20714

VAT – SECURITY – Protection of Revenue – Appellant had poor record of VAT compliance at the time the security decision was taken – the Appellant’s reasons for contesting the security were not relevant to the disputed issue – Whether Respondents’ actions in requiring a security reasonable –Yes – Appeal dismissed – VAT ACT 1994 Schedule 11 p 4(1)

MANCHESTER TRIBUNAL CENTRE

	NORTH (NEWCASTLE) LIMITED   	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      WARREN SNOWDON JP (Member)	  

Sitting in public in North Shields on 4 June 2008

Peter Dixon, director, assisted by Rob Page of McCready Page, Chartered Certified Accountants appeared for the Appellant

Kim Tilling of the Solicitor’s Office for 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 £24,217.00 (quarterly returns) or £16,926.00 (monthly returns) issued on 15 August 2007.
2.	The grounds of Appeal were that
“Mr Dixon was not involved in managing the previous business which defaulted on VAT. Previous business was operated by Mark Connelly. Hans Jungerius was retained under TUPE regulations. Mr Jungerius has no part in management and has been replaced as company secretary”.
3.	The Appeal was heard together with the Appeal of Camp David Limited (MAN/08/0074) against a security notice. This decision was taken with the consent of the parties because the issues in both Appeals were similar and Mr Dixon was a director of each of the Appellant companies. We, however, recorded separate decisions for the Appellants.
The Issue to be Decided
4.	The Appellant carried on a business as a public house, The Old Ticket Office, in Newcastle, operating as a cocktail bar. The Respondents maintained that the Appellant represented a risk to the revenue principally because it failed to make its first two returns on time. The Appellant argued that normally a failure to make returns would not result straightaway in a security notice. Further the Respondents had mistakenly assumed that the Appellant was associated with the former owners of the business which had become insolvent with a VAT debt of £150,000. In the Appellant’s view it was this supposed association which was the primary reason for the Respondents’ security notice. 
5.	The issue for the Tribunal was whether the Respondents had acted reasonably in imposing the security for the protection of the revenue. Thus we have to decide whether the Respondents acted in a way in which no reasonable panel of Commissioners for HM 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 requirements. 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 Evidence
7.	We heard evidence from:
(1)	Peter Dixon, director for the Appellant company.
(2)	Martin Whitelegge, Senior Officer for HM Revenue and Customs, who issued the Notice of Requirement for Security.
8.	We were presented with a documents bundle from the Respondents.
The Facts Relied upon by the Respondents for the Notice of Security
9.	In January 2007 the Respondents were alerted by an entry in the Appellant’s VAT 1 Registration form indicating  that the Appellant was associated with North Bar (Newcastle) Limited which had previously occupied the Appellant’s premises and accrued VAT debts in excess of £150,000. The Respondents decided to monitor the Appellant’s compliance, which they reviewed in May 2007 discovering that the Appellant had failed to make its first VAT return.  On 31 May 2007 the Respondents sent a letter to the Appellant warning that it ran the risk of a security requirement if it did not make its VAT returns on time. The Appellant did not respond to the letter.
10.	On 15 August 2007 Mr Whitelegge decided to issue the Appellant with a notice requiring a security of £24,217.00 (quarterly returns) or £16,926.00 (monthly returns). His main reason for requiring a security was that the Appellant was 117 days late with its first return due on 28 February 2007 and had not submitted the VAT return due on 31 May 2007. Mr Whitelegge also took into account when making his decision that the Appellant’s sister company, Camp David Limited, showed a similar pattern of non-compliance with its VAT obligations. Mr Dixon was the director of both companies and they traded in the same line of business.
11.	 The amount of security requested was derived from the Appellant’s actual VAT liability declared in its first period return. The security also included an outstanding VAT debt of £2,344.00 in respect of a centrally raised assessment. 
12.	On 20 August 2007 the Appellant requested a review of the decision to require a security.  On 28 September 2007 Mr Whitelegge after considering the information put forward by the Appellant upheld his decision to issue a security requirement. Mr Whitelegge accepted that Mr Dixon was not involved in the management of North Bar (Newcastle) Limited, and that the holding company of the Appellant was owned 100 per cent by Mr Dixon.  Mr Whitelegge pointed out, however, that the company secretary of the Appellant, Mr Jungerius, also held the same position with North Bar (Newcastle) Limited. Mr Whitelegge acknowledged that Mr Dixon had no debts of VAT owing from his previous public house business, although at the time of its de-registration Mr Dixon had accrued a VAT debt of  £31,000 which was cleared by a one-off payment of £25,000 with the balance paid under a time for payment agreement over two years. Mr Whitelegge concluded that the Appellant had not addressed the principal reason for issuing the security requirement which was its poor compliance with VAT obligations.
The Appellant’s Evidence
13.	In September 2006 Mr Dixon acquired the leases of the  Old Ticket Office and Camp David   from Mr Donnelly, a director of North Bar (Newcastle) Limited and the owner of Camp David, when he defaulted with payments on a loan granted by Mr Dixon.  When they were acquired the two public houses were losing money. Mr Dixon has since turned round the businesses with both public houses now making a profit. 
14.	At the beginning Mr Dixon was unable to make the VAT payments for the businesses because of their stretched financial circumstances. On 25 June 2007 Mr Dixon made the first payments of VAT for the Appellant and Camp David. The payment was 117 days late (due date 28 February 2007) for the Appellant, and 86 days late for Camp David (due date 31 March 2007). Also the cheque for the Camp David payment did not clear, which meant that the debt for the 02/07 period was not met until January 2008, when Mr Dixon made another substantial payment of VAT for both companies. Mr Page, however, acknowledged that the Appellant was still not sending its VAT returns on time which was a result of the Appellant not getting the requisite information on time to its accountants. The VAT arrears as at the date of hearing were £11,095.29 for North (Newcastle) Limited, and £16,129.28 for Camp David Limited.
15.	Mr Dixon and Mr Page pointed out that the naming of North Bar (Newcastle) Limited  as an associated company in the VAT registration form was in a different handwriting from the other entries in the form. They denied responsibility for inserting North Bar (Newcastle) Limited in the registration form and queried whether the Respondents had added the information. Mr Dixon asserted that he had no reason to name North Bar (Newcastle) Limited because he had not been involved in the management and running of the company. He considered that the reputation of his companies had been adversely and unfairly affected by the purported association with North Bar (Newcastle) Limited. He was obliged to take on Mr Jungerius as an employee under the TUPE regulations. Mr Dixon had subsequently relieved Mr Jungerius of his company secretary responsibilities.
16.	Mr Dixon did not consider that he and his companies posed a risk to the revenue. He had no intention of avoiding his VAT obligations and had discharged his previous VAT debt. Mr Dixon offered the Respondents a personal guarantee to indemnify them against any VAT debt accrued by the Appellant. He considered that a third party guarantee was too expensive. He denied receiving a copy of the warning letter which was sent to the address of the public house. Mr Dixon indicated that he would have to sell the businesses if  security requirements were imposed.
Reasons
17.	Our starting point is to consider whether Mr Whitelegge 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 15 August 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 Mr Whitelegge was reasonable.
18.	Mr Whitelegge decided that the Appellant posed a substantial risk to the protection of the revenue. The Appellant was put under the monitoring scheme because of a potential association with North Bar (Newcastle) Limited. The Appellant failed to make its first VAT return on time and did not respond to the warning letter issued in May 2007. At the time Mr Whitelegge issued the requirement for a security the Appellant had submitted its first VAT return 117 days late with its 04/07 return still outstanding. Also the same pattern of non-compliance with VAT obligations was replicated in Mr Dixon’s other company Camp David Limited. Mr Whitelegge’s principal reason for the security was the non-compliance of the Appellant and its sister company Camp David Limited with their VAT responsibilities. We accept Mr Whitelegge’s evidence that the insolvency of North Bar (Newcastle) Limited with huge VAT debts played no part in his decision. We consider that Mr Whitelegge was correct in giving weight to the non-compliance of the Appellant and Camp David Limited when imposing the security requirement. In our view they were relevant in assessing the Appellant’s risk to the protection of the revenue.  We find no evidence that Mr Whitelegge took into account some irrelevant matter or disregarded something to which he should have given weight in coming to his decision on the 15 August 2007.
19.	Mr Whitelegge calculated the amount required for the security from the information in the Appellant’s first VAT return. Thus the security bore a close relationship to the Appellant’s actual VAT liability. We consider the amount demanded as security was reasonable and reflected the degree of risk posed by the Appellant.
20.	The Appellant contended that the Notice of Security would not have been issued except for its purported association with North Bar (Newcastle) Limited. The Appellant had no intention of avoiding its VAT responsibilities and that if a security was imposed it would jeopardise the continuing existence of the company which would be regrettable following the turn round in its fortunes.  The Appellant, however, accepted that it had not complied with its VAT responsibilities in making returns and payments on time. Although not relevant to our decision, this state of non-compliance had not been rectified by the time of the Appeal hearing which confirmed Mr Whitelegge’s view that the Appellant posed a risk to the protection of the revenue. 
21.	Mr Dixon considered that he posed no risk to the revenue because he would eventually pay his debts. He suggested that the Respondents had other options to deal with the Appellant’s non-compliance, such as assessments and default surcharges. Mr Dixon was prepared to offer a personal guarantee against which the Respondents could recover any VAT debt accrued by his companies. 
22.	We consider that Mr Dixon has misunderstood our powers on Appeal in respect of security requirements.  We have no authority to substitute our own decision for that of the Respondents. We are restricted to considering the circumstances that existed at the time Mr Whitelegge took his decision to issue the security requirement.  The question of which of their powers the Respondents chose to exercise to protect the Revenue was a matter for them provided they acted reasonably. The plain fact was that at the time the decision was taken to issue the security requirement the Appellant was in arrears with its VAT payments and had failed to make its VAT returns on time. The Appellant’s reason for not complying with its VAT obligations was cash flow difficulties. Those facts supported Mr Whitelegge’s conclusion that the Appellant posed a risk to the protection of the revenue. We hold that the matters raised by the Appellant did not render Mr Whitelegge’s decision unreasonable. The issue of the potential consequences to the Appellant’s business if a security was imposed was not a relevant matter, provided the security amount was proportionate to the level of risk posed by the Appellant. We find that the amount was proportionate because it was based on the Appellant’s actual VAT liability. Finally the question of how the security was discharged was a matter of agreement between the parties, although Mr Whitelegge indicated at the hearing that a personal guarantee of a director was not appropriate in the case of a company.
Decision
23.	For the reasons set out above we decide that the issue of the Notice of Security dated 15 August 2007 on the Appellant was reasonable. We, therefore, dismiss the Appeal. We make no order for costs.

                                

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 24 June 2008

MAN/