United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2006] UKVAT V19679

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T2 Toho Ltd v Revenue & Customs [2006] UKVAT V19679 (04 August 2006)

19679

SECURITY – Requirement for – Whether requisite for the protection of the Revenue – Appeal dismissed – VATA 1994 Sch 11 para 4(2)

LONDON TRIBUNAL CENTRE

T2 TOHO LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: STEPHEN OLIVER QC (Chairman)

R K SURI

Sitting in public in London on 30 July 2006

M Hildred, accountant, for the Appellant

Jonathan Holl for the Respondents

© CROWN COPYRIGHT 2006


 


DECISION

1. T2 Toho Ltd, the Appellant, appeals against the decision of HMRC (dated 21 October 2005) operating as a Notice of Requirement to provide security in the sum of £68,000 with quarterly returns and £45,000 with monthly returns. The Notice is made under the provisions of paragraph 4(2)(a) of Schedule 11 to VAT Act 1994.
2. We heard evidence from Mr Y K K Mak, director of T2 Toho. We also heard evidence for the Respondents from D G C Hammersley, higher officer in the security team at the Colchester VAT office.

Background

3. In October 2005 the security team of HMRC heard that a company called Toho Ltd had been placed in the hands of an administrator. It appeared that another company, T2 Toho, had moved into the premises of Toho and was continuing with its business. On 21 October 2005, following an examination of the administrator's report and a visit to the business premises of T2 Toho, HMRC issued the Notice of Requirement which is the subject matter of this appeal. It appeared that the restaurant business, previously carried on by Toho Ltd, had been transferred as a going concern, via a vehicle company called Floating Petals Ltd, to T2 Toho.
4. Toho Ltd had been incorporated in 2002. It had acquired leasehold premises in Peterborough and conducted an extensive fit-out programme to transform the premises into a Chinese restaurant. The fitting out had taken several months and had exceeded the original budget estimations; trade started in November 2002. Toho Ltd had been unable to meet original trading forecasts with the result that working capital was required but unavailable. In an attempt to revitalize Toho Ltd's position its business had diversified with more emphasis being placed on its bar activities. This did not help and Toho Ltd continued to incur losses with a result that, in July 2005, Mr K Mak (the director and shareholder who gave evidence before us) approached accountants to discuss its financial position and to explore the options available in the light of its insolvency and on account of a distraint over its assets by HMRC.
5. Toho Ltd was under administration from 11 August 2005. The total debt on the file of HMRC was some £148,000. At the time of the appointment of the administrator one quarterly return was overdue. The return for the 09/05 period was also overdue. Centrally issued assessments were raised for both periods.
6. The considerations taken into account by HMRC had, according to Mr Hammersley, included Toho Ltd's non-compliance with its VAT obligations, the similarity in officeholders as between Toho Ltd and T2 Toho, i.e. Mr Mak's directorship of both companies and the similarity in business premises and business activities between the two companies. It was on that basis that he had authorized the issue of the Notice of Requirement to provide Security.
7. To calculate the amount of the security HMRC took the net figures for tax for the four periods of Toho Ltd up to 03/05. This showed a net value of sales as some £1.46 million. Bearing in mind that the Application for Registration of T2 Toho had estimated its annual turnover to be £1.2 million with the result that there would be a reduction in turnover by a factor of 0.81, HMRC calculated that £68,000 of tax would become due for a six month period and £45,000 of tax would be payable for a four month period. On the basis that T2 Toho was to make monthly returns, security covering four months would be required, i.e. £45,000.
8. It had also appeared to HMRC that Mr Y K K Mak, as well as being a director of T2 Toho and Toho Ltd, had also been a director of Toho Express Ltd. This business operated as a takeaway food shop from Hendon in London. It had a poor record of compliance and Notice of Requirement had been served upon that business when a payment of £3,000 had been made. Toho Express Ltd's business is quite distinct from that of Toho Ltd and T2 Toho. Another company of which Mr Y K K Mak is recorded as a director is Lap Wai Trade Developments Ltd. There were no compliance problems in relation to that company.

The Statutory tests

9. We have to decide whether HMRC's decision to require security of £45,000 from T2 Toho was a reasonable decision in all the circumstances. The question has to be determined with reference to facts and matters which were known when the disputed decision was made by HMRC, i.e. in October 2005. The decision of the Court of Appeal in John Dee Ltd v Customs and Excise Commissioners [1995] STC 941 establishes that we have to consider whether HMRC have acted in a way in which no reasonable panel of Commissioners could have acted, or whether they have taken into account some irrelevant matter or have disregarded something to which they should have given weight. It is not for us to exercise a fresh discretion. But, if it appears to us that the decision of HMRC was erroneous, because they had failed to take some relevant material into account, we can dismiss the appeal.

The case for T2 Toho

10. T2 Toho through Mr Mak accept that Toho Ltd had been non-compliant. They also accept that there has been a connection, through Mr Mak's directorship, linking both companies. But that, they say, is not sufficient to warrant a decision to require security from T2 Toho.
11. T2 Toho does not challenge the amount of the security required by HMRC, i.e. £45,000, on the basis that monthly returns are made.
12. In support of their case that it was not reasonable to require T2 Toho to provide security, Mr Mak gave evidence and explained how he had become involved with Toho Ltd and T2 Toho.
13. Mr Mak's own experience, he said, had been in export and import activities and in sales of imported goods. This explained the business of Lap Wai Trade Developments. Mr Mak said, and we accept this, that there is no relevant connection between the activities of Lap Wai Trade Developments and the businesses of either Toho Ltd or T2 Toho. Mr Mak said that he had been with Toho Ltd since it start. He had held 30% of the shares. The name Toho had in effect belonged to Mr Mak. Other shares in Toho Ltd had been held by a person in the building industry (30%), a financial consultant (10%) and a restaurant specialist (30%). Mr Mak had been one of the four directors of Toho.
14. Toho Ltd had conducted a restaurant business with some 250-380 covers. Mr Mak attributed its failure to excessively high overheads and particularly to too many full-time staff. Mr Mak had felt under a strong sense of moral responsibility to keep Toho Ltd solvent and to see that its debts were paid. He had put in £10,000 on 21 June 2005, coming out of his own money. But he had been unable to persuade the other shareholders to do the same. And when the administrator was appointed Lap Wai Trade Developments, his own company, had been owed £248,000 by Toho Ltd.
15. Mr Mak had no shares in T2 Toho and the shareholders in that company took no part in the running of its business. Even before the administration of Toho Ltd, Mr Mak had sought to change the way the restaurant business had been conducted. He had seen advantages in selling more drink and in cutting down the number of covers in the restaurant area. He saw that it would be better to concentrate restaurant activities on the busy days of the week and to staff the restaurant accordingly. He had introduced a D J into the bar area of the premises.
16. When Toho Ltd was placed in administration, the administrator was under an obligation to get the best price for the business. There was no question of any "phoenix" operation. T2 Toho had paid a fully arms length price for the business. We accept all that evidence without question.
17. The name "Toho" was assumed by T2 Toho and Mr Mak had become its sole director. He had taken a large part in the management of T2 Toho, though he said that he was not being paid much for his services. He had, he said, an expectation that he would get shares in T2 Toho, but he could not explain how or when that would happen.
18. Our understanding is that the "Toho" idea and particularly the creation and running of T2 were the "brain child" of Mr Mak. He expects to make a success of the concept and his reward will come in the shape of shares allocated to him in due course. T2 Toho, as already mentioned, replaced Toho Ltd. It operates with a greater emphasis on sales of drink than Toho Ltd, but otherwise there is a strong similarity between the businesses of Toho Ltd and T2 Toho. At all times, as already mentioned, Mr Mak has been actively involved in the management of both companies.

Conclusion

19. We fully recognize the dedication on the part of Mr Mak to make a success of T2 Toho. And we recognize Mr Mak's efforts to keep Toho Ltd trading as a viable operation. Nonetheless we cannot fault the decision of HMRC to require security of £45,000 from T2 Toho on the basis that it makes monthly returns. The most significant fact is that Toho Ltd failed leaving a large VAT liability. A real link between Toho Ltd and T2 Toho exists through the active involvement of Mr Mak as a director of both companies. The link is all the more real because of the similarity between the businesses of both companies. The change in the scale of the restaurant activities, following the takeover of the business by T2 Toho, is not, we think, sufficient to break the link. Nothing that has been said by Mr Mak or Mr Hildred, as representative of T2 Toho, has caused us to change our view that at the relevant time T2 Toho was reasonably regarded by HMRC as a risk to the Revenue. HMRC took into account all the relevant considerations and did not, in our view, take into account any irrelevant matters. All in all their decision was one which they could reasonably have taken. We recognize that things may have changed since the time when the decision was taken to issue the Notice of Requirement for Security. But, as we have already mentioned, our attention has to be focused (by reason of the provisions of Schedule 11 paragraph 4(2) of the VAT Act 1994) on the circumstances that existed at the time when the decision was taken.
20. For all those reasons we dismiss the appeal.

STEPHEN OLIVER QC

CHAIRMAN

RELEASED: 4 August 2006

LON/06/9