19253
	VAT — SECURITY — Protection of Revenue — Company Directors involved in failed companies in the same business and operating from the same address as the Appellant companies- one of the Appellant companies poor VAT compliance record — downturn in business and threat to jobs not relevant — Appellants engaged in cash business VAT collected but not paid — threat to jobs due to Appellants’ actions not the imposition of security — Whether Respondents’ actions in requiring a security reasonable — Yes — Appeal dismissed — VAT ACT 1994 Schedule 11 p 4(1)

MANCHESTER TRIBUNAL CENTRE

 
 	
	F2 LEISURE LIMITED	Appellant (1)

	- and -

	VIRTUAL LEISURE LIMITED	Appellant (2)

	- and -

	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Michael Tildesley OBE (Chairman)
						Bob Grice LLB (Hons)	

Sitting in public in Birmingham on 22 August 2005

David Mayer, Jacksons Chartered Accountants, for the Appellant 

Richard Mansell, Advocate, of the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

The Appeal

1.	F2 Leisure Ltd, (Appellant 1), was appealing against a Notice of Requirement to give Security in the sum of £35,500 issued on 4 October 2004.

2.	The grounds of Appeal for F2 Leisure Limited were:

“F2 Leisure Ltd is currently experiencing cash flow difficulties, primarily a result of the administration of Vivid Leisure Ltd. F2 Leisure Ltd having to absorb additional overheads. It is likely that any payment of £35,500 security may result in the directors seeking appropriate independent insolvency advice. As you are aware the company prepares monthly VAT returns. All arrears will be cleared by 14 March 2005”.

3.	Virtual Leisure Limited, (Appellant 2), was appealing against a Notice of Requirement to give Security in the sum of £23,500 issued on 3 May 2005.

4.	The grounds of Appeal for Virtual Leisure Limited were:

“Payment of the security deposit would severely affect the Company’s cash flow, which would result in the business not being able to pay its debts as they fall due. This would necessitate the directors requiring to obtain independent insolvency advice. The company employs about 45 full and part time employees. Any insolvency procedure would affect their employment status, resulting in redundancies”.

The Issue to be Decided
5.	Both Appellant companies shared the same directors, David Goodwin and Paul John Walters, the same trade name of “Fluid” and carried on the same business of bar and nightclub. The administration for both companies was run from premises at 10 Foundry Street, Stoke on Trent which was also the location of one of the bars. The other bar operated from premises At 15-19 Marsh Parade, Newcastle under Lyme. There were about 45 full-time and part-time members of staff employed at each of the locations.

6.	The Respondents considered that their decisions to require a separate security from each of the Appellants were justified because their directors, Messrs Goodwin and Walters, had a poor record of VAT compliance with other companies which have become insolvent and subsequently deregistered for VAT. Further F2 Leisure Ltd had failed on a regular basis to make its VAT payments on time. Virtual Leisure Limited was, in the Respondents’ opinion, a phoenix of Vivid Leisure Limited which had gone into administration. Vivid Leisure Limited operated with the same directors, from the same premises and in the same business as Virtual Leisure Limited. 
7.	The Appellants contended that they had co-operated fully with the Respondents in respect of the management of their VAT liability. The directors for Virtual Leisure Limited disputed that the Appellant company was a phoenix of Vivid Leisure Limited. Both Appellants considered that they would make staff redundant and probably go out of business if they were required to pay the security. 
 
8.	The issue for the Tribunal was whether the Respondents had acted in a way in which no reasonable panel of Commissioners of HM Revenue and Customs could have acted, or whether they had taken into account some irrelevant matter, or disregarded something to which they should have given weight when imposing the security requirements. In exercising this jurisdiction the Tribunal must limit itself to considering facts and matters which existed at the time the challenged decisions to require a security were taken.

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

“If they think it is 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 whom or to whom relevant goods or services are supplied.”

Preliminary Matter
10.	The Representative for Virtual Leisure Limited requested an adjournment of the Appeal because it was a separate company from F2 Leisure Limited and that the jobs of its employees would be in jeopardy if the Appeal was heard and the decision went against the Appellant. Further the Representative advised the Tribunal that the directors had not been notified of today’s hearing for Virtual Leisure Limited.

11.	We refused the application for adjournment and directed that the Appeals of F2 Leisure Limited and Virtual Leisure Limited be heard together because:

(1)	On 28 July 2005 the Tribunal notified Virtual Leisure Limited by letter of the hearing date of 22 August 2005.
(2)	The facts for both Appeals were virtually identical and involved the same issues.
(3)	The Appeals concerned potential risks to the Revenue which placed a degree of urgency upon the Tribunal to determine whether those risks existed. 
The Evidence

12.	We heard evidence from:
(1)	Mrs Ruth Morris, Senior Officer for HM Revenue and Customs, who issued the Notice of Security for F2 Leisure Limited.
(2)	Mr Ian Pumfrey, Senior Officer for HM Revenue and Customs, who issued the Notice of Security for Virtual Leisure Limited.
(3)	Mr Martin Whitelegge, Senior Officer for HM Revenue and Customs, who reviewed the Notices of Security for both Appellants.

13.	The Tribunal was presented with a documents bundle from the Respondents.

The Facts Relied upon by the Respondents in respect of F2 Leisure Limited

14.	 The directors of F2 Leisure Limited had been involved as directors of two other companies, Mainframe Leisure Limited and ST2 Leisure Limited, which had gone into liquidation owing VAT debts of £29,951.04 and £4,052.85 respectively. Mainframe Leisure Limited and ST2 Leisure Limited each ran a bar/nightclub business with Mainframe having the same business address as F2 Leisure Limited.

15.	The VAT compliance and payment record for F2 Leisure Limited were poor. In 2003 seven of its monthly payments were late as were six of the nine monthly returns in 2004 prior to this issue of the Notice of Security in October 2004. Following the issue of the Notice the Appellant company was late with its payment returns for October, November and December 2004. Its associated company, Vivid Leisure Limited, had a similar poor compliance and payment record which resulted in the issue of a Notice of Security against the company also in October 2004.

16.	F2 Leisure Limited was a cash business which meant that it received the VAT on its sales. Bad debts were not the cause of the company’s poor record of VAT compliance.

17.	The Respondents gave F2 Leisure Limited two opportunities to put its house in order. After issuing the first Notice of Security in October 2003, the Respondents agreed to monitor the Appellant company rather than enforcing the Notice which was withdrawn in January 2004. In September 2004 the Appellant company was again in arrears with its VAT in the sum of £14,278.50 with the result that the Respondents issued a second Notice of Security in October 2004 which is the subject of this Appeal. Again the Respondents suspended enforcement of the Notice provided the Appellant company and its associate company, Vivid Leisure, rendered timely returns for the months, October to December 2004 and in addition Vivid Leisure cleared its debt of £18,536.02.  The Respondents eventually lost patience with the Directors of the Appellant company when they failed to keep to the terms of the October 2004 agreement. On 4 March 2005 the Respondents informed the directors that they were demanding the security of £35,500.

18.	The amount of security requested was calculated by adding together the four VAT returns for the months of April, May, June and July 2004. 

The Facts Relied upon by the Respondents in respect of Virtual Leisure Limited

19.	Since the issue of the Notice of Security against F2 Leisure Limited, the directors of Virtual Leisure Limited have been directors of two other companies, F3 Leisure Limited and Vivid Leisure Limited which have gone into administration on 2 February 2005 owing VAT liabilities of £12,204.78 and £27,912.78 respectively. Thus the directors of Virtual Leisure Limited have been involved with four failed businesses which have incurred VAT debts. The four failed business were in the same trade of bar/nightclub and three of them shared the same trading address as Virtual Leisure Limited.

20.	Virtual Leisure Limited purchased the assets of Vivid Leisure Limited including its trading name “Fluid” as a transfer of a going concern. Virtual Leisure Limited, however, took out a new VAT registration. Thus the Respondents considered that Virtual Leisure Limited was a phoenix of Vivid Leisure Limited, operating from the same address, in the same line of business and with the same directors but without inheriting the debts of Vivid Leisure Limited.

21.	The amount of security in the sum of £23,500 was calculated from the estimated annual turnover of £1,110,000 for the Appellant company as declared by the directors in the VAT registration form. The £23,500 represented the estimated VAT liability of the Appellant company for a four month period.

The Appellants’ Statement

22.	F2 Leisure Limited and Vivid Leisure Limited encountered financial difficulties in summer 2004 which was an unusually quiet period for the bar and nightclub trade in Stoke on Trent and nationwide. The 2004 European Football Championship was one of the contributory factors for the downturn in business. The bars run by the two companies were also subject to adverse unjustified criticism from local newspapers following a drug related death of a patron at one of the bars. The two companies, therefore, experienced a 40 per cent downturn in takings from April to July 2004 compared with the previous year.

23.	The directors had been proactive with the management of the VAT debt in their various companies. They initiated contact with the Respondents with a view to finding a mutually acceptable solution. They agreed to make monthly VAT returns and payments. They opened a “number two” bank account for Virtual Leisure Limited in which the directors transferred an amount each week to cover anticipated VAT liabilities. Mr Whitelegge of HM Revenue and Customs, however, commented that the same arrangement (a “number two” bank account) had been in place for Vivid Leisure Limited which had not prevented that company from falling into VAT arrears.
24.	The directors kept to the agreement in respect of Vivid Leisure Limited before it went into administration. They had submitted VAT returns and payments on time and cleared the VAT debt in respect of that company.

25.	Vivid Leisure Limited was not put in administration to avoid its debts. The administration was due to an unforeseen downturn in trade affecting the whole bar scene in the area, which was outside the directors’ control.

26.	The Appellants’ representative challenged the Respondents’ contention that Virtual Leisure Limited was a phoenix of Vivid Leisure Ltd. He pointed out that none of the companies referred to by the Respondents were part of a companies group. Further the decision to put Vivid Leisure Limited into administration was taken following independent advice from an insolvency practitioner. There was a distinct break in trade between the folding of Vivid Leisure Limited and the start up of Virtual Leisure Limited. The latter company paid the market price for the assets of Vivid Leisure Limited. The Tribunal noted, however, that it would appear from the “Chain Chart” in the document bundle that the same process (transfer of going concern) had been used when Vivid Leisure Limited on start up acquired its assets from ST2 Leisure Limited when it was placed into administration.

27.	The imposition of the securities would jeopardise the 90 full-time and part-time jobs of the employees of the two Appellant companies. The directors were presently experiencing personal difficulties which prevented them from putting additional funds into their companies.

Reasons for Our Decision

28.	Our starting point is to consider whether  Mrs Morris and Mr Pumfrey acted in a way in which no reasonable panel of Commissioners of HM Revenue and Customs could have acted, or whether they took into account some irrelevant matter, or disregarded something to which they should have given weight when imposing the security requirements on F2 Leisure Limited and Virtual Leisure Limited on the 4 October 2004 and 3 May 2005 respectively. In exercising our jurisdiction we must limit ourselves to considering facts and matters which existed at the time the challenged decisions to require a security were taken. We are unable to substitute our own discretion for that of the Commissioners. Our task is to decide whether the decisions of Mrs Morris and Mr Pumfrey were reasonable.

29.	Mrs Morris’ decision was based upon the involvement of the two directors of F2 Leisure Limited, Messrs Goodwin and Walters with two other companies which had gone into liquidation owing VAT debts. The two companies, Mainframe Leisure Limited and ST2 Leisure Limited carried out the same business as F2 Leisure Limited with Mainframe trading from the same premises as F2 Leisure Limited.  F2 Leisure Limited had a poor record of VAT compliance and payment. The facts of the directors’ involvement and the poor compliance record were not in dispute. We consider that Mrs Morris was correct in giving weight to these sets of facts. In our view they were relevant in assessing risk to the protection of revenue. 

30.	Mr Pumfrey’s decision took into account the fact that Messrs Goodwin and Walters had been directors of four failed companies operating in the same business and from the same trading address as Virtual Leisure Limited. He also formed the view that Virtual Leisure Limited was a phoenix of Vivid Leisure Limited which had gone into administration in February 2002. The Appellant contended that Virtual Leisure Limited was not a phoenix company. An insolvency practitioner had advised on the administration of Vivid Leisure Limited. Virtual Leisure Limited paid the market price for the assets of Vivid Leisure Limited including its trading name of “Fluid”.

31.	We were not impressed with the Appellant’s argument. We concluded from the facts that the companies set up by Messrs Goodwin and Walters had been engaged in the same business of bar/nightclub in the Stoke on Trent area. When the business got into difficulties the company was put into administration and a new company was set up to continue the same business. The “chain chart” included in the documents bundle showed that ST2 Leisure Limited was set up in 1996 trading as bar/night club in the Stoke on Trent area. ST2 Leisure Limited transferred its assets in 2000 to Vivid Leisure which was bought off the shelf by Mr Walters in November 1999. Vivid Leisure Limited went into administration on 2 February 2005 and transferred its assets to Virtual Leisure Limited which was established in January 2005 by Messrs Goodwin and Walters. We are, therefore, satisfied that Virtual Leisure Limited was a phoenix of Vivid Leisure Limited. 

32.	We consider that Mr Pumfrey was correct in giving weight to Messrs Goodwin and Walters involvement with failed companies engaged in the same trade as Virtual Leisure Limited. Further we agree with his conclusion that Virtual Leisure Limited was a phoenix of Vivid. In our view these facts were relevant in assessing risk to the protection of revenue.
33.	Messrs Goodwin and Walters asserted that they had been proactive with the management of the VAT affairs of their companies and fully cooperated with the Respondents. The evidence produced by the Respondents of the compliance history for F2 Leisure Limited and Vivid Leisure Limited, however, showed a different picture of long periods of  excessive delays with payment followed by short periods of compliance when the Respondents threatened enforcement action. Mrs Morris and Mr Pumfrey were right in the light of the evidence to disregard Messrs Goodwin and Walters assertion that they had been proactive in dealing with the VAT debt.

34.	 The Appellants submitted that their financial difficulties had been a result of a downturn in business which was outside their control. Further the jobs of their employees would be in jeopardy if the securities were imposed against the Appellant companies. We consider that these issues were not relevant to the matter under Appeal. The Appellant companies were cash businesses which meant that the VAT had been paid on their supplies. Their failure to pay the VAT due was because the directors of the Appellant companies chose to divert the VAT revenues collected to fund other activities. The threat to employees’ jobs stemmed from the irresponsible actions of the directors in not exercising proper management of the companies’ VAT affairs. We are satisfied that Mrs Morris and Mr Pumfrey correctly disregarded the Appellant’s financial difficulties and the threat to employee jobs as relevant facts in exercising their discretion to issue Notices of Security. We note, however, Mrs Morris did give F2 Leisure Limited two opportunities to put its house in order.

35.	We find no evidence that Mrs Morris and Mr Pumfrey took into account some irrelevant matter in coming to their decisions on the on the 4 October 2004 and 3 May 2005 respectively.

36.	We consider that Mrs Morris and Mr Pumfrey took considerable care in the calculation of the securities for F2 Leisure Limited and Virtual Leisure Limited. Mrs Morris based her calculation upon the actual VAT returns for the company over a four month period. Mr Pumfrey computed his calculation on the estimated annual outturn for Virtual Leisure Limited provided by the company in its application for VAT registration. Further both Officers opted for a security based upon a four month liability rather than a six month liability which again was of benefit to the Appellants.  

37.	For the reasons set out above we have decided that the issue of the Notices of Security dated 4 October 2004 and 3 May 2005 on F2 Leisure Limited and Virtual Leisure Limited were reasonable. We, therefore, dismiss the Appeals of both companies. We make no order for costs.

MICHAEL TILDESLEY
CHAIRMAN
Release Date: 4 October 2005

MAN/05/0228 & MAN/05/0503