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United Kingdom VAT & Duties Tribunals Decisions

You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Mushtaq's Food Factory Ltd v Revenue & Customs [2007] UKVAT V20496 (06 December 2007)
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Cite as: [2007] UKVAT V20496
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Mushtaq's Food Factory Ltd v Revenue & Customs [2007] UKVAT V20496 (06/12/2007)
    20496
    VAT – SECURITY – the Respondents introduced new evidence of suspected fraud – strong grounds for disallowing the evidence – the Respondents, however, failed to consider relevant information known at the time when the security was issued which indicated that the Appellant had ceased trading – decision to issue security unreasonable – Appeal allowed

    MANCHESTER TRIBUNAL CENTRE

    MUSHTAQ'S FOOD FACTORY LIMITED Appellant

    - and -

    HER MAJESTY'S REVENUE and CUSTOMS Respondents

    Tribunal: MICHAEL TILDESLEY OBE (Chairman)

    MARJORIE KOSTICK BA FCA CTA (Member)

    Sitting in public in Birmingham on 3 October 2007

    Gregory Flowers company secretary for the Appellant

    Bernard Hayley of the Solicitor's Office for HM Revenue & Customs, for the Respondents

    © CROWN COPYRIGHT 2007

     
    DECISION
    The Appeal
  1. The Appellant was appealing against a Notice of Requirement to give Security in the sum of £1,700 (quarterly returns) or £1,100 (monthly returns) issued on 6 June 2006.

  2. The ground of Appeal were that

    3. (1) The decision appears to have been made on the basis that one of the directors for the Appellant is involved as a director of a phoenix company to a company that has failed to pay its liabilities to HM Revenue and Customs, and has been the subject of a request for a deposit which is the subject of an appeal. The allegation is incorrect and the Appellant puts the Respondents to strict proof of such allegation.
    (2) Further, or in the alternative the decision appears to have been made on the basis that the other director for the Appellant is a director of a company to whom HM Revenue and Customs have issued a similar request for a deposit which request is to be the subject of an Appeal.
    (3) The Appellant avers that there are no sustainable grounds for this request for a deposit.
    (4) The Appellant has always submitted its returns on time and is presently awaiting a refund of the VAT due to it from such returns.
  3. We heard this Appeal on the same day as the Appeals of Mushtaq's Limited and MFM Equipment Limited against Notices of Security also issued on 6 June 2007. We treated each Appeal separately, reserving our decision in the three Appeals.

  4. We heard evidence from Mr Max Houghton the officer who issued the Notice for Security. The Appellant and Respondents each supplied their own statements of case and bundle of documents.

    5. Background
  5. The directors of the Appellant were brothers, Messrs Bashir Ahmed and Parvaiz Ahmed. Their father founded Mushtaq's Limited which prepared and sold savoury and sweet Asian foodstuffs. On the death of their father Mr Bashir Ahmed took over the directorship of Mushtaq's Limited. The younger brother, Mr Parvaiz Ahmed, was the director of MFM Equipment Limited which manufactured catering equipment for sale to Asian businesses.

  6. Messrs Bashir Ahmed and Parvaiz Ahmed set up the Appellant for the purpose of manufacturing Asian foodstuffs. The Appellant leased premises on Golden Hillock Road with the intention of converting the rear of the premises as a food preparation area, and sub-dividing the remaining area into individual units which could then be let out to separate businesses. The Appellant's business, however, did not get off the ground. Instead Mr Bashir Ahmid in his personal capacity purchased the freehold of the Golden Hillock Road premises on 2 November 2006, and let it out to other businesses.

  7. The Appellant was registered for VAT on 9 January 2006. It submitted five VAT returns with a total net repayment of £32,418 to the Appellant. The Respondents, however, have reduced the Appellant's VAT returns to nil. The Appellant's VAT registration was cancelled with effect from 1 June 2007.

    8. The Issue to be Decided
  8. The issue for the Tribunal was whether Mr Houghton acted reasonably in imposing the security for the protection of the revenue. Thus we have to decide whether Mr Houghton acted in a way in which no reasonable panel of Commissioners for HM Revenue and Customs could have acted, or whether he had taken into account some irrelevant matter, or disregarded something to which he should have given weight when imposing the security requirements. In exercising this jurisdiction we must limit ourselves to considering facts and matters which existed at the time the challenged decision to require a security was taken.

    9. The Legislation
  9. Paragraph 4(2), Schedule 11, of the Value Added Tax Act 1994 provides that

    10. "If the Commissioners think it is necessary for the protection of the revenue, they may require a taxable person, as a condition of his supplying or being supplied with goods or services under a taxable supply, to give security, or further security, for the payment of any VAT that is or may become due from –
    a) the taxable person, or
    b) any person by whom or to whom relevant goods or services are supplied."
    The Respondents' Statement of Case
  10. The principal reason for requiring a security as set out in the statement of case was Mr Parvaiz Ahmed's involvement in other businesses which owed the Respondents large sums of monies together with a poor record of VAT compliance. In their case the Respondents particularised the following businesses, in which Mr Parvaiz Ahmed held an interest:

    11. (1) EC Specialist Equipment Limited (formerly known as Mushtaq's Food Machinery Limited) which owed a debt in excess of £90,000 to the Respondents.
    (2) MFM Equipment Limited which the Respondents considered to be a phoenix of EC Specialist Equipment Limited. On the transactions between the two companies, MFM Equipment Limited reclaimed the input tax but EC Specialist Equipment Limited did not pay the output tax.
    (3) Mushtaq's limited, against which a Notice of Requirement for Security had been issued. The Respondents accepted that Mr Parvaiz Ahmed was not a director of Mushtaq's limited, however, the Appellant had named it as an associated business in its VAT1.
    (4) Fresh Jalabi Limited which claimed input tax on an invoice for £253,255 (gross) issued by MFM Equipment Limited. The latter, however, had not declared output tax on the purported sale recorded by the invoice. Mr Parvaiz was not a director of Fresh Jalabi Limited but had registered it for VAT without the knowledge of its directors.
  11. In the statement of case the Respondents explained that the amount of security was based on the turnover of £100,000 declared in the Appellant's VAT 1.

    12. Mr Houghton's Evidence
  12. In contrast to the statement of case, Mr Houghton stated that his principal reason for requesting a security was a suspected fraud perpetrated by the Appellant in respect of its input tax claim for two invoices in the quarter ending 03/06. The two invoices related to the supply of labels and packaging from Box Smile Limited and Boxfast Limited upon which the Appellant claimed VAT of £8,050 and £7,910 respectively. The Respondents' enquiries with the suppliers revealed that the VAT charged on the invoices were £70.35 and £80.50, significantly less than the VAT claimed by the Appellant. Mr Houghton accepted that this reason was not disclosed in the Respondents' statement of case.

  13. In issuing the security Mr Houghton also placed reliance on Mr Parvais Ahmed's directorships with EC Specialist Equipment Limited and Mushtaq's Limited. EC Specialist Equipment Limited owed a debt in excess of £90,000 to the Respondents. Mushtaq's Limited purportedly issued an invoice for rent of the Golden Hillock Road premises without accounting for output tax. Mr Houghton accepted that he made a mistake about Mr Parvais Ahmed being a director of Mushtaq's Limited.

  14. Mr Houghton acknowledged that Mr Parvais Ahmed's association with Fresh Jalebi Limited formed no part of his decision to issue a Notice for Security against the Appellant. The connection with Fresh Jalabi Limited had been added by the Officer who carried out the review following the Notice of Appeal.

  15. When making his decision to impose a security Mr Houghton was unaware of the Appellant's letter of 26 May 2006 to Ms Donaldson of the Respondents' Birmingham Business Centre which stated that the Appellant had put on hold its proposals to convert the Golden Hillock Road premises. Mr Houghton, however, did not consider that the contents of the letter would have affected his decision because the Appellant had not ceased trading.

  16. Mr Houghton indicated in evidence that without the suspected fraud in relation to the two invoices, the other reasons advanced by him would not be sufficient grounds for the imposition of a security against the Appellant, particularly in view of his mistaken belief regarding Mr Parvaiz Ahmed's directorship of Mushtaq's limited.

    17. The Appellant's Representations
  17. The Appellant contested the grounds set out in the Respondents' statement of case, in particular Mr Parvaiz Ahmed's involvement with other businesses which owed large sums of money to the Respondents. In the Appellant's view Mr Parvaiz Ahmed was involved in one company, EC Specialist Equipment Limited, which had a debt with the Respondents. The amount owed was considerably less than the £70,000 suggested. Further MFM Equipment Limited was not a phoenix of EC Specialist Equipment Limited which continued as a going concern after its sale of assets to MFM Equipment Limited.

  18. The Appellant protested strongly about the introduction in evidence of the suspected fraud, particularly as it was now being advanced as the principal reason for demanding the security. The Appellant had no prior notice of Mr Houghton's evidence. The Appellant was considerably disadvantaged by the late introduction of the fraud evidence, which had seriously compromised the fairness of the proceedings.

  19. The Appellant considered the imposition of a security unreasonable since the Appellant have never traded. Its VAT registration was cancelled with effect from 1 June 2007. The Respondents were aware from the Appellant's letter of 26 May 2006 that it had a called a halt to the conversion of the premises and effectively ceased trading from that date.

    20. Reasons for Our Decision
  20. This was a highly unusual case, in that the Respondents' statement of case did not reflect accurately the grounds upon which Mr Houghton made his decision, and failed to disclose his principal reason for requiring the security. It was clear from Mr Houghton's evidence that he suspected Mr Parvaiz Ahmed of perpetrating systematic VAT fraud through his involvement with a number of companies. However, Mr Houghton's belief of widespread fraud was undermined somewhat when he discovered subsequently that Mr Parvaiz Ahmed was not a director of Mushtaq's Limited which was suspected of failing to account for output tax on property supplies.

  21. In this Appeal we are considering whether Mr Houghton acted in a way in which no reasonable panel of Commissioners for HM Revenue and Customs could have acted, or whether he took into account some irrelevant matter, or disregarded something to which he should have given weight when imposing the security requirement for the protection of the revenue on the Appellant on the 6 June 2006. Thus we are examining Mr Houghton's reasons which centre on alleged fraudulent activity on the part of the Appellant, and in particular Mr Parvaiz Ahmed. The accusation of fraud was not included in the Respondents' statement of case which posed serious questions about the admissibility of Mr Houghton's evidence of the fraud on grounds of fairness and abuse of tribunal procedure. The exclusion of this part of his evidence would be fatal to the Respondent's case in view of Mr Houghton's admission that the other reasons advanced would not be sufficient to justify the imposition of a security.

  22. We would be minded to exclude Mr Houghton's evidence of the fraud, however, a detailed examination of its admissibility was, in our view, academic. Mr Houghton failed to have regard to the Appellant's letter of 26 May 2006 informing the Respondents that its conversion of the Golden Hillock Road premises was on hold. The existence of this letter was known to the Respondents at the time Mr Houghton made his decision. The contents of the letter were highly relevant to his decision because they indicated that the Appellant had ceased trading, which if correct would question whether the Appellant posed a significant risk to the protection of the revenue.

  23. Although not strictly relevant to this Appeal, the reality was that the Appellant no longer posed a significant risk to the protection of the revenue. The Appellant's VAT registration has been cancelled from 1 June 2007 and ceased trading. The Respondents have refused to repay the input tax on the suspect invoices by their amendment of the Appellant's VAT 03/06 return dated 8 June 2006 which reduced the repayment claim to nil. As far as the Tribunal was aware the Appellant has not challenged the Respondents' amendment of its VAT return.

    24. Decision
  24. We find that Mr Houghton based his decision on incorrect information concerning Mr Parvaiz Aheed's directorship of Mushtaq's Limited and disregarded the Appellant's letter of 26 May 2006 indicating that it had ceased trading which went to the heart of whether the Appellant posed a significant risk to the revenue. We, therefore, hold that Mr Houghton's decision to issue a Notice of Requirement for Security on 6 June 2006 against the Appellant was not reasonable. We allow the Appeal. We make no order for costs, as none was sought by the Appellant.

    25. MICHAEL TILDESLEY OBE
    CHAIRMAN
    RELEASE DATE: 6 December 2007

    MAN/06/0480

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