20812

REQUIREMENT FOR SECURITY – decision to require security made in November 2007 - Appellant owed tax and had a very poor compliance record - whether decision to require security a reasonable decision when it was made – yes – appeal dismissed – VATA 1994 Sch 11 para 4(2) 

LONDON TRIBUNAL CENTRE

NEILSON & CO 
Appellant

 - and -   	

THE COMMISSIONERS FOR HER MAJESTY’S 
REVENUE AND CUSTOMS 
Respondents

Tribunal : DR A N BRICE (Chairman)
MISS S C O’NEILL

Sitting in London on 9 September 2008

Stephen Hyett, Partner in the Appellant Firm, for the Appellant 

Gloria Orimoloye, Advocate in the Office of the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

The appeal
1.	Neilson & Co (the Appellant) appeals against a decision of The Commissioners for Her Majesty’s Revenue and Customs (HMRC) dated 29 November 2007. The decision was that, as a condition of the Appellant making taxable supplies, it was required to give security of £123,600 (or of £112,400 if monthly returns were submitted). The decision was made under the powers contained in paragraph 4(2) of schedule 11 of the Value Added Tax Act 1994 (the 1994 Act). 

The legislation
2.	Paragraph 4(2) of schedule 11 of the 1994 Act provides:

“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 … of such amount and in such manner as they may determine, for the payment of any VAT which is or may become due from;
(a)	the taxable person; or
(b)	any person by or to whom relevant goods or services are supplied.”

The evidence
3.	A bundle of documents was produced by HMRC and another bundle was produced by the Appellant. Oral evidence was given on behalf of the Appellant by Mr Stephen A Hyett, a partner in the Appellant firm, who also  represented the Appellant at the hearing. Oral evidence on behalf of HMRC was given by Mr Paul Johnstone, a Higher Officer of HMRC; Mr Johnstone made the disputed decision.

The facts
4.	From the evidence before us we find the following facts.

The events before the decision to require security
5.	The Appellant is a firm of solicitors and has been registered for value added tax since 1 April 1973. There are two partners in the firm of which Mr Hyett is one. 

6.	The Appellant’s compliance record since July 2003 has been very poor. The return and tax for the accounting period ending on 31 July 2003 were received late and a default surcharge was imposed. The returns and/or tax due in the accounting periods ending on 31 October 2003, and for the twelve consecutive periods from 31 October 2004 to 31 July 2007, were also late and surcharges were imposed. 

7.	On 7 March 2007 HMRC issued a bankruptcy petition for the sum of £30,944.39 which represented the amount owed by the Appellant as at April 2006. The amount was paid to HMRC by instalments between 2 March 2007 and 24 April 2007. On 25 April 2007 the bankruptcy petition was dismissed with an order that the Appellant should pay the costs of HMRC.  

8.	Thus, although by 24 April 2007 the Appellant had paid all outstanding tax, default surcharges and interest incurred up to April 2006, tax and default surcharges after that date were not paid. By the end of April 2007 the amount outstanding was £81,136.96 and HMRC issued a second bankruptcy petition in the sum of £76,136.96. On 20 August 2007 the Appellant wrote to HMRC with proposals for paying the outstanding amount; these included the suggestion that Mr Hyett would sell his house and pay the outstanding amount from the proceeds of sale and meanwhile would make monthly payments of £2,000 each. These proposals were not agreed by HMRC.

9.	By 1 October 2007 the outstanding debt had risen to £110,118.87 and on that date HMRC wrote to the Appellant to say that if full payment was not made within fourteen days security action would commence.  Payment was not made. 

The decision to require security
10.	The Appellant’s compliance record, and a schedule of the amounts outstanding, were reviewed by Mr Johnstone in November 2007. Mr Johnstone was also aware of the two bankruptcy petitions and the substantial correspondence between the Appellant and HMRC’s debt management team. Mr Johnstone formed the view that the pattern of non-compliance, and the amount of the outstanding debt, indicated that security was required to protect the revenue. In calculating the amount of the security he was aware of the fact that, if the amount shown in the second bankruptcy petition were to be paid, the amount of the security could be reduced. We accept his evidence that it was not unusual to pursue a debt through both a bankruptcy petition and a requirement for security at the same time as different proceedings took different lengths of time but if the bankruptcy debt were cleared the requirement for security would be reviewed. 

11.	In calculating the amount of the security Mr Johnstone determined an annual amount of tax by reference to the tax due as shown on the last four returns which had then been received. These four returns indicated that the total net tax due for twelve months was £66,743.16. On the basis that quarterly returns were to be submitted then Mr Johnstone halved the annual amount of tax to find a figure for six month’s liability which gave a figure of £33,371.58 and added to that the amount of the tax debt on 29 November 2007 which was £90,231.42. That gave a figure of £123,603 which, when  rounded down, came to £123,600. If monthly returns were to be submitted then Mr Johnstone calculated that four months’ tax liability would be £22,247.22 which, with the outstanding tax, amounted to £112,479.14 and which, when rounded down, came to £112,400. Mr Johnstone thus considered that the amounts of security required were £123,600 if quarterly returns were submitted or, alternatively, £112,400 if monthly returns were submitted.  

12.	HMRC wrote to the Appellant on 29 November 2007 giving the formal notice against which the Appellant appealed. 

Events after the issue of the notice
13.	In January 2008 the Appellant wrote to HMRC asking them to withdraw the second bankruptcy petition on payment of half of the debt with the remainder being paid before 12 March 2008, which was the hearing date of the petition. The letter said that this arrangement would enable the sale of Mr Hyett’s house to take place and that would produce funds for the final payment. By January 2008 the amount outstanding had grown to £129,148.36  Mr Hyett’s house was sold in April 2008 and on 25 April 2008 a payment of £44,500 was made to HMRC. The second bankruptcy proceedings were settled. 

14.	However, the Appellant’s debt to HMRC continued to grow and at 29 May 2008 stood at £108,379.60 even after taking into account the payment of £44,500. There was also a liability for PAYE. At the date of the hearing the value added tax liability was £92,181.06, made up of tax of £84,722.36, default surcharges of £6,710.92 and interest of £747.78. Also, there were two returns outstanding.  

The arguments 
15.	For the Appellant Mr Hyett argued that the Appellant could not produce the amount of security required without borrowing and that would take time. He also argued that there was no risk to the revenue. He accepted that the Appellant had been in arrears but asserted that that was due to economic pressures, the fact that clients did not pay on time, and substantial overheads. The full amount of the first bankruptcy petition had been paid in April 2007 and that had disposed of arrears up to April 2006. A further amount of £44,500 had been paid in April 2008 from the sale of his house. He had also offered to pay the remainder by instalments but that had not been accepted by HMRC. The Appellant had done the best it could; he had sold his house and the Appellant had moved to cheaper office premises. Also, the Appellant had always paid something when pressed. It was unfair for HMRC to issue a bankruptcy petition and to require security at the same time and it was not clear whether, when Mr Johnstone made the disputed decision, he knew and took account of the two bankruptcy petitions. It was unrealistic and excessive to request security of such a high amount and the Appellant should be allowed to discharge its arrears by regular payments. Also, the amount of security required was now out of date as the Appellant’s turnover had reduced since November 2007. 

16.	For HMRC Ms Orimoloye argued that the Tribunal had to consider whether the decision to require security was a reasonable decision when it was made and went on to argue that the decision was reasonable at the time it was made. Mr Johnstone had considered the amount which the Appellant owed to HMRC and the Appellant’s very poor compliance record since 2003. 

Reasons for decision 
17.	In considering the arguments of the parties we first summarise the relevant legal principles. 

18.	Customs and Excise Commissioners v Peachtree Enterprises Ltd [1994] STC 747  established the principles that: the Tribunal’s jurisdiction in cases where the exercise by HMRC of discretionary powers was challenged was a supervisory jurisdiction; that the Tribunal could not substitute its own discretion for that of HMRC; that the Tribunal had to limit itself to considering facts and matters which were known when the disputed decision was made; and that where the decision in dispute was a decision by HMRC to require security then, in determining whether that decision was reasonable, the Tribunal should take into account only matters known to HMRC at the date of the decision. 

19.	John Dee Limited v Customs and Excise Commissioners [1995] STC 941 established the principles that: the Tribunal had to examine whether HMRC had thought it necessary for the protection of the revenue to require the taxable person to give security; that in doing that the Tribunal had to consider whether HMRC had acted in a way in which no reasonable panel of commissioners could have acted or whether they had taken into account some irrelevant matters or had disregarded something to which they should have given weight; that the Tribunal might also have to consider whether HMRC had erred on a point of law; that the Tribunal could not exercise a fresh discretion as the protection of the revenue was not a responsibility of the Tribunal; and that if it were shown that HMRC’s decision was erroneous because of their failure to take relevant material into account the Tribunal could nevertheless dismiss an appeal if the decision would inevitably have been the same had account been taken of the additional material. 

20	Applying those principles to the facts of the present appeal we are of the view that the decision of 29 November 2007 to require security in the amounts stated was a reasonable decision when it was made. At that time Mr Johnstone knew about the amount outstanding from the Appellant and the Appellant’s very poor compliance record, in particular the history of late returns and late payments of tax. In our view it was reasonable to conclude that security was required. The amount of the security required was based on the four most recent returns then in the possession of HMRC and on the amount of tax then outstanding and we regard the amounts required as reasonable on the dates they were required. In reaching their decision HMRC took into account all relevant information. For those reasons we dismiss the appeal.

21.	We have considered the events since the date of the disputed decision and have considered whether to request HMRC to review their decision in the light of those facts. However, we have decided not to do so. The amount of outstanding tax as at the date of the decision was £90,231.42 (excluding default surcharges and interest) and at the date of the hearing was £84,722.36 (excluding default surcharges and interest). The two amounts are of the same order of magnitude. The calculation of the total net tax due for twelve months at the date of the decision was £66,743.16. Although Mr Hyett told us that turnover had reduced since then we were not told of the new amount of annual total net tax due. Also, we were told by HMRC that two returns were outstanding. We therefore do not know the extent to which the amount of the total annual net tax due has been reduced. 

Decision  
22.	For the above reasons the appeal is dismissed.

DR NUALA BRICE

CHAIRMAN

RELEASE DATE: 23 September 2008

LON/2008/ 0147
19.09.08