First-tier Tribunal (Tax)

[2010] UKFTT 348 (TC)

TC00630

Appeal number: TC/09/16633

Tax – Vat – Requirement for Security – Previous Businesses Non-Compliant/Insolvent – Common Directors.  Appeal Dismissed.

FIRST-TIER TRIBUNAL

VAT

                                    TIPPLE INNS CRAMOND LTD                   Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS               Respondents

TRIBUNAL JUDGE:            N. A Baird                                                                 

(Members)                             J M Barton, WS.                                           

                                                P Sheppard, F.C.I.S., F.C.I.B., ATII

Sitting in public in Edinburgh on Wednesday 12 May 2010

Mr David Logan of Oak Team Finance, for the Appellant

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

© CROWN COPYRIGHT 2010

DECISION

1.       This is an appeal against the decision made on 19 November 2009 to issue to the Appellant a Notice of Requirement to give security under Schedule 11 paragraph 4(2)(a) of the Value Added Tax act 1994 (“the Act”).  The sum required is £27,283 if quarterly returns are submitted or £18,188 for monthly returns.

2.       The Notice was issued by the Respondents (HMRC) because they consider that the Appellant represents a risk to the Revenue.  In their Statement of Case they set out their reasons as follows:-

(1)        The directors of the company, Gerard D'Agostino and Jack McLachlan had previously been involved in a number of VAT registered businesses in the supply of restaurant and bar services.  All of the businesses accrued substantial VAT debts or became insolvent, details of which are annexed hereto and marked ‘B’.

(2)        Previous notices of requirement were served on Dunfermline Leisure Trading Ltd, Tipple Inns Ltd and Porterfield Restaurants Ltd.  The Notice of Requirement for Dunfermline Leisure Trading Ltd was appealed and heard by the Tribunal which ruled in the Commissioners’ favour.  Tipple Inns Cramond Ltd is a continuation of Dunfermline Leisure Trading Ltd.

(3)        The Notice of Requirement served on Porterfield Restaurants Ltd was subsequently withdrawn following the resignation of the director Gerard D'Agostino.

(4)        Following the Commissioners’ service of the Notice of Requirement Tipple Inns Ltd became insolvent and ceased to trade.

(5)        It appeared to the Respondents that, for the protection of the Revenue, it was necessary to require the Appellant, as a condition of its supplying goods or services, to give security by means of a guarantee or cash deposit and this requirement was notified to the Appellant on 19 November 2009.

(6)        In the grounds of appeal it is submitted that the request for a security is punitive and unnecessary.  It is submitted that the Appellant is being unfairly treated due to the failure of an associated business and that that failure was a result of the ongoing recession and not due to poor management.  It is submitted that to enforce this requirement would place the future of the company at risk and with it the full-time employment of a considerable number of staff.

(7)        The response of HMRC to the grounds of appeal is contained in the Statement of Case and is that the decision to issue the Notice was reasonable and the Notice was fully merited at the time of issue, due to the involvement of the directors of the Appellant in previous businesses in the course of which there was non-compliance with the VAT regulations and substantial debts were accrued or the businesses became insolvent owing the Treasury large sums of VAT.

(8)        HMRC provided Records of Compliance and Statements of Account for the companies they took into account and for Mr D’Agostino.  There is a summary sheet setting out the names of the Directors of the various companies and the amounts of tax due.

3.       The Directors of the various companies are noted as follows:-

(1)        Tipple Inns Cramond Ltd

Gerard D’Agostino; Jack McLachlan; Adeline D’Agostino

(2)        Dunfermline Leisure Trading Ltd

Anthony Delicata; Gerard D’Agostino (appointed 20/4/08 - resigned 20/10/08)

(3)        Tipple Inns Ltd

Jack McLachlan. His wife Laura McLachlan was Company Secretary

(4)        Caledonian Outlets Ltd

Gerard D’Agostino; Jack McLachlan.  Laura McLachlan is Company Secretary

(5)        Porterfield Restaurants Ltd

Anthony Delicata

4.       Laura and Jack McLachlan are Gerard D’Agostino’s daughter and son-in-law.  Adeline D’Agostino is his wife.

5.       The sums due set out on the Records of Compliance are as follows:-

(1)        Tipple Inns Cramond Ltd – no sums due

(2)        Dunfermline Leisure Trading Ltd, t/a The Cramond Brig – £69,195.61 for returns due March, June and September 2009.

(3)        Porterfield Restaurants Ltd t/a The Cramond Brig - £155,846.03 for the period November 2006 to May 2008.  Became insolvent on 28 April 2008.

(4)        Tipple Inns Ltd - £114,891.17.  Became insolvent on 2 November 2009.

(5)        Caledonian Outlets Ltd t/a  The Calderwood Arms - £11,260.60  for period November 2008

(6)        Gerard D’Agostino - £14,529.70 for returns for the period June 2008 to September 2009

The Law

6.       When a security is required and requested this can be of such an amount and must be given in such a manner as HMRC determine.  In practice HMRC use an estimate of six months’ tax for returns made quarterly and four months’ for returns made monthly.  The Statement of Case contains a detailed calculation of the sums intimated to the Appellant.  When a business has been issued with a Notice of Requirement to provide security it is a criminal offence to continue to trade without providing the security.  HMRC will regularly review the requirement and will return the security when they consider there is no longer a risk to the collection of VAT.

7.       The jurisdiction of the Tribunal is to be exercised using supervisory principles so the duty of the Tribunal when considering a requirement to give security is to consider whether HMRC acted in a way in which no reasonable panel of Commissioners would have acted and whether they took into account irrelevant matters or failed to take into account relevant matters.  The Tribunal cannot exercise discretion, ie substitute its own decision for that of the Commissioners because they believe it to have been reached on an incorrect basis.  The Tribunal must consider facts and matters which existed at the time the challenge to the decision was made.

Evidence at the hearing

8.       We were advised at the start of the hearing that the Appellant would be leading no evidence.  Mr D’Agostino and Mr McLachlan were in court.

9.       All of the witnesses gave their evidence on oath.

10.    We have a bundle of Certificates issued by HMRC to the Appellant, to the other companies named in the Statement of Case and to Mr D’Agostino personally.  These were signed on behalf of HMRC by Alan MacDonald so he was called as a witness.  He corrected one or two errors in the certificates and confirmed he had signed and issued them.

11.    We then heard evidence from Paula Pettigrew who issued the Notice of Requirement for security.  She said she made the decision on the basis of all the information before her and took particular account of the addresses of the businesses and the Directors, which confirmed links between them.  Porterfield and Dunfermline Leisure Trading have the same trading address.  She took into account that Tipple Inns Cramond Ltd was registered for VAT on 1 October 2009 and Tipple Inns Ltd de-registered on 23 November 2009.

12.    Mr Logan put it to her that if Mr Delicata failed to submit returns this had nothing to do with the Appellant or Mr D’Agostino.  She responded that she was looking at the company situation as a whole.  In looking at the history she found a pattern of behaviour.

13.    When we asked for submissions from Mr Logan, he said he would like to give some evidence about Mr D’Agostino that is relevant to the issue of his interest in Dunfermline Leisure Trading Ltd.  We told him that if this evidence was to be heard Mr D’Agostino himself should give it.  It would not be appropriate for fresh evidence to be led in the course of submissions and if evidence were to be led, Mr Haley would have the opportunity to cross-examine the witness.  We offered a short adjournment so that he might take instructions but Mr D’Agostino immediately stood to give evidence.

14.    Mr D’Agostino said he never had any involvement in Porterfield.  With regard to Dunfermline Leisure Trading, he had no involvement in the running of this company but he did set it up.  He was approached in May 2008 by Mr Delicata who had been running Porterfield.  Mr Delicata told him that Porterfield was going into liquidation and asked if he would be interested in taking over the running of the Cramond Brig Inn.  At the time of these negotiations Mr D’Agostino was on holiday and when he came back he was admitted to hospital where he remained until September or October.  He said he was ‘out of it’ throughout this time.  He could not walk, sit or think and it was well into 2009 before Mr D’Agostino was able to attend to his duties again.  Mr Delicata continued to run the business albeit through the new company.  When Mr D’Agostino was able to return, Mr Delicata told him that the business was in difficulty.  Mr D’Agostino had had nothing to do with it for a year but had signed guarantees for the rent so Mr Delicata was able just to walk away.  Mr D’Agostino asked Tipple Inns Ltd, who were running his other business, to take over the Cramond Brig which was being run by Porterfield and they did this in May 2009.  As soon as he was able, he resigned as a Director of Dunfermline Leisure Trading.

15.    Mr Logan took Mr D’Agostino through the Records of Compliance for the various companies.

16.    With regard to Dunfermline Leisure Trading, Mr D’Agostino said he had no involvement with this company during the time of the accrual of the debt.  He never had any involvement with Porterfield.  So far as Caledonian Outlets is concerned everything was paid in full until November 2008 when a cheque was dishonoured in the sum £11,260.60.  All subsequent returns were nil.  Returns and payments for Tipple Inns Ltd were up to date until October 2008 when outstanding sums began to accrue.  The company became insolvent. Compliance was good up to the late submission of the return for February 2008.  The company traded successfully from March to September 2008 but the combination of the smoking ban and the recession caused deterioration in business.  Many of their customers work in the building trade which was particularly badly hit by the recession.  They also had to comply with new licensing requirements which caused additional expense.  Since Tipple Inns Ltd went into liquidation in November 2009, there has been no adverse comment from the liquidator about the management of the company.

17.    He said he owned public houses and leased them to Tipple Inns Ltd for nil rent.  We asked him if these properties have devalued in light of the recession and he confirmed that there has been a drop of around 40%.  He estimated a loss of around £70,000.  He said in cross-examination that he had a management contract with this company from March 2008 but this ceased when he became ill.  He had signed guarantees to Scottish brewers on behalf of Dunfermline Leisure Trading Ltd but he did not run the business.

18.    He said Caledonian Outlets is no longer trading so there is no prospect of increased liability.  This company too got into difficulties in late 2008/early 2009.  He was asked in cross-examination about the sum due to HMRC by Caledonian Outlets and said it remains unpaid because if the security required has to be paid by the Appellant there will be no funds to pay it.

19.    Mr D’Agostino then gave an explanation for his own debt to HMRC.  Suffice it to say that this issue appears to have been all but resolved.

20.    He concluded by saying the Appellant employs around 70 or 80 staff whose jobs would be at risk if the security has to be paid.

21.    In his submissions Mr Logan said that the Notice of Requirement is based on HMRC’s review of a series of businesses and of Mr D’Agostino as a sole trader.  None of the Directors of the Appellant had any involvement with Dunfermline Leisure Trading Ltd and made no contribution to its failure to comply with the VAT regulations.  It is therefore irrelevant to this case.  The same applies to Porterfield.  Tipple Inns Ltd was liquidated but reasons have been given for the failure of this business.  The licensing trade has been one of the worst hit in the recession.  It was not due to poor management.  It is accepted that the debt of Caledonian Outlets is due.  Mr D’Agostino and HMRC are in discussion about his own case and it is being resolved. 

22.    It was put to Mr D’Agostino that he should have resigned as a Director of Dunfermline Leisure Trading sooner.  Mr Logan agreed that he should but said he was not in a position to do so because of his illness.  He had resigned before the current liability arose.

23.    In his submissions, Mr Haley said that when Ms Pettigrew made the decision to issue the Notice she could do no more than look at the history of the Directors of the various companies.  Mr D’Agostino owed money to HMRC.  He was involved with Caledonian Outlets.  Tipple Inns Ltd failed, leaving a sizeable debt.  He submitted that the decision to issue the Notice cannot in all the circumstances be said to be one which no reasonable body of Commissioners could have made.

24.    In response, Mr Logan submitted that the Notice is unreasonable given the lack of involvement of the Directors in Dunfermline Leisure Trading Ltd and Porterfield.  These companies should not have been taken into account.  In particular, account was taken of the fact that Gerard D’Agostino’s brother had been a Director of Porterfield until August 2006 and this is quite irrelevant.

Decision and Reasons

25.    Mr D’Agostino did give an explanation for his continued involvement with Dunfermline Leisure Trading Ltd and we do accept that he had no involvement with this company at the time the debt accrued.  We do not agree with Mr Logan that he had no involvement with it at all.  From his evidence he clearly did and there clearly was a connection with Tipple Inns Ltd in the running of the Cramond Brig.  In the absence of any knowledge of the circumstances on the part of HMRC, it appears to us to be reasonable that his involvement with this company was a factor to be taken into account.  Even leaving aside Dunfermline Leisure Trading, Mr D’Agostino’s son-in-law was the Director of Tipple Inns Ltd and co-director with him of Caledonian Outlets, and his daughter Company Secretary.  Both these companies failed to comply with the VAT regulations and owe HMRC large sums of money.  Mr D’Agostino admitted that if the security is to be paid, the debt of Caledonian Outlets cannot be met. It seems to us that Ms Pettigrew was justified in taking account of the dates of de-registration and registration for VAT of Tipple Inns Ltd and Tipple Inns Cramond Ltd.

26.    We find that in all these circumstances the decision of HMRC was not based on irrelevant matters and was not one which no reasonable panel of Commissioners would make. 

27.    Decision

28.    The appeal is dismissed.

29.    This document contains full findings of fact and reasons for the decision.  Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

MRS NORMA BAIRD

TRIBUNAL JUDGE

RELEASE DATE:  27 JULY 2010