First-tier Tribunal (Tax)

[2009] UKFTT 313 (TC)

TC00257

Appeal number LON/2008/1098

VAT – Security – Appellant a Solicitor and sole trader – Large debts incurred to HMRC in past – Bankruptcy petitions withdrawn – Appellant in default for 28 periods – Insufficient evidence of net worth – Whether power to impose penalties sufficient protection to the revenue – appeal dismissed

FIRST-TIER TRIBUNAL

TAX CHAMBER

                                        PAUL MAURICE ROCHE                       Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                             REVENUE AND CUSTOMS (VAT)         Respondents

TRIBUNAL: MISS J C GORT (Judge)

                        MISS S C O’NEILL

Sitting in public in London on October 2008 and 6 October 2009

The Appellant appeared in person

Mrs P Crinnion, Advocate, instructed by the Solicitors office for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.         This is an appeal against a decision by HMRC contained in a letter dated 9 April 2008 and is a Notice of Requirement to give Security (“the Notice”) under Schedule 11 paragraph 4(2)(a) of the Value Added Tax Act 1994 (“the Act”).  The sum required was for £80,300 if the Appellant (“Mr Roche”) continued to render quarterly returns, and £72,800 if he changed to monthly returns.  These sums were arrived at by, in the first place, calculating the quantum of twelve months’ total net tax due, i.e. £44,454.15, dividing that by two, which gives £22,227.08 and adding in Mr Roche’s then outstanding to the Commissioners debt of £58,080.23, which gave a figure of £80,307.31 which was then rounded down to £80,300.  In the second case, if four monthly returns were to be rendered, the combined figure of the tax and the debt came to £72,800.  The decision to issue the Notice was upheld after a reconsideration set out in a letter dated 30 May 2008.

2.         Mr Roche submitted lengthy grounds of appeal, running to some 28 paragraphs.  The principal grounds were that:

(i)        Mr Roche would suffer serious prejudice if required to provide a security.

(ii)       His clients would suffer as he would be unable to trade.

(iii)      As he has considerable assets there was no danger of a loss to the Revenue.

(iv)      Any late payments for VAT were caused by late payment to him by a government body, the Legal Services Commission.

(v)       A requirement to provide security would be disproportionate.

The Law

3.         Schedule 11 para 4(2), (4), (5) of the Act provides:

“4(2)   If  they think it 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 or to whom relevant goods or services are supplied.

4(4)     Security under sub-paragraph (2) above shall be of such amount, and shall be in such manner, as the Commissioners may determine.

4(5)     The powers conferred on the Commissioners by sub-paragraph (2) above are without prejudice to their powers under section 48(7).”

Background

4.         Mr Roche trades as a criminal defence solicitor, having been a member of the Law Society since 1992.  He has been registered as a sole proprietor for VAT with effect from 14 September 1995.  His principal work is defending in criminal cases prosecuted by HMRC and/or pursuing civil remedies in the High Court on behalf of clients against HMRC and/or Revenue and Customs Prosecutions Office.

The evidence

5.         The Tribunal heard evidence from both Mr Roche on his own behalf and from Mr Paul Andrew Johnston, a Higher Executive Officer with HMRC in the Insolvency Department.  An agreed bundle of documents was provided.

6.         Having heard evidence from both the above at the original date of hearing, we adjourned the matter for Mr Roche to provide further evidence and we issued a direction that seven days before the adjourned hearing he serve at the Tribunal various documents including his accounts for the years ending 2006, 2007 and 2008, a list of his creditors, a list of his clients and the value of all his assets.  Five days prior to the adjourned hearing we were provided with the accounts as specified, those for 2008 not having been signed off, and the day before the hearing copies of bank drafts in the sums of £110,000 and £35,511.23 payable to HMRC were produced by Mr Roche.  On the date of the hearing itself Mr Roche produced a list of some recent and some historic cases on which he had worked, at least four of which involved considerable sums of money and in all of which HMRC were a party.  Mr Roche also provided a property schedule listing the two properties which he owned, and setting out his own opinion of their value and any incumbencies, although all figures were approximate and none was substantiated by independent evidence.  He listed the value of his work in progress as £500,000, his bank borrowing as nil, and his current account balance as being £11,000 in credit.  He did not list any outstanding debts.  The Tribunal took no point on the documents not having been provided by the due date, nor on the absence of some of the required documents. 

7.         Mr Roche had had a variety of health problems.  In 2004 he had suffered two painful prolapsed disks (which were not operated on) and in or about 2006 he had been admitted to hospital with a suspected heart attack.  This turned out to be an infection of the gall bladder, which was removed.  He had an allergic reaction to the antibiotics and was left weak and (apparently) unable to eat for weeks following his discharge from hospital.  Despite stating in his grounds of appeal that evidence of his medical conditions would be provided, none was.  It was his evidence that these matters affected his capacity to work and to generate income and caused him to fall into arrears with his tax. 

8.         Two bankruptcy petitions had been issued by HMRC against Mr Roche in 2006 and 2007; following payment by Mr Roche of all the outstanding sums and consequent penalties, interest and legal costs, both petitions were withdrawn.  At that time HMRC had sought a security, but had at some stage withdrawn it.  We were not told the circumstances of this. 

9.         The specific facts relied on by HMRC at the time of issuing the Notice were that:

(i)        Mr Roche had been late submitting all his VAT returns from periods 01/04 to 01/08, being 289 days late for the period 01/06 and 224 days late for periods 01/07;

(ii)       Mr Roche had been in the default surcharge regime for 28 periods;

(iii)      As at 9 April 2008 Mr Roche had a tax debt of £58,080.23.

10.       In earlier correspondence with HMRC Mr Roche had informed them that £70,000 was expected from the Legal Services Commission on or about 22 May 2008 and payments would then be made to HMRC, he also expected a sum of approximately £50,000 in June 2008.  Following receipt of the Notice, Mr Roche issued a cheque to HMRC in the sum of £60,000, but this was not received by HMRC until 8 August 2008, albeit the covering letter was dated 21 April 2008.  By the time of the first hearing, although his returns were up to date, Mr Roche had a debt to HMRC of £105,000.  At that hearing Mr Roche referred to a client being invoiced for £75,000, and informed us that he expected payment of that invoice the next day, he also referred to a further payment of £60,000 being due in about December 2008.  Despite these claims, no money was paid over by Mr Roche to HMRC between the first hearing in October 2008 and the issuing by him of the bank draft on 29 September 2009.  At the time of the resumed hearing the draft in the sum of £110,000 had not been received by HMRC, even though it had been sent to them on 29 September 2009, and HMRC had received the draft in the sum £35,511.23 sent on 1 October 2009.  After payment of both these sums, Mr Roche would still, according to HMRC, have a debt to them of £5,213.  However Mr Roche produced at the hearing a letter from his accountants stating that input tax in that same sum had not been declared on a previous return and relevant documents had now been submitted to the Commissioners in respect of it.  If that proves to be the case, and if the sum of £110,000 is received by HMRC, then Mr Roche will have no indebtedness to HMRC.  Between the last hearing and the present one, Mr Roche had submitted his returns and paid the tax due on them. 

11.       We do not propose to set out the claimed value of Mr Roche’s two properties because those valuations are not supported by any documentation, and in any event the only relevance would be to show that Mr Roche has assets against which he himself might be expected to obtain borrowing.  He has no personal bank account, but he uses his business account with HSBC for both business and personal matters.  Mr Roche claimed to be owed £320,000 by one client, and he claimed that he expected to receive at least 50% of that amount, and he also claimed to be owed £40,000 by the Legal Services Commission.  He gave no details of where the sum of £140,000, being the difference between this £360,000 combined total and his claimed work in progress of £500,000, would come from.  His 2008 accounts show closing work in progress in the sum of £165,752.  Mr Roche’s explanation for the discrepancy between this amount and his claim to us of £360,000 being outstanding was that his accountant had only put down in the accounts a figure of amounts which had to be declared, as such sums were taxable.  We find this an unsatisfactory answer, and conclude that, on the balance of probabilities, Mr Roche exaggerated the figure.

12.       Mr Roche disclosed an historic personal credit card debt of £21,000 with the former MBNA, and a current debt of £10,000 with other credit card companies.  He also admitted to owing PAYE of about £21,000.  We saw no documentary evidence of any of the above and we do not know what his current position is with regard to other tax matters.  The accounts showed drawings of £134,506 in 2006, £198,995 in 2007 and £96,424 in 2008.  Mr Roche’s only comment on what these drawings had been put toward was that much of it must have represented expenses.  We do not find it credible that that was the case.  Mr Roche had no personal overdraft nor overdraft facility.  He had however paid off a loan which he had had with HSBC.  We understand that the original amount of that loan was either £70,000 or £75,000.  Differing amount were put forward by Mr Roche.  The above matters only emerged in cross-examination, and had not been provided to us before the hearing despite our having requested a list of his creditors.

The Respondents’ case

13.       The Respondents’ case was that its requirement for Mr Roche to give security was reasonable in all the circumstances, and, given the facts set out above, there was a clear risk to the revenue, which HMRC had a duty to protect.  Financial hardship within the business and any cashflow problems were not relevant to its decision.  Mrs Crinnion pointed to the fact that Mr Roche had not at any stage approached HMRC with any ‘Time to Pay’ proposals.  He had made promises to settle the debt both in April and May 2008 which had not materialised.  He had made no attempt to reduce the debt between the date of the first hearing in October 2008 and the second hearing in October 2009, until immediately before the second hearing despite money clearly having evidently come into the business.

The Appellant’s case

14.       Apart from the matters set out above referable to his grounds of appeal, Mr Roche submitted that there was a difference between somebody who is a late payer and somebody who was committing a fraud.  He suggested that HMRC could only exercise the power to require a security if it was essential that they did so, they did not under the Act have an unfettered discretion.  He suggested that there was a high threshold for HMRC to cross and that the phrase “protecting the Revenue” meant that HMRC must show a loss to the Revenue rather than late payment.  Historically he had always ultimately paid his debts and this was a matter they should take into account.  Furthermore, HMRC were protected where there were late payments by the ability to impose penalties and interests.  In his case HMRC had received a considerable amount of money from him by way of penalties and interest. 

15.       Mr Roche admitted that the power to demand a security only arose where it was essential to avoid a tax loss, and that it had to be a matter of inevitability that there would be a tax loss.  It was up to the Commissioners to show that they had acted reasonably, and this depended upon the facts of the case.  The Commissioners had failed to take into account relevant factors in his case, in particular his individual circumstances and the fact that he had sufficient assets to cover any actual loss.  HMRC had never asked him about his assets.  Indeed they had specifically referred to his individual circumstances as being irrelevant in the Statement of Case.

16.       Mr Roche also pointed to the fact that at the time of the hearing his VAT returns were up to date.  He had had an accountant previously with whom he had had difficulties who had incorrectly dealt with his outputs and inputs, but by the time of the first hearing he had a new accountant who had put matters right.  He also pointed to the fact that he worked hard and that his turnover in 2007 was significantly higher than in 2006.  The intention of Schedule 11 was to prevent a loss to the Revenue, the imposition of a security on him would have the opposite effect in that it would prevent him from working in what was a thriving business, which was not what Parliament had intended.  He also submitted that HMRC should take into account the fact that he was not paid by the Government in the shape of the Legal Services Commission until long after the work he had done for them was completed.  They were also aware that he could not afford to pay, and that historically he had always paid.  It was therefore unreasonable of HMRC not to exercise their discretion in his favour.

17.       Finally, Mr Roche pointed to the fact that it was a time of recession and that he was being treated differently from other small businesses for whom the Government had made concessions with regard to late payment of tax.  He suggested that it might be contrary to Article 8 of the Convention on Human Rights to insist on payment of a security after he had paid all the relevant penalties.  He did not elaborate on this submission nor refer us to any authorities. 

Reasons for decision

18.       Whilst at the first hearing we were prepared to effectively allow Mr Roche time to provide the evidence needed for us properly to ascertain whether or not it was reasonable for the Commissioners to require him to pay a security, the very fact that he did not comply with our direction in any particular, the direction being that the various matters should be served seven days before the adjourned hearing, and in particular that he did not provide us with a list of his creditors, leave us in a position where we cannot be sure, on the balance of probabilities, that he does not present a risk to the revenue.  The law is that we have to decide whether at the time the Notice was issued, namely in April 2008, Mr Roche represented a risk to the revenue.  At the time of the first hearing in October 2008 he produced no evidence of his financial circumstances and had a debt of £105,000 to HMRC.  Having between the issue of the notice and the date of the hearing informed HMRC that he was expecting sums of money amounting to £130,000, only £65,000 was paid over to them, and that not until August 2008.  The fact that a few days before the resumed hearing he had apparently issued a draft in the sum of £110,000 and had issued a further draft in the sum of £35,511, does not satisfy us that Mr Roche does not, or did not at the relevant time, represent a risk to the revenue.  Mr Roche only waited until the eleventh hour to clear his very large debts to HMRC.  HMRC are required to take proceedings against him in order to extract money from him which he owes them.  Whilst up to date Mr Roche has settled those debts, we cannot be sure that he will continue to do so in the future.  He appeared completely uncertain about his actual financial position, he did not disclose to us at the outset, as he ought to have done, the extent of his indebtedness in respect of PAYE and his credit cards, and there was no evidence about his circumstances with regard to direct tax.  He gave us clearly a guess as to the sums of money he was owed, and that guess appeared to us to be widely exaggerated given the evidence of the accounts; he had attempted to persuade us that some of the VAT related to unpaid invoices, but he is on the cash accounting scheme so that is not the case.  He failed to make any contact with HMRC between the hearing a year ago and the present hearing and, although such a matter is not relevant to his circumstances at the date of the issue of the Notice, nonetheless it is indicative of his behaviour with regard to financial matters.  Looking at the specific matters relied on by HMRC set out in paragraph 9 above, we conclude that on the balance of probabilities, HMRC properly issued the Notice, despite the historical evidence that Mr Roche had settled earlier debts. 

19.       With regard to Mr Roche’s reference to Article 8 of the Convention on Human Rights, at the time of the issue of the Notice he had an outstanding debt to the Commissioners of over £58,000, so it is not correct to say that at the time he had paid all relevant penalties.  In the present circumstances where the taxpayer has provided no reliable documentary evidence of his assets, nor of his liabilities, despite a direction that he do so, HMRC are entitled to conclude that he has not shown sufficient net worth to satisfy them that he does not represent a risk to the revenue.  The fact that HMRC have power to impose penalties, and that these have, eventually, been paid by Mr Roche, is not in the circumstances of this case sufficient to protect them from the possibility of loss at the hands of Mr Roche.  In all the circumstances we find that on the balance of probabilities the Commissioners properly issued the Notice and this appeal is dismissed.

MISS J C GORT

TRIBUNAL JUDGE

Released:19 November 2009