However it does not seem to us that the Commissioners’ apprehension is wholly unreasonable: where a cash business has been in default it may suggest that the management has not had a proper regard for the need to pay VAT and may not have that regard in future – and the fact that it had the cash to fulfil its obligation but chose to apply it differently may suggest that the risk of future default is greater.  Accordingly we cannot conclude that this was an unreasonable approach.

35.	Although Mr Holl came close to suggesting that a defaulting cash business was more culpable in relation to a default than a credit business and that such culpability was relevant to risk of loss of revenue, Miss Bell did not say that was a reason for her decision. Had she done so, we would have needed to have been persuaded that culpability for default was relevant to risk of loss.

36.	Apart from the two potential criticisms of the Commissioners’ decision noted in paragraph 20 above we saw no other unreasonable features or any factors which had been ignored or given weight when they should not have been. In particular the facts that:

(i)	considerable sum of VAT due had been left unpaid for substantial periods;

(ii)	the Appellant had continued to default after the first requirement for security 

were in our view reasonable grounds for concluding that there was a risk of loss to the revenue which security for VAT could protect; and that the amount of the security required reasonably:

	(i)	took account of the VAT liabilities of the Appellants;

	(ii)	took account of seasonal variations; and 

(iii)	took account of outstanding VAT 

and did not (for the reasons set out above) take account of irrelevant issues.

37.	We remind the Appellant that the Commissioners are under a duty to reconsider the need for, and the amount of, security when they are given fresh information.  Ensuring that their accountants get speedily to the bottom of the assessment of £14,697.78 and relaying that conclusion quickly to the Respondents could serve substantially to reduce the security required and might even call into question the need for security if older balances had been cleared.

36.	We therefore dismiss the appeal.  Our decision was unanimous.  We make no award of costs.

CHARLES HELLIER
CHAIRMAN

RELEASED: 13 August 2007

LON/2007/107