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URL: http://www.bailii.org/uk/cases/UKFTT/TC/2010/TC00556.html
Cite as: [2010] UKFTT 262 (TC)
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Stephen Lloyd Phillips v Revenue & Customs [2010] UKFTT 262 (TC) (10 June 2010)
VAT - REGISTRATION
Compulsory
[2010] UKFTT 262 (TC)
TC00556
Appeal number MAN/2008/1028
VAT-compulsory registration-appellant trading through several companies – companies struck off for non-compliance – VAT invoices for trade utilising obsolete number of liquidated company – trading by appellant – registration correct – consequential assessment to best judgment – appeal dismissed
FIRST-TIER TRIBUNAL
TAX
STEPHEN LLOYD PHILLIPS Appellant
- and -
THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS (VAT) Respondents
TRIBUNAL: David S Porter (Judge)
Christine Owen (Member)
Sitting in public in Manchester on 15 April 2010
Nigel Gibbon VAT Consultant for the Appellant
Jonathan Cannan instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents
© CROWN COPYRIGHT 2010
DECISION
1. The Appellant (Mr Phillips) appeals against the decision of the Respondents (HMRC) in a letter dated 15 June 2007 compulsorily registering him for the purposes of VAT from 24 September 2003 with a consequential assessment to VAT dated 20 December 2007 of £138,833 for the period 24.9.03 to 31.10.07. Mr Phillips says that he has always traded through his companies and never in his own name consequently he should not be compulsorily registered for VAT and the assessment was therefore invalid. HMRC say that Mr Phillips has purported to trade through a number of companies all of which have been struck off by Companies House for non-compliance and failure to file accounts. Throughout the period he utilised a VAT number of a defunct company on all the invoices, he therefore traded on his own account.
2. Mr Jonathan Cannan appeared on behalf of HMRC and called Mrs Shirley Carey, who gave evidence on oath. He also produced two bundles and a skeleton argument for the Tribunal. Mr Nigel Gibbon appeared on behalf of Mr Phillips and Mr Phillips gave evidence under oath. Mr Gibbon produced a skeleton argument and in it referred us to the following cases:
· Salomon v Salomon [1897] AC 22
· Adams v Cape Industries Plc [1991] 1AER 929
The Facts
3. Mr Phillips told us that he has a science degree and that he is a Chartered Accountant and in that capacity he had acted as a forensic auditor on the use of computers for small businesses. He subsequently had worked abroad for Shell and then in London. He had then worked for Grenville & Co stockbrokers before starting his own business with a friend Mr Stephen Grundy. Showing considerable distress, he also told us that he had a severely handicapped son, who is now 8 years old. He and his partner have had great difficulty looking after his son, which left them both exhausted most of the time, and he felt that this was responsible for his failure to keep up to date with the requirements of Companies House. Further, Mr Phillips suffers from a chronic heart problem, which means he has to take 8 tablets a day and 3 at night.
4. When he started his own business, he purchased companies from Liquidators and/or Receivers. He had originally acquired Hygicare Limited (Hygicare) which operated from 1 May 1998 to 12 June 2001.It appears that Hygicare had completed its VAT returns and had been compliant with its tax affairs during most of its trading until it was dissolved in 13 June 2001 owing £23,146.50 VAT arrears. When Mr Phillips realised that Hygicare was about to be struck off by Companies House for non-compliance with its statutory obligations, he told us that he contacted Companies House, who advised that he could either apply to have the company reinstated, or set up a new company to take over the business of Hygicare. He decided to do the latter and formed Sitegold Limited on 21 May 2001, less than a month before Hygicare was struck off on 12 June 2001. Hygicare’s business was continued by Sitegold Limited, however, Mr Phillips produced no evidence of the transfer of the business assets to Sitegold Limited. VAT was charged on all the invoices using Hygicare’s de-registered VAT number, 482 2374 43. Mr Phillips told us that he had spoken to HMRC and they had confirmed that he could continue to use Hygicare’s VAT Number. Again no evidenced was produced by Mr Phillips to that effect and we find it difficult to believe that HMRC had confirmed that he could use a de-registeredVAT number. Prior to being struck off, Hygicare had purchased Rawlinson’s Workwear’s business in 1993. Mr Phillips produced no evidence of the acquisition of the business assets of Rawlinson’s Workwear. No accounts or VAT returns were ever provided for Rawlinson’s Workwear Limited.
5. The Hygicare business had operated from Wrexham which manufactured clothing for local businesses. Mr Phillips advised that another company, Tricane Limited, was also acquired, which operated from a second unit in Wrexham and operated the same type of business. It was unclear when Tricane Limited was formed, but we were told that it was dissolved on 1 May 1993. Mr Phillips and his colleague acquired a further business called Reece Hough, which operated from Preston. The factory had been occupied by Rawlinson’s Workwear Limited and trading continued under that name. The Reece Hough business looked after the administration and the Wrexham business was concerned with the day to day manufacturing. Throughout all the transactions, Mr Phillips purported to trade under the name of Sitegold Limited; the invoices were all in the name of Sitegold Limited even though they carried the Hygicare VAT number; the bank account and cheques were all in the name of Sitegold Limited. The bank had agreed that where cheques were made payable to Rawlinson’s Workwear Limited they could be paid into the Sitegold Limited’s account. Sitegold Limited failed to make any VAT returns, or, it appears, to account for PAYE and Corporation Tax, the latter in excess of £200,000. The turnover for the period 21 May 2001 to 23 September 2003, based on the records uplifted by HMRC, was £1.1 million. In the assessments HMRC have conceded that Mr Phillips traded in the name of Sitegold Limited for the period to 23 September 2003 and assessed that company to a VAT liability of £103,071.
6. Mr Phillips produced to the Tribunal a decision by the Shrewsbury Employment Tribunal in which the parties, by consent, agreed that Mr Phillips’ employees were employed by Tricane Limited. This was extraordinary as the hearing was on 2 March 2004 and Tricane Limited had been dissolved on 9 May 2003, some ten months earlier. Mr Phillips knew that Tricane Limited had been dissolved but appears not to have advised the Employment Tribunal or the other parties of the facts.At this tribunal he advised that the business was by that time purported to be run through Stockfresh Limited (one of the companies referred to later). He stated that the intention had been to change the name of Stockfresh Limited to Tricane Limited in order to continue that business and that, in those circumstances, the decision was correct. It transpired that Stockfresh’s name was never formally changed by passing a company resolution or notifying Companies House. Stockfresh Limited was struck off on 13 October 2009. Mr Phillips produced a draft contract of employment between Tricane Limited (identified by the number of Stockfresh Limited) and P Davies. Mr Phillips alleges that some time after the employment hearing similar contracts had been entered into with the other employees. The document he produced for Mr Davies was unsigned and there was no evidence, other than Mr Phillips comments, that any other agreements were ever concluded in this form for the rest of the work force. We cannot accept that the decision of the Employment Tribunal in any way assists Mr Phillips in his contention that he traded throughout through the various companies. The decision was by consent and based on a mistaken understanding of the legal position. Mr Phillips never suggested that he had traded other than as Sitegold Limited, so that alleged employment contracts in the name of Tricane Limited (formerly Stockfresh Limited) would not assist. Although the first company trading as Sitegold Limited had been struck off on 23 September 2003, Mr Phillips continued to run the business in the name of Sitegold Limited. No evidence was produced as to the transfer of the Hygicare business assets from Sitegold Limited to Mr Phillips or any of the companies. He merely continued the business utilising the original Hygicare VAT number; and the Sitegold bank accounts. During the period 24 September 2003 to 30 April 2007 the turnover of the business, based on records provided by Mr Phillips, was £1.5 million. Again, no VAT was accounted for and we understand the same was true for PAYE and Corporation Tax. Mr Phillips had always intended to use the name Sitegold Limited for the businesses. He told us that he had intended to split up the company and to this end he formed four further companies as under:
Date of incorporation Date struck off
Weaverange Limited 4/12/2002 14/6/2005
Wildagent Limited 11/12/2002 30/8/2005
Stockfresh Limited 11/12/2002 13/10/2009
Labeldesk Limited 25/8/2005 14/1/2010
Weaverange was dissolved, having failed to submit any accounts. Stockfresh was dissolved for the same reason, although it had purported to continue the business of Tricane Limited. Labeldesk submitted dormant accounts to 27 August 2007 and was subsequently dissolved having submitted no VAT returns or accounts. We were not told what happened to Wildagent Limited save that it too was dissolved on 13 October 2009.
7. On 7 June 2006, a company controlled by Mr Phillips and previously known as Deskfirst Limited changed its name to Sitegold Limited. Deskfirst Limited had been formed on 18 August 2005, some 35 months after the original Sitegold Limited had been dissolved in September 2003, although Mr Phillips had purported to continue to trade as Sitegold Limited. There had been a delay in changing the name to Sitegold Limited because another company had acquired the name at the time of the dissolution of the first Sitegold Limited and the name had only become available again in June 2006. Subsequently, when Deskfirst Limited (having changed its name earlier to Sitegold Limited) was dissolved on 15 May 2007, Pencilgrill Limited, which had been incorporated on 13 March 2007, ostensibly took over the undertaking of Deskfresh Limited and changed its name to Sitegold Limited on 17 July 2007. Again, no evidence was given as to the transfer of the second Sitegold Limited’s business assets to Pencilgrill Limited or any evidence of notification to Companies House of the purported change of name.
8. Mr Phillips gave evidence as to his use of all the companies. It appears that all of them were eventually struck off by Companies House for his failure to lodge accounts and to complete annual returns. It also appears that a new company was purchased off the peg from Jordons, Company agents, in anticipation of an earlier company being struck off. Their names were changed, informally in most cases, to Sitegold Limited, when that was possible, for the most part without any notification to Companies House. Mr Phillips explained that he had failed to deal with the companies properly throughout the entire period because of the illness of his son and his own poor health. We found Mr Phillips evidence unconvincing. We cannot believe that a man of his experience and training failed to understand how to form, run and dissolve companies. He knew that he could not use the VAT number of a defunct company for all of the companies that he alleged he traded through. We believe that he preferred to replace the older companies with the new ones because he did not need to comply with company legislation nor pay VAT, PAYE or Corporation Tax. It was also unlikely that any of the tax authorities would be aware of his operations (which has proved to be the case) due to the dissolution of the various companies with no evidence of trading.
9. HMRC raised assessments on 17 May 2007 on the following basis:
· Sitegold Limited (4220144) 21.5.201 to 23.9.2003 £103.071
· Stephen Phillips (sole trader) 24.9.2003 to 17 .8.2005 £55,436
· Sitegold Limited (5540168) 18.8.2005 to 30.4.2007 £58,464
It would appear that these assessments arose as a result of negotiations with Mr Phillips on 18 April 2007 on the understanding that Sitegold Limited (540168) (formerly Deskfirst Limited) was fully operational and would trade in future in accordance with Companies House obligations and a PAYE scheme would be set up properly for the company. Sitegold Limited (formerly Deskfirst Limited) was dissolved on 15 May 2007, 27 days later. Mr Phillips must have been notified by Companies House, prior to his negotiations on 18 April 2007, that it was their intention to dissolve the company for non-compliance. Normally the failure to lodge accounts gives rise to a penalty of £100 which must have alerted Mr Phillips to the fact that the company or companies were non-compliant. He must have known during the course of the negotiations with HMRC that it was unlikely that Sitegold Limited (540168) (formerly Deskfirst Limited) would ever be compliant. It certainly followed the sequences of all his other companies and his behaviour before the employment Tribunal. He never responded to the letter of 17 May 2007. HMRC wrote to him again on 15 June withdrawing the earlier assessment on the basis that Mr Phillips had failed, once again, to fulfil his obligations as a director of a company and no accounts had been submitted. As a result they incorporated the VAT assessment of Sitegold Limited (540168) (formerly Deskfirst Limited) with the new assessment raised against Mr Phillips.
Submissions
10. Mr Cannan provided a skeleton argument which set out the facts in general terms. He submitted that Mr Phillips contended that he was not a taxable person during the period of assessment and that he was not therefore liable to be registered for VAT. It appeared from the Notice of Appeal that although Mr Phillips does not admit the quantum of the assessment neither has he raised any issues in relation to the quantum. The burden is on Mr Phillips to satisfy the Tribunal that he was not trading as a sole proprietor and thereafter that the assessment is excessive. There are 8 limited companies in question, two of which were dissolved prior to the proposed registration date, 3 companies were not incorporated until several years after that date. This is not a case where HMRC are attempting to lift the corporate veil, but rather a case where they allege that Mr Phillips was trading in his own right. From the evidence the Tribunal cannot be satisfied that the business was traded through one or more of the companies. This is simply an attempt on the part of Mr Phillips to avoid personal liability for VAT which he has collected but not accounted for over an extended period. The business of the original Sitegold Limited was simply appropriated by Mr Phillips and run by him for his own profit. The appeal should be dismissed.
11. Mr Gibbon provided a skeleton argument and submitted that Mr Phillips had never traded as a sole proprietor but always through the limited companies and that he was therefore never liable to be registered for VAT. It is pertinent that HMRC had been prepared to accept that the supplies had been made by Sitegold Limited (formerly Deskfirst Limited) between 18 August 2005 and 30 April 2007 and not by Mr Phillips. HMRC changed their mind when they discovered that that company had been dissolved. The dissolved status of that company cannot affect its trading position prior to dissolution nor can dissolution retrospectively confer trading status on Mr Phillips as a sole proprietor for the period that that company was in existence. At all times, supplies which have been attributed to Mr Phillips were made by one or other of the limited companies. HMRC may not pierce the corporate veil afforded by limited company status no matter how reprehensible they consider the Appellant’s conduct to have been as a director of those companies.
The Decision
12. We have considered the facts and the law and we dismiss the appeal. Mr Phillips has produced no evidence of the transfer of the various businesses to Sitegold Limited. We are surprised that HMRC have conceded that the business was run through the first Sitegold Limited up to 23.9.2003. As they have done so, we have not been asked to consider that assessment. For the period of 35 months, from the dissolution of the first Sitegold Limited in September 2003 to the formation of Deskfirst Limited in August 2005, none of the other companies, through which he alleges he had traded, had been properly constituted. He purported to trade throughout that period as Sitegold Limited, utilising the Hygicare VAT number. We are satisfied that Mr Phillips knew full well how companies operate. He chose to form companies with no intention of complying with company and tax law. When a company was about to be struck off he formed another, again with no intention of being compliant. All the companies were convenient vehicles to give an aura of respectability and to confuse HMRC as to his trading activities. He successfully collected VAT from all of his customers, but never accounted for any of it from May 2001. He also appears to have failed to pay PAYE on behalf of the staff and to pay any corporation tax. No evidence has been given as to what has happened to approximatley £400,000 he has received over the period by way of the retained VAT, PAYE and the non-payment of corporation tax. He must presumably have used it for his own purposes. We were told that Stockfresh Limited entered into all the contracts with the Tricane Limited staff. Mr Phillips conceded that he had not formally notified the registrar of companies of the change of name. He was content for Stockfresh Limited to be struck of in October 2009 having completed no returns nor paid any tax liabilities.
13. Mr Gibbon seeks to argue that HMRC cannot ‘pierce the corporate veil’. He has referred us to:
Salomon v Salomon [1897] AC 22
Adams v Cape Industries Plc [1991] 1AER 929
Salomon v Salomon is the principle case on the matter. Adams concerned two associated United Kingdom companies that owned South African companies, which mined asbestos, and a United States company through which the asbestos was marketed in the United States. 205 individuals successfully sued the subsidiaries in Texas. The individuals then sort to enforce the judgement against Cape Industries Plc, the parent company, in England. The court held that Cape Industries Plc had no presence in the United States through its subsidiaries and the action was dismissed. On appeal to the Court of Appeal Slade LJ elaborated on the concept of the ‘corporate veil’ at page 1026 he said:
“T R A Morrison (QC for Adams) submitted that the court will lift the corporate veil where a defendant by the device of a corporate structure attempts to evade (i) limitations imposed on his conduct by law (ii) such rights of relief against him as third parties already possess and (iii) such rights of relief as third parties might in the future acquire…[Conditions (i) and (ii) did not apply in the case]….. It is not suggested that the arrangements involved an actual or potential illegality or were intended to deprive anyone of their existing rights. Whether or not such a course deserves moral approval, there was nothing illegal as such in Cape arranging its affairs (whether by the use of subsidiaries or otherwise) so as to attract the minimum publicity to its involvement in the sale of Cape asbestos in the United States. As to condition (iii), we do not accept as a matter of law that the court is entitled to lift the corporate veil as against a defendant company which is the member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company. Whether or not this is desirable, the right to use a corporate structure in this manner is inherent in our corporate law….”
There was a suggestion in the case that there had been some correspondence by which the parent company was seeking to avoid its liability in the United States. Slade LJ did not think that was sufficient for the plaintiffs to circumvent the subsidiaries to the defendants.
14. HMRC clearly accept that Mr Phillips traded through the first Sitegold Company after Hygicare went into liquidation. Apart from the use of the Hygicare VAT number the entire enterprise was run through the first Sitegold Company until it was struck off in September 2003. Thereafter there is no evidence that any of the other companies traded. There is no evidence that the assets of the first Sitegold Company were transferred to any of the other companies. There is no evidence that Tricane transferred its business to Stockfresh Limited or that Tricane’s employees were employed by Stockfresh. It would appear from the evidence of the P14 Summary for the year 203/4 that their employment status might have been with Rawlinson Workwear Limited as the PAYE returns are in that company’s name. None of the companies were compliant with the requirements of company law nor did they prepare accounts or deal with their tax affairs. For Mr Gibbon to submit that HMRC cannot pierce ‘the corporate veil’ it is necessary for there to be a veil. Mr Phillips undoubtedly ran the business in his own capacity from September 2003 to August 2005 as there was no company in existence, which he could have used. Thereafter all the companies were companies purchased ‘off the peg’ from his company agents Jordons of London and were all dormant for practical purposes. In fact Labeldesk Limited lodged dormant accounts and presumably did so as there were no tax consequences. Mr Phillips was content to do nothing with the companies and as and when they were about to be struck off he purchased another one. All the while he purported to trade as if the first Sitegold Limited was still in existence. Mr Phillips never intended that any of the companies should trade, if he had done so he would have alerted HMRC to his tax obligations, which he has successfully avoided since 2003.
15. Mr Gibbon submits that HMRC cannot change its mind having first assessed the second Sitegold Limited for the period 18.8.2005 to 30.4.2007. We cannot accept that submission. There is no doubt that the negotiations in April 2007 were designed to reach a settlement acceptable to all the parties. It was part of that settlement that Mr Phillips should be compliant in the way that he dealt with the second Sitegold Limited. He was aware at the time of the negotiations that the second Sitegold Limited would be struck off and he chose not to tell HMRC. In the circumstances HMRC were entitled to take the view that Mr Phillips was continuing to trade in his own capacity as assessed for the periods 24.9.2003 to 17.8 2005. We therefore dismiss the appeal. We confirm that Mr Phillips is to be registered for VAT with effect from 24 September 2003 and that the assessment of £138,883 for the period 24.9.2003 to 31.10.2007 is to best judgement.
16. We reserve our decision with regard to costs. We consider that costs must be decided under the earlier rules as the Appellant entered into this appeal on the basis of those rules and not the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. We direct that the Respondents submit their application for costs, if they intend to do so, to the Tribunal and to the Appellant within 28 days from the release of the decision. The Appellant shall reply within 56 days with the Respondents right to reply within 70 days. The tribunal will decide the costs on the basis of written representations.