19356
	VAT — SECURITY — Protection of Revenue — company directors involved in another company which had gone into liquidation owing considerable sums in VAT — the Appellant had a poor record of VAT compliance and payment including a large VAT debt — the Appellant used its VAT revenues to ease its cash flow difficulties — the Appellant had taken steps to remedy its compliance record after the issue of the Notice for Security — whether Respondents’ actions in requiring a security reasonable — yes — appeal dismissed — VAT ACT 1994 Schedule 11 p 4(1)

MANCHESTER TRIBUNAL CENTRE

 
 	
	REED LEISURE LIMITED	Appellant

	- and -

THE COMMISSIONERS FOR
	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Michael Tildesley OBE (Chairman)
						Elizabeth Pollard

Sitting in public in North Shields, Tyne & Wear on 2 November 2005

John Reed, Managing Director,  for the Appellant 

Bernard Haley, counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

The Appeal

1.	The Appellant was appealing against a Notice of Requirement to give Security in the sum of £17,400 (quarterly returns) or £11,600 (monthly returns) issued on 3 May 2005.

2.	The ground of Appeal was that:

“The company was in the process of obtaining a loan to pay off  the majority of the VAT owed and the requirement for security would cause further financial problems ”.

3.	The directors of the Appellant company were father and son sharing the same name John Reed. The son attended the hearing to represent the Appellant company. Where we make reference to Mr Reed in this decision, we are referring to the son.

The Issue to be Decided

4.	The Appellant company had a poor record of VAT compliance and owed a considerable sum of VAT. The directors of the Appellant company had also been directors of another company, Target Travel Ltd, which had recently gone into liquidation owing VAT in excess of £84,380.  The Appellant was contesting the imposition of the security because it would jeopardise the company’s current financial stability which had taken a considerable time to establish. 

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)	John Reed, the managing director for the Appellant company.
(2)	David Price, 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.	The directors of the Appellant company had been involved as directors of Target Travel Ltd which had gone into liquidation after having failed to maintain payments under a creditors voluntary arrangement.  Target Travel Ltd owed the Respondents VAT in excess of £84,380. 

10.	The VAT compliance and payment record for the Appellant company was poor.  The Appellant experienced a history of delay in furnishing the returns and making the payments on time.  The average delay for furnishing the returns for the period 01/01 to 10/03 was 205 days.  The average delay for making payments against the returns for the same period was 399 days.  The Appellant rendered no VAT returns for the periods 07/04, 10/04 and 01/05, although this has now been rectified.  The Appellant company as at 16 March 2005 built up VAT arrears of £87,055.18, which comprised of £76,801.56 (tax), £8471.91 (default surcharge) and £1,781.71 (interest).
11.	 The nature of the Appellant’s business was in the retail sector where supplies were paid for when they were made.  The Appellant should, therefore, have had the funds with which to discharge its VAT liability.
12.	 On the 16 March 2005 the Respondents initially issued a Notice of Security in the sum of £82,256.34 which incorporated an amount for the VAT owed by the Appellant.  On 3 May 2005 the Respondents on review reduced the security required to £17,400 (quarterly returns) or £11,600 (monthly returns).  The reason for reducing the security was that the Appellant disputed the amount of the VAT debt. 
13.	  The amount of the revised security requested was calculated by adding together the four VAT returns for the months of April, July and October 2004 and January 2005 and dividing that sum by six for quarterly returns or by four for monthly returns. 
The Appellant’s Evidence
14.	Mr Reed with his father established the Appellant company in 1999 for the purpose of purchasing a public house in Blyth, Northumberland to be run as a licensing trade business.  The vendors of the public house, however, apparently exaggerated the turnover by 50 per cent, which was the subject of a later fraud enquiry with the Crown Prosecution Service deciding not to prosecute because one of the vendors had emigrated to Australia.  The Appellant based its business case on the exaggerated turnover, which meant that the business suffered from cash flow difficulties. Mr Reed accepted on behalf of the Appellant that it had used the VAT charged on its sales to ease the cash flow difficulties.
15.	Mr Reed and his father have worked hard to make the public house a viable business proposition.  They renovated the public house and opened two new bars including a night club.  From April 2005 the public house was making a profit with an annual turnover of £320,000 compared with a turnover of  £100,000 when the Appellant bought the property.
16.	Mr Reed explained that Target Travel Group Ltd was originally set up by his father in 1978 to carry out a coach and taxi business.  Mr Reed became a director of his father’s business around 1991/1992.  In 1995 the company diversified into parcel delivery.  Unfortunately successive contractors which Target Travel Group Ltd relied upon for its business in parcel delivery went into liquidation owing significant sums of money to Target Travel Group Ltd.  One of the contractors was associated with the French Post Office.  Target Travel Group Ltd never recovered from its failed parcel delivery venture with the result that it went into liquidation.  Mr Reed accepted that Target Travel Group Ltd suffered a poor record of VAT compliance.
17.	Mr Reed disputed the amount of VAT owed by the Appellant company principally because a cheque for £4,000 had not been accounted for by the Respondents.  However, he did accept that the Appellant owed a considerable amount of VAT in the region of £60,000.  
18.	Mr Reed stated that the Appellant submitted its April and July 2005 returns on time with payment of the outstanding VAT.  The April payment, however, was after the due date.  The Appellant was taking out a loan with Carlsberg to pay the outstanding VAT owed to the Respondents and was willing to make monthly returns. Mr Reed considered that the payment of the additional security would undermine the efforts made by the Appellant to put its house in order.  Mr Reed accepted, however, that the Respondents’ request for the security was reasonable when it was made but circumstances have now changed and the security would jeopardise the financial recovery of the Appellant company.
Reasons for Our Decision
19.	Our starting point is to consider whether Mr Price 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 company on the 3 May 2005.  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 Price was reasonable.
20.	Mr Price’s decision was based upon the Appellant’s poor record of VAT compliance, the large sum of VAT owed by the Appellant and that the directors of the Appellant company were involved in another company that had gone into liquidation owing the Respondents in excess of £84,380 in unpaid VAT.  We consider that Mr Price 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. 
21.	 Mr Reed relied upon the fact that the Appellant recently had taken steps to comply with the time limits for submitting VAT returns and payments.  Also the Appellant was seeking to discharge its VAT debt by taking out a loan with Carlsberg. These facts, however, related to a period after the decision to issue the Notice for Security and were not relevant to the circumstances at the time the Notice was issued. Mr Price, however, had been mindful of the Appellant’s representations about the amount of VAT owed and about reducing the sum demanded by the original Notice for Security.
22.	We noted that Mr Reed accepted that over a lengthy period of time the Appellant deployed VAT revenues to ease its cash flow difficulties which reinforced the Respondents’ view that the Appellant’s mode of business operations posed a significant risk to the protection of the revenue.  The fact that the Appellant may be placed in financial difficulties by the requirement to find the security was not a relevant factor in our deliberation about the reasonableness of the Respondents’ decision to impose a security.  The reasonableness of the Respondents’ actions is judged against the statutory requirement of “for the protection of the revenue” not the potential impact of the imposition of the security upon the financial well-being of the Appellant. 
23.	 We find no evidence that Mr Price took into account some irrelevant matter or disregarded something to which he should have given weight in coming to his decision on the 3 May 2005.
24.	For the reasons set out above we have decided that the issue of the Notice of Security dated 3 May 2005 on the Appellant was reasonable.  We, therefore, dismiss the Appeal.  We make no order for costs.

MICHAEL TILDESLEY
CHAIRMAN
Release Date: 30 November 2005
MAN/05/0409
££Reed Leisure Ltd v Revenue and Customs [2005] UKVAT V19356 (30 November 2005)