19886

SECURITY – requirement for security for tax due or anticipated – whether requisite for the protection of the revenue – appeal dismissed – VTA 1994 Sch 11 para 4(2)

LONDON TRIBUNAL CENTRE

BULK PRODUCTS (UK) LIMITED
	Appellants

and
		
THE COMMISSIONERS FOR HER MAJESTY’S  
REVENUE AND CUSTOMS	Respondents	

Tribunal:  Rodney P Huggins (Chairman) 
                                                       John G Robinson

Sitting in public in London on 31 October 2006

Mr Michael Turner, Director, for the Appellant 

Mr Simon J L Chambers, Advocate, of the office of the Acting Solicitor for Her Majesty’s Revenue and Customs for the Respondents.

	

 CROWN COPYRIGHT 2006

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50	DECISION

The appeal

1.   Bulk Products (UK) Limited (“the Appellant”) appeals against a decision of the Commissioners for Her Majesty’s Revenue and Customs (“Customs”) contained in a letter dated 12 December 2005 requiring the Appellant to give security of £88,774.07 for the payment of any tax due from the Appellant.

The legislation

2.   The decision to require security was given under the provisions of paragraph 4(2) of schedule 11 of the Value Added Tax Act 1994 (the 1994 Act) which provides :

         “ … where it appears to the Commissioners requisite to do so for the 
        protection of the revenue they may require a taxable person, as a
        condition of his supplying goods or services under a taxable supply, to
        give security, or further security, of such amount and in such manner as 
        they may determine, for the payment of any VAT which is or may
        become due from him.”

The issue

3.  The issue for determination in the appeal was whether the decision by Customs, requiring the Appellant to give security, was a reasonable decision.

The evidence

4.   Oral evidence for the Appellant was given by Mr Michael Turner, its Managing Director.

5.   A bundle of documents was produced by Customs.  Mrs Sue Ogburn, a Higher Officer of Customs (Mrs Ogburn) and Mr Rod Bailey (Mr Bailey) both at the relevant time at the South Region Debt Management Unit of the Securities Team at Southampton gave evidence to the Commissioners.

The facts

6.   From the evidence before us we find the following facts.

7.   Over a period of several years, two brothers, Alan and Michael Turner have at different times run two companies known as Bulk Products Limited (the first company) and then Bulk Products (UK) (the Appellant) as freight haulage contractors from the same premises at Mark Lane, off Norfolk Road, Denton, Gravesend, Kent.

8.   Originally, Michael Turner ran the first company and his brother Alan drove one of the lorries.  This company became registered for Value Added 

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	Tax (VAT) with effect from 27 January 2003.  It became insolvent with VAT debts totaling £154,659.53 and changed its name to Mercon Transport Limited on 11 December 2004.

9.   Michael Turner was successfully prosecuted for offences committed under Schedule 11 Paragraph 4(2)(a) of the 1994 Act relating to the first company.

10.   Meanwhile, the Appellant was incorporated on 8 December 2003 and registered for VAT with effect from 1 July 2004.  It undertook to make quarterly returns.  It was started by Alan Turner and he was and still is at the date of the hearing, the sole shareholder.

11.   Alan Turner raised monies to finance this associated haulage business by re-mortgaging his residence.  He became the sole Director after acquiring the company and Michael’s son Paul became the Company Secretary as well as being the Transport Manager.  Paul had also been a Director of the first company.

12.   The reason for the Appellant taking over the running of the first company’s business was its liquidation.  The business started by operating 11 HGV vehicles operating on leases with a combined cost of about £15,000 per month.  Michael Turner drove a vehicle for his brother.  He also gave advice to his brother in the running of the business.

13.   The Appellant submitted VAT returns for four qusrters ending April 2005 for which the VAT totalled £81,591.40.

14.   Customs became aware that the Appellant had been formed shortly after the demise of the first company.  As there were similarities and strong links between the two companies, Customs served a notice of requirement on the appellant on 24 November 2004 in the sum of £6,400.  This was not challenged by the Appellant and eventually the sum was paid in March 2005.

15.   During the first half of 2005, the Appellant experienced severe cash flow problems. This was due to two major factors.  First, escalating fuel prices and secondly the breakdown of Mr Alan Turner’s health.  He developed a stress related illness and was unable to cope with the day-to-day financial decisions in the Appellant’s business.  He had long periods away from work because of his illness.  Unfortunately, he failed to appreciate the seriousness of the situation as the financial position of the Appellant was in a very poor state with monies owing to many suppliers including Customs.

16.   As a result, Mr Alan Turner resigned as a Director of the Appellant and was replaced by Mr Michael Turner who took over the day-to-day control of the company on 1 October 2005.

17.  In the meantime, as the VAT compliance record of the Appellant was so poor, Customs decided in August 2005 to issue another Notice of 

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	requirement to give further security.  At that time, the Appellant had had periods of default since VAT period 01.05. The debt due to the Crown totalled £21,100.83 inclusive of default surcharges.  This was after taking into account the £6,400 paid by the Appellant in settlement of the first notice of requirement issued on 24 November 2004.

18.   Therefore, a second Notice of requirement was sent by a letter from Mrs Ogburn dated 30 August 2005.

19.   On 1 September 2005, the Appellant wrote to the Regional VAT Debt Management Unit at Southampton putting forward proposals as a means of clearing the VAT debt of £21,100.83.  It was proposed that the company would make weekly payments of £3,000 which, in the view of the company, would pay the current VAT liability in the region of £27,000 per quarter and also reduce the arrears by £12,000 per quarter.  It was also mentioned that a £10,000 payment had been sent by cheque the previous week.

20.  Mrs Ogburn responded by letter dated 19 September 2005 that she was treating the letter of 1 September as a request for a re-consideration and continued as follows :

“Security was required from Bulk Products (UK) Ltd as a result of the Commissioners’ concerns for the revenue.  A deposit was paid and subsequently offset against arrears. The fact that his offset was necessary tends to confirm our view that tax will not be paid when it falls due.

I note your comments regarding the £10,000 payment but would point out that the return for period 07/05 has not been rendered and an assessment of £33,309.00 is now on file along with a default surcharge of £1665.45. The amount due is now £46,075.28.

Settlement by instalments cannot be allowed where returns remain outstanding.  Miss Evans is dealing with the issue of payment and I believe she has already spoken to you on this subject.

There is no new information and nothing in your letter persuades that the potential risk to the revenue has been addressed.  The level of deposit has been calculated using the returns rendered by the business and thus would seem to adequately reflect the level of liability.

On the basis of the information to hand I am unable to withdraw the Notice of Requirement dated 30 August 2005.  If you have any specific information you feel should be considered please put it in writing to this office and an independent review of the case will be made.”

21.   Mr Michael Turner replied on behalf of the Appellant on                   27 September 2005 saying how saddened he was to receive Mrs Ogburn’s reply.  He repeated the company’s arguments and stated :

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	“As I mentioned in my previous letter, the rise in fuel prices has resulted in a very difficult time for us and every other road haulage company in the country.  We have reviewed our operation and have a series of measures which, when implemented, will improve our financial position significantly. For instance, we are restructuring our vehicle lease agreements in such a way as to reduce our outgoings by around £8,000 per month.  We are also currently switching our operation over to using a greater number of sub-contract hauliers, which has the effect of increasing our profitability whilst leaving our fixed costs at the present levels.

The one area over which we seem to have no control or influence is your requirement for a VAT guarantee,  Clearly, we have been having problems making the quarterly VAT payments, due mainly to the ever increasing World oil prices, but are committed to clearing the outstanding debt and making future payments on time. Under these circumstances it is virtually impossible for us to pay an additional amount to HM Customs & Revenue, purely as a guarantee. Obviously, if we have spare funds at our disposal we would not be in arrears with the quarterly returns.  It seems very much that we are faced with a double penalty due to rising oil prices.

I would once again as you to review your request for the guarantee at least until the end of November, by which time we will have demonstrated that we have reduced the outstanding debt significantly and have made the VAT payment due for the Oct 05 Return. I simply am asking for you to delay implementing the guarantee until we have had time to prove ourselves over the next two months …”

22.   On 12 October 2005, a Mrs H Evans, Customs Officer wrote to the Appellant informing the company that its request for a time to pay agreement for the outstanding amount had been rejected.

23.   By december 2005 the Appellant’s VAT debt had risen even higher.  As a result, the amount of  security required on 30 August 2005 was reviewed.

24.   The amended quantum was ascertained by Customs to be £88,774.07.  This was calculated on the basis that the Appellant was submitting quarterly returns.  The figure included the amount of £55,950.00 (six months tax) rounded down from an original figure of £55,959.17.  This as calculated using figures rendered by the Appellant on its VAT returns for the periods ending October 2004, January 2005, April 2005 and July 2005. The actual security required included the then liability of £32,834.07 inclusive of default surcharges.

25.  Mr Bailey notified the Appellant officially on 12 December 2005 by letter of the requirement that the amount had increased to £88,774.07.  The Appellant appealed on 20 December 2005.

26.   Subsequently, despite a time to pay agreement with Customs and 		

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	promises to pay regular instalments, the Appellant had not met its VAT commitments and at the date of the hearing, the total debt including default surcharge had increased to about £60,000.  Another Notice of requirement to give security was issued by Mr Bailey on 24 January 2006 in the sum of £105,647.89 but that notice had not been appealed against by the Appellant and was therefore not before the tribunal.

Reasons for Decision

27.  In considering the issue before the tribunal, we are guided by the principles as described by Farquharson J in Mr Wishmore Limited v the Commissioners of Customs and Excise [1988] at page 728g who said :

“The Tribunal … should restrict itself, on the hearing of an appeal, to deciding whether the taxpayer company has established the decision arrived at by the commissioners was unreasonable, or … whether the decision had been arrived at by taking into account matters which are not relevant or by ignoring matters which are relevant.”

28.   The principles were further developed in Customs and Excise Commissioners v Peachtree Enterprises Ltd [1994] STC 747 where it was held that the tribunal had to limit itself to considering facts and matters which were known at the time the disputed decision was made by Customs and Excise.  The principles were yet further developed in John Dee Limited v Customs and Excise Commissioners [1995] STC 941 where the Court of Appeal held that the tribunal had to consider whether Customs and Excise could have acted, or whether they had taken into account some irrelevant matter, or had disregarded something to which they should have given weight.  The tribunal could not exercise a fresh discretion;  the protection of the revenue was not a responsibility of the tribunal or the court.  However, if it was shown that the decision of Customs and Excise was erroneous because they had failed to take some relevant material into account, the tribunal could, nevertheless, dismiss the appeal if the decision would inevitably have been the same had account been taken of the additional material.

29.  In the light of these principles, we have considered the decision taken by Mr Bailey to issue the Notice of requirement which was issued to the Appellant on 12 December 2005.  The decision was based on the VAT records of the Appellant and a failure to discharge arrears including the default surcharges despite the efforts of Customs’ local Debt Management Unit.  We find that Mr Bailey considered carefully all the information he had before him and that, in the light of that information, he reached a decision which was eminently reasonable.

30.   The Appellant put forward three arguments to support its appeal.

31.   First, it argued it could not afford to pay the amount of s security required.  However, in Rosebronze v The Commissioners of Customs and 

		

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	Excise (1984) VAT decision No.1668 the tribunal held that such a consideration could not be taken into account in deciding an appeal:  the legislation provided that Customs and Excise had to act “for the protection of the revenue” and a tribunal could only allow an appeal against a decision of Customs and Excise to require security if it was one which no reasonable body of Commissioners of Customs and Excise could take.  We adopt that principle.

32.  Secondly, the person ultimately responsible for the business activities of the company up until October 2005 was Mr Alan Turner.  Mr Michael  Turner did not become a Director until then.  However, there is nothing in paragraph 4(2) of Schedule 11 of the 1994 Act which provides that there must be a commonality of directors before a taxpayer can be required to give security.  Mr Michael Turner had been the controlling Director of the first company which failed leaving a large VAT debt.  We have no doubt that he was involved in the activities of the Appellant prior to his appointment as the sole Director in October 2005.  As his brother was absent for lengthy periods due to his illness, Mr Michael Turner must have been performing day-to-day duties. Mr Bailey was aware of his involvement.  He also know that the Appellant basically took over the business of the first company, it traded from the same premises and was in the same line of business with, on the balance of probability, the same customers.

33.   Thirdly, Mr Michael Turner argued in his grounds of appeal that “whilst we accept that this company has failed to make VAT payments on time, we would like to show that the level of guarantee, as calculated by HM Customs and Revenue, is not relevant now as we in the process of implementing major changes to the operating structure of this business.  These will not only underscore it’s financial viability, but will result in a much lower VAT liability.  We believe that the changes detailed below will significantly change the calculation of any VAT Guarantee.  Indeed, we very much hope that the need for a VAT Guarantee will be dropped altogether …”

He then itemised three major company changes involving vehicle leasing,  owner drivers and fuel.

34.   We are not able to take these matters into account because, as we have already indicated in paragraphs 27 and 28 of this decision, we cannot exercise a fresh discretion such as considering new proposals for the company’s future.

35.   We conclude that the decision reached by Mr Bailey on 12 December 2005 was eminently reasonable.

36.   It follows that our decision on the issue for determination in the appeal is that the decision to require security was a reasonable decision and was 

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	not arrived at by taking into account matters which are irrelevant nor by ignoring matters which were relevant.

37.   The appeal, is, therefore, dismissed. There will be no order as to costs.

Rodney P Huggins
Chairman
17 November 2006

LON/06/26