19233
VAT — requirement for security — appellant trading in mobile phones — appellant involved in chain of transactions in which supplier went missing having failed to account for or pay VAT said to have been paid by the appellant — requirement for security imposed following appellant’s failure to comply with HMRC’s instructions for those dealing in mobile phones — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

 
 	
BALMORAL LIMITED	Appellant

- and -

HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

			Tribunal:	David Demack (Chairman)
					John Lapthorne	

Sitting in public in Birmingham on 9 and 10 August 2005

Andrew Young of counsel instructed by Messrs Dass, solicitors, Birmingham for the Appellant 

Craig Sephton QC instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents 

© CROWN COPYRIGHT 2005

DECISION

1.	By paragraph 4(2) of Schedule 11 to the Value Added Tax Act 1994 (for which Schedule section 58 of the Act makes provision), Her Majesty’s Revenue & Customs  (‘HMRC’) may require a taxable person to give security for future taxable supplies.  That power was significantly extended by section 17 of the Finance Act 2003 “to tackle serious cases of VAT evasion where several businesses act together to attack the tax system”, (Budget Notice 14/03).  The section created what Lightman J described as ‘the security provision’ in his judgment in Federation of Technological Industries and 53 other traders v Commissioners of Customs and Excise and HM Attorney-General [2004] STC 1008.  The security provision is set out at paragraph 22 of this decision. 
2.	How the security provision works was uncontroversially explained in the skeleton argument of Mr Jonathan Peacock QC, as taken “almost verbatim” by Jacob LJ when the Federation case was taken on appeal to the Court of Appeal, as follows (see 2004 STC 1424 at p 1431):
“i.	if they think it necessary for the protection of the revenue, the CCE [now HMRC] 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 for the payment of any VAT which is, or may become, due from any person to whom ‘relevant’ goods or services are supplied by or to the taxable person.  The security shall be of such amount and shall be given in such manner as the CCE may determine.
ii.	if an appeal is made against the requirement to give security, then the Tribunal shall allow the appeal unless the Commissioners of Customs and Excise satisfy the Tribunal that: there has been an evasion of, or an attempt to evade, VAT in relation to goods or services supplied by or to that person; or, it is likely (or without the requirement for security it is likely) that VAT in relation to such goods or services will be evaded;
iii.	if the CCE do so satisfy the Tribunal, then the Tribunal will consider the requirement to give security in the same manner as they would consider a request for security from a taxable person in respect of that person’s current or future VAT debts.  The approach which a Tribunal should follow on such an appeal was considered by the Court of Appeal in John Dee Limited v CCE [1995] STC 941 at pps.952-3.  The Court held that such an appeal was appellate in nature as opposed to supervisory.  The statutory condition which the Tribunal must consider on such an appeal is whether it appeared requisite to the CCE to require security.  In considering this, the Tribunal should consider whether the CCE acted in a way in which no reasonable panel of CCE could have acted or whether they had taken into account some irrelevant matter or had disregarded something to which they should have given weight.  The Tribunal may also have to consider whether the Commissioners of Customs and Excise have erred in point of law.”
3.	The Appellant company, Balmoral Limited (“Balmoral”), a trader in mobile telephone handsets, was, by letter of 21 October 2004, required to give security of £1,541,300 “for the payment of any VAT which is or may become due from you or a business or individual in a supply chain in which you trade”.  It was told that the security might be enforced against any existing or future indebtedness.  The letter opened by saying that HMRC had written to Balmoral on 2 October 2003 drawing attention to its involvement in a VAT supply chain in which a VAT registration number had been used without the knowledge of the registered business, leaving VAT unpaid. (The VAT in question totalled £891,974).  The letter continued, “It has now been brought to my attention that you have been involved in a further supply chain where a business went missing leaving an amount charged as VAT unpaid.  VAT registration number 768 0302 32 (Direct Phones Limited) went missing leaving an amount charged as VAT unpaid”.  The reasons for the requirement were disclosed in evidence as follows:
“Firstly, the Appellant had previously been involved in supply chains involving businesses that evaded substantial VAT payments and had been issued a warning letter accordingly.
Secondly, the Appellant was aware that VAT had been evaded, and had been given the opportunity to address its commercial practices in order to avoid becoming involved in high risk supply chains in the future.
Thirdly, the Appellant did not provide further information after the issue of the Warning letter, despite being invited to do so in the letter.
Fourthly, the Appellant had entered into 26 deals with a ‘missing’ trader, Direct Phones Ltd, leaving a significant amount of VAT unpaid.”
4.	Balmoral appealed against the security requirement and, in its Notice of Appeal given on 26 October 2004, admitted that it had been involved in a supply chain where there had been irregularity but claimed that the irregularity had not been caused or permitted by it.  It contended that it had not been negligent or reckless in the course of its taxable activities.  It further alleged that HMRC was in breach of EU Community law in that:
i)	paragraph 4(2)(b) of Schedule 11 to the 1994 Act was ultra vires;
ii)	any requirement for security would be parasitic on a claim that Balmoral could be held jointly and severally liable for the tax debts of another person;
iii)	as a matter of community law, the United Kingdom had no power to impose joint and several liability in the circumstances; 
iv)	on the facts, the exercise of such a purported power lacked proportionality and was irrational;
v)	on the facts, the application of such a decision could result in double taxation, which was unlawful; and
vi)	the application of the security was discriminatory, amounted to negative state aid and distorted the market.
Finally, Balmoral claimed in the alternative that the quantum of the security required was excessive.
5.	Both parties were represented by counsel:  Balmoral by Mr Andrew Young, and HMRC by Mr Craig Sephton QC.  They presented us with a joint bundle of copy documents, and we took parol evidence from the following three officers of HMRC:
Alan Geoffrey Penfold, who made the requirement for security;
Mrs Margaret Patricia Pearson, a senior assurance officer; and
John Henry Gates, the manager of the HMRC national asset and security team.
From that evidence, we make the following findings of fact.
6.	Balmoral trades as a wholesaler of mobile telephone handsets from a base in Birmingham.  It was registered for VAT with effect on 1 July 2002.  In its application for registration, Balmoral estimated the value of taxable supplies it would make in the 12 months from 5 July 2002 as £500,000.
7.	In March 2003, Balmoral commenced trading with a company said to be Conductive Products Limited (‘Conductive’).  Between 21 March 2003 and 25 March 2003 inclusive, in 17 transactions it purchased goods from Conductive to the value of £11,683,605.50, on which the VAT totalled £1,740,111.50.  In March 2003 there was no such company as Conductive.  A company originally of that name had changed it to Charleswater Europe Limited on 28 April 2000.  (The company subsequently changed its name again – to Charleswater Limited – but  that is irrelevant in the present context).  On instructions from Conductive, the whole consideration for every one of the transactions it entered into with Balmoral was required to be paid, and was in fact paid, to a third party (in some cases to two third parties).  On 25 March 2003, Balmoral also purchased goods to the value of £250,500 from Business Logic Consulting Limited (“Business Logic”) on which the VAT was £43,837.50.  The invoice from Business Logic contained no VAT registration number or serial number.  Consequently, it was not a valid VAT invoice.  (By regulation 14 of the VAT Regulations 1995, a registered person providing a VAT invoice on making a taxable supply in the United Kingdom to a taxable person shall state thereon, inter alia, an identifying number, and the name, address and registration number of the supplier).  
8.	None of the almost £1.8 million VAT so charged to Balmoral by Conductive and Business Logic was ever accounted for or paid to HMRC.  
9.	Ms Beverley Tookey, the company secretary of Balmoral, was asked to explain to HMRC why the company had traded with Conductive and Business Logic.  She claimed that the transactions had been entered into in the absence, and consequently without the authority, of Balmoral’s managing director. 
10.	As it appeared to HMRC that Balmoral had carried out transactions with a net value of over £10 million without checking its suppliers as required by HMRC Notice 700/52, on 31 March 2003 they compulsorily de-registered it as a risk to the revenue.  (A copy of Notice 700/52 had been sent to Balmoral with the warning letter of 2 October 2003.  The Notice requires taxable persons to take reasonable steps to avoid dealing with high risk businesses and provides that a warning letter shall be sent before a notice is served requiring the provision of security.  At paragraph 4.2 of that notice, HMRC say that they may make a notice of requirement for security, inter alia, if a trader is unable to show that he has taken reasonable steps to establish the business credentials of his suppliers.  The notice continues:
“We will take into account what you know about the nature of the supply and your suppliers and customers.  We will not necessarily expect you to know about the full extent of the supply chain, but it is reasonable to assume that you will at least know your supplier and the recipient of your supplies.”).
11.	Following representations by Balmoral’s then VAT advisors, WJB Chiltern, HMRC agreed conditionally to reinstate its VAT registration.  Reinstatement took place on 30 April 2003 subject to the following conditions:
“Before the first transaction is undertaken you must notify myself [ie Mrs Emery of HMRC’s Birmingham Business Centre who wrote the letter] of the details of the proposed deal including the names & VAT numbers of the supplier and customer.  This is in addition to all the normal checks and clearances detailed below.  You must speak to myself, or one of my colleagues in my absence, before the deal is concluded.
Basic checks to be conducted by yourself include checking details supplied by another business match and make sense.  Where appropriate you should check Companies House for directors and a personal visit is recommended where possible.  
You are strongly advised never to deal with anybody who only gives you a mobile phone number.
You are strongly advised never to deal with anybody who wishes you to make, or receive, a third party payment.
For all new customers and suppliers the VAT number must be cleared by ourselves before trading commences.  You should obtain copies of the VAT certificate, Companies House certificate and a letterheading giving the bank account details.  These should be faxed to our Redhill office … You should repeat this check if you have not traded with somebody for a period of time.
At the end of each day's trading you must notify myself of the details of the transactions that have taken place.  A suggested format has been supplied which should be faxed across but the same information can be provided by E Mail or even a phone call if you prefer.” 
12.	We should explain the reference to HMRC’s Redhill office in the penultimate paragraph of the extract cited.  HMRC have a special office at Redhill with which all traders in mobile phones and CPUs (computer chips) should check to ensure that those with whom they intend to contract are registered for VAT and are not classified as missing traders or associated with such traders, or are not believed to be using a ‘hijacked’ VAT registration number.  Only if such checks are made and the HMRC’s responses confirm that traders with whom the enquirer proposes to contract are registered for VAT will HMRC allow their input tax claims.
13.	Despite having been re-registered for VAT, Balmoral carried out little trade in 2003, and failed to make any VAT returns for the months of September 2003 to February 2004 inclusive.  Consequently, on 4 February 2004 it was again compulsorily de-registered, HMRC considering that it had ceased to make taxable supplies.  
14.	On 11 May 2004, Andrew Kelly, the director of Balmoral, submitted a new application for VAT registration on behalf of the company.  In it he stated that its turnover in the following 12 months was expected to be £100,000, with no EC supplies or purchases.  It was to trade in “mobile telecommunications accessories”, and had made its first supplies on 5 February 2004 – one day after the previous de-registration.  The application was processed and the company given a new registration number.  (Presumably, that was to prevent claims being made under the old number).  
15.	On 11 August 2004, Balmoral telephoned HMRC at Redhill to enquire whether a VAT registration number it had been given for Direct Phones Limited (“Direct”) was the correct one.  On being told that it was, Balmoral began trading with the person or persons behind the organisation purporting to be Direct, that company’s VAT registration details having been hijacked.  Between 17 and 24 August 2004, Balmoral made 38 purchases from “Direct” in a total sum of £12,623,283, exclusive of VAT.  All payments for those purchases were, at “Direct’s” insistence, made to one or more third parties (as were all payments by Balmoral’s own customers).  Balmoral recorded a very small profit on every transaction.  The VAT on the purchases, £2,209,074, has never been accounted for or paid to HMRC by Direct.  (We were provided with copies of invoices relating to but 26 of Balmoral’s 38 purchases from “Direct”. The VAT shown on them totals £1,541,336.28 – a figure which, rounded down to the nearest £100, was that demanded as security from Balmoral.  None of the 26 invoices contained a serial number or VAT registration number.  Consequently, none was a VAT invoice).  
16.	Meanwhile, on 18 August 2004, following an investigation by HMRC which showed not only that the genuine Direct was, if trading at all, trading at a level far below the VAT registration limit, but that its VAT registration number had been hijacked and was being used by a person or persons unknown, Direct was compulsorily de-registered.  (We accept that Mrs Pearson visited Direct’s place of business in August 2004 and was unable to obtain an answer to the door; and that she revisited the premises in February 2005 only to be told by Mr Cross, Direct’s director, that he had been working away from home so that Direct had not traded for some time.  Balmoral was informed of HMRC’s de-registration decision, whether by letter of 18 August or 23 August, or both, is not clear to us.  The final VAT return made by the true Direct, for the period from 1 June 2004 to 18 August 2004, shows sales in the period as ‘Nil’, and purchases of £55.  It was against that factual background that HMRC made their security demand of Balmoral, and against which it now appeals.
17.	In February 2004 the Federation of Technological Industries and others brought the case to which we referred in the first paragraph of our decision.  Balmoral was one of the 53 traders involved in the case.  The applicants claimed, inter alia, that the amendment to paragraph 4 of the Schedule 11 to the 1994 Act, as inserted by section 17 of the Finance Act 2003, was unlawful as offending against both EU Community law, and the European Convention on Human Rights and its First Protocol.  Lightman J decided to refer that particular ground of complaint to the Court of Justice of the European Communities (‘the ECJ’) and his decision to do so was later confirmed by the Court of Appeal.  For completeness, we include at this point three of the questions referred to the ECJ by the Court of Appeal.  They are: 
“2.	Does Art.22(8) of the Directive permit Member States to provide that any person may be made so liable or to provide that one person may be made so liable or to provide that one person may be required to provide security for tax due from another subject only to [the measure being objectively justifiable, rational, proportionate and legally certain]? 
4.	If the answer to question 2 is no, what limits, other than those imposed by the aforesaid general principles, are there on the power conferred by Art. 22(8)?
5.	Are member states precluded by the Directive as amended from providing for joint and several liability of taxpayers or from requiring one taxpayer to provide security for tax due from another in order to prevent abuse of the VAT system and the protection of revenues properly due under that system, if such measures comply with the aforesaid general principles?”
18.	We were informed that the oral hearing before the ECJ is to take place early in October next, so that we should expect that Court to give its judgment early in 2006.
19.	As we understood him, Mr Young sought to persuade us, on the basis of the detailed arguments to be advanced by the Federation of Technological Industries before the ECJ, that we should allow Balmoral’s appeal.  But were we to do so, we should encroach on the territory of that court, and we therefore do not propose to embark on that course.  Rather, we take the view that, in reliance on paragraphs 76 and 89 of the judgments in the Federation case in the Court of Appeal, we should simply apply the impugned provisions to determine the instant appeal.  The first of those paragraphs is to be found in the judgment of Jacob LJ (at p 1441) and reads as follows:
“76.	It remains only to comment on the CCE's [HMRC’s] current position.  Mr Peacock frankly told us that the CCE only appealed to this Court rather than going on a reference was for the sake of speed.  In the result he has in fact lost time.  Given the amount of money at stake (both in the UK and across the EU) it is highly desirable that the ECJ should decide this reference as soon as possible.  Meanwhile it is accepted that the CCE can use the impugned provisions.  We were told they are only using the security provisions.  That is of course a matter for them.  On my view they are free also to use the joint and several liability provisions and all threats from the Federation about claims for damages are nothing more than “sound and fury signifying nothing”.
The second is to be found in the judgment of Ward LJ (at p 1443) and reads as follows: 
“89.	With regret I conclude that the correct application of Community law in this case is not so obvious as to leave no scope for any reasonable doubts. I am compelled, therefore, to refer the questions to the Court of Justice.  My misgivings are obvious.  Were the matter one of domestic law my first impression would prevail.  Dishonest trade in these goods must be stamped out.  Sections 17 and 18 of the Finance Act 2003 provide ample safeguards for honest traders, though they will be put to inconvenience.  Like Jacob LJ, I encourage the Commissioners to apply the impugned law in the expectation of eventual victory in Luxembourg.  With so much money at stake I earnestly hope the Court of Justice will be able to expedite the determination of the questions we reluctantly have to send them.”
20.	And lest it be contended (which in fact it was not), that the sentence, “Meanwhile it is accepted that the CCE can use the impugned provisions” in the extract cited from the judgment of Jacob LJ at paragraph 76 can be interpreted otherwise than as indicating that “Both parties accept that the CCE etc”, we should say that we reject any such interpretation.  In our judgment, Balmoral, as one of the traders involved in the Federation case, is bound by that acceptance.
21.	We have one observation to make on Mr Peacock’s excellent summary of the security provision.  In the third sentence of paragraph (iii), he observed that the Court of Appeal in the case of John Dee Limited held that an appeal to the tribunal was appellate in nature as opposed to supervisory.  We accept that without question, but should explain that in exercising its appellate jurisdiction the tribunal must apply supervisory principles.  
22.	We then turn to the relevant statutory provision.  Section 17 of the 2003 Act, so far as relevant, provides as follows:
“(2)	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 —
(a)	the taxable person, or
(b)	any person by or to whom relevant goods or services are supplied 
[…]
(4)	Security under sub-paragraph (2) above shall be of such amount, and shall be given in such manner, as the Commissioners may determine.
[…]
(5)	In section 72(11) (penalty for supplying goods in contravention of paragraph 4(2) of Schedule 11) after ‘supplies’ insert ‘or is supplied with’
[…]
(6)	In section 84 (further provisions relating to appeals) after subsection (4D insert —
‘(4E)	Where an appeal is brought against a requirement imposed under paragraph 4(2)(b) of Schedule 11 that a person give security, the tribunal shall allow the appeal unless the Commissioners satisfy the tribunal that —
(a)	there has been an evasion of, or an attempt to evade, VAT in relation to goods or services supplied to or by that person, or 
(b)	it is likely, or without the requirement for security it is likely, that VAT in relation to such goods or services will be evaded.”
23.	Mr Sephton submitted that there had been evasion of VAT on goods supplied to Balmoral.  He did so in reliance on Mrs Pearson’s evidence as to her two visits to Direct’s premises when, it will be recalled, on the first of them she was unable to obtain any answer from within and, on the second, was told by Direct’s director that he had been working away from home so that Direct had not been trading.  Mr Sephton quite rightly observed that had the true Direct been trading with Balmoral in August 2004, it would have had good reason for declaring its dealings to HMRC, unless, of course, Direct was itself evading tax.
24.	He submitted that HMRC had a rational policy for dealing with the problems addressed by Notice 700/52, and implemented it in a straightforward and fair way, i.e. by giving warning that a notice of requirement to provide security might follow.
25.	There was not a shred of evidence, except a single telephone call to HMRC’s Redhill office, that Balmoral took any steps to check that Direct was a bona fide trader.  Mr Sephton submitted that Direct’s invoices, being devoid of identifying numbers and a VAT registration number, cried out for further investigation, and the fact that payments to third parties had been required for huge amounts of money only exacerbated the situation.  Further, the history of the matter had to be seen in the context of Balmoral’s previous trading history.  (We need not set out that history in detail.. Suffice it to say that except in March 2003 and August 2004 its trading was in minimal amounts).
26.	In those circumstances, Mr Sephton contended that there were good reasons for requiring security of Balmoral; and the reasons were those advanced by Mr Gates in evidence (The reasons are set out in paragraph 3 above).  He further submitted that the way in which HMRC had dealt with the matter was appropriate, bearing in mind the limited information Balmoral had provided.  It appeared to Mr Sephton to be the case that Balmoral was not challenging the security requirement itself, but merely the quantum thereof.  
27.	It was rational for HMRC to require security based on Balmoral’s past history.  Looking to the past was an eminently sensible way of trying to predict the future.  No evidence had been adduced to show that Balmoral could not satisfy the security demand; nor had it claimed that the demand was disproportionate.  Against that background, Mr Sephton claimed that the test provided for in section 84 (4E) was satisfied.
28.	He kindly addressed us at some length on the Community provisions in point in the appeal.  For the reasons we gave earlier for restricting our consideration to domestic law, we find it unnecessary to deal with them.  We simply note that the judgments in the Federation case in the Court of Appeal are said by the Lords Justices to point to an eventual HMRC victory before the ECJ.
29.	Mr Young indicated that whichever way our decision went, it was likely to be appealed.  He maintained that the tribunal should await the judgment of the ECJ before arriving at its final decision.  If it were not to do so, he claimed, it would find itself in the same position as did the tribunal in Conoco Limited v Customs and Excise Commissioners [1995] STC 1022 (where the High Court directed the tribunal, which had refused to refer a question on a provision which was not acte clair, to decide whether the appeal should be referred to the ECJ).
30.	Mr Young submitted that, in missing trader cases, HMRC could not succeed unless they could produce the missing trader.  He did, however, accept that they had established that there had been evasion of VAT in relation to goods supplied to Balmoral.
31.	We are unable to accept that HMRC cannot succeed in missing trader cases unless they produce that trader.  If we were to do so, HMRC would be faced with an impossible task, particularly where the parties to a transaction arrange for payment for goods to be made to a third party, usually to a bank abroad, and that third party’s true identity and whereabouts are never revealed: it would be to place HMRC in a ridiculous situation.
32.	Having most carefully considered the case for HMRC advanced by Mr Sephton, we accept it in every detail.  The test provided for in section 84(4E) was satisfied.  It appeared requisite to HMRC to require security of Balmoral.  In so requiring it, they did not act in a way in which no reasonable panel of revenue commissioners could have acted; they did not take into account any irrelevant matter, nor did they disregard something to which they should have attached weight.  Further, in our judgment, the requirement for security, being based on the value of the Direct invoices, was proportionate.
33.	We dismiss the appeal and direct Balmoral to pay HMRC’s costs of and incidental to and consequent upon the appeal.  If those costs cannot be agreed, we direct that they be assessed by a costs judge. 

DAVID DEMACK 
CHAIRMAN
Release Date: 25 August 2005

MAN/04/0610