United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2008] UKVAT V20860

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NEC Engineering Ltd v Revenue & Customs [2008] UKVAT V20860 (07 November 2008)

20860

Notice of Requirement to give security - poor compliance and two insolvencies in associated companies- same directors in all - change in business activities considered - methodology and calculation of amounts correct - appeal dismissed

MANCHESTER TRIBUNAL CENTRE

NEC ENGINEERING LIMITED Appellant

-and-

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal : Elsie Gilliland (Chairman)

Carole Roberts (Member)

Sitting in public in Manchester on 5 September 2008

Robert Kelly, financial accountant of the Appellant, for the Appellant

Kim Tilling of the Solicitors Office of Her Majesty's Revenue and Customs for the Respondents

DECISION

The appeal is against a decision of Customs under the provisions of Schedule 11 section 4(2)(a) of the Value Added Tax Act 1994 to require security from NEC Engineering Ltd. (the Appellant). This decision was set out in a letter dated 6 September 2007 and the amount of security required for the payment of any value added tax which was or might become due from the Appellant was £24,500.00 if quarterly returns were to be submitted or in the alternative £16,300.00 if the returns were to be made monthly. The decision was reviewed and upheld on 23 October 2007. The Appellant appealed. The officer who made the initial decision and issued the requirement letter Ruth Morris gave evidence to the tribunal. The Appellant's case was presented by its financial director Robert Kelly who also responded to questions raised by Kim Tilling representing Customs.

In her evidence Mrs. Morris confirmed the reasons for her decision. These substantially arose from the Appellant's association with certain other companies. We were referred to a schedule in the bundle of documents produced by Customs which gave details of those companies and the Appellant on information available as at 31 July 2007 and in addition there was information from charts certificates and records in the bundle. The named companies were:

(1) Northern Electrical Connectors Limited (Connectors) which had gone into administration on 23 May 2006 and become insolvent leaving a Vat debt of £41,396.94 plus interest of £4,989.52 making up a Customs claim of £46,386.46. The bulk of the debt was the result of an officer's assessment in December 2005.The trading premises of Connectors are shown as Unit 8 Glover Centre, Egmont Street, Mossley, Lancs OL5 9PY and the directors Peggy Rigby appointed on 1 January 1993 (also company secretary from 9 April 1986); Samuel Rigby appointed on 9 April 1986; and Martin Rigby also appointed on 9 April 1986. The type of business is noted on the schedule as electrical engineers.

(2) Seel Park Entertainments Limited which had a registration period of one day only ie. 1 March 1998 to 2 March 1998 with the same address as Connectors given and with the same company secretary Peggy Rigby appointed on 3 February 1998. That business is said to be "other entertainment". The company was dissolved.

(3) Mossley AFC Limited registered on 1 July 1997 with an address at Steel Park Mossley but with the directors shown as Peggy Rigby (24 April 2001); Samuel Rigby (24 April 2001); and Martin Rigby who was appointed a director on 23 April 2001 and company secretary on 2 December 1997. The schedule shows that there is then on file an 05/07 assessment in the sum of £1,250.00 and an SLNE. Additional records on the file show that Peggy Rigby Samuel Rigby and Martin Rigby resigned as directors and Martin Rigby as secretary on 17 July 2007 and as at 6 September 2007 no Vat was outstanding.

(4) Electrical Connectors International Limited which traded as NEC (International) was registered for Vat on 23 May 2006 the date of the administration of Connectors. This also is a company which went into administration the date being 15 June 2007 and became insolvent. The Vat liability is scheduled as £25,553.00 made up of 12/06 and 03/07 central assessments and a 03/07 default surcharge at 5% being £603.55. On the compliance record in the bundle the tax outstanding is shown as at 6 September 2007 as £36,483.55 comprising 2 assessments and a default surcharge and this figure was confirmed by Mrs. Morris in her evidence. The address is the same as for Connectors; the directors are shown as Peggy Rigby (9 May 2006 and company secretary from 9 May 2006); Samuel Rigby (9 May 2006); and Martin Rigby (9 May 2006). The business is stated to be "manufacturing and distribution of Electrical Connectors/Engineering".

(5) The Appellant, NEC Engineering Limited is recorded as registered for Vat purposes on 13 June 2007. Its address is the Glover Centre premises as above and the directors are Peggy Rigby (25 May 2007 and company secretary from the same date); Samuel Rigby (25 May 2007); and Martin Rigby (25 May 2007). The business is described as " Electrical equipment for engines & vehicles manufacture".

Mrs. Morris told the tribunal of her concern that two of the directors of the Appellant, Samuel Rigby and Martin Rigby and the third director, Peggy Rigby who is also the company secretary, had been involved in other Vat registered companies (Connectors and International) which had poor compliance records and which had become insolvent and de-registered from Vat owing substantial tax to Customs. Further the Appellant traded from the same premises in the same nature of business. She took the view that the Revenue was at risk and accordingly calculated the amounts of security to be required for both quarterly and monthly returns using the estimated turnover figure of £1,250,000.00 declared in the Appellant's Vat 1 application form for registration as the basis and applying Customs methodology calculating within the trade class the notional output and input tax on this turnover. This gave a projected 12 month liability. For quarterly returns Customs require security based on the estimated Vat for 6 months and for monthly returns it is for the estimated Vat for 4 months (see Notice 700/52 paragraph 3.4).

The Appellant's Notice of appeal was submitted by Mr. Kelly and the grounds given in it are:

"The assessment for the security deposit is excessive, as it is based upon information from old company. Estimated turnover figure was used and was also excessive. Payment will cause great hardship".

Mr Kelly told the tribunal that he had been financial director of the Appellant for 2 months though he had previously been a bookkeeper for International and with Connectors for a short while. The Appellant's business activity was making parts. The previous 2 companies (meaning Connectors and International) had as their main core business electrical battery connectors. This was a niche market and they traded mainly in Europe. There were substantial tax refunds. By the time of the International acquisition margins were becoming tighter and by the end of International the core business had changed. The Appellant does not do electrical connectors at all; it is a battery industry and different despite the common directors. At the hearing Mr. Kelly produced a draft report of the Directors and of unaudited financial statements for the Appellant for the period 25 May 2007 to 31 May 2008 in support of this explanation.

He sought to deal also with the circumstances of the tax liability of Connectors and International both of which had become insolvent. In the case of Connectors he stated that the assessment had been made on a technicality; that there had been a property transfer and not a trading one with the problem caused by a solicitor who had not effected a group registration. As far as International was concerned because of its export business the 2 outstanding returns might well have been refunds due.

As to compliance he referred to difficulties which had been caused by a computer crash with some 18 months of records having to be put back in. When it was accurate again returns were submitted. His explanation as to why this had not been brought to the attention of Customs was that since there would be refunds due to the company he did not think there would be a problem.

The representative for Customs had raised also the issue that in the VAT 1 application of the Appellant in response to the question as to the involvement of any of the directors in the running of any other companies reference was made to International only and not to Connectors nor to the Mossley Football Club. Mr. Kelly said that the omission was his though as far as Mossley was concerned he had not at that particular time known of the connection of the directors and did not recall it mentioned by them.

The role of this tribunal is not the protection of the Revenue but is to test the reasonableness of the decision made requiring the Appellant to give security. In doing so we look to see that the officer making that decision did not take into account some irrelevant matter or disregard something to which she should have given weight and also that she acted on a correct understanding of the law (see Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1KB 223. We are not to take into account any changes in facts and circumstances which may have arisen subsequent to the decision (see CCE v Peachtree Enterprises Ltd. [1994] ST 747. In that regard neither the compliance record of the Appellant at 4 September 2008 nor the unaudited 2008 accounts have been taken into consideration.

Mr. Kelly sought to establish that the Appellant was a different kind of company from both Connectors and International that it was smaller in its operation with a different kind of product. On compliance his approach appeared to be that with Connectors because it arose from a technicality there had not been in reality a tax liability. There had also been a long period of difficulty due to the computer failure (which would not appear to have been previously mentioned to Customs). This he said had affected 18 months of records for a period from January 2003 to May 2004 but that in any event essentially repayments were due.

We do not accept these arguments. No documentation was produced to indicate the nature of the transfer referred to nor that the point had been taken up with Customs. As to compliance it is part of the taxpayer's legal responsibility to submit returns on time and pay tax when due. There is a history of delays in the submission of returns in the case of the earlier companies. It is neither rigorous accounting nor legally correct merely to await a repayment return to offset liabilities including default surcharges nor would it appear that the assessments on the record were in fact appealed. The representative for Customs suggested that these companies had sought to use Customs as a banker and in our view some evidence before us points in that direction.

It was submitted also for the Appellant that the amount of the security was in any event excessive. This we do not accept. The calculation undertaken by Mrs. Morris had as its baseline a turnover figure supplied by the Appellant in the Vat registration application form 1 completed by Mr. Kelly and confirmed by his legal declaration that the information was true. The formula used was the standard one used by Customs and in our opinion is neither incorrect nor inaccurate.

We dismiss the appeal.

Customs have not sought costs and we make no direction on costs.

MAN/08/0122

Elsie Gilliland

CHAIRMAN

Release date: 7 November 2008