20493

VAT – NOTICE OF REQUIREMENT FOR SECURITY – Appellant phoenix of a company with a poor record of VAT compliance – the director of both companies manipulating the VAT system to gain a tax advantage – security amount based on turnover declared in VAT 1 return – satisfied that the Respondents took account of relevant matters and disregarded irrelevant matters – Respondents’ decision to request security reasonable – Appeal dismissed 

MANCHESTER TRIBUNAL CENTRE

	M F M EQUIPMENT LIMITED 	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      MARJORIE KOSTICK BA FCA CTA (Member)	  

Sitting in public in Birmingham on 3 October 2007

Gregory Flowers company secretary for the Appellant 

Bernard Hayley of the Solicitor’s Office for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
The Appeal
1.	The Appellant was appealing against a Notice of Requirement to give Security in the sum of £27,600 (quarterly returns) or £18,000 (monthly returns) issued on 6 June 2006. On 4 August 2006 the security was reduced to £19,300 (quarterly returns) or £12,800 (monthly returns) because the wrong turnover figure had been used in the initial calculation.
2.	The ground of Appeal were that
(1)	The decision appears to have been made on the mistaken assumption that this company is a “phoenix” company to a company that has failed to pay its liabilities to HM Revenue and Customs. This is incorrect and the Appellant puts the Respondents to strict proof of such allegation.
(2)	The Appellant has always submitted its returns on time and pay any duty then due.
(3)	The amount of the deposit sought bears no relation to the returns of the company and could only be considered to be a penalty, which would severely affect the cash flow of the company. 
3.	We heard this Appeal on the same day as the Appeals of Mushtaq’s Limited and Mushtaqs Food Factory Limited against Notices of Security also issued on 6 June 2007.  We treated each Appeal separately, reserving our decision in the three Appeals.
4.	We heard evidence from Mr Max Houghton the officer who issued the Notice for Security. The Appellant and Respondents each supplied their own statements of case and bundle of documents.
Background
5.	Mr Parvaiz Ahmed was director of the Appellant with Greville Secretaries Limited acting as company secretary. The Appellant’s business was the design, manufacture, sale and lease of catering equipment and traded from premises at 440 -444 Stratford Road, Birmingham.  The Appellant was registered for VAT with effect from 11 October 2004. The VAT 1 estimated an annual turnover of £500,000 for the Appellant.  The Appellant submitted five VAT returns on time up to the date of the Notice of Requirement for Security. All the returns were repayment returns.
6.	Mr Parvaiz Ahmed and Greville Secretaries were also director and company secretary of EC Specialist Equipment Limited (formerly known as Mushtaq’s Food Machinery Limited) which traded from the same premises and carried out the same business as the Appellant.  EC Specialist Equipment Limited had a poor VAT compliance record submitting late VAT returns from 06/04 to 06/05.  The certificates issued under paragraph 14(1)(d) schedule 11 of VAT Act 1994 showed that as at 6 June 2006   EC Specialist Equipment Limited owed the sums of £78,354 (VAT), £3,542 (default interest), and £8,161(default surcharge) to the Respondents. 
7.	In March 2005 the Appellant purchased the assets and stock of Mushtaq’s Food Machinery Limited. The Appellant also acquired the trading style of Mushtaqs Food Machinery with the result that Mushtaqs Food Machinery Limited changed its name to E C Specialist Equipment Limited. On 20 June 2005 Mr Parvaiz Ahmed advised the Respondents in writing that as from 1 March 2005 the Appellant was the new tenants of 440 – 444 Stratford Road Birmingham, the owner of all stock, equipment, fixtures, fittings and furniture, and that there were no items belonging to Mushtaq’s Food Machinery Limited on these premises. The Appellant reclaimed the input tax on the asset purchase. E C Specialist Equipment Limited charged output tax on the sale but failed to pay it.
8.	A VAT audit inspection of EC Specialist Equipment Limited by David Hancox on 19 December 2005 revealed that sales outside the United Kingdom were not supported by export certificates or VAT numbers and sales had been omitted from VAT returns. The majority of its sales were to the Appellant which had claimed input tax on the purchases. The Appellant had acquired the stock of EC Specialist Equipment Limited. Mr Hancox concluded that there was a clear intention on the part of EC Specialist Equipment Limited to invoice the associated business (the Appellant), allowing it to recover input tax whilst not fully declaring output tax. Further its business records were not credible. 
The Issue to be Decided
9.	The disputed issues between the parties were whether the Appellant was a phoenix of EC Specialist Equipment Limited (formerly known as Mushtaq’s Food Machinery Limited) and the reasonableness of the amount requested as security.
10.	The issue for the Tribunal was whether Mr Houghton acted reasonably in imposing the security for the protection of the revenue. Thus we have to decide whether Mr Houghton acted in a way in which no reasonable panel of Commissioners for HM Revenue and Customs could have acted, or whether he had taken into account some irrelevant matter, or disregarded something to which he should have given weight when imposing the security requirement. In exercising this jurisdiction we must limit ourselves to considering facts and matters which existed at the time the challenged decision to require a security was taken.
The Legislation
11.	Paragraph 4(2), Schedule 11, of the Value Added Tax Act 1994 provides that
“If the Commissioners think it is necessary for the protection of the revenue, they 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.”
Mr Houghton’s Evidence
12.	Mr Houghton found that the Appellant shared the same director and company secretary, the same business, and traded from the same premises as EC Specialist Equipment Limited. Further the Appellant adopted the trading name of Mushtaq’s Food Machinery. He considered these facts strongly supported his conclusion that the Appellant was a phoenix of EC Specialist Equipment Limited when it traded under its previous name of Mushtaq’s Food Machinery Limited.  According to Mr Houghton the close relationship between the two companies enabled the Appellant to obtain a cash injection at the expense of the tax payer arising from the Appellant’s input tax claim on the purchase of assets from EC Specialist Equipment Limited which did not account for  output tax on the sale.
13.	Mr Houghton was satisfied that the Appellant being a phoenix of EC Specialist Equipment Limited posed a significant risk to the protection of the revenue. In coming to his view Mr Houghton relied on EC Specialist Equipment Limited’s inferior record of VAT compliance which included a debt of £90,000 to the Respondents, and the questionable VAT accounting of the transactions between the two companies.
14.	Mr Houghton acknowledged that at the time of his decision to require a security, he mistakenly believed that Mr Parvaiz Ahmed was also a director of Mushtaq’s Limited which failed to submit a critical VAT return. Mr Houghton accepted that the compliance of Mushtaq’s Limited had no direct bearing or connection with this case.
15.	Mr Houghton held grave doubts about the accuracy of the Appellant’s VAT returns. They were all repayment returns. Further the Appellant’s director, Mr Parvaiz Ahmed, was also the director of EC Specialist Equipment Limited at the time of Mr Hancox’s audit visit when he found that its business records were not credible. In view of Mr Parvaiz Ahmed’s history of poor record keeping Mr Houghton was not confident of an improvement in the quality of the Appellant’s business records. In those circumstances Mr Houghton did not use the figures declared in the Appellant’s VAT returns for calculating the amount of the security. Instead he used the Appellant’s estimated annual turnover of £500,000 declared in the VAT 1 as his starting point. He then calculated the projected output tax for 12 months, £87,500, from which he deducted notional input tax of £48,882.86, producing a projected 12 months VAT liability for the Appellant of £38,617.32. The security of £19,300 for quarterly returns represented a projected six months VAT liability rounded down, whilst the alternative of £12,800 for monthly returns represented a projected four months VAT liability rounded down.
The Appellant’s submissions
16.	The Appellant denied that it was a phoenix of EC Specialist Equipment Limited. The latter remained a going concern and continued to trade in specialist bespoke catering equipment until the company was liquidated in 28 February 2007. At the liquidation of EC Specialist Equipment Limited the Appellant and Mr Parvaiz Ahmed were shown to be creditors for the respective sums of £143,179 and £178,509 in the company’s final statement of affairs.
17.	The Appellant stated that the Respondents’ allegation about the failure of EC Specialist Limited to account for VAT on the assets sale to the Appellant was demonstrably untrue. The Appellant produced the 03/05 and 06/05 VAT returns for EC Specialist Equipment Limited which showed that the Appellant had declared the relevant out put tax. The Appellant also relied on a letter dated 3 January 2006 from the Respondents which acknowledged the existence of the VAT returns. However, those returns were dated 14 December 2005 and submitted late because of an apparent computer failure. Further the 3 January 2006 letter pointed out that the returns were currently unpaid.
18.	The Appellant disputed that EC Specialist Equipment Limited had a debt of £90,000 with the Respondents. According to the Appellant the Respondents failed to make repayment claims to EC Specialist Equipment Limited which reduced the size of the debt to about £49,000.
19.	The Appellant acknowledged that it recovered input tax on the purchase of assets of EC Specialist Equipment Limited but it had overpaid the purchase price by £143,079. According to the Appellant, the Respondents accepted the truth of the overpayment following a VAT inspection on 10 August 2006. However, it would appear from the Respondents’ letter dated 16 August 2006 that the Respondents during the inspection identified errors with the Appellant’s VAT returns, giving grounds for an assessment for unpaid VAT against the Appellant.
20.	The Appellant objected to Mr Houghton’s method for calculating the security. The turnover figure used by Mr Houghton was estimated and over-stated. Mr Houghton ignored the Appellant’s actual turnover declared in its VAT returns which was £184,513 at the date of request for the security.  Further Mr Houghton should have considered the actual figures declared by the Appellant for input and output tax rather than notional figures when computing the security amount. Had he done so the Appellant would have been in a repayment situation. Thus the security was excessive and punitive.
21.	The Appellant submitted that the contents of Mr Hancox’s VAT inspection report should be disregarded because it had not been previously disclosed to the Appellant. 
Reasons for Decision
22.	The High Court in Customs and Excise Commissioners v Peachtree Enterprises Ltd [1994] STC 747 explained the extent of the Tribunal’s jurisdiction on hearing Appeals against the issue of a Notice of Requirement for Security. The Court held that 
“The tribunal's jurisdiction in cases where the exercise of discretionary powers by the commissioners was challenged was supervisory; the tribunal could not substitute its own discretion for that of the commissioners. In the exercise of its supervisory jurisdiction the tribunal had to limit itself to considering facts and matters which were known when the disputed decision was made. Accordingly, as an appeal to the tribunal lay only against a specific identifiable decision, it was the matters and facts which were in existence at the date of the specific identifiable decision in dispute to which the tribunal had to have regard in assessing whether the decision was reasonable. In the instant case the specific identifiable decision in dispute was the commissioners' decision to require a security and in determining whether that decision was reasonable the tribunal should only have taken into account matters known to the commissioners at 30 April 1991 and 20 June 1991 respectively”.
23.	 The Appellant submitted that we should disregard the contents of Mr Hancox’s VAT inspection report of EC Specialist Equipment Limited because the report had not been previously disclosed to the Appellant, and not included in the Respondents’ list of documents. We found that Mr Houghton relied on Mr Hancox’s report to provide in part the factual basis for the issue of the security against the Appellant. The facts relied on were disclosed to the Appellant in Mr Houghton’s letter to the Appellant dated 15 June 2006 and in the Respondents’ statement of case.  We concluded that Mr Hancox’s report did not introduce new facts which took the Appellant by surprise. We held that the Appellant was not prejudiced by the introduction of the report in evidence by the Respondents.  
24.	The Respondents’ statement of case included additional grounds for issuing the security, in particular Mr Parvaiz Ahmed’s purported involvement with Fresh Jalebi Limited. We ignored those grounds which did not form part of Mr Houghton’s reasoning for the security because it would compromise the principle that we should have regard solely to those facts and matters which were known when Mr Houghton made the disputed decision.
25.	The principal grounds upon which Mr Houghton issued the security were that the Appellant was a phoenix of EC Specialist Equipment Limited which had a poor record of VAT compliance and that Mr Parvaiz Ahmed as director of both companies was manipulating the VAT system to their advantage. 
26.	The Appellant asserted that it was not a phoenix since EC Specialist Equipment Limited continued as a going concern. The Appellant’s assertion was not backed up by direct evidence of the officers responsible for managing EC Specialist Equipment. The Appellant provided no details of how EC Specialist Equipment Limited carried on trading as a separate entity particularly as it sold its assets and trading style to the Appellant. Also EC Specialist Equipment Limited appeared to have no premises from which to trade following the Appellant’s occupation of its trading premises. Mr Hancox found that the majority of the sales of EC Specialist Equipment Limited were to the Appellant.  The final statement of affairs for EC Specialist Equipment Limited showing Mr Parvaiz Ahmed and the Appellant as creditors was not a relevant consideration for this Appeal as it dealt with circumstances subsequent to the Notice of Requirement dated 6 June 2006.
27.	In contrast Mr Houghton’s finding that the Appellant was the phoenix of EC Specialist Equipment Limited had a firm factual foundation. The Appellant shared the same director and company secretary, the same business, and traded from the same premises, as EC Specialist Equipment Limited. Further the Appellant used the same trading name of Mushtaq’s Food Machinery under which EC Specialist Equipment Limited operated until the sale of its assets to the Appellant.
28.	We are satisfied that the Appellant was a phoenix of EC Specialist Equipment Limited. We were convinced by the facts relied upon by Mr Houghton to demonstrate that the Appellant had effectively assumed the business of EC Specialist Equipments Ltd. Correspondingly we found the Appellant’s assertions about not being a phoenix of EC Specialist Equipment Limited hollow and lacking in substance. The Appellant failed to explain how EC Specialist Equipment Limited could operate as a going concern with no stock, no assets and no separate trading premises.
29.	We find that EC Specialist Equipment Limited trading as Mushtaq’s Food Machinery Limited did not comply with its obligations in respect of VAT, and owed the Respondents in the region of £90,000. These failures occurred during the tenure of   Mr Parvaiz Ahmed’s directorship of the company. We consider there was a strong likelihood that Mr Parvaiz Ahmed would continue with the same disregard of VAT obligations with his management of the Appellant. We also find that Mr Parvaiz Ahmed in his capacity of director of both companies manipulated the VAT system by attempting to secure a cash injection for his companies by the Appellant claiming input tax and EC Specialist Equipment Limited not paying output tax on the transactions between them.  We are satisfied that our findings strongly support the conclusion that the Appellant posed a serious risk to the protection to the revenue.
30.	The Appellant contended that the amount of security demanded by Mr Houghton was excessive and punitive. The Appellant submitted that Mr Houghton should have used the information in its VAT returns to determine the security amount. However, Mr Houghton considered the Appellant’s VAT returns unreliable because they were all repayment returns and Mr Hancox’s finding that the business records of EC Specialist Equipment Limited were not credible.  We are satisfied that Mr Houghton had good reason to doubt the reliability of Appellant’s VAT returns, particularly as they were signed by Mr Parvaiz Ahmed who was responsible for the inadequate record keeping of EC Specialist Equipment Limited.  In those circumstances Mr Houghton was justified, in our view, in rejecting the turnover figures declared in the Appellant’s VAT returns as his basis for computing the required security. The only other source of information about the Appellant’s annual turnover was the estimated figure of £500,000 stated by the Appellant in its VAT 1. We consider it was reasonable for Mr Houghton to rely on the turnover figure in the VAT 1 to calculate the required security, particularly as the Appellant volunteered this information when registering for VAT.
31.	In this Appeal we are required to consider whether Mr Houghton acted in a way in which no reasonable panel of Commissioners for HM Revenue and Customs could have acted, or whether he took into account some irrelevant matter, or disregarded something to which he should have given weight when imposing the security requirement for the protection of the revenue on the Appellant on the 6 June 2006. 
32.	Mr Houghton’s decision was based upon his finding that the Appellant was a phoenix of EC Specialist Equipment Limited which had a poor record of VAT compliance. Mr Houghton believed that there was a strong likelihood that the Appellant would ignore its VAT obligations, particularly under the directorship of Mr Parvaiz Ahmed who was ultimately responsible for the failings of EC Specialist Equipment Limited. Further Mr Houghton considered that Mr Parvaiz Ahmed secured cash injections for his companies by a cynical manipulation of the VAT system. We found that Mr Houghton’s reasons were fully justified on facts. In contrast, we decided  that the Appellant’s objections lacked substance with no factual foundation. We consider that Mr Houghton was correct in giving weight to these facts when imposing the security. In our view they were relevant in assessing the Appellant’s risk to the protection of the revenue.  Mr Houghton acknowledged that his decision to issue the security was also influenced by his mistaken belief that Mr Parvaiz Ahmed was also a director of Mushtaq’s Limited. However, we are satisfied that his mistake did not undermine the strength of his case for issuing the security based upon the close association of the Appellant with EC Specialist Equipment Limited. We find no evidence that Mr Houghton disregarded something to which he should have given weight in coming to his decision on the 6 June 2006.
33.	  We held that Mr Houghton was justified in using the turnover figure declared in the Appellants VAT 1 for computing the amount of security required. Mr Houghton’s reasons for rejecting the turnover declared in the Appellant’s VAT returns were sound. We find that the security required was not excessive and punitive. The amount of security requested was proportionate to the risk posed by the Appellant. 
34.	We, therefore, find nothing unreasonable either in the requirement or the amount.
Decision
35.	For the reasons set out above we decide that the issue of the Notice of Security dated 6 June 2006 on the Appellant was reasonable. We, therefore, dismiss the Appeal. We make no order for costs.

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 6 December 2007

MAN/06/0479