United Kingdom VAT & Duties Tribunals Decisions

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Gainsborough Decorations Ltd v Revenue & Customs [2006] UKVAT V19672 (19 July 2006)

19672

SECURITY – requirement for – whether requisite for the protection of the Revenue – Yes – appeal dismissed – VATA 1994 Sch 11 para 4(2)

LONDON TRIBUNAL CENTRE

GAINSBOROUGH DECORATIONS LIMITED	Appellant
and
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS	Respondents

Tribunal: Rodney P Huggins (Chairman)

Angela West FCA

Sitting in public in Cardiff on 27 June 2006

The Appellant was not represented.

Mr Jonathan Holl, Advocate of the Acting Solicitor's office of H M Revenue and Customs for the Respondents

... CROWN COPYRIGHT 2006

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The appeal

1. Gainsborough Decorations Limited (the Appellant) appeals against an initial decision of the Commissioners for Revenue and Customs (Customs) contained in a letter dated 13 October 2005 requiring the Appellant to give security of £18,900 for the payment of any VAT due from the Appellant. The Notice of Requirement to give security was confirmed in a letter dated 25 November 2005 which was effectively the decision.

2. At the hearing, no one appeared for the Appellant and no reason for absence was given. The hearing notice had been sent to the Appellant in good time at its notified address.

3. The tribunal decided to proceed under Rule 26(2) of the Value Added Tax Tribunals Rules 1986 as amended as the Appellant can apply within 14 days after the date of release of the decision to have it set aside if there is a proper reason. The Appellant is therefore protected because it can apply to have the appeal re-heard. The Appellant should note, however, that if its application is to be entertained by a tribunal the Appellant must arrange to be represented at the hearing of the application.

The legislation

4. The decision to require security was given under the provisions of paragraph 4(2) of Schedule 11 of the Value Added Tax Act 1994 (the 1994 Act) which provides :

" … where it appears to the Commissioners requisite to do so for the protection of the revenue they may require a taxable person, as a condition of his supplying goods or services under a taxable supply, to give security, or further security, of such amount in such manner as they may determine, for the payment of any VAT which is or may become due from him"

The issue

5. The issue for determination in the appeal was whether the decision by Customs and Excise, requiring the Appellant to give security, was a reasonable decision.

6. At the hearing oral evidence was given on behalf of Customs by Mrs Guiliana Cradle a Higher Officer of H M Revenue and Customs of the Security and Insolvency Team stationed in Cardiff. A bundle of 86 pages of documents was produced on behalf of Customs containing copy letters, reports of visiting officers, extracts from officers notebooks, VAT Returns and other information about payment of VAT and relevant material.

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The facts

7. From the evidence before us we find the following facts.

8. The Appellant was incorporated as a private limited company on 26 September 1997 and became registered for VAT with effect from 17 October 1997. The remaining directors of the Appellant company since inception are Mr David William Stockley (Mr Stockley) and Mr Peter McMurray-Cole (Mr McMurray-Cole). The company has an authorised and issued share capital of 1000 ordinary £1 shares. The only shareholder is Pearl Products Limited which effectively is the Appellant's holding company. Both Mr Stockley and Mr McMurray-Cole have been and were at the date of the hearing directors of Pearl Products Limited. This company was at the date of 25 November 2005 when the final notice of requirement to give security was issued by Customs an extant VAT registered business which had not submitted a VAT return since 2003. It had a VAT debt of £71,248 at 25 November 2005.

9. The Appellant imports and wholesales costume jewellery and Christmas products and also manufactures Christmas crackers. The costume jewellery was sold through some fifty store concessions around the United Kingdom, the majority of whom self bill for the jewellery takings.

10. There have been three relevant visits by officers of Customs in the last six years, The first was on 16 June 2000. Although the investigating Customs Officer at that time. Mr S F Parsons, found that the trader appeared credible, the VAT return for the period 03/00 was still outstanding. Mr Stockley said that the delay was due to pressure of work running the accounts books for the Appellant and Pearl Products Limited. He was employing a new book-keeper which would improve the situation.

11 The second visit was made by Officer Ms Eileen Wong on 15 May 2003. She referred to the missing VAT returns for the periods 12/02 and 03/03. She was told that the company had recently moved premises and had fallen behind with its paperwork. She was informed that the outstanding returns would be submitted by the end of May 2003 and the annual turnover was £1.7 million. Ms Wong told Mr Stockley that his company was in the default surcharge system and the submission of the outstanding returns would be monitored.

12. For the period 03/03 the VAT Central Office had issued an estimated assessment of £602.00 but when eventually the return was submitted on 14 April 2004 a sum of £19,037.11 for VAT was shown. On an earlier occasion for the period 12/02 the Central Office Assessment was £659.00 and when the return was eventually submitted on 14 April 2004 (439 days late) the amount of VAT revealed as payable was £56,809.84. Payment was not made by the Appellant until 15 September 2004 (a further 55 days).

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13. Because of the company's appalling record with reference to submission of late returns and considerable delay in paying VAT, Officer Mr Tony Bowen visited the Appellant's business premises on 22 March 2004. He saw Mr Stockley. He pointed out that one of the reasons for the visit was that two apparently very low Central Assessments had been paid for periods 12/02 and 03/03 and it was essential that the records for these periods be seen by Customs as soon as possible. It was explained to Mr Stockley that it was an offence to pay assessments knowingly lower that the actual liabilities.

14. Mr Stockley could not produce Sage printouts for the relevant periods as they were with the company's accountants for audit purposes. He undertook to obtain these and Mr Bowen returned on 2 April 2004. He was told by Mr Stockley that although he had not checked the accounts printouts, the VAT liabilities for the two periods 12/02 and 03/03 exceeded the Central Assessments paid by about £73,500. He said his company could not pay what was due at once as there were no funds available and the Appellant would have to pay in instalments. Mr Stockley accepted his company would incur more surcharge penalties at 15% and that the ultimate responsibility lay with him. He added that in hindsight he should have taken more interest in the financial records but had left it to his book-keeper.

15. There was an exchange of letters in October 2004 when Mr Stockley explained to Customs in Cardiff how he was not involved in the day to day financial administration of two other companies known as P C Wise Limited and South Green Holdings plc who both owed the Respondents considerable amounts of VAT and had become insolvent as a result.

16. On 26 January 2005, Officer Miss Carpanini (the Security and Insolvency Team Manager at Revenue and Customs at the Cardiff Office) wrote in reply to the Appellant's letter of 28 October 2004 in the following terms :

"I have reviewed the information put forward in your letter and the explanations for the associated companies, however, after careful consideration I feel that security action on Gainsborough Decorations Ltd is still appropriate due to the compliance of this company with it's VAT affairs :

* In May 2003 our Compliance Management Team rang and Mr Stockley
acknowledged that there were missing VAT returns, however it was
stated that this coincided with the busiest time of the year for the
company.

* In April 2004 a VAT inspection was carried out and the company was
warned that it was an offence to knowingly pay central assessments and
the facts of your case are currently being reviewed to consider whether

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further action is appropriate as the central assessments under declared
the VAT by £73,500.00. This was confirmed by the audit officer in a
letter dated 7/4/04.

* In May 2004 your company was offered a Time to Pay agreement that
should have cleared the outstanding debt (originating from September
2002) by 20th August 2004. This agreement was not adhered to as the
VAT return for 06/04 was submitted late and the current debt on file is
£22,710.46.

Please note that as a VAT registered trader your minimum legal requirements are to render your VAT returns along with full payment.

Due to the above factors I feel that Gainsborough Decorations Ltd does pose a risk to the future collection of VAT, hence the continued security action, however, if you feel that you have any further information, which is relevant and may influence my decision, then please do not hesitate to write to me at the above address."

17. Then on 13 April 2005 as there had been no response from the Appellant, Miss Carpanini wrote again indicating that the company was required to give security in the sum of £28,300. Mr Stockley replied on 10 May 2005 stating that the balance of VAT outstanding of £23,323,58 (including a default surcharge) had been settled. He also mentioned that the company had lost a major customer and they had "to re-build our sales levels …"

18. Officer Mr Huw Gingell replied on 29 June 2005 stating that the Respondents had considered the further information put forward and were of the opinion that security was not required at that stage commenting it was primarily as a result of the company's improved Compliance history since the service of the bond request. However, there was a caveat. Mr Gingell said :

"The ledger balance is now nil which is satisfactory to the Commissioners. I note the missing VAT return for 03/05 and note your reasons for not rendering the returns. I would advise that you render an estimated return for this period at the earliest possible opportunity with any VAT adjustments to be made in the following VAT return …

This offer of withdrawal of the security bond is conditional. The company has to render all its future VAT returns on time with full payment. If the business cannot fulfil this liability payment in full, they MUST contact the Debt Management Unit at Cardiff VAT Office to discuss payment proposals. The future returns will be closely monitored.

If the company defaults on the conditional arrangement on offer, then the Commissioners will revert to immediate securities action without further consultation with you or your client …"

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19. On 22 August 2005, the Cardiff VAT Securities team notified the Appellant that as the outstanding returns for 03/05 and 06/05 had still not been received, the Commissioners were reverting "to immediate securities action without further consultation with the company". On 23 August 2005 in accordance with their statutory power the Respondents decided that the requirement for registered persons to render returns for periods of a quarter was not appropriate in the Appellant's case and it was required to render returns on a monthly basis. A Notice of Direction to make monthly returns was enclosed with the letter.

20. On 13 October 2005 Officer Mrs Cradle notified the Appellant officially that the Respondents required the Appellant to give them by Third Party Guarantee or cash deposit in the sum of £18,900 for the payment of any VAT which was or might become due from the company. This was served personally the same day by an Officer of Customs. Mr Stockley was told that all VAT Returns for 2005 were still outstanding. He replied that he had extreme cash flow problems until Christmas as the company owed a considerable sum to the Inland Revenue in tax.

21. Mr Stockley wrote on behalf of the Appellant to the Cardiff VAT Office on 8 November 2005 stating the company wished to appeal and re-stating his concern that the Commissioners had not taken into account the fact that he was a non-executive officer of the previous companies mentioned and had no hand in the day to day running of those ventures.

22. On 25 November 2005 Officer Mr Gingell responded and stated in his letter :

"The Commissioners having considered the further information put forward by you are still of the opinion that security is required for the protection of the revenue and are not prepared to reduce the amount of £18,900. The Commissioners have still not received the missing returns as discussed at our meeting on 13 October 2005. The Commissioners deem you a current risk to the revenue. This is due to your current non-compliance and the Commissioners have not taken into consideration your position in the previous companies in making the decision to request a bond from you.

The Commissioners, therefore now require you to pay the security at the above address in the form of a cash deposit or acceptable Third Party Guarantee. The Commissioners will consider a payment plan staggered of several months but in order to agree to this, all returns have to be immediately rendered and our Debt Management team in Cardiff must accept an agreed payment plan. This must be done within 14 days of receipt of this letter …"

23. At the time of the hearing, the Appellant had still not provided any VAT Returns for the year 2005 and particularly for the periods 03/05. 06/05, 07/05, 08/05 and 09/05.

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24. Since period 12/02 there have been ten default surcharges, five of which have been for periods in 2005. The rate charged has been 15% for all five.

Submission for the Respondents

25. On behalf of Customs Mr Holl submitted that the power of the tribunal was limited to deciding whether the Commissioners, properly considering the relevant and disregarding the irrelevant, could not reasonably have come to the decision in question and, in considering the reasonableness of the decision, the tribunal could only take into account of the evidence available to Customs, in the person of Mrs Cradle, at the time the decision was reached. He cited Goldhaven Limited v The Commissioners of Customs and Excise (1996) VAT decision No, 14675.

Conclusions

26. First, we have to identify the principles which we should apply in considering this appeal. These were described by Farquharson J in Mr Wishmore Limited v Commissioners of Customs and Excise [1998) STC 723 at page 728g in the following way :

"The tribunal … should restrict itself, on the hearing of an appeal, to deciding whether the taxpayer company has 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 are not relevant or by ignoring maters which are relevant."

27. The principles were further developed in Customs and Excise Commissioners v Peachtree Enterprises Ltd [1994] STC 747 where it was held that the tribunal had to limit itself to considering facts and matters which were known when the disputed decision was made by Customs. The principles were yet further developed in John Dee Limited v Customs and Excise Commissioners [1995] STC 941 where the Court of Appeal held that the tribunal had to consider whether Customs had acted in a way in which no reasonable panel of Commissioners of Customs and Excise could have acted, or whether they had taken into account some irrelevant matter, or had disregarded something to which they should have given weight. The tribunal could not exercise a fresh discretion; the protection of the revenue was not a responsibility of the tribunal or the court. However, it was shown that the decision of Customs and Excise was erroneous, because they had failed to take some relevant material into account, the tribunal could, nevertheless, dismiss the appeal if the decision would inevitably have been the same had account been taken of the additional material.

28. In the light of those principles we have considered the decision taken by Mrs Cradle and notified to the Appellant on 13 October 2005. The decision was based on the information contained in three reports of the
visits on 16 June 2000, 15 May 2003 and 22 March 2004; in the

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correspondence entered into with Mr Stockley; the VAT returns relating to the Appellant since it became registered; the default surcharge history; the record of the Appellant's VAT particulars; record of the Appellant's Compliance and VAT Statement of Account. She also knew that Mr Stockley and Mr McMurray-Cole were also directors of Pearl Products Limited which had a VAT debt of £71,248 at the time she authorised the service of the Notice of Requirement.

29. The Appellant in the view of the tribunal had every opportunity to put its VAT house in order over a period of at least three years. The company persistently did not file returns and relied upon low central assessments to gain time before paying the full amount of VAT due knowing that the correct amounts had not been paid. It took 439 and 349 days respectively from the due dates to achieve this on two occasions when delay meant that sums of £56,809 and £19,037 were not paid on time. This was repeated on several other occasions with smaller sums.

30. We agree with Mr Holl that taking all these matters into account Customs was put at risk and security was necessary "for the protection of the Revenue".

31. The amount of security required of £18,900 is in our opinion reasonable as it was calculated over a twelve month period and therefore took into account the fluctuations in the Appellant's cash flow due to its seasonal trade.

32. We conclude that the decision reached by Mrs Cradle endorsed by Mr Gingell was eminently reasonable.

33. It follows that our decision on the issue for determination in the appeal is that the decision to require security was a reasonable decision and was not arrived at by taking into account matters which were irrelevant nor by ignoring mattes which were relevant.

34. The appeal is, therefore, dismissed. There will be no order as to costs.

RODNEY P HUGGINS
CHAIRMAN

Release Date : 19 July 2006

LON/05/1226