20566

VAT - SECURITY– Protection of Revenue –– the Appellant’s director involved with three separate companies which went into liquidation owing significant VAT –– Appellant had poor record of VAT compliance –– Whether Respondents’ actions in requiring a security reasonable –Yes –– Appeal dismissed ––  VAT ACT 1994 Schedule 11 p 4(1)

LONDON TRIBUNAL CENTRE

DISCOUNT FURNITURE DIRECT LIMITED  	Appellant

- and -

HER MAJESTY’S REVENUE and CUSTOMS	Respondents

Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
RICHARD CORKE FCA (Member)

Sitting in public in Bristol on 11 January 2008

David Wright, director, for the Appellant 

Pauline Crinnion of the Solicitor’s Office of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The Appellant was appealing against a Notice of Requirement to give Security in the sum of £14,250 for quarterly returns or £9,500 monthly returns issued on 11 January 2007.
2.	The grounds of Appeal were that
“Discount Furniture Direct has no connection to a previous company owned by myself, offering a totally different product and services. Enforcement of this request would have a serious effect on the business”.
3.	We heard evidence from Mr Wright for the Appellant and Miss C Bell, the Officer who issued the Notice of Requirement. The Respondents supplied a bundle of documents.
The Issue to be Decided
4.	The Respondents considered that the Appellant represented a significant risk to the revenue because it was controlled by Mr Wright who had been a director of three other companies which had gone into liquidation owing significant sums of VAT. Also the Appellant had a poor VAT compliance record.  Mr Wright accepted that the Respondents had solid grounds for requesting a security. However, Mr Wright did not consider himself to be a risk to the revenue as he was not responsible for the failures of the other companies. The imposition of a security now would jeopardise the Appellant’s survival, which was developing into a profitable enterprise.
5.	The issue for the Tribunal was whether Miss Bell had acted reasonably in imposing the security for the protection of the revenue. Thus we have to decide whether Miss Bell acted in a way in which no reasonable panel of Commissioners for HM Revenue and Customs could have acted, or whether she took into account some irrelevant matter, or disregarded something to which weight should have been given 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
6.	Paragraph 4(2), Schedule 11, of the Value Added Tax 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 Facts
7.	The Appellant operated as a retailer of office and domestic furniture from warehouse premises in Highbridge, Somerset. The Appellant’s sales were conducted through the internet with the Appellant providing a home delivery service which had been expanded to include furniture deliveries for its suppliers. The Appellant’s annual turnover was £600,000 with a gross profit ratio of 38 per cent. The Appellant’s expected turnover for this year was £2 million. 
8.	From 25 October 2000 to 19 April 2002 Mr Wright was a director and company secretary of Ashfields Limited, trading in office furniture, which was liquidated on 29 November 2002 with a VAT debt of £36, 392. Mr Wright’s next venture was as a director of Options 123 which also sold office furniture. Options 123 was liquidated on 17 December with a VAT debt of £10,616.23.
9.	In May 2003 Mr Wright set up his own company, Workplace Warehouse Limited, with his partner, Ms Davis, who was company secretary. The company sold office and shop furniture and traded from warehouse premise in Highbridge Somerset. The company entered into the default surcharge scheme with its first return and rarely managed to render and pay a single VAT return on or before the due date. The company incurred ten default surcharges on its thirteen eligible returns. On 22 September 2006 it ceased business with PAYE debts in excess of £50,000 and unpaid VAT in the sum of £38,302.62.
10.	 Mr Wright accepted that the facts regarding his involvement with the three previous companies were correct. Mr Wright, however, did not consider himself a risk to the revenue because he believed that he was not responsible for the financial difficulties of those companies. 
11.	Throughout his career, Mr Wright has been involved in the furniture industry, primarily in sales. In 2001 he was approached by Mr Ashfield to become a director and company secretary of a new company, Ashfields Limited, selling office furniture. Mr Wright was flattered to be given the opportunity of running a company. In hindsight he acknowledged that he was naïve, and had no real input in the running of the company. Options 123 was a joint venture with Mr Ashfield’s brother. Mr Wright decided to resign his directorship because Mr Ashfield exerted too much influence over the running of the company. 
12.	The business model for Workplace Warehouse Limited involved the sale of office furniture by mail order catalogue. Mr Wright arranged for the printing and posting of mail slots to coincide with the peak of the seasonal business cycle for the purchase of office furniture which was November for delivery in January to March. Unfortunately the business was hit by postal strikes which meant that the mail slots for October and November were not delivered until the last week before Christmas.  As a result the company did not receive the anticipated orders plunging it into financial difficulties from which it never recovered.
13.	The Appellant operated from the same premises as Workplace Warehouse Limited, and was in the same line of business of furniture sales, albeit domestic as well as office furniture. As with Workplace Warehouse Limited the Appellant has a poor VAT compliance record. Its first VAT return for the quarter ending 30 November 2006 was late. Following the Appellant’s request for reconsideration of the security notice issued 11 January 2007 the Respondents delayed enforcement of the notice to allow for an improvement in the compliance record. The Appellant failed to take advantage of this opportunity and reneged on its promise to correct and pay in full the 02/07 return in May 2007. On 19 July 2007 the Respondents issued the security notice, at which time the Appellant’s 02/07 and 05/07 VAT returns had not been paid.   
14.	Mr Wright explained that he and his partner had re-mortgaged their home to fund Discount Furniture Direct Limited which was developing into a profitable company. The Appellant had recently employed an accountant part-time to sort out its VAT accounting. Mr Wright expected that the Appellant would be up-to date with its VAT payments by July 2008. 
Reasons for Our Decision
15.	Our starting point is to consider whether Miss Bell acted in a way in which no reasonable panel of Commissioners for HM Revenue and Customs could have acted, or whether she took into account some irrelevant matter, or disregarded something to which she should have given weight when imposing the security requirement for the protection of the revenue on the Appellant on the 11 January 2007. In exercising our jurisdiction we must limit ourselves to considering facts and matters which existed at the time the challenged decision to require a security was taken. We are unable to substitute our own discretion for that of the Commissioners. Our task is to decide whether the decision of Miss Bell was reasonable.
16.	Miss Bell decided that the Appellant posed a substantial risk to the protection of the revenue. It traded from the same premises and operated a similar business to Workplace Warehouse Limited which had ceased business owing substantial VAT and PAYE debts. Mr Wright, the director of the Appellant, had been a director of two other companies as well as Workplace Warehouse Limited which had got into financial difficulties leaving unpaid VAT debts. Finally the Appellant was replicating the same pattern of poor VAT compliance characteristic of Mr Wright’s other companies. We consider that Miss Bell 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.  We find no evidence that Miss Bell took into account some irrelevant matter or disregarded something to which she should have given weight in coming to her decision on the 11 January 2007.
17.	Miss Bell derived the amount required for the security by estimating the net VAT due on the projected annual turnover of £600,000 for the Appellant as declared in its VAT registration. The net VAT due was divided by two and three respectively to give the amount of security required for quarterly and monthly returns. The amount of security requested was less than what it would have been if the amount had been calculated from the net VAT declared in the Appellant’s returns, which was not known when Miss Bell performed the calculation. We consider that the amount demanded was reasonable and reflected the degree of risk posed by the Appellant.
18.	Mr Wright conceded that the Respondents had valid grounds for issuing a security notice on the Appellant. He sought to absolve himself from responsibility for the failures of his previous companies and pleaded for more time to get the Appellant’s VAT affairs in order. We attached no weight to Mr Wright’s pleadings. Ultimately as a director he bore responsibility for ensuring that the companies met their VAT responsibilities. The companies including the Appellant had poor VAT compliance records, which demonstrated that Mr Wright did not give priority to the VAT requirements. Miss Bell suspended enforcement action against the Appellant to give it time to resolve its VAT problems. The Appellant failed to take advantage of the further time, which left Miss Bell with no alternative but to issue the security. We recognized that Mr Wright was working hard to make his present company a success, however, as a result of our decision the Appellant will be required to pay the security if it wishes to continue trading lawfully.   
Decision
19.	For the reasons set out above we have decided that the issue of the Notice of Security dated 11 January 2007 on the Appellant was reasonable. We, therefore, dismiss the Appeal. We make no order for costs.

                       

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 5 February 2008

LON/07/706