United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2008] UKVAT V20561

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Aerospace Tooling Ltd v Revenue & Customs [2008] UKVAT V20561 (31 January 2008)

20561

REQUIREMENT FOR SECURITY – Involvement of director in defaults by prior companies – No evidence as to finances of Appellant – No returns by Appellant – Coleman [1999] V&DR 133 considered – Appeal dismissed

LONDON TRIBUNAL CENTRE

AEROSPACE TOOLING LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: THEODORE WALLACE (Chairman)

P DAVDA FCA

Sitting in public in London on 16 January 2008

John Seaton, director, for the Appellant

Gloria Orimoloye, advocate, for the Respondents

© CROWN COPYRIGHT 2008


 


DECISION

1. This appeal concerned a requirement for security in the sum of £69,700 or £46,450 if monthly returns are rendered.
2. The security was originally required on 4 April 2007 by Clare Bell, Higher Officer, of the VAT Security Unit at Southampton. It was confirmed after a local reconsideration on 13 June 1007 by Desmond Callow, also a Higher Officer and renewed on 25 July 2007 by Miss Tish Birch, a Higher Officer, of the same unit.
3. The appeal was against the July requirement by Miss Birch which was for the same sum as the original requirement.
4. The requirement was made under Schedule 11, paragraph 4(2) of the VAT Act 1994 which enables Customs to require a taxable person as a condition of supplying goods or services to give security for VAT which is or may become due "if they think it necessary for the protection of the revenue."
5. The Act gives Customs a discretion. In order to succeed the Appellant has to show that Customs acted unreasonably. In John Dee Ltd v Customs and Excise Commissioners [1995] STC 941 Neill LJ said in the Court of Appeal that the Tribunal,

"should consider whether Customs had 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 disregarded something to which they should have given weight."

6. The focus in this appeal is on the position at 25 July 2007 when Miss Birch made the actual requirement under appeal. Because the decision was cumulative the Tribunal is also concerned with the material before the other officers.
7. The Appellant company was incorporated on 9 January 2007. Mr Seaton was director and his wife, Jacqueline, the company secretary.
8. On 23 January 2007 the Appellant applied for registration. The trading name was given as "Startrite Designs" and the business address as Courtney Road, Gillingham, Kent. The business activity was given as design and manufacture of machine tools and the involvement of a director in Dynamic Equilibrium Ltd was recorded. Estimated turnover in the next 12 months was given as £2 million. The Appellant was registered with effect from 1 February 2007. It was required to make its initial return for February 2007 with quarterly returns thereafter.
9. On 6 March 2007 Maria Snape of the VAT Security Unit sent to the Appellant a warning letter as to the power to require security inviting the Appellant to provide any information which might influence whether or not security should be required.
10. Customs have no record of a response although Mr Seaton told us that he telephoned Customs at Southampton. At all events his evidence was that the conversation was brief and that he said that the Appellant was a newly formed company and a deposit would cause severe problems and that he was not asked for any further details.
11. A recommendation was passed to Miss Bell to make a requirement in late March 2007. She signed the requirement on 30 March 2007. Miss Bell produced the 4 page recommendation. This was central to the requirement decision and should have been included in the List of Documents.
12. The recommendation stated that the Appellant had links with Dynamic Equilibrium Ltd, the representative company of a group which included Startrite Designs which entered into administration in December 2006. Dynamic Equilibrium Ltd had the same director and secretary as the Appellant and the same place of business. It gave the debt owed by Dynamic Equilibrium Ltd as £153,943. A further linked company was given as Crescent Precision Tools Ltd which was deregistered in January 2005 owing £33,921 VAT; it had the same director and secretary. The recommendation stated that Dynamic Equilibrium Ltd had sought time to pay in 2006 but this had been rejected; it stated that there were six time to pay agreements on file one of which was defaulted.
13. Miss Bell recorded that Dynamic Equilibrium Ltd had 18 periods of defaults and that Insolvency Advice Service had advised that Dynamic Equilibrium Ltd might follow Startrite Designs into administration. The Appellant was trading as Startrite Designs. There was a risk to revenue on the basis of the links with Dynamic Equilibrium and Startrite and their poor compliance history. The quantum of the requirement was based on the projected turnover of £2 million.
14. We note at this juncture that the Appellant did not challenge the amount of the requirement on the appeal but only the making of the requirement. We do not therefore go further into the calculation.
15. Miss Bell viewed the compliance history of Dynamic Equilibrium Ltd on screen and produced a print out. This showed that six returns between 03/01 and 09/03 were late for periods varying from 194 days for 09/03 to 541 days for 09/01 whereas 03/02 and 06/02 were on time and 03/03 and 06/03 were 1 and 4 days late. The VAT, interest and penalties up to 12/05 had been paid. Since then VAT totalling £127,560 was unpaid for periods 03/06, 06/06 and 09/06, default surcharges totalled £26,294 and the balance of the £153,953 unpaid was interest. A repayment claim for £12,245 was not deducted; the evidence was that it had not been verified.
16. The recommendation showed some £300,000 in direct tax as owed by Dynamic Equilibrium group. Its turnover was shown as £6,989,000.
17. Miss Bell said that she had received no information as to the funding of the Appellant company. She had read a letter from Tenon Recovery dated 17 November 2006 regarding the problems of Startrite Designs; she was aware however that the Large Debt Unit had rejected the instalment proposals.
18. She told the Tribunal that she had not asked for a control visit before making the requirement.
19. Miss Bell's requirement Notice was served by Alan Harte. Carol Fuller who was in charge of accounts signed an acknowledgement of receipt. She told him that the Appellant designed and made machine tool parts and tools for blue chip companies including Siemens, Rolls Royce and Ford, currently employing 40-42 staff and factoring invoices through Arbuthnot. The previous business had gone into administration, Independent Growth Finance having stopped factoring due to the company reaching its credit limits. There were more favourable terms with the new factoring company and overheads were lower with the workforce reduced by approximately 50%.
20. In a letter dated 20 April 2007 Mr Seaton wrote that the Appellant had purchased Startrite Designs from the administrators and was a new company which was not in a position to pay "such huge payments up front". Miss Bell replied giving the Appellant until 10 May 2007 to provide further information and request a reconsideration. On 2 May 2007 Mr Seaton telephoned Mr Harte stating that his earlier letter contained factual errors in that the Appellant had not bought Startrite Designs but only the order book and stock; he said that the company was not in a position to pay the deposit but that forecast cashflow would enable it to pay returns on time. In a further telephone conversation with Mr Seaton, Mr Harte recorded that any reconsideration request must be in writing and should cover reasons for previous business failure, measures put in place to reduce the risk to the revenue and what exactly the business had bought via the administrators. Mr Seaton replied with a letter stating that to help with cashflow the Appellant was factoring with Arbuthnot Commercial Finance; the letter confirmed what had been bought.
21. On 13 June 2007 Mr Callow wrote confirming the earlier requirement. He wrote that the 02/07 return had not been submitted and no payment had been received on an assessment raised in the absence of the return. The amount of the requirement would be reconsidered if further information and figures were provided: the present deposit assumed an annual turnover of £2 million.
22. On 28 June 2007 Customs received a payment of £5,724 for the 02/07 assessment.
23. On 2 July Customs received a letter from Mr Lord-Castle of the Insolvency Advisory Service LLP on behalf of the Appellant. He wrote that the Appellant had been created using the latest turnaround procedures under the Insolvency Act 1986 and the Enterprise Act and embodied what the government had tried to achieve in funding positive restructuring procedures. The Appellant had assumed the employment liabilities. The officer had lost a considerable amount of money through the administration of Startrite, including personal guarantees. He had used every source of funding for the Appellant and Insolvency Advisory Service was advised that it was making a small profit every month.
24. A meeting of Creditors of Dynamic Equilibrium Ltd was called for 16 July to put the company into creditors' voluntary liquidation. Dynamic Equilibrium was the parent company of Startrite.
25. On 21 November 2006 Tenon Recovery had written to the National Large Debt Unit of HMRC regarding the outstanding liability of Startrite in respect of accrued PAYE, National Insurance Contributions and VAT. This is letter referred to at paragraph 17 and was on the computer file. An enclosed statement of affairs showed £160,000 VAT as owed and £460,855 tax and insurance contributions; accrued pension liabilities were £129,588 and trade creditors £268,413; adding a director's loan of £400,000, unsecured creditors totalled £1,408,856. Assets were shown as £2,519,416: financed debtors were £1,505,545, of which £1,043,622 was owed to IGF Invoice Finance Ltd under an invoice finance agreement, the finance being secured by a fixed and floating charge. The book value of plant and machinery, fixtures and fittings was over £600,000 but a valuation by an independent agent was £371,250. Stock and work in progress on an ongoing basis was £1,456,374; the valuation on a forced sale basis was £291,275 .
26. Tenon Recovery's letter stated that the company (Startrite) was trading profitably, the management accounts showing a pre-tax profit of £91,582 for the ten months to September 2006 on sales of £3,578,260. The letter said that the company was clearly insolvent as a consequence of historic trading difficulties. The letter proposed making monthly contributions of £11,000 for 36 months towards the arrears in addition to meeting ongoing liabilities as they fell due.
27. These proposals had not been accepted by the Commissioners.
28. Startrite's VAT liabilities were of course as part of the Dynamic Equilibrium VAT group, the record of which has been summarised already.
29. Miss Birch notified the Appellant by letter dated 25 July 2007 that the security was still required. She referred to the Appellant's direct links to companies which had left considerable VAT arrears and the fact that no returns had been received and a central assessment was unpaid. She wrote that the evidence and figures requested by Mr Callow had not been provided. She wrote that further information as to the sales by Startrite to the Appellant would help to understand the position of the Appellant. She told the Tribunal that she had seen no reason to change the amount of the security which was based on the estimated turnover of £2 million. It did not include the unpaid assessment.
30. Mr Seaton gave evidence and was cross-examined. He said that the shares in the Appellant are owned by an LLP comprising himself and his wife, the capital subscribed being £100.
31. He said that in addition to its main place of business at Gillingham, the Appellant had a premises within the factory of Siemens at Lincoln; all but 5% of the work done there was for Siemens.
32. He said that the Appellant had never received a return form although it had been requested three or four times by telephone.
33. He had funded the Appellant personally with unsecured loans using a lump sum from his pension and a mortgage on his family home.
34. He said that IGF which had discounted invoices from September 2006 had run into problems and had demanded their money at 24 hours notice : this was after the Tenon Recovery letter.
35. He said that Customs had concentrated on the companies in which he had been involved where there had been difficulties but not in another 9 companies where there was no problem.
36. He told Miss Orimoloye that Crescent Precision Pools Ltd had been purchased around 1995; he did not dispute the fact that it became insolvent owing £33,920 being deregistered in 2006. He said that was the only company where he had a hand in a Revenue loss.
37. He said that the Appellant had never calculated the VAT due. The person from Startrite doing the accounts had left earlier on. Another accounts clerk had been retrained but had been dismissed after 4 months leaving the accounts in a mess. That was now being sorted out. Mr Seaton denied that filling in the VAT return had been a low priority.
38. Mr Seaton submitted that there should have been a visit before the requirement was made. Mr Harte had not said what information was sought : most of it could have been given. He complained that Customs had fixed on a small number of companies, whereas his record over 32 years showed that he did run companies properly. He said that the Startrite loss was out of his control. The offer of £11,000 a month had not been accepted. He said that Customs had not asked for security from Startrite and Dynamic Equilibrium and asked why should it be required from the Appellant.

Conclusions

39. On the basis of section 84(2) of the VAT Act 1994 this appeal should not have been entertained because the Appellant had not made all returns due. No Rule 6 application had been made by Customs. No doubt this was because in Coleman, Miah and Miah and Others v Customs and Excise Commissioners [1999] V&DR 133 the President decided that section 84(2) was capable of undermining the fundamental principle of correct taxable and the correct application of the compliance rules and dismissed the Rule 6 application in Miah and Miah as contrary to Community Law. In spite of that decision section 84(2) remains on the statute book. It may be that the requirement to make a return is not incompatible in a security appeal. However we proceeded to hear the appeal. The alternative would have been to make an unless order dismissing the appeal unless returns were submitted within a specified time, meanwhile halting the substantive appeal.
40. In order to succeed the Appellant needed to show that the decision of Miss Birch on 25 July 2007 to maintain the requirement was unreasonable.
41. The case was complicated by the fact that requirements were made by three officers consecutively on information from a variety of sources. Since an important part of an appeal against a security requirement is concerned with the material on which the decision is made it is essential that the material should be before the Tribunal. The original recommendation before Miss Bell, trader screen prints and a further computer generated document were not listed and only produced during evidence.
42. A requirement for security will frequently have the effect of putting a trader out of business and throwing the trader's employees out of work.
43. It must therefore be soundly based being founded on a correct appreciation of the relevant facts. It is not sufficient that the officer acting on behalf of the Commissioners should consider VAT to be at risk; the requirement must comply with the need for proportionality. Every new business poses a risk; it would clearly not be reasonable to demand security from every new trader.
44. However, having considered the material in this case we concluded that the requirement was fully justified.
45. The Appellant traded under the same trade name as Startrite Designs, used the same principal place of business, had common directors and had acquired the order book, stock and presumably plant and machinery and had taken on a substantial proportion of Startrite's staff.
46. Startrite had a poor compliance record for a considerable period. While the decision of IGF to require immediate payment in December 2006 may have been the immediate cause of Startrite ceasing to trade, the Statement of Affairs produced by Tenon Recovery showed that it was already insolvent. We are not concerned to apportion blame for Startrite's plight, the unavoidable fact is however that there were clear grounds for believing that the Appellant might encounter similar problems.
47. In spite of several inquiries Customs were given no information as to exactly what was transferred from Startrite to the Appellant and at what price. There was not even evidence before the Tribunal as to those matters.
48. We recognise the standing of Arbuthnot Commercial Finance, the new factoring company, and of the Appellant's clients, however Customs were given no evidence of the financial stability of the Appellant.
49. Mr Seaton said that much of the apparent Revenue loss on Startrite/Dynamic Equilibrium might be recovered, however he produced no evidence as to this. Given the Statement of Affairs produced by Tenon Recovery in November 2006, we would be surprised if there is not a substantial loss. Furthermore Customs have an unrecovered debt from Crescent Precision Tools Ltd.
50. No express consideration was apparently given to the need for proportionality, however this was in no sense a marginal case and we were satisfied that the requirement was not disproportionate and that the result must have been the same.
51. After retiring to consider our decision we dismissed the appeal.
52. Following our decision Mr Seaton undertook to furnish the outstanding returns within a month. Miss Birch stated that Customs would recalculate the requirement once the returns were received and would give a further period to provide the security.

THEODORE WALLACE

CHAIRMAN

RELEASED: 31 January 2008

LON 2007/1400