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Cite as: [2005] UKVAT V19359

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Zakaria & Anor (t/a OBM Systems) v Revenue and Customs [2005] UKVAT V19359 (01 December 2005)

19359

SECURITY – Notice – Amount – Whether calculation of amount required was reasonable – Appeal dismissed

LONDON TRIBUNAL CENTRE

M A E & Y ZAKARIA T/A O B M SYSTEMS Appellants

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: STEPHEN OLIVER QC (Chairman)

MRS R A WATTS-DAVIES MHCIMA FCIPD

Sitting in public in London on 17 October 2005

M A E Zakaria, partner, for the Appellants

Pauline Crinnion for the Respondents

© CROWN COPYRIGHT 2005

DECISION

The Appellants appeal against a decision in the form of a Notice of Requirement to give Security under Schedule 11 paragraph 4(2) of the Value Added Tax Act 1994. The original decision was contained in a letter dated 26 January 2005. The matter was reconsidered and a further decision was released on 11 April 2005. It upheld the original decision but reduced the security from £15,000 to £3,500. Mr M A E Zakaria came and presented the Appellants' case as well as giving evidence. Mr Alan Goldring, an officer of the Customs, gave evidence for the Respondents.

The Appellants carry on business as software consultants, suppliers of hardware and installers of networks. They trade under the name OBM Systems.

At the time of the relevant decision, Mr M A E Zakaria's partner in OBM Systems was also involved in a limited company, Millennium Software Developments Ltd. At the time of the Notice of Requirement this company had a debt to the Commissioners of £1,825 which related to centrally issued assessments due to outstanding VAT returns from 09/02.

At the time of the relevant decision the Appellants had a debt due to the Commissioners of some £62,075. On the basis of the returns that the Appellants had supplied to the Commissioners by the end of 2004, turnover was £396,000 per year. Returns since 09/02 were still outstanding at that time. The debt had consisted of default surcharges and centrally issued assessments. The Appellants had been in the default surcharge regime since 06/93 and at the current rate of 15% since the period 06/02. There had been 33 default surcharges raised against the Appellants.

On 16 March 2005 the Commissioners received a letter from the Appellants dated 22 February. Included in that letter were VAT returns for the four quarters of 2004. The letter went on as follows:

"As you can see the £15,000 requested, as security seems to be rather high in light of the fact that three of the quarters I received a repayment and in the quarter ended 30 September 2004 we owed £951.53. I therefore kindly ask you to reconsider the security amount requested as it will cause financial hardship and will force us to stop trading."

Following the submission of outstanding returns, the Commissioners reviewed the original quantum of the calculations (which had led to an amount required of £15,000). They based revised calculations on returns for the periods 09/02 as reflecting the current trading activities of the business. The 09/02 return showed a repayment of £451 due to the Appellants. The 12/02 return showed a payment of £2,559 due from the Appellants. The return for 3/03 showed a repayment due to the Appellants of £431. The returns for 6/03, 9/03 and 12/03 showed payments due from the Appellants of £4,400, £999 and £10,032 respectively. The returns for the periods 3/04 and 6/04 showed repayments of £156 and £140 due to the Appellants. The return for the 9/04 period showed £951 of tax due from the Appellants. The return for the 12/04 period showed a repayment of £222 due to the Appellants. The net tax difference between the amounts due from the Appellants and the amounts due to the Appellants worked out at £17,541.

The Commissioners calculated the amount required as security by dividing the above ten periods to arrive at an average net tax per quarter of £1,754. The average for six months worked out at £3,508. That was the figure taken for purposes of the revised Notice.

Since the letter from the Appellants received by the Commissioners on 18 March 2005 (an extract of which set out above) nothing was heard from the Appellants. No returns were lodged and no explanation were given.

As already noted, it was no part of the Appellants' case that the Commissioners have acted unreasonably in requiring the security. The Appellants' case is that the amount required is excessive. The Appellants, through Mr M A E Zakaria, say that over the last 18 months there has been a marked downturn in their business. Their sales have dropped as has their cashflow. Mr M A E Zakaria referred to three events that might have caused the downturn. The first was an assault in July 2005 on him. The second was his father's illness. The third was his recent absence abroad. Moreover, because of a consistent problem with their computer system, the Appellants had been behind with their returns for the last two to three years.

We have to apply Schedule 11 paragraph 4(2) of VAT Act 1994. This provides that if the Commissioners think it necessary for the protection of the revenue, they may require a taxable person, as a condition of his continuing to supply services, to give security of a specified amount. The requirement and the amount must be reasonable. This means that the Commissioners must, in reaching the decision, take into account all relevant considerations and must not take into account irrelevant ones.

Mr Zakaria's main challenge to the manner on which the revised calculations was based was that it covered the period from the 2/02 period until the 12/04 period. It should have focussed on the amounts of VAT due for the four periods of 2004. The effect of taking the longer period was that this increased the positive amounts due from the Appellants to the Commissioners by some £17,000. What is more, said Mr Zakaria, had the Commissioners taken into account the much smaller turnover for the three periods of 2005 the amount of security required would have been drastically reduced.

We see nothing unreasonable in the approach of the Commissioners. In the first place it was, we think, quite appropriate for them to take into account more than the four quarters of 2004. Comparing 2004 with the five periods immediately before it, a significant change is seen. For the year 2003, for example, tax of some £14,500 was due from the Appellants. The return for the final period of 2003 showed tax of £10,032 due from the Appellants. The returns for the next two periods showed tax of £156 and £140 due to the Appellants. The fluctuations were so great that we think the Commissioners were correct in taking a longer period than the year 2004. The position might conceivably have been different had the Appellants provided returns for 2005. No returns had been received by the date of the revised decision (11 April 2005). Indeed no further information had been obtained even by the time of the present hearing.

We think that the Commissioners took into account all the relevant considerations without taking irrelevant considerations into account and approached the question of security reasonably and appropriately in all the circumstances. We therefore dismiss the appeal.

STEPHEN OLIVER QC

CHAIRMAN

RELEASED: 1 December 2005

LON/05/510