19396
VAT – notice of requirement to give security – nature of tribunal’s jurisdiction – whether decision reasonable – whether change in company personnel after date of notice to be taken into account – no – appeal dismissed 

LONDON TRIBUNAL CENTRE

	FASHION BASE LIMITED T/A PARALLEL	Appellant

	- and -

	 THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS	  Respondents

			Tribunal:	JOHN CLARK (Chairman)
					SHEILA EDMONDSON FCA

Sitting in public in London on 21 November 2005

Mr Mikailian, Accountant, of Mikailian & Co, for the Appellant

Mrs PA Crinnion, Officer of Her Majesty’s Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	Fashion Base Limited (the Company”) appeals against a Notice of Requirement to give security under paragraph 4(2) of Schedule 11 of the Value Added Tax Act 1994. The Notice requires the Company to give security in the sum of £11,700.00 if quarterly returns were to be rendered or in the sum of £7,800 if monthly returns were to be rendered.
2.	The Notice was given in a letter from Customs dated 30 September 2004. In its Notice of Appeal dated 29 October 2004, the Company stated its grounds of appeal:
“The Director of this new company is also the Director of M & N Designs Ltd, which has been trading since May 1997 and its VAT position is up to date; the Director is confident of her ability to pay the VAT of the new company as she has managed to pay the VAT of her other company without the need for a deposit.”
The background facts
3.	The evidence consisted of Customs’ bundle of documents, a further small bundle provided on behalf of the Company, and oral evidence from Mr Mikalian and from Sarah Saunders, a Higher Officer from Customs’ Security and Insolvency Team. From this we find the following facts.
4.	The Company carries on business as a retailer of shoes from premises at 22 Marylebone High Street London W1. It registered for VAT with effect from 1 June 2004. At the date of the Notice of Requirement, the director of the Company was Nora Yousif and the company secretary was Antonina Kabbani.
5.	Antonina Kabbani had been the company secretary of Parallel (Marylebone) Ltd, a retailer of shoes trading at 22 Marylebone High Street. This company had traded from 1 April 1996 and had gone into liquidation on 7 May 1998, leaving a debt to Customs of £19,023.22. Antonina Kabbani had also been the company secretary of London Footwear Ltd, a retailer of shoes trading at 22 Marylebone High Street. This company had traded from 1 November 1997 and had gone into liquidation on 21 October 2004, leaving a debt to Customs of £119,204.78. At the time when the Notice of Requirement was served on the Company, this debt due from London Footwear Ltd to Customs remained outstanding.
6.	As at the time of the Notice of Requirement, Antonina Kabbani was the company secretary of M & N Designs Ltd, trading at 22 Marylebone High Street; at that time that company had an outstanding debt to Customs of £5,714.11. [In his evidence Mr Mikailian questioned whether this was the case at 30 October 2004.] Nora Yousif was listed at that time as a director of M & N Designs Ltd and had signed the VAT declarations for that company.
7.	At 30 September 2004 there was a common director of Parallel (Marylebone) Ltd, London Footwear Ltd and M & N Designs Ltd, Mido Kabbani. Information from Companies House indicated that Mido Kabbani had lived and currently lived at the same address as Antonina Kabbani. Mido Kabbani was also a director of a further company, Quickstep Designs Ltd, until June 1999; the current company secretary [at 30 September 2004] was Donna Kabbani, and the director was Rami Kabbani. The company was trading from 70 High Street Wimbledon, and as at 30 September 2004 had a debt due to Customs of £8,952.30.
8.	Taking into account this information, Customs decided to require security from the Company. The calculations were carried out at a time when there had been no VAT declarations made by the Company. Customs therefore used the declared expected turnover as stated on the registration form VAT1. This was £336,000. The VAT on this figure was calculated and divided by two to give the total tax for six months, amounting to £29,400. From this, notional input tax was deducted, based on the average for the trade class. For this trade, the average was 60 per cent. The resulting figure net of notional input tax was £11,760, which was rounded down to £11,700 as the figure required for security if quarterly returns were to be submitted. To arrive at the alternative figure required for security if monthly returns were to be submitted, Customs took the six month net figure of £11,760, doubled it, then divided the result by three; the resulting figure of £7,840 was rounded down to £7,800.
9.	The Notification was served on Nora Yousif on 30 September 2004 at 13 Marylebone High Street. (Mr Mido Kabbani was also present.) Nora Yousif signed a receipt for the documentation, which included a letter relating to appeals and indemnity from prosecution, and a letter setting out relevant company law provisions, and Notice 700/52 dated April 2003.
10.	On 13 October 2004, which was before the Notice of Appeal was served, Mr Mikailian’s firm wrote to Customs asking for an explanation of the reason for issuing the Notice of Requirement. The letter informed Customs that the Company, as a new business, had already been subjected by its suppliers to [a requirement to make] payments in advance on orders placed, to the extent that the director had had to obtain a bank overdraft which was operating close to its limits at all times, and [the Company] being in its first year of trading, the bank would not be willing to increase the overdraft facility or issue guarantees. Mikailian & Co expected the average monthly payable figure for VAT to be approximately £4,000. They stated:
We have found the annual accounting scheme most suitable for the retail industry due to its seasonal and unpredictable pattern of cash flow. We feel the equal monthly payments act as a guide and a discipline for the directors to follow and is [sic] a more effective long term solution for collecting VAT.
We are aware that our client does not yet satisfy the criteria to apply for the annual accounting scheme as it has not yet traded or submitted 12 months returns . . .”
11.	In their response dated 14 October 2004, Customs gave a brief statement of their reasons for requiring security, and confirmed that as the Company had not been trading for 12 months and the expected turnover exceeded £150,000, it was not eligible for the annual accounting scheme. Customs stated that they still considered it necessary that the security amount be paid.
12.	In his oral evidence Mr Mikailian explained that Nora Yousif and Antonina Kabbani had resigned from their roles for the Company on 1 February 2005 and 12 September 2005 respectively. Mrs Kabbani was now involved in a property business. The new officers of the Company were aware of the requirement to give security. A company called Quickstep Ltd had been formed for Mido Kabbani, but Mr Kabbani’s brother had taken it over within two months. Mido Kabbani did have an interest in the Company through the shareholding of Antonina Kabbani, his wife. She had sold 30 per cent of her shares but hoped to sell more. Mr Mikailian questioned whether Customs’ records relating to another company, M & N Designs Ltd, had been correct as at October 2004. In relation to the Company’s VAT liabilities, he explained that its difficulties arose from small working capital, high rents, trading conditions in the light of the congestion charge, and more recently the London bombings had not helped. He had acknowledged in a telephone conversation with Mrs Saunders that the Company would not have been disciplined enough to set up its own account to reserve money for VAT. He confirmed that this would not have worked because the Company would have had access to the money if financial conditions became difficult; he thought that it would have been better if an account could have been set up under Customs’ control, to provide a “push” to ensure that the Company dealt with its VAT liabilities. He thought that the level of security being requested was unreasonable, given the Company’s difficulties. The Company’s rent for a week was £2,000, which had to be paid before the Company could open for trade each week.
13.	Mrs Saunders explained the process of identifying the Company as being appropriate for security to be required, and confirmed the method of calculating the amount required. Although she would not be involved in the question of annual accounting, she had informed Mikailian & Co that the Company did not qualify and also that its turnover was too high. She indicated what the required level of security would have been on the basis of the Company’s actual turnover rather than its anticipated turnover as shown on Form VAT1. Although it would have been greater, the practice was to keep the terms of the Notice the same, except where an original Notice was withdrawn and replaced by another. She felt that it had been correct for Customs to ask for security from the Company.
Arguments for the Company
14.	Mr Mikailian produced a brief statement of the case for the Company. This contained the following contentions against Customs’ case, which had been pursued on the basis that Nora Yousif and Antonina Kabbani were officers of the Company and were currently officers of another company, M & N Design Ltd, which had been late with payments or had been involved in other companies which had failed in the past:
(1)	Customs should have been aware that all the information relating to Quickstep Designs Ltd was not relevant to the Company’s case as Quickstep was owned and controlled by Rami Kabbani, the brother-in-law of Antonina Kabbani.
(2)	Customs should have known that the information relating to the amount of £5,714 owed by M & N Designs was incorrect, as indicated by an extract from the company books, which had been prepared and reconciled with the bank statements by Mikailian & Co, and confirmed in the VAT annual accounting statement dated 25 October 2004.
(3)	Customs should have known that M & N Designs Ltd did not trade from the same premises as the Company, as indicated in Customs’ Statement of Case.
(4)	Mikailian & Co had written on 14 October 2004 to suggest that the Company should be placed on a weekly standing order payments plan, but this had been turned down.
(5)	Customs should have been aware that Nora Yousif and Antonina Kabbani were no longer officers of the Company due to a management buyout whereby Jasmina Dvisac, a manger of the shop, and her partner Denis Bohm decided to acquire 30 per cent of the shares in the Company and became the new director and secretary of the Company on 1 February 2005 and 12 September 2005 respectively, as shown in Companies House documents submitted to the Tribunal.
Arguments for Customs
15.	On the basis of the history as set out in the Statement of Case and in the evidence, Customs considered that the requirement to give security under paragraph 4 of Schedule 11 to the Value Added Tax Act 1994 was correct and reasonable both in principle and amount. What had happened since could have no bearing on the decision that Customs had made on 30 September 2004.
Conclusions
16.	The test to be applied by this Tribunal in considering an appeal against a requirement to give security has been established in various cases sufficiently familiar for Mrs Crinnion not to have needed to set them out in her argument. We have to consider whether Customs acted in a way in which no reasonable body of Commissioners could have acted or whether they took into account some irrelevant matter or disregarded something to which they should have given weight (see Neill LJ in John Dee Ltd v Customs and Excise Commissioners [1995] STC 941 at p 952).
17.	On this basis, we see no reason to call into question the issue of the Notice of Requirement to give security. Mr Mikalian made it clear that traders of this type within the retail sector commonly have problems paying their VAT; he was requesting some form of monthly accounting to impose an external discipline on the trader. The annual accounting system was not available because the Company could not meet the necessary conditions. His other suggestion was not a method that Customs are authorised by legislation to operate, and would raise serious questions of fairness as between different taxable persons and Customs, as well as leaving Customs open to possible claims that they would be acting without authority.
18.	Mr Mikailian referred to various events which had taken place after the Notice of Requirement had been issued. Although reference was made by Farquharson J in the case of Mr Wishmore Ltd v Customs and Excise Commissioners [1988] STC 723 at p 727 to the apparent practice at the time of tribunals taking into account circumstances as at a time later than that of the decision in question, he expressed reservations as to the ability of tribunals to do so, although the point had not been argued before him. We consider that there are considerable difficulties in applying the test set out at paragraph 16 above to a decision of Customs made on the information available to them at the time, and then adding to that test by bringing in circumstances that have only come to their knowledge at a much later stage. We have even more difficulty in taking into account information of which Customs were not aware, and which they could only have discovered by searching Companies House records many months after the date of the decision. We do not think that in this case the subsequent events, namely the change in officers of the Company and the sale by Antonina Kabbani of 30 per cent of her shareholding, can be taken into account. The position must be considered in the light of the circumstances as they were when Customs decided to issue the Notice.
19.	We are satisfied that in the light of the circumstances known to Customs at the date of the Notice, their decision to require security was reasonable. It was correct to say that the individuals who at the time were principals of the Company had also been principals of companies that had either gone into liquidation owing significant amounts of VAT or had been persistently non compliant for VAT purposes, as stated in Mrs Saunders’ letter dated 14 October 2004. Mrs Kabbani owned all the shares in the Company at that time. In addition, it is clear from notes taken by Customs at the creditors’ meeting of London Footwear Ltd that the Company had taken over the shop and was trading under the same name, and although Mr Kabbani, who was a director of London Footwear Ltd, said that he was not involved in the running of the Company, he confirmed that his wife was the company secretary. Taking into account all the information that Customs had about the Company and the compliance records of the other companies, there was ample reason to decide to issue the Notice.
20.	The calculations of the amounts required by way of security have in practice proved to be favourable to the Company, as on the actual turnover the security would have been over £22,000 (on the quarterly returns basis) and £14,453 (on the monthly returns basis). The requirement to give security applies to the Company irrespective of any change in the shareholders in the Company, so Jasmina Dvisac and Denis Bohm, the current officers of the Company, will need to take into account the fact that Customs’ decision is being confirmed, whether or not they knew about the Notice of Requirement when they took office and acquired shares. (Whether Customs choose to cancel this Notice and replace it with one requiring a greater amount by way of security is not a matter for this Tribunal.)
21.	In summary, we are satisfied that Customs’ decision to issue the Notice was reasonable, and thus it remains in force. The appeal is therefore dismissed. No application for costs was made, so we make no award.

JOHN CLARK

CHAIRMAN
RELEASE DATE: 21 December 2005

LON/04/1807

££Fashion Base Ltd T/A Parallel v Her Majesty's Revenue and Customs [2005] UKVAT V19396 (21 December 2005)