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Cite as: [2009] UKVAT V20908

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J & W Waste Services Ltd v Revenue & Customs [2009] UKVAT V20908 (07 January 2009)

20908

VAT – Notice of requirement to give security – appellant recently commenced trading and not in default – associated companies in default – whether decision of the Commissioners was reasonable – yes –VATA 1994, Sch 11 para 4(2) - appeal dismissed

LONDON TRIBUNAL CENTRE

J & W WASTE SERVICES LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS Respondents

Tribunal: EDWARD SADLER (Chairman)

S K DAS

Sitting in public in London on 11 December 2008

The Appellant did not appear and was not represented

Mrs G Orimoloye of the office of the Solicitor and General Counsel to HM Revenue and Customs, for the Respondents

Appeal heard in the absence of the Appellant under Rule 26 (2) of the Value Added Tax Tribunals Rules 1986

© CROWN COPYRIGHT 2008

DECISION

Introduction and preliminary matters

This is an appeal by the company J & W Waste Services Limited ("the Appellant") against a notice served on it by The Commissioners for Her Majesty's Revenue and Customs ("the Commissioners") requiring the Appellant to give security by way of third party guarantee or cash deposit as a condition of the Appellant supplying taxable goods or services. The notice of requirement to give security ("the Security Notice") was dated 29 November 2007 and required the Appellant to give security in the sum of £15,800, or the reduced sum of £10,550 if the Appellant opted to make monthly, rather than quarterly, returns. The Security Notice was served by the Commissioners pursuant to the powers they have under paragraph 4 of Schedule 11 to the Value Added Tax Act 1994 ("VATA 1994").

On 21 December 2007 the Appellant served its notice of appeal against the Security Notice. The grounds given for the appeal were as follows: "The requirement to give security under paragraph 4(2) (a) of Schedule 11 of VATA 1994 is unreasonable given the fact that the company has only just commenced trading." The Appellant was registered for VAT on 28 August 2007, and its first VAT quarter ended on 31 October 2007, so that it was not due to make a VAT return and a VAT payment until 30 November 2007, the day after the Security Notice was issued.

The Appellant's notice of appeal was completed by the firm Hazell Minshall & Co, accountants, as representative of the Appellant, and the tribunal office corresponded with that firm in relation to the usual matters to bring the appeal to a hearing. On 6 October 2008 the tribunal advised Hazell Minshall & Co that the hearing of the Appellant's appeal had been listed for 11 December 2008.

On 4 December 2008 Chiltern Tax Support for Professionals Ltd wrote to the tribunal office (their letter was received on 8 December 2008) to say that they had just been instructed to represent the Appellant at the hearing of the appeal, that they had not had a chance to take full instructions, and that they applied to postpone the hearing. The lawyer having conduct of the appeal for the Commissioners was advised of this and by fax dated 8 December 2008 (received 9 December 2008) objected to a postponement of the hearing on the grounds that the Appellant had known of the date of the hearing since 6 October 2008 and therefore had had sufficient time to instruct its representative for the hearing. The matter was reviewed in chambers by a tribunal chairman who decided that the hearing should take place. It is not clear whether this decision was communicated by telephone to Chiltern Tax Support for Professionals Ltd. In any event, on the morning of the hearing they wrote to the tribunal to say that they were not yet in a position to advance any cogent arguments on behalf of the Appellant and would not attend the hearing if it were to proceed, so as to minimise the Appellant's costs.

Therefore, when the appeal was called for hearing the Appellant did not appear nor was it represented. At the hearing Mrs Orimoloye, for the Commissioners, requested that we should hear the appeal under rule 26(2) of the Value Added Tax Tribunals Rules 1986 (as amended) ("the VAT Tribunals Rules"), which, in a case such as the present, gives the tribunal the power to proceed to consider the appeal in the absence of the Appellant. Mrs Orimoloye pointed out that the Commissioners had prepared their case for the hearing and had gone to the trouble and expense of bringing their witness to London, and that the Appellant had chosen to absent itself from the hearing by its failure to instruct in due time its representative.

We decided to hear the appeal in the absence of the Appellant under rule 26(2) of the VAT Tribunals Rules, taking the Appellant's case to be as set out in its Notice of Appeal (the Appellant having had no correspondence of any kind with the Commissioners in relation to the Security Notice).

The Appellant has the right, under rule 26(3) of the VAT Tribunals Rules, to apply to the tribunal to set aside our decision, provided such application is served at the London tribunal centre within 14 days after the date when our decision is released.

The evidence and the facts

We had in evidence before us a substantial bundle of documents relating to the VAT registration of the Appellant; the VAT "history" of eleven other companies which the Commissioners claimed were associated with the Appellant; a certificate of the Commissioners for each of those eleven other companies stating the amount of VAT due and unpaid by the company in question, provided as evidence under paragraph 14(1) of Schedule 11 to VATA 1994; entries from the Companies Registry in relation to the Appellant and certain of those eleven other companies (including details of the directors and company secretary of the Appellant and those other companies); a list of the company secretary appointments held by Marguerite Ashley and a list of the director appointments held by Christopher Ian Collins, as appearing in the Companies Registry.

Mrs Susan Ogburn, a Higher Officer in the VAT Security Team of the Commissioners in Southampton, gave evidence. Her duties extend to authorising notices of requirement of security, serving those notices, and reconsidering any decisions to issue such notices where the taxpayer requests that such a decision is reconsidered. In relation to the present case, Mrs Ogburn did not prepare and issue the Security Notice (that was done by a colleague, who was on extended sick leave and could therefore not give evidence to the tribunal), but she was the officer responsible for serving the Security Notice, and in that capacity, in accordance with standard procedure, had reviewed the file before the Security Notice was served. Mrs Ogburn's evidence related to the information taken into account by the Commissioners in deciding to issue the Security Notice; the relationship of the Appellant with eleven other companies through common directorships and appointments of company secretary; the nature of the business undertaken by those eleven other companies; the failure of those eleven other companies to comply with their VAT return and payment obligations and, in certain of those cases, the attempts by the Commissioners to use the procedure for requiring security; the insolvent winding up of certain of those companies owing amounts to the Commissioners; the reasons the Commissioners had come to their decision to serve the Security Notice on the Appellant notwithstanding that it was newly-registered and had not failed in its VAT compliance obligations; the method of calculation used to determine the sum required by way of security in the Security Notice; and the service of the Security Notice on the Appellant in person.

From the evidence we find the following facts:

(1) The Appellant was incorporated on 30 August 1996. On 30 August 2007 it applied to be registered for VAT, and was so registered with effect from 28 August 2007 (the date given by the Appellant as the date it commenced making taxable supplies). In its application for registration the Appellant described its business activities as "Operation of a waste recycling business", and it estimated the amount of its taxable supplies in its first twelve months as being £1 million. The principal place where the business is carried out is shown as Willments Shipyard, Hazel Road, Woolston, Southampton.

(2) The form for application for registration completed by the Appellant (and signed by M M Ashley, as company secretary) has this question: "Are you (or any partners or directors in this business) currently involved, or in the last two years have been involved, in any other business in the UK or Isle of Man (VAT registered or not) either as a sole proprietor, partner or director? If Yes, complete the boxes below." The form was completed with the name and VAT number of C I Collins Limited, and no other companies.

(3) As at 29 November 2007 (the date of the Security Notice) the only director of the Appellant was Christopher Ian Collins ("Mr Collins") and the company secretary was Marguerite Ashley ("Mrs Ashley").

(4) The Security Notice is dated 29 November 2007 and was served on that date in person by Mrs Ogburn on Mr Collins at the premises of the Appellant. Mrs Ogburn tried to serve a copy on Mrs Ashley, but Mr Collins, once he had seen the purport of the Security Notice, instructed Mrs Ashley not to accept a copy. We regard the Security Notice as having been duly served on the Appellant.

(5) The Security Notice requires the Appellant to provide security to the Commissioners (by way of either a cash deposit or a third party guarantee in prescribed form) in the sum of £15,800 as a condition of the Appellant continuing to make taxable supplies. It provides that, alternatively, the Commissioners will accept security in the reduced sum of £10,550 if the Appellant submits monthly returns.

(6) The Commissioners calculated these sums on the following basis:

(a) they took the Appellant's own estimate of its taxable turnover for its first year of operation (that is, for the year from 28 August 2008) – this estimate, given in the Appellant's VAT registration form, is £1 million;

(b) that taxable turnover sum was treated as inclusive of VAT, so that the Appellant was regarded as having for the year an amount of output tax estimated at £148,936.17;

(c) they applied to that estimated amount of annual output tax a ratio referred to as the "Tax Performance Ratio" for the trade class (37200: recycling of non-metal and scrap) to which, according to the Appellant's VAT registration form, the Appellant belonged. This ratio is calculated as the amount of net VAT (that is, total output tax less total input tax) which, as the average across that class of traders, traders in that class account for to the Respondents as a proportion of their output tax. For this particular class of traders, the Tax Performance Ratio is 27/127;

(d) applying the relevant Tax Performance Ratio to the Appellant's estimated output tax gives a sum of £31,663.60 as the net VAT which it is estimated the Appellant will have to pay to the Commissioners for the year in which the Security Notice is served. Assuming the Appellant makes the standard quarterly returns and payments, two return periods (i.e. 6 months) are covered by the required security of £15,800: if the Appellant chooses to make monthly returns and payments, four return periods (i.e. 4 months) are covered by the reduced required security of £10,550.

(7) At the time the Security Notice was served the Appellant had not become liable to make its first quarterly VAT return and payment – they were due on 30 November 2007. The Appellant has since made its first VAT return and payment, and all subsequent VAT returns and payments to date, on time and therefore has complied with all its VAT return and payment obligations. Its taxable turnover for its first year of trading, as appears from its VAT returns, is approximately £3.1 million.

(8) The Security Notice offers the Appellant the right to apply to the Commissioners for them to reconsider their decision to issue the Security Notice by bringing to their attention any information which the Appellant wishes to be taken into account. The Appellant did not avail itself of this right, but instead served its notice of appeal to the tribunal. The Appellant has had no contact with the Commissioners in relation to the Security Notice following the occasion on which the Security Notice was served.

(9) Mr Collins is, or has been, a director of the following companies (together, "the Associated Companies") carrying on the following respective trades as categorised by the Commissioners: J & W Demolition & Recyling Limited (collection and treatment of waste); J & W Recycling Limited (recycling of non metal and scrap); J & W Waste Management Limited (recycling of non metal and scrap); J & W (Aggregates) Limited (construction work involving special trades); J & W Plant and Tool Hire Ltd (machinery and equipment rental); J & W Tipper Hire Limited (storage and warehousing); Swanwick Homes Ltd (development and selling of real estate); Swanwick Civil Engineering Limited (agricultural services); Swanwick Communications Limited (alterations of civil engineering constructions); Swanwick Construction Co Ltd (alterations of civil engineering constructions); C I Collins Ltd (holding company providing management services to subsidiary companies). All of the "J & W" companies trade or traded from the same address as the Appellant. The "Swanwick" companies trade or traded from various addresses in the Southampton area.

(10) Mrs Ashley is, or has been, the company secretary of C I Collins Ltd and all the "J & W" companies except for J & W (Aggregates) Limited and J & W Tipper Hire Limited.

(11) Mr Collins is or was the sole director of each of the Associated Companies except for C I Collins Ltd, Swanwick Construction Co Ltd, J & W Recycling Limited, J & W Waste Management Limited and J & W (Aggregates) Limited (where, in each case, there is one other director, being either a Mr Ian Cox or a Mr Conrad Collins).

(12) In relation to the Associated Companies, on the date on which the Security Notice was served:

(a) J & W Demolition & Recycling Limited was in default with its VAT compliance, having an outstanding VAT liability of £170,929.92 and default surcharges for nineteen periods of default totalling £13,557.33;

(b) J & W Recycling Limited (which was deregistered for VAT on 22 March 2006 following its insolvency on 8 February 2006) was in default with its VAT compliance, having an outstanding VAT liability (including default surcharges for three periods of default) of £122,189.13;

(c) J & W Waste Management Limited (which was deregistered for VAT on 19 August 2004 following its insolvency on 28 April 2004) was in default with its VAT compliance, having an outstanding VAT liability (including default surcharges for ten periods of default) of £144,495.47;

(d) J & W (Aggregates) Limited (which was deregistered for VAT on 15 January 2002 following its insolvency on 10 April 2001) was in default with its VAT compliance, having an outstanding VAT liability (including default surcharges for thirteen periods of default and default interest) of £969,747.74;

(e) J & W Tipper Hire Limited (which was deregistered for VAT with effect from 1 September 1994) was in default with its VAT compliance, having an outstanding VAT liability (including default surcharges for three periods and default interest) of £151,352.65;

(f) Swanwick Communications Limited (which was deregistered for VAT on 11 June 2007 following its insolvency on 19 March 2007) was in default with its VAT compliance, having an outstanding VAT liability (including default surcharges for four periods) of £262,526.23. The Commissioners served a notice of requirement of security on the company in January 2007, but the notice was not enforced as the company went into an insolvent winding up;

(g) Swanwick Construction Co Limited (which was deregistered for VAT on 2 May 2007 following its insolvency on 20 December 2006) was in default with its VAT compliance, having an outstanding VAT liability (including default surcharges for five periods) of £513,378.28. The Commissioners served a notice of requirement of security on the company in November 2006, but the notice was not enforced as the company went into an insolvent winding up;

(h) Swanwick Civil Engineering Limited had an outstanding default surcharge liability for the VAT quarterly period ending 08/07 in the sum of £1,196.74;

(i) Swanwick Homes Limited had an outstanding VAT liability of £753.00; and

(j) C I Collins Limited had no outstanding VAT liability, but has been in the default surcharge regime since the VAT quarterly period ending 03/02, with default surcharges for fourteen periods.

The Appellant's submissions

The Appellant, in its notice of appeal, stated that the Security Notice is unreasonable given the fact that it was served shortly after the Appellant had commenced trading (and, the Appellant might have added, before its first VAT return and payment was due). In their letter to the tribunal of 11 December 2009 Chiltern Tax Support for Professionals Limited stated: "We have been given to understand the [Appellant] has submitted and paid all of its VAT returns, but have seen no evidence in support of this statement and are unable at present to advance any argument on behalf of the Appellant." This statement is indeed correct, as Mrs Ogburn confirmed to us.

The Commissioners' submissions

For the Commissioners Mrs Orimoloye submitted that the security requirement provisions of Schedule 11 to VATA 1994 confer on the Commissioners the power to require security from a taxable person for VAT due from him if they think it necessary for the protection of the revenue. In exercising that power the Commissioners are entitled to take into account as a relevant factor the compliance history of any other taxable persons which have a relevant connection with the person from whom the security is required. In the Appellant's case there are a number of companies which are connected, because they carry on (or did so before they became insolvent) similar businesses from the same premises or because they have, in Mr Collins, a director in common (and some have, in Mrs Ashley, a company secretary in common). All those connected or linked companies and businesses have had a history of severe non-compliance in relation to their VAT obligations, and in several cases have gone into insolvent winding up owing very substantial amounts of VAT to the Commissioners.

In these circumstances and in this context it was reasonable of the Commissioners to require that the Appellant, as a new trader making taxable supplies, should provide security for the tax which would become due: given the connections of the Appellant to those other companies and their poor compliance record it was reasonable to anticipate that the Appellant might follow the same course, and therefore early action to protect the revenue was both prudent and reasonable.

The decision to serve the Security Notice was therefore reasonable, and this was so notwithstanding that the Appellant was not then itself in default. It is the policy of the Commissioners in so-called "Phoenix cases" (where, as in this case, businesses have become insolvent owing VAT and new businesses similar in nature are started up with the same principal persons involved) to move quickly so as to reduce the risk of future default in relation to the new businesses. The reasonableness of the action on the part of the Commissioners is to be judged at the time they served the Security Notice: see Customs & Excise Commissioners v Peachtree Enterprise Ltd [1994] STC 747, so that the subsequent compliance by the Appellant with its VAT obligations is not relevant. In any event, in Phoenix cases it is not unusual for the new trader to begin life by complying with its VAT obligations, but then to slip into default. The Commissioners were taking protective action against that risk.

Not only was the Security Notice reasonable in principle, but it was reasonable in the amount of security it required: the Commissioners had used the Appellant's own estimate of its annual turnover (which, as events had proved, was considerably below its actual turnover) and had used a method of calculation which had been judicially approved to assess the likely net VAT due to the Commissioners. The amount of security was therefore proportionate to the risk to the revenue which the Commissioners had identified.

Accordingly, the decision of the Commissioners to require the security specified in the Security Notice was, at the time the Security Notice was served, both fair and reasonable and therefore a proper exercise of their powers in this regard. The Appellant therefore had no valid grounds on which to appeal and its appeal should be dismissed.

Our decision

We have no hesitation in deciding that the Commissioners have exercised their powers reasonably in this case in serving on the Appellant the Security Notice, and that therefore the Appellant's appeal should be dismissed.

The relevant statutory provision is paragraph 4(2) of Schedule 11 to VATA 1994, which is in these terms, so far as relevant to this appeal:

"If they think it necessary for the protection of the revenue, the Commissioners 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 the taxable person…."

Paragraph 4(4) provides that any such security "shall be of such amount, and shall be given in such manner, as the Commissioners may determine."

In cases such as this, where the Commissioners have had conferred on them powers which they can exercise if they think it is necessary to do so for the protection of the revenue, the role of the tribunal is to consider whether the Commissioners acted reasonably in the exercise of those powers, taking into account, when reaching their decision so to act, only such material as is relevant, and disregarding any material which is not relevant to that decision.

In this case we have, in the Appellant, a trader which had recently commenced trading and which was not in default in any respect when the Security Notice was served on it – indeed at that time it had not even reached the point when it was due to make its first VAT return. Therefore, if it were the case that the Commissioners were required, in acting reasonably, to look only to the circumstances of the Appellant's behaviour, it would unquestionably have been unreasonable on the part of the Commissioners to serve a Security Notice at that time since, taking account of the Appellant's behaviour alone, it could not reasonably be said that such action was necessary for the protection of the revenue. That is the argument of the Appellant as we understand it from the notice of appeal.

However, the Commissioners are not so constrained. In exercising their powers they must take into account those factors that are material to their decision to take action necessary for the protection of the revenue. In the present case they were aware that the only director of the Appellant was also a director (and in some cases the sole director) of a number of companies, all of which had a history of default in terms of compliance with payment of their VAT, and that the company secretary of the Appellant was also the company director of some of those defaulting companies. They were aware that most of those companies traded from the same premises as those from which the Appellant traded, and that some of those companies carried on, or had carried on, a similar trade to that carried on by the Appellant. At the date the Security Notice was served on the Appellant, the total amount owing to the Commissioners by those companies by reason of their default was in the region of £2.35 million. The Commissioners were aware that five of those companies had been wound up as insolvent companies, each one owing a very substantial amount of VAT to the Commissioners which they were unable to recover.

Given the relationship between those companies and the Appellant (by reason of controlling directors, or by reason of the similarity of trade carried on, or by reason of trade conducted from the same premises), and given the very substantial extent of the default practised by those companies, it was unquestionably material for the Commissioners to take into account the VAT compliance record of those companies when deciding whether or not it was necessary for the protection of the revenue to serve the Security Notice on the Appellant. Having properly taken such compliance record into account it was perfectly reasonable for the Commissioners to conclude that there was a real risk that the Appellant would follow the same path as those other companies and that accordingly they should act promptly to pre-empt that eventuality occurring with its consequent risk of unpaid tax. In several cases in relation to those other companies the Commissioners had, after substantial default, taken action to require security, only to find that the companies in question went into insolvent winding up proceedings: no doubt in relation to the Appellant they intended, quite reasonably, to shut the stable door before the horse had bolted.

There is a further factor which the Commissioners were entitled to take into account: the Appellant, in completing its VAT registration form, stated that there was only one other company, C I Collins Limited, which had a director or principal in common with the Appellant (see paragraph 10(2) above). This was a false statement, as the Appellant must have known to be the case. It is reasonable to surmise that this statement was falsely made in the hope that, on reading the registration form, the Commissioners would not make the connection between the Appellant and the defaulting companies of which Mr Collins is or was a director. We note that the only company mentioned in reply to this question, C I Collins Limited, is the only one of those companies which, at least as of the end of November 2007, did not owe any unpaid VAT to the Commissioners (although it had then entered into the default surcharge regime). The making of this false statement was a further ground for the Commissioners to apprehend that the Appellant could not be relied on as trustworthy in relation to its VAT affairs, and hence for the Commissioners to reach a reasonable decision that immediate action, by way of the requirement of security, was necessary for the protection of the revenue.

In reaching their decision to serve the Security Notice, therefore, the Commissioners acted reasonably in taking into account factors and material relevant to that decision. We had no evidence that they failed to take into account, or disregarded, any other factors which were relevant to that decision. The Appellant might argue that they failed to take into account the fact that the Appellant had not itself defaulted in its VAT compliance: but that factor was known and was taken into account – it is simply that the other factors taken into account (in particular, the severe and persistent default of the associated companies, and the likelihood of the Appellant following the same path) outweighed in the minds of the Commissioners the possibility that the Appellant would be VAT compliant in its early stages of trading. As we were reminded, the Peachtree Enterprises case requires us to look at the position when the notice of requirement of security is served, so that in any event the later compliance record of the Appellant is not relevant. But even if that later record, to the date of the hearing of this appeal, were taken into account that would not in our view make it unreasonable for the Commissioners to weigh that against the history of default by the associated companies and still to conclude that action was necessary for the protection of the revenue.

If there were other factors unknown to the Commissioners which the Appellant considered they should have taken into account in reaching their decision then the Appellant had the opportunity to make them known to the Commissioners – as mentioned, the Security Notice invites the Appellant to bring such matters to the attention of the Commissioners if a request is made for the decision to be reconsidered, but the Appellant chose not to do so.

In principle, therefore, the Commissioners acted reasonably in making their decision to require the Appellant to provide security for its VAT payment obligations. That leaves us to consider whether the amount of security requested was itself reasonable in the circumstances of the Appellant. We consider that it was.

In deciding upon the amount for which security would be required, the Commissioners used as the basis of their calculation the annual turnover estimated by the Appellant and included by it in its application to register for VAT purposes. The basis of the calculation they then made is set out in paragraph 10(6) above. That calculation is a fair and reasonable attempt to quantify, by reference to the Appellant's particular business, the net amount of VAT which the Appellant is likely to have to pay to the Commissioners if the Appellant's estimate of its turnover is accurate, and therefore is a fair and reasonable attempt to quantify the amount of revenue which is at risk should the Appellant default in its VAT payment obligations.

For these reasons we consider that the Commissioners acted reasonably in serving the Security Notice on the Appellant, and accordingly the Appellant's appeal is dismissed.

The Commissioners made no application for costs in this appeal, and therefore we make no order as to costs.

EDWARD SADLER

CHAIRMAN

RELEASE DATE: 7 January 2009

LON/2008/0015