First-tier Tribunal (Tax)

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Cite as: [2009] UKFTT 129 (TC)

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[2009] UKFTT 129 (TC)

TC00097

Appeal number: EDN/08/206

SECURITY – requirement for – whether requisite for the protection of the Revenue – VAT compliance of previous companies with which director concerned – VATA 1994 Sch. 11 para 4(2) – Appeal Dismissed.

FIRST-TIER TRIBUNAL

TAX

ARKZONE LTD Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS (VAT) Respondents

TRIBUNAL JUDGE: W Ruthven Gemmell, WS

MEMBER: James D Crerar, WS,

Sitting in public in Edinburgh on Wednesday 20 May 2009.

Mr John Bruce – for the Appellant

Mr Bernard Haley – instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

This was an appeal against a requirement sent by the Respondents on 24 October 2008 that the Appellant give security pursuant to paragraph 4(2)(a), Schedule 11, VAT Act 1994, for the payment of VAT that is or may become due. The security required to be given was £5,185 if monthly returns were to be rendered.

Mr John (also known as 'Ian') Lee Bruce, a representative of the Appellant, who carry on business of recruitment consultants from 6 Whitburn Road, Bathgate, EH48 1HH and Mr Edward Joseph MacMahon, a Higher Officer with H M Revenue & Customs, based in Belfast, dealing with insolvency and security and who was the officer who made the requirement for security, both gave evidence. The Tribunal found both to be entirely credible witnesses.

From the oral evidence and documents, the Tribunal found the following facts.

Mr Bruce had joined in a recruitment venture with a longstanding friend, Alistair McIntosh, in 2004 by means of a recruitment franchise 247 operated through companies, the first of which was Bernshore Limited, which was registered for VAT on 4 August 2004. Mr McIntosh became a Director of this Company on 27 July 2007 and Mr Bruce, the Company Secretary on 3 August 2007.

Mr Bruce had thought he was being made a director of Bernshore Limited and he owned one third of the share capital. The Company was placed in administration on 14 November 2007 with a debt to the Commissioners in the sum of £817,352.

A further recruitment company, Jessmore Limited, became registered for VAT on 5 September 2007 with ownership being split fifty per cent to Mr McIntosh, who became a Director of the Company on 18 July 2007 and fifty per cent to Mr Bruce who became Company Secretary on 18 July 2007. This Company was placed in administration on 17 July 2008.

Jessmore Limited was considered by HMRC to be a continuation of Bernshore Limited. Liability in respect of the returns for the periods February 2008 to May 2008 and August 2008 in the sum of £222,869 remain unpaid and Jessmore Limited was subject to a Notice of Requirement to provide security in 2008 which was appealed. Jessmore Limited went into administration prior to the hearing of the appeal.

Arkzone Limited obtained registration for VAT on 28 April 2008 and, consequently, was trading prior to the administration of Jessmore Limited and was intended to take over the more southerly Scottish branches of Jessmore Limited.

In July 2008, Mr Bruce terminated his business relationship with Mr McIntosh. Mr McIntosh resigned as a Director of Arkzone Limited and Mr Bruce retired from the companies which were to be run by Mr McIntosh being Renflo Limited and Specsite Limited formed to take over the more northerly Scottish branches of Jessmore Limited.

In April 2008 the basis of operating a franchise of 247 staff changed. Prior to the change, companies such as Bernshore Limited would supply and pay temporary staff and then invoice their client for these amounts. In order to improve the rate of cash flow, these sums due were factored and given to factoring agents.

In April 2008, the franchisors of 247 Staff, Interlet Limited, decided that they would pay the staff directly and that companies such as Jessmore Limited and Arkzone Limited would instead receive a commission on each employees' employment. This had a profound effect on the future amounts of turnover of Arkzone Limited when compared with Bernshore Limited.

At the time of the split between Mr McIntosh and Mr Bruce, Mr Bruce resigned as a director and Mr McIntosh as company secretary of Arkzone Limited and were replaced respectively by Mr Bruce's daughter, Jennifer, and by a member of staff, Aileen Taylor. Mr Bruce, however, remained fully involved in Arkzone Limited being, in effect, the person running it.

Mr Bruce explained that he had resigned and made these appointments as he was aware of the process of HMRC requesting security where there was a link or "guilt by association" with a company that had a poor record of VAT compliance or outstanding VAT liabilities such as Jessmore Limited.

Mr Bruce emphasised that there was no conspiracy to close Jessmore Limited and that Arkzone Limited and other companies had been created to meet the franchisors' requests that each branch be run by a separate company.

It was admitted, in evidence, that Mr Bruce had been Company Secretary of both Bernshore Limited and Jessmore Limited and had been a director of Arkzone Limited until 21 July 2008. From September 2007 until July 2008 Mr Bruce became increasingly more concerned and circumspect about the companies' accounting, repeatedly asking for accounts, particularly management accounts, as well as cheque stubs. Although Mr Bruce was not a director of Bernshore Limited, according to the records filed at the Companies House, he believed himself to be one.

Mr Bruce explained that although he held the role of Company Secretary, he had little involvement in Bernshore Limited and Jessmore Limited's accounts, management accounts or VAT returns, whilst acknowledging that he should have had more interest or control over these. Instead he relied upon and trusted Mr McIntosh to deal with these matters.

He explained that latterly he saw very little of Mr McIntosh who lived in Broughty Ferry and dealt with the more northerly offices whereas he lived in Motherwell and dealt with the more southerly offices and was predominantly based in Glasgow.

When Jessmore Limited had financial difficulties Mr Bruce used his own personal savings to try and keep the Company running but this was insufficient to prevent the Company going into administration.

The amounts of tax unpaid by Bernshore Limited and Jessmore Limited at the time of the issuance of the Notice of Requirement to give security were accepted by Mr Bruce although it was unclear whether any of this total amount of approximately £1.4 million would yet be repaid by administrators of Jessmore Limited and/or Bernshore Limited.

Mr Bruce confirmed that although he predominantly managed an office on his own he did attend to opening mail/post, was a signatory on all payments in excess of £3,000, had not seen accounts either as a director of Bernshore Limited, which he thought he was, or as company secretary or as a shareholder in Bernshore Limited and Jessmore Limited.

Mr Bruce had not noticed the absence of regular cheques in payment of VAT instead assuming that he would be chased by Customs and Excise if there was no payment but knew, as a former employee, of Customs and Excise in the VAT division, that the output was likely to be large as it was based on the companies' high turnover.

The link between events at Bernshore Limited and Jessmore Limited and Arkzone, may have arisen by chance rather than design but on investigation Customs felt there was a risk given the considerable amount of lost revenue in relation to Bernshore Limited and Jessmore Limited and that for the protection of the Revenue, security should be sought by issue of a Notice of Requirement on 24 October 2008.

The following reasons were given; Arkzone Limited was registered before Jessmore Limited went into administration; Mr Bruce was involved with both Companies; Mr Bruce's daughter had been made a Director on or about the time that Jessmore Limited had gone into administration and at a time when Mr Bruce resigned as a Director of Arkzone Limited; they were all involved in the same style of trading and that Bernshore Limited and Jessmore Limited had very poor compliance records.

The level of security sought by the Commissioners was based on the turnover declared on the VAT1 and was not inconsistent with estimated annual turnover of £120,000.

Mr Bruce contended that payment of security was more likely to jeopardise the future of the business of Arkzone Limited in light of current trading conditions.

Mr MacMahon explained how and why the sum sought on security was calculated. Mr MacMahon also explained that the reasons for the issuance of the letter on 19 November 2008 were:-

The experience of the Commissioners, in relation to Bernshore Limited and Jessmore Limited, in both of which Mr Bruce had been Company Secretary (whilst believing he had been a Director in Bernshore Limited) and their view that this established a link to the non-compliant business.

The consequent risk of repetition by the Appellants.

That Arkzone Limited engaged a continuation in parts of the business of Jessmore Limited and had the same classification of business and numbers as Jessmore Limited and Bernshore Limited.

The VAT compliant of the previous business was of a very poor standard and there had been a very considerable loss to the Revenue.

The principal issue for determination by the Tribunal was whether the decision of the Commissioners requiring the Appellants to give security was a reasonable one. The Tribunal is restricted on hearing the Appeal, to decide whether the Appellant had established that the decision arrived at by the Commissioners was unreasonable, or whether the decision had been arrived at by taking into account matters which were not relevant or by ignoring matters which were relevant.

In our view, it was reasonable, in the circumstances narrated above, for the Commissioners to require the Appellants to give security. They did not reach their decision, based on the information at the time, by taking into account matters which were not relevant or by ignoring matters which were relevant.

The Tribunal was understanding of Mr Bruce's predicament during his involvement with Jessmore Limited and Bernshore Limited but formed the view that he was, nonetheless, responsible and ought, as he admitted himself, to have known of and to have made further enquiry in to the actings of both these companies in relation to their compliance or lack of compliance with VAT legislation and payment of liabilities due.

The Tribunal must also consider whether the amount of the security prescribed was reasonable at the date at which the decision was made, namely 24 October 2008. In our view the decision as to the amount was one which a reasonable body of Commissioners could have reached.

Our conclusion is that the requirement to give security and the amount of security as set out in a letter of 24 October 2008 was reasonable at that date and the Appeal is accordingly dismissed. No doubt, the Commissioners could review the amount of security required if the level of the Appellants' taxable supplies has fallen substantially since then.

W RUTHVEN GEMMELL, WS

TRIBUNAL JUDGE

RELEASE DATE: 16 JUNE 2009