20495

VAT – NOTICE OF REQUIREMENT FOR SECURITY – Respondents considered that the Appellant posed a risk to the security of revenue because of its missing VAT returns and its failure to account for VAT on an invoice for property supplies – Appellant contended that the Respondents did not have sufficient grounds for the security and were seeking to rationalise their decision after the event – satisfied that the Respondents took account of relevant matters in assessing risk – the Appellant’s objections lacked substance – decision to require security was reasonable – Appeal dismissed. 

MANCHESTER TRIBUNAL CENTRE

	MUSHTAQ’S LIMITED  	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      MARJORIE KOSTICK BA FCA CTA (Member)	  

Sitting in public in Birmingham on 3 October 2007

Gregory Flowers company secretary for the Appellant 

Bernard Hayley of the Solicitor’s Office for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
The Appeal
1.	The Appellant was appealing against a Notice of Requirement to give Security in the sum of £9,300 (quarterly returns) or £6,200 (monthly returns) issued on 6 June 2006.
2.	The ground of Appeal was that there were no grounds for seeking a deposit. The returns of the company always resulted in a repayment of VAT.
3.	We heard this Appeal on the same day as the Appeals of Mushtaq’s Food Factory Limited and MFM Equipment Limited against Notices of Security also issued on 6 June 2007.  We treated each Appeal separately, reserving our decision in the three Appeals.
4.	We heard evidence from Mrs Susan Batten who served the Notice of Requirement for Security on Mr Parvaiz Ahmed and visited the premises on Golden Hillock Road, and Mr Max Houghton, the officer who issued the Notice for Security. The Appellant and Respondents each supplied their own statements of case and bundle of documents.
Background
5.	Mr Bashir Ahmed was one of three directors for the Appellant. His younger brother Mr Parvaiz Ahmed was not a director. Their father started the Appellant’s business which was the preparation and sale of savoury and sweet Asian foodstuffs. Messrs Bashir Ahmed and Parvaiz Ahmed were directors of Mushtaq’s Food Factory Limited, which was originally set up to process Asian Foodstuffs but did not get off the ground with its VAT registration cancelled on 1 June 2007. Mr Parvaiz Ahmed, was a director of MFM Equipment Limited which manufactured catering equipment for sale to Asian businesses.
6.	The Appellant was registered for VAT on 1 January 2000. As the Appellant’s business was in foodstuffs the majority of its sales were zero-rated for VAT purposes which meant that it was a repayment trader. The Appellant’s VAT returns from 01/03 to 07/06 were all repayment claims for input tax. The returns from 01/03 to 07/04 were submitted on time.  It appeared from the records submitted by the Appellant that the returns from 10/04 had been submitted late. According to the Respondents at the time of the issue of the Notice of Requirement the Appellant had two VAT returns outstanding and had paid centrally issued assessments. 
7.	On 7 April 2006 Mr Ridley, HM Revenue and Customs Officer, visited a Mr Amjid Ali in respect of a repayment claim in the sum of £73,450 for his business, Samosa Shop, which traded from 49 Golden Hillock Road. In conducting his verification exercise Mr Ridley discovered an invoice from the Appellant dated 1 January 2006 to the Samosa Shop in the sum of £72,000 plus VAT of £12,600 for 12 months rent for the premises. The Appellant had not accounted for the output tax on the invoice, as its return for this period was outstanding. Mr Ridley concluded that there was no reason to withhold from Mr Amjid Ali the VAT repayment on the rent because Mr Ali held valid tax invoices and evidence of payment. According to Mr Ridley the problem appeared to lie with the Mushtaqs’ companies. Mr Ridley’s visit prompted the investigation of the Respondents’ Security Team into the business dealings of the Mushtaqs’ companies.
8.	Mr Amjid Ali has subsequently disappeared from the scene. As a result the Respondents have set up a separate fraud enquiry of the repayment claim made by Mr Amjid Ali.
The Issue to be Decided
9.	The Respondents submitted that the security was fully justified at the time of issue due to the Appellant’s poor compliance with its VAT obligations and the evidence of the rental invoice which suggested that the Appellant had a higher VAT liability. The Appellant contended that the Respondents did not have sufficient grounds for requiring a security. According to the Appellant, the Respondents issued the security because they believed mistakenly that Mr Parvaiz Ahmed was a director of the Appellant. In the Appellant’s view the Respondents were seeking to post rationalise its case by relying on the late submission of returns which always result in a repayment of input tax, and on an invoice that was not issued by the Appellant. 
10.	The issue for the Tribunal was whether Mr Houghton acted reasonably in imposing the security for the protection of the revenue. Thus we have to decide whether Mr Houghton acted in a way in which no reasonable panel of Commissioners for HM Revenue and Customs could have acted, or whether he had taken into account some irrelevant matter, or disregarded something to which he 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
11.	Paragraph 4(2), Schedule 11, of the Value Added Tax Act 1994 provides that
“If the Commissioners think it is necessary for the protection of the revenue, they 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 Evidence of the Respondents
12.	On 6 June 2006 Mrs Batten served the Notice of Requirement upon Mr Parvaiz Ahmed at the Golden Hillock Road Premises, which comprised a huge garage set back from the road. A glass door was located on the righthand side of the property upon which a sign “Samosa Shop” was affixed. Mrs Batten showed Mr Parvaiz Ahmed a copy of an invoice from Mushtaq’s Limited to the Samosa Shop for 12 months rent. According to Mrs Batten, Mr Parvaiz Ahmed stated that the rent was a yearly amount and that the intention was to let out the shop but it was never occupied. Mrs Batton in cross examination accepted that the premises were dilapidated and empty with a few chairs. The sign “Samosa Shop” was handwritten.
13.	Mr Houghton placed significant weight on the rental invoice and the Appellant’s missing VAT return for the period in which the output tax for the rent should have been declared in arriving at his decision to require the security from the Appellant.  He considered that the combination of the invoice and the missing VAT return demonstrated that the Appellant was avoiding its liability to pay VAT. His conclusion was reinforced by details of a “Samosa Shop” bank statement which showed that the rent had been paid.
14.	Mr Houghton denied that his mistaken belief about Mr Parvaiz Ahmed being a director of the Appellant played a substantial part in his decision making. Mr Houghton considered that it was an innocent mistake having regard to the number of companies in which Messrs Bashir Ahmed and Parvaiz Ahmed held interests.
15.	Mr Houghton considered that his method for calculating the security took into account the imminent threat to the protection of the revenue by the non-payment of output tax on the rental invoice. Mr Houghton used as his starting point the output tax liability as per the rental invoice, £12,600.00, from which he deducted the average quarterly VAT repayment to the Appellant over the previous 12 months, £3,202.74, which produced a security of £9,300.00 rounded down if quarterly returns were submitted.
Appellant’s Representations
16.	The Appellant supplied a fax from its bundle dated 10 June 2006 addressed to the Respondents’ Securities Team which stated that Mr Parvaiz Ahmed was under the impression that a security was imposed against the Appellant because he was a director of the Appellant. The Respondents responded by letter dated 28 June 2006 where they acknowledged that Mr Parvaiz Ahmed’s purported directorship of the Appellant was one of the reasons why the security was requested. The Respondents accepted their mistake but were unwilling to withdraw the security because the main reason for the security was the Appellant’s failure to submit its VAT return for 01/06. In the Appellant’s view the Respondents were rationalising their decision after the event.
17.	The Appellant conceded that the VAT returns for 01/06 and 04/06 were filed late. The delay arose from the dismissal of the Appellant’s book-keeper which necessitated fresh entries of data by the Appellant’s accountants before the returns could be submitted. The date of the 01/06 return was the 17 May 2007. 
18.	The Appellant submitted that it was not entitled to issue the invoices for rent of the Golden Hillock Road premises. The Appellant was not the landlord or tenant of the premises. Further there was no direct evidence that the property had been let by the Appellant to the Samosa Shop. The property was empty when visited by Mrs Batten. Mr Bashir Ahmed in his personal capacity had rented the premises from 1 June 2006. The examination of the invoices issued by Mr Bashier Ahmed revealed that he had let all the units on the site of the Golden Hillock Road premises and that the Samosa Shop was not a tenant of any of them. Mr Bashir Ahmed completed his purchase of the freehold of the premises in November 2006.
19.	Following the inclusion of the copy invoice issued to the Samosa Shop in the Respondents’ bundle, the Appellant made enquiries about it. According to the Appellant, its previous book-keeper may have prepared an invoice in anticipation of a letting which did not occur. A draft lease had been drawn up but not executed. The Appellant did not receive payment on the invoice.
20.	The Appellant submitted that the method adopted by Mr Houghton to calculate the security was wrong and unsupportable. He only deducted one quarterly repayment from the alleged VAT liability on 12 months rent. The Appellant has already suffered delay in recovering the input tax paid by it, the additional burden of a security penalised the Appellant for no good reason and was totally iniquitous.
Reasons for Decision
21.	The High Court in Customs and Excise Commissioners v Peachtree Enterprises Ltd [1994] STC 747 explained the extent of the Tribunal’s jurisdiction on hearing Appeals against the issue of a Notice of Requirement for Security. The Court held that 
“The tribunal's jurisdiction in cases where the exercise of discretionary powers by the commissioners was challenged was supervisory; the tribunal could not substitute its own discretion for that of the commissioners. In the exercise of its supervisory jurisdiction the tribunal had to limit itself to considering facts and matters which were known when the disputed decision was made. Accordingly, as an appeal to the tribunal lay only against a specific identifiable decision, it was the matters and facts which were in existence at the date of the specific identifiable decision in dispute to which the tribunal had to have regard in assessing whether the decision was reasonable. In the instant case the specific identifiable decision in dispute was the commissioners' decision to require a security and in determining whether that decision was reasonable the tribunal should only have taken into account matters known to the commissioners at 30 April 1991 and 20 June 1991 respectively”.
22.	Mr Houghton decided that the Appellant was seeking to avoid a significant VAT liability and as such posed a substantial risk to the protection of revenue. Mr Houghton gave weight to the existence of an invoice in the Appellant’s name charging rent with VAT to the Samosa Shop, a record of the rent payment and the Appellant’s failure to submit the VAT return for the relevant period. We are satisfied that these were relevant matters to which Mr Houghton should have regard when assessing the Appellant’s risk to the protection of revenue.
23.	Mr Houghton acknowledged that he initially placed some weight on his mistaken belief that Mr Parvaiz Ahmed was a director of the Appellant with the implication that the Appellant’s alleged indiscretion was part of a wider fraud. However, we are satisfied from the Mr Houghton’s evidence and the Respondents’ correspondence dated 28 June 2006 that his mistaken belief did not play a significant role in his decision making to impose a security upon the Appellant. 
24.	The Appellant asserted that it had no legal standing to let out the premises on Golden Hillock Road. Further, the foundations of the Respondents’ case for requiring a security were built on sand.  We were not persuaded by the Appellant’s submissions. They were not supported by evidence from the Appellant’s directors. The Appellant acknowledged that a draft lease for the Samosa Shop had been drawn up, and that the Appellant’s book-keeper, who was later dismissed, had probably made out the invoice to the Samosa Shop. The Appellant’s explanation begged questions about whether it authorised the book-keeper to make out the invoice and what was its precise involvement with the draft lease.
25.	The Appellant’s reliance on copies of invoices issued by Mr Bashir Ahmed to demonstrate that the Samosa Shop was not a tenant and that all available space in the premises had been used up was misplaced. The invoices effectively related to periods after Mr Houghton took his decision to issue the Notice of Requirement. Our jurisdiction when assessing the reasonableness of Mr Houghton’s decision was limited to considering facts and matters which were known when he made the disputed decision.
26.	 The Appellant accepted that it submitted its 01/06 and 04/06 VAT returns late.  The critical return of 01/06 was dated 17 May 2007. A closer examination of the Appellant’s returns included in its bundle revealed a problem with late returns from 10/04, which explained the reason for the four centrally raised assessments upon the Appellant by the Respondents.  The Appellant suggested that the cause of the problem was an incompetent book-keeper. The Appellant, however, was silent upon why the problem was not detected earlier by its directors who held the principal responsibility for ensuring that the returns were delivered on time. Mr Houghton was correct to place weight on the Appellant’s poor record of VAT compliance, which was not restricted to the two 2006 returns, when he decided to request a security from the Appellant. The facts that the Appellant  eventually filed the late returns and was now complying with its VAT obligations were not relevant to the Appeal as they post-dated Mr Houghton’s decision.
27.	The Appellant contested Mr Houghton’s basis for calculating the security. The Appellant considered his approach irrational using different time frames for calculating the supposed VAT liability, and the repayments set off against the liability. The effect of the calculation would be to penalise the Appellant twice by requiring it to pay up front a substantial sum of money, and at the same time suffer delay with the recovery of its input tax. The jurisdiction of the tribunal may extend to considering the amount of the security and, if excessive, substituting a lower amount (Craig Security Services Ltd v C & E Comrs (1993) VAT Decision 11484; Colette Ltd v C & E Comrs [1992] VATTR 240 (VAT Decision 6975). In Morris (2006) VAT Decision 19492 the tribunal allowed the appeal on the grounds that the Commissioners had not considered whether the level of security required was proportionate to the risk to the revenue. 
28.	The risk posed by the Appellant to the protection of revenue as perceived by Mr Houghton was that it failed to account for the VAT on the supply of rental services made on 1 January 2006. The full amount of £12,600 VAT was due in the quarter ending 31 January 2006 regardless of the fact that the supply was for 12 months rent. Against the £12,600 Mr Houghton set off an amount which represented the average quarterly repayment due to the Appellant. We are satisfied that Mr Houghton’s set off was consistent with the principles of VAT accounting and reflected the correct position had the Appellant declared the £12,600 in its 01/06 VAT return. We find that the amount of security demanded was proportionate to the risk and in accordance with the Respondents’ policy as published in Notice 700/52/05  Notice of Requirement to give security to Customs and Excise (April 2003) which required recovery of the debt within six months (two quarterly returns).
29.	The thrust of the Appellant’s case was that Mr Houghton misused the power to require a security. According to the Appellant the use of the power was inappropriate when the circumstances concerned a disputed single transaction and where the Respondents had alternative means of recovering the supposed debt, such as an assessment, which would allow a full airing of the dispute. 
30.	Under paragraph 4(2), schedule 11, of the VAT Act 1994 Mr Houghton was entitled to require a security provided it was necessary for the protection of the revenue. The Respondents’ policy in Notice 700/52/05 stated in paragraph 3.1 that VAT law allowed them to require an amount of security if they consider there was a risk of tax being unpaid by a business. Para 3.2 cited examples of when they may issue a Notice of Requirement which included previous failures to comply with VAT obligations. We find that Mr Houghton has not erred on point of law or gone against the Respondents’ stated policy. He required the security against the Appellant because he believed that it posed a risk to the protection of revenue. He was not required by the legislation or the policy to consider alternative steps before issuing the Notice of Requirement. The issue was whether Mr Houghton acted reasonably when making his decision.
31.	 As the High Court made clear in Peachtree we must assess the issue of reasonableness on the matters and facts which were in existence on 6 June 2006 when Mr Houghton made his decision.  We are not entitled to substitute our own decision for that of the Respondents, the protection of the revenue was their responsibility. We found that Mr Houghton was correct to place weight on the invoice, the bank statement showing payment of the rent, and the Appellant’s poor record of VAT compliance in determining whether the Appellant posed a risk to the protection of the Revenue. We were satisfied that Mr Houghton’s mistaken belief about Mr Parvaiz Ahmed’s directorship of the Appellant did not play a significant part in his decision making. We held that the amount of security demanded by Mr Houghton was proportionate to the risk posed by the Appellant. We found that Mr Houghton had not erred on point of law or acted contrary to the Respondents’ policy. We consider that the matters raised by the Appellant regarding the status of the invoice and the Appellant’s recent good compliance record were not relevant since they have come to light after Mr Houghton’s decision was taken. The Appellant’s remedy was to request the Respondents to conduct a fresh review of the continuing need for a security in the light of the new circumstances. 
Decision
32.	For the reasons set out above we find that Mr Houghton’s decision to issue the Notice of Requirement for Security dated 6 June 2006 on the Appellant was reasonable. We, therefore, dismiss the Appeal. We make no order for costs.

                                 MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 6 December 2007

MAN/06/0497