United Kingdom VAT & Duties Tribunals Decisions

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Marc Lawson & Co Ltd v Revenue & Customs [2007] UKVAT V20311 (16 August 2007)

20311

SECURITY – requirement for security for tax due or anticipated – whether requisite for the protection of the revenue – appeal dismissed – VATA 1994 Sch 11 para 4(2)

LONDON TRIBUNAL CENTRE

MARC LAWSON & CO LIMITED	Appellant
and
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS	Respondents

Tribunal: Rodney P Huggins (Chairman)

Dr Michael James

Sitting in public in Plymouth on 7 August 2007

Mr Marc Lawson, Director, for the Appellant.

Mrs Pauline Crinnion. Advocate, of the office of the Solicitor for Her Majesty's Revenue and Customs for the Respondents.

... CROWN COPYRIGHT 2007

DECISION

The appeal

Marc Lawson & Co Limited ("the Appellant") appeals against a decision of the Commissioners of Her Majesty's Revenue and Customs ("Customs") contained in a letter dated 31 October 2006 requiring the Appellant to give security of £14,400 for the payment of tax due from the Appellant.

The legislation

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 and in such manner as they may determine, for the payment of any VAT which is or may become due from him."

The issue

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

Oral evidence for the Appellant was given by Mr Marc Lawson ("Mr Lawson"), its Managing Director.

A bundle of documents was produced by Customs. Miss Clare Louise Bell, a Higher Officer of Customs ("Miss Bell") at the relevant time at the National Compliance VAT Security Unit at Southampton ("the Compliance Unit") gave evidence for the Commissioners.

The facts

From the evidence before us we find the following facts.

Mr Lawson is a Chartered Accountant and has been in practice for some twenty years. After a brief period practising from his home, he purchased an existing practice for £80,000 in 1989 when his bank provided the necessary finance.

He then practiced from premises at 17 Southgate Close, Goosewell, Plymstock near Plymouth, Devon and registered for VAT on 1 January 1989. Because of his cashflow problems caused by the bank loan and his overheads, he began immediately not to pay his VAT on time and also delayed submitting his returns.

His first default surcharge was incurred for the period 01/91 and thereafter he nearly always persisted in defaulting. From 1991 until he ceased trading on his own account at the end of June 2006 he had a total of 57 defaults. Until period 10/05 it was quite normal for the delay in payment to be many months in arrears.

Because of his debts including VAT he entered into an Insolvency Voluntary Arrangement (IVA) under the Insolvency Act 1986 with his creditors on 22 January 1994. Normally this Arrangement would be concluded after five years. However, the implications dragged on for several years afterwards and Customs only became aware of its conclusion in July 2006.

When an individual is in the IVA regime it is not the practice of Customs to seek security for tax due or anticipated as Customs is normally a creditor. For that reason, Customs did not consider requiring security for VAT before it was known Mr Lawson was no longer subject to IVA supervision. In July 2006, in view of three factors, the Compliance Unit based in Southampton began investigating his situation on account of several factors. First, it was known that he was out of the 'IVA regime'; secondly, his bad payment record; and thirdly the fact that he owed a total of approximately £51,000 VAT for default surcharges in or about June 2006.

In or about 2004, the Chartered Institute of Accountants agreed to permit their members to practice through a limited liability company. Mr Lawson decided, when he had been finally released from his IVA to form such a company under his name to take over his practice as a going concern. The Appellant was incorporated and shortly afterwards effectively took over Mr Lawson's Accountancy practice on 1 July 2006.

Mr Lawson deregistered his sole practitioner firm from VAT on 1 August 2006. at the time of deregistration the practice owed £19,662.04 as an outstanding VAT balance and £3,325.06 in unpaid default surcharge penalties.

The application form for VAT registration of the Appellant from 1 July 2006 was received on 6 July 2006 in the Customs Office at Wolverhampton which deals with registration applications. The form revealed that Mr Lawson's firm had been taken over and the estimate for taxable supplies in the first 12 months was stated to be £350,000.

As a result of a routine search at Companies House in Cardiff after the new application form for registration by the Appellant was received, the Compliance Unit, in September 2006, became aware of the transfer of the practice.

Since the Compliance Unit was already investigating Mr Lawson's non-compliance record at the time, Maria Snape, a Customs Assistant Officer in

the Compliance Unit and a member of Miss Bell's team wrote to the Appellant on 25 September. She stated in the opening :

"It has been brought to my attention that MARC LAWSON & CO LTD is the same entity as MARC LAWSON which ceased trading owing Customs a considerable amount of VAT. In light of this I am concerned that VAT may not be paid by MARC LAWSON & CO LTD. I must warn you that I am considering what steps need to be taken to protect the revenue.

The Commissioners of Customs and Excise have the power to require security from you as a condition of future trading. The security is for the payment of any VAT that is or may become due. If you were to fail to provide the security, you would be liable to prosecution …"

She then stated that if Customs were to require security from the Appellant at that time, it would normally be £20,550.

She continued :

"If you have information which you feel is relevant and which may influence whether or not security is required of you. Please contact me urgently. Please note, if you wish to allow HM Revenue and Customs to release details of your tax affairs to a third party, please give written authorisation. A blank copy of the form "Authorising your Agent" is enclosed with this letter for this purpose."

Neither the Appellant nor Mr Lawson responded. In the absence of a reply, Miss Bell, as was customary, waited for one month and then formally served a statutory notice of requirement to give security in a letter dated 31 October 2006. The sum of £14,400 was required by guarantee or cash deposit. This was lower than the sum indicted in Officer Snake's previous letter as it was based on the figures stated for the net VAT to be paid to Customs in the last four VAT Returns made by Mr Lawson for his practice. The total tax due for the twelve month period ending 31 July 2006 amounted to £28,809.14 and the sum required was half this sum being a six monthly figure in accordance with recognised Customs practice.

The Appellant was informed in Miss Bell's letter that if it wished the Commissioners to reconsider their decision, the Appellant must bring any information it wished to be taken into account to the Unit's attention as soon as possible.

On behalf of the Appellant, Mr Lawson wrote to the Compliance Unit on 7 November 2006. He indicated that his company wished to appeal and put forward various grounds. He supplied a cash flow forecast and maintained the company would be able to meet its VAT liabilities "as and when due". He categorically stated the company's VAT assessment for the first period (08/06) since VAT registration on 1 July 2006 had been paid

but admitted there had been a delay in payment. He also mentioned that the outstanding liability for the single practitioner practice was believed to be "less than £15,000". Payments had been made during the previous three months in respect of VAT liabilities of over £21,000.

He added :

"In addition to our present situation we can inform you that a substantial amount of outgoings on our cash flow forecast relate to short term financing and enclose a chart summarising this. In particular the chart shows that there is a substantial reduction in outgoings with effect from August 2007 (the date when a large number of contracts cease). There will be no need to replace these contracts as they relate to items such as refurbishments etc and will provide at least a further £3,000 worth of savings per month to the practice.

Although we appreciate our history is far from perfect, we have always stated that it is our intention to repay existing debts and to maintain future liabilities and we hope that the above facts support this. Unfortunately, no further finance is immediately available from either the directors personal property or from the current bankers Lloyds TSB but believe that the above information shows that the practice is able to support itself with regard to its VAT liabilities as well as making in roads with regard to the existing debts from the old sole trader."

As a result of this letter Miss Bells' team checked the authenticity of claims by Mr Lawson in his letter. They ascertained that the Appellant had not submitted a Return for the first period after registration (08/06) nor paid the assessment of £3,495 which the Central VAT Unit at Southend had calculated as due on the basis of the estimated annual turnover in the application for registration and submitted an assessment to the Appellant accordingly.

They also checked the indebtedness of Mr Lawson's practice which had been taken over by the Appellant and found according to Customs' records £22,987.10 was still outstanding.

As the Appellant had in its letter of 7 November effectively asked for a reconsideration of the requirement to provide security, this was conducted by another Higher Officer Trish Birch in the Compliance Unit who had not had any previous dealings with the case. She considered all the relevant information and documentation and wrote to the Appellant on 17 November 2006 and stated that Customs were still of the opinion that security was required. She also raised a query concerning a possible reduction in the outstanding liability of Mr Lawson's practice which had been raised in the letter from him on 7 November 2006. She also asked for further copies of the cash flow forecast and the schedule of short term financing which had not been made available to her.

The Appellant, through Mr Lawson, replied by letter dated

23 November 2006 supplying extra copies of the two documents. He admitted that the payment for the first VAT return had "unfortunately not been remitted." He added :

"We presently have funds available, but they will not be sufficient to immediately pay the VAT security deposit, the VAT arrears on VAT number 501 5332 01 and the first VAT return for the limited company. Whilst we are fully aware that all amounts need to be paid, we felt that the security deposit as the most important amount to deal with first and were awaiting the outcome of your letter before making any further payments.

As previously mentioned we are very keen to clear all arrears, and our commitment to this has been shown by the fact that payments in excess of £24,000 have been made since mid August with further funds available now.

As you will appreciate we are in a chicken and egg situation in that is we use funds to pay off old arrears then we will not have sufficient for the security deposit. Similarly the security deposit is being requested because the arrears have not been cleared.

We believe that the security deposit will be able to be paid on or before 3^rd December and should be grateful if you would let us know if this is acceptable."

The Appellant submitted its first Return and paid the VAT accountable in accordance with the figures supplied on 7 December 2006.

On 15 January 2007 Higher Officer Trish Birch replied apologising for the delay due to Mr Lawson's query about the amount of his personal indebtedness which had been referred to the Debt Management Unit to provide an explanation of how the amount was calculated.

Officer Birch said that the Commissioners had considered the further information put forward but were still of the opinion that security was required for the protection of the revenue. She also commented :

"I note from you cash flow forecast that the amount of deposit required is in line with your forecast of VAT to be paid and so I am satisfied that the amount requested was not excessive."

Reasons for Decision

In considering the issue before the tribunal, we are guided by the principles as described by Farquharson J in Mr Wishmore Limited v the Commissioners of Customs and Excise [1988] at page 728g who said:

"The Tribunal … should restrict itself, on the hearing of an appeal, to deciding whether the taxpayer company has established 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 matters which are relevant."

The principles were further developed in Customs and Excise Commissioners v Peachtree Enterprises Ltd [1994] STC 747 (a case put forward by Mr Lawson at the hearing) where it was held that the tribunal had to limit itself to considering facts and matters which were known at the time the disputed decision was made by Customs. The principles were yet further developed in John Dee Limited v Customs nd Excise Commissioners [1995] STC 942 where the Court of Appeal held that the tribunal had to consider whether Customs could have acted, or whether they had taken into account some irrelevant matter, or has disregarded something to which they should have given weight. The tribunal could not exercise fresh discretion; the protection of the revenue was not a responsibility of the tribunal or the court. However, if it was shown that the decision of Customs 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.

In the light of these principles, we have considered the decision taken by Officer Bell to issue the Notice of requirement which was served to the Appellant on 31 October 2006. The decision was based on the VAT records of the Appellant and Mr Lawson's practice which was taken over by the Appellant on 1 July 2006 and a failure to discharge arrears including default surcharges incurred by Mr Lawson in his practice, both Higher Offices Bell and Birch considered carefully all the information they had before them and that, in the light of that information, they reached decisions which were eminently reasonable both initially and on reconsideration.

The Appellant put forward three arguments to support its appeal.

First, it argued it could not afford to pay the amount of security required and VAT outstanding. However, in Rosebronze v The Commissioners of Customs and Excise (1948) VAT decision No. 1668 the tribunal held that such a consideration could not be taken into account in deciding an appeal: the legislation provided that Customs had to act "for the protection of the revenue" and a tribunal could only allow an appeal against a decision of Customs to require security if it was one which no reasonable body of Commissioners of Customs and Excise could take. We adopt that principle.

Secondly, efforts had been made by Mr Lawson and the Appellant to reduce the VAT indebtedness of Mr Lawson when he was a sole trader. It is true that there had been a substantial reduction over a period of some

three months when about £21,000 had been paid. However, there was still a sum of £22,987.10 outstanding as at 17 November 2006. It was admitted in Mr Lawson's letter of 7 November 2006 that although it was his company's intention to repay existing debts and to maintain future liabilities unfortunately no further finance was immediately available

Thirdly, Mr Lawson maintained that his company would be able to meet its obligations when they arose. It could not even meet its first VAT assessment by the due date of 30 September 2006. This was not paid until December 2006.

The tribunal is satisfied that both Officers Bell and Birch were well aware of the deplorable record of Mr Lawson with reference to the payment of VAT over many years. A total of 57 defaults is abysmal. In addition, he was subject to an IVA regime for a considerable period of time which is evidence of financial mismanagement.

Mr Lawson told the tribunal he transferred his accountancy practice to a limited liability company in order to save too much income tax. There must be a suspicion that he wanted to wipe the slate clean and have a fresh start as far as some of his creditors were concerned. When considering whether to require security for payment of any VAT which is or may become due, Customs is entitled to look at the past VAT record of those concerned in running the new enterprise. In this instance, it is only Mr Lawson who is involved.

We are not able to take into account financial planning for the future since as we have already indicted in paragraphs 27 and 28 of this decision, we cannot exercise a fresh discretion such as considering proposals for the company's financial future.

We conclude that the decision reached by Miss Bell on 31 October 2006 was eminently reasonable as reconsidered and confirmed by Ms Birch later.

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

The appeal is therefore dismissed there will be no order as to costs.

Rodney P Huggins

Chairman

Release date : 16 August 2007

LON/06/1358