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Cite as: [2006] UKVAT V19860

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BELFIELD ENGINEERING LTD v Revenue & Customs [2006] UKVAT V19860 (02 November 2006)

19860

Requirement to give security - Appellant a "phoenix" company - sole director of Appellant had been director of a previous "phoenix" company - no material or accounts supplied to Customs - appeal dismissed

MANCHESTER TRIBUNAL CENTRE

BELFIELD ENGINEERING LTD. Appellant

and

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Elsie Gilliland (Chairman)

Mohammed Farooq (Member)

Sitting in public at Birmingham on 28 September 2006

Ralph Holden, Vat Consultant for the Appellant

Richard Mansell, Advocate Solicitors Office of HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2006

DECISION

The appeal before the tribunal is that of Belfield Engineering Ltd. (the Appellant) against a decision of Customs dated 31 January 2006 upheld on review on 14 February 2006 to require security from the Appellant under paragraph 4 (2) (a) of Schedule 11 to the Value Added Tax Act 1994 (the Act) as a condition of it supplying goods or services under a taxable supply. The security required by way of third party guarantee or cash deposit is in the sum of £16,450.00 if quarterly returns are made and £10,950.00 for monthly returns. The Appellant's case was presented by Ralph Holden Vat Consultant and the witness he called was Brian Woolley the sole Director of the Appellant.

The Appellant was incorporated on 23 November 2005 registered on 21 December 2005 and trades from Unit 2 Rock House Belfield Street Ilkeston Derbyshire DE7 8DU. Its trade class is general mechanical engineering and it manufactures metal pressings and general metal fabrications. It is not disputed that it may be termed a " phoenix company". Its predecessor company was B.J. Engineering Ltd.(B.J.Engineering) registered on 10 September 2002 which ceased trading on 16 December 2005 and presented its own petition in Derby County Court which was granted on grounds of insolvency on 21 March 2006.ItsVat liability was £25,882.02. That company was in turn a "phoenix" company to B&W Pressings Ltd. (B&W Pressings) registered on 1 April 1973 which became insolvent with effect from 30 September 2002 with a Vat liability £82,295.48.

The case for Customs put by Richard Mansell was that the background history of the Appellant and its 2 predecessor companies was such that the security required was necessary for the protection of the Revenue. This was confirmed by the witness for Customs Ruth Morris the officer who made the original decision. She told the tribunal that the risk had to be evaluated in view of the poor compliance record of B.J. Engineering and B&W. Pressings. The Appellant was in the same trade class as both those companies with the same director Mr.Woolley and traded from the same premises previously occupied by B.J. Engineering.

Mr. Woolley made a witness statement produced at the hearing and gave oral evidence -in-chief and under cross-examination as to the 3 companies and their operation. B&W Pressings had been established by his father . He had subsequently become a director and on the advice of the bankers another director had been brought in to provide accounting and financial expertise. That company's failure after many years of satisfactory trading he attributed to 2 main commercial problems. The first was in connection with work undertaken for Havelock Europe Ltd. (Havelock) in the fitting- out of a new Debenham's store in Dublin. B&W Pressings exposed itself bringing in other contractors which it had to pay. Although a job price of £500,000. 00 was expected only £200,000.00 was received the rest having been written off as a bad debt. It has to be observed that on Mr.Woolley's own admission BW Pressings continued to trade with Havelock and did not take any legal steps against them.

The second main problem arose with Rittal CMS Ltd. This was a large order to supply the casings for computer furniture. There was a change in design which the witness said had not been notified to B&W Pressings which made the items they had manufactured unusable. This produced a second irrecoverable debt of £300,000.00. Again no legal proceedings were taken. In due course advice was obtained from insolvency practitioners and a creditors' voluntary winding-up was commenced on 30 September 2002. B&W Pressings' freehold property was sold off by the bank as debenture holder and the directors' personal guarantees were called in.

Shortly before the winding-up Mr. Woolley formed B.J. Engineering which was registered on 10 September 2002. He became sole director and holder of 9999 ordinary shares of £1 out of a paid -up share capital of £10000. He obtained financing from HSBC and was able to purchase some of B&W Pressings' machinery equipment and work-in-progress. Mr. Woolley was anxious to retain his skilled workmen and gave continuity of employment to 12.

Mr. Woolley referred to a difficult initial trading period. Customs called for security of £13,700.00 for Vat which was provided by a bank bond supported by a personal guarantee. Mr. Woolley explained that there was then a downturn in the market and he expanded on the problems created by customers changing over to supplies of cheap steel pressings from India and China. There was a further injection of money into B.J.Engineering by way of £47,500.00 from him and a personal loan of £50,000.00 from HSBC who also granted an extra facility of £50,000.00. The loan the facility and the bank bond were secured by a charge on the home of Mr. Woolley and his wife. Mr.Woolley identified a worsening of trade despite a number of cost-cutting exercises undertaken. He quoted however that at the year end of 30 September 2005 on a turnover of £755,201.00 the deficit was £15,500.00.

The witness said that he had then sought to negotiate price rises with customers on the basis that if B.J.Engineering went under they would lose their supplier of a staple product. This proved unsuccessful, one particular customer indicating that it could not consider this as its brochure had been produced and its prices had to stand as per that brochure. B.J.Engineering's position worsened with the Bank refusing to help further and suppliers not agreeing extended credit terms. The Revenue gave notice of legal proceedings for arrears of tax on 15 November 2005. Once again Mr. Woolley took advice from insolvency consultants. B.J.Engineering ceased trading on 16 December 2005.

The Appellant as a new company commenced trading on 21 December 2005. Its incorporation pre-dated the insolvency of its immediate predecessor company as B.J.Engineering itself had done. It is the director Mr. Woolley rather than the Appellant on this occasion who has purchased the machinery and equipment of the previous company though the lease of the premises has been taken in the name of the Appellant.

As to the current and future trading prospects of the Appellant Mr. Woolley is optimistic. He has revised his manufacturing strategy to produce small rather than large quantity orders; he has factoring and insurance of debts cover in place; the competition from India and China is less strong because of the poor quality of their goods and on the part of the Chinese onerous payment terms. More importantly having failed in the case of B.J. Engineering, Mr. Woolley was able by the end of January 2006 to obtain the agreement of former customers of B.J.Engineering to substantial price rises. A schedule he produced showed for instance that Work Space Office Solutions which makes up 33% of the Appellant's output had agreed an increase of 30%. He felt the improvement dated from early 2006.This was of course the customer base of B.J. Engineering though we are informed that there are some new customers. The Appellant however does not have overdraft facilities; Mr. Woolley has no assets for personal guarantees; his family home is on the market. We are told that the Appellant cannot meet the security requirement.

Mr. Woolley is confident of the future prospects of the Appellant. In his statement and evidence and in the submissions of his representative it was put to the tribunal that Customs in coming to their decision to require substantial security acted arbitrarily unfairly and unreasonably and too readily relied on the past involvement of the witness in the 2 companies which had failed rather than looking at the reasons for those failures and the different conditions applying to the Appellant. Mr. Holden examined in some detail with Mrs. Morris in cross-examination the difference in the procedures followed between the instant case and the previous one where security was required that is in the matter of B.J. Engineering. It is clear that there was discussion and consultation over a period between Customs and the Chartered Accountants then representing B.J.Engineering. This had led to a reduction in the requirement. Mr.Holden contrasted this with the total lack of contact and negotiation afforded by Customs in respect to the Notice of Requirement under appeal. Mrs.Morris had no involvement in the previous matter but was satisfied from her papers that there had been paperwork produced then by the agents such as a statement of accounts which provided information and more for Customs to work on. Mr. Holden submitted that there was a clear difference in approach and that had Customs been prepared to discuss and negotiate with Mr. Woolley the outcome could have been different.

We have in the bundle of documents produced to us a copy of a letter dated 3 February 2006 addressed to Customs by Mr. Woolley and marked as received by them on 7 February 2006. We set out below the main paragraphs of this letter.

" I feel the requirement for monthly returns, and the deposit to be grossly unfair. My customers are all on sixty days credit terms, and this would mean that not only raising the deposit, but funding Customs & Excise payment for a thirty day period.

As a new company this is simply not possible, and I wish to appeal against your decision."

We were referred by both representatives to a number of cases some of them from previous tribunals on the legal position as to the exercise by Customs through their officers of a discretionary power. We are clear however that our role as a tribunal is to test the reasonableness of the decision of Customs and not to seek to substitute a decision of our own for it nor is it our function to look to the protection of the Revenue. Customs must comply with Wednesbury principles in that the officers must take into account all relevant matters not give weight to irrelevant ones and must not err in law. We feel able to look afresh at the material facts and circumstances on the basis of those then available to Customs. It is accepted that the only contact between the parties was by way of correspondence and the only letter from the Appellant that sent by Mr. Woolley dated 3 February 2006.

We refer once more to the witness statement of Mr. Woolley and the detailed evidence he has given to the tribunal. It has been acknowledged by the representative for Customs that a considerable amount of information has been supplied at this hearing. We have however to look at what was available when the decision was made. Mr. Woolley challenged the decision in his letter of 3 February 2006 and stated that the Appellant would appeal. This led to the review. Mr. Woolley's letter was available to and referred to by the review officer G.N.Bradley in the review letter dated 14 February 2006. There was no further contact from the Appellant until in due course the Notice of Appeal dated 9 March 2006 was submitted to the Tribunal Centre.

In Mr. Woolley's letter he referred to the unfairness and unreasonableness of the decision.He also stated that the Appellant had to give sixty day credit terms to its customers which meant that the Vat requirement could not be met. We would mention that Customs were not directing monthly returns in their correspondence and this was made clear in the review letter. No further background was given which could have enabled the officers to draw distinctions between the Appellant and the previous companies with which Mr. Woolley had been involved. He told us in evidence that the turn in the Appellant's prospects had begun in the New Year of 2006 but no reference was made to that; it was not drawn to the attention of Customs as a relevant matter.

It was submitted also by Mr. Holden in comparing the procedures followed by the officers seeking security in the two cases that of the Appellant and that of B.J.Engineering that more should have been done in the current case to negotiate. In her evidence Mrs. Morris confirmed that she had examined carefully the Vat records of B&W Pressings and B.J Engineering. Her intention was to test the risk factor and the calculation of the security was on the basis that by holding security there would be cover against failure to pay and liability to the Revenue. Her decision had been upheld by the review officer. Mr. Bradley did not appear before us to give evidence. Mrs. Morris could not speak for him but sought to clarify what would have been the standard examination he would have followed. On the relevant issue of the letter from Mr. Woolley in response to the Notice she had issued it was her view that to say that a decision was "unfair and unreasonable" did not constitute new material and to refer to sixty day credit terms was not a relevant matter. In our view the statements in the letter from Mr Woolley were not supported by background information or accounts . We do not consider it to be a function of Customs to seek to negotiate without material being available nor indeed themselves to search out the same.

We are satisfied that Customs put themselves in a position to reach a proper decision in this case and that the decision made was not one that could not reasonably be arrived at.

We dismiss the appeal

Customs have not sought costs and we make no direction as to costs.

ELSIE GILLILAND

CHAIRMAN

Release Date: 2 November 2006

MAN/2006/0192