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You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Morris (t/a DV8) v Revenue and Customs [2006] UKVAT V19492 (09 March 2006) URL: http://www.bailii.org/uk/cases/UKVAT/2006/V19492.html Cite as: [2006] UKVAT V19492

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Morris (t/a DV8) v Revenue and Customs [2006] UKVAT V19492 (09 March 2006)

19492

VAT - SECURITY– Protection of Revenue – the Appellant failed to submit VAT returns and pay outstanding VAT – relevant factors for determining reasonableness – quantum of security included outstanding arrears – Respondents aware that outstanding arrears may exaggerate the Appellant's liability for VAT – Respondents did not consider whether the amount of security was proportionate to the risk posed by the Appellant– whether Respondents' actions in requiring a security reasonable – No – Appeal allowed – VAT ACT 1994 Schedule 11 p 4(1) – direction for costs

LONDON TRIBUNAL CENTRE

LUKE MORRIS Appellant

TRADING AS DV8

- and -

HER MAJESTY'S REVENUE and CUSTOMS Respondents

Tribunal: MICHAEL TILDESLEY OBE (Chairman)

NORAH CLARKE (Member)

Sitting in public in Bristol on 17 February 2006

Appellant did not appear

Pauline Crinnion, Advocate for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

Appeal

1. The Appellant was appealing against a Notice of Requirement to give Security in the sum of £29,800 (quarterly returns) or £28,000 (monthly returns) issued on 4 April 2005.
2. The ground of Appeal was that

"The security required by HMRC far exceeds the VAT liability for one year of trading and the department has failed to distinguish between a limited company and a sole trader as held in J McPhee (LON/97/1564)".

The Issue to be Decided

3. The Appellant was a sole proprietor running a nightclub in Hereford. The Respondents considered that the Appellant was a risk to the revenue because of his poor record of compliance with his obligations to make returns and payments for the purposes of VAT. The Appellant disputed the amount of the security. He also contended that the Respondents failed to give proper regard to his position as a sole trader, in that he remained personally liable for outstanding VAT debts.
4. The issue for the Tribunal was whether the Respondents had acted reasonably in imposing the security for the protection of the revenue. Thus we have to decide whether the Respondents acted in a way in which no reasonable panel of Commissioners for 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 we must limit ourselves to considering facts and matters which existed at the time the challenged decision to require a security was taken.

The Legislation

5. 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."

The Hearing

6. The Appellant failed to attend the hearing. We granted the Respondents' application to hear the appeal in the absence of the Appellant in accordance with rule 26 of the Tribunal Rules 1986 because:

(1) The Appellant had been notified in writing of the hearing date.

(2) The Appellant provided no good reason for his non-attendance. We were told of his letter to the Respondents dated 11 February 2006 stating that he had difficulties in attending the hearing. However, those difficulties related to him working late on 15 February 2006 and a pending VAT inspection on 19 March 2006. We considered his explanation unconvincing.

(3) The nature of the Appeal which suggested that the Appellant posed a risk to the protection of the revenue.

(4) The file contained correspondence from the Appellant's former Indirect Tax Adviser which set out his case.

7. We concluded that Appellant deliberately chose not to attend the hearing. However, we considered that justice could be done to his case because of the correspondence on file from his former Indirect Tax Adviser.

The Evidence

8. We heard evidence from Nigel Ridsdel, the Officer responsible for the issue of the Notice of Requirement for Security.
9. The Respondents provided us with a bundle of documents.

The Facts

10. The Appellant ran a small commercial night club in Hereford open on Friday and Saturday evenings. The Appellant was a leaseholder of the premises and engaged agency staff to assist him with his business venture. The estimated annual turnover for his business was £150,000. The Appellant was registered for VAT with effect from 17 November 2003. The Appellant was aged 20 when he took on the business.
11. At the time of the issue of the Notice of Requirement for a Security on 4 April 2005 no VAT returns had been submitted by the Appellant since the inception of his business. Thus the Respondents had not received the returns for the periods 03/04, 06/04, 09/04, and 12/04.
12. The Appellant paid three centrally issued assessments for the periods 03/04, 06/04, and 09/04 in the sums of £1,541, £1,073 and £1,179 respectively. However, on 6 January 2005 the Respondents issued additional assessments totalling £19,101 for the periods 03/04, 06/04, and 09/04 because they considered that the centrally issued assessments for those periods did not reflect the Appellant's true VAT liability based upon the estimated annual turnover of £150,000 for the business. On 11 February 2005 the Respondents issued a central assessment in the sum of £7,762 for the period 12/04. As at 4 April 2005 the Appellant had not paid the additional assessments issued 6 January 2005 and the centrally assessment dated 11 February 2005 totalling £26,860.
13. The level of security was calculated on the basis of the Appellant's estimated annual turnover of £150,000 declared in his Application for VAT registration. Thus Mr Ridsdel calculated the output tax for the 12 month period at £26,250 from which he deducted notional input tax at £20,348.83 based upon the trade class for the Appellant's business to arrive at a projected 12 month liability of £5,901.17. Using the projected 12 month figure Mr Ridsdel calculated the six month liability for VAT at £2,950.58 and the four month VAT liability at £1,967.05. The six month liability figure supplied the basis for the security required for quarterly returns, whilst the figure for four months was used to calculate the security required for monthly returns.
14. Mr Ridsdel then decided to add the outstanding VAT arrears in the sum of £26,860 owed by the Appellant to the six month and four figures to arrive at the level of security demanded in the notice issued on 4 April 2005. Thus £29,800 was the amount for quarterly returns and £28,800 for monthly returns.
15. Mr Ridsdel applied his discretion in adding the outstanding arrears to the six month and four month liability figures to arrive at the eventual amount of security required from the Appellant. He considered that it was appropriate to add the outstanding arrears because the Appellant had not appealed against the assessments as at 4 April 2005. Mr Ridsdel accepted, however, that the purpose of the notice requiring the security was not to collect the arrears. The Respondents had other legal powers which they could apply to enforce payment of the arrears.
16. Mr Ridsdel acknowledged that Mr Perry who raised the revised assessments on 6 January 2005 had not taken account of the notional input tax in his re-calculations of the Appellant's tax liability for the periods 03/04, 06/04, and 09/04. Mr Perry's approach was at odds with that adopted by Mr Ridsdel when he calculated the four and six month liability. Mr Ridsdel was aware that Mr Perry had not included notional input tax in the revised assessments at the time the Notice of Requirement for Security was issued on 4 April 2005. Mr Ridsdel accepted that he made no enquiry of Mr Perry about why he left out notional input tax in the revised assessments. Mr Ridsdel conceded at the hearing that it would have been better if Mr Perry had incorporated the notional input tax in the revised assessments.
17. Mr Roberts-Thomas, the Appellant's advisor at the time of lodging the Notice of Appeal, in a letter to the Respondents dated 21 June 2005 explained that the Appellant was a very young man who had concentrated his energies on attracting customers to his new business. The Appellant did not appreciate the importance of submitting VAT returns and overlooked the accounting and administrative aspects of his business. The Appellant panicked when he received the revised assessments because they were well in excess of his expected VAT liability. Mr Roberts-Thomas stated that the Appellant would be contesting the amount of the security because it overstated the true VAT liability. Also the decision did not distinguish a sole trader from a limited company where at the cessation of the trading for a company the Respondents have no means of recovering outstanding VAT. This was not the case for a sole trader who remained personally liable for debts arising from the business cessation.
18. Since the issue of the Notice of Requirement for Security, the Appellant has made several promises to bring his VAT affairs up to date but has failed to do so. The Respondents' bailiffs visited the Appellant and collected some monies but his current debt stood at £37,062.52. The Respondents have prosecuted the Appellant for continuing to trade without giving a security with a court hearing listed at the end of May 2006.

Reasons for Our Decision

19. Our starting point is to consider whether Mr Ridsdel acted in a way in which no reasonable panel of Commissioners for HM Revenue and Customs could have acted, or whether he took into account some irrelevant matter, or disregarded something to which he should have given weight when imposing the security requirement for the protection of the revenue on the Appellant on the 4 April 2005. In exercising our jurisdiction we must limit ourselves to considering facts and matters which existed at the time the challenged decision to require a security was taken. We are unable to substitute our own discretion for that of the Commissioners. Our task is to decide whether the decision of Mr Ridsdel was reasonable.
20. Mrs Ridsdel's decision was based upon the Appellant's failure to meet his legal obligations in respect of VAT. The Appellant had not submitted any VAT returns since the inception of his business. Although he paid three centrally issued assessments, he failed to pay or appeal against the revised assessment issued on 6 January 2005 and the central assessment issued on 11 February 2005. The Appellant's VAT arrears stood at £26,860 as at 4 April 2005 when the security notice was issued. We consider that Mrs Ridsdel was correct in giving weight to these facts when imposing the security. In our view they were relevant in assessing the Appellant's risk to the protection of the revenue.
21. We, however, have concerns with the amount of security demanded in the notice. Mr Ridsdel had a discretion whether to add the outstanding arrears to the security required. He was aware at the time of issuing the security notice that Mr Perry had not included an element for the notional input tax in his calculation of the Appellant's revised tax liability for the periods 03/04, 06/04, and 09/04. We are entitled to infer from those circumstances that Mr Ridsdel knew or closed his mind to the real possibility that Mr Perry's assessment may have exaggerated the Appellant's liability for VAT during the said periods. Mr Ridsdel fairly stated in his evidence that it would have been better for Mr Perry to have incorporated notional input tax in his calculations as Mr Ridsdel had done when calculating the initial four and six month VAT liability. Mr Ridsdel made no enquiries of Mr Perry about why he adopted this approach for the revised assessments.
22. We consider that an essential element of the reasonableness of the decision to issue a Notice of Requirement for Security is that the amount of security demanded must be proportionate to the risk posed by the taxpayer to the protection of the revenue, having regard to the fact that the purpose of the security is not to collect the arrears. In the Appellant's case the effect of adding the outstanding arrears to the security amounted to a five year protection of future tax liabilities^[1] instead of the six month protection normally required for quarterly returns.
23. We are satisfied on the evidence that Mr Ridsdel did not give proper regard to whether the amount of security demanded from the Appellant was proportionate to the risk posed by the Appellant to the protection of the revenue. In our view Mr Ridsdel should have made enquiries of Mr Perry about his reasons for not including notional input tax in the revised assessments. Armed with that information Mr Ridsdel should then have considered whether it was appropriate to include the arrears figure in the security. Finally he should have asked himself the question: "in all the circumstances is the amount of security demanded proportionate to the risk posed by the Appellant for the protection of the revenue"? We consider that Mr Ridsdel did not give sufficient attention to whether the arrears should have been added to the security and to the overriding issue of proportionality. We, therefore, find that Mr Ridsdel disregarded something to which he should have given weight in coming to his decision on the 4 April 2005.

Our Decision

24. In view of our findings in paragraphs 21 to 23 above, we hold that the decision to issue the Notice of Requirement for Security on the 4 April 2005 was unreasonable. We allow the Appeal.
25. We direct that the Appellant has 28 days from release of this decision to make an application to the Tribunal Office in London for costs related to his Appeal. The application must be in writing setting out clearly the breakdown of costs supported wherever possible by documentary evidence. If the Tribunal Office receives no application within the stipulated 28 days, no order for costs shall be made. If an Application is received, the parties will be given an opportunity to agree the costs. In the absence of an agreement, either party may apply to the Tribunal for a direction on costs.
26. This decision does not affect the Appellant's legal liabilities to submit outstanding VAT returns and to pay the current debt for VAT. Also the decision does not prevent the Respondents from issuing a new Notice of Requirement for Security. The Tribunal would urge the Appellant as a matter of urgency to contact the Respondents to resolve the outstanding issues, and if he considers it appropriate to seek advice.

MICHAEL TILDESLEY

CHAIRMAN

RELEASE DATE: 9 March 2006

LON/05/656

Note 1    Five year protection derived from dividing the outstanding arrears of £26,860 by £2,950, the six month liability estimated by Mr Ridsdel which gives nine periods of six months equalling four and years and six months plus the six months already included making five years in total.    [Back]