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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Parkground Ltd v Revenue & Customs [2007] UKVAT V20052 (20 February 2007) URL: http://www.bailii.org/uk/cases/UKVAT/2007/V20052.html Cite as: [2007] UKVAT V20052

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20052

VAT — SECURITY — REQUIREMENT FOR — "phoenix" company — level of trading much less than previous failed company — security required progressively reduced — appeal allowed to correct admitted miscalculation in requirement — otherwise appeal dismissed — security required reasonable once correction made

MANCHESTER TRIBUNAL CENTRE

PARKGROUND LTD Appellant

- and -

THE COMMISSIONERS FOR

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: Michael Johnson (Chairman)

Kathleen Ramm FCA

Sitting in public in North Shields, Tyne and Wear on 24 January 2007

Mark Hutton, director, for the Appellant

Bernard Haley, of the Solicitor's office of H M Revenue & Customs for the Respondents

© CROWN COPYRIGHT 2007


 


DECISION

1. This appeal is against a requirement to provide security for value added tax pursuant to paragraph 4(2)(a) of Schedule 11 of the Value Added Tax Act 1994. Notice of the requirement was given to the Appellant by the Respondents ("HMRC") on 14 June 2006. The amount of security required was £7,300, on the footing of quarterly VAT returns.
2. That security represented a substantial reduction in the amount of security originally required. A Notice dated 9 March 2006 had required security in the amount of £41,000. Following representations by the Appellant, HMRC by Notice dated 21 March 2006 substituted a requirement for security of £14,700. The requirement under appeal followed a further reconsideration by HMRC.
3. The grounds of appeal contained in the Notice of Appeal state that the security required is "extremely high in comparison to the weekly invoiced figures from the [Appellant] (only trading at £961.00 per week). Presently, the [Appellant] is trading under a small business allowance". The reference to "small business allowance" was explained at the hearing as meaning that the Appellant has been accepted by HMRC as being entitled to account for VAT in accordance with the flat-rate scheme for small businesses.
4. At the invitation of the tribunal, and with the agreement of Mark Hutton, representing the Appellant, we invited HMRC to present its case first.
5. Bernard Haley, representing HMRC, called two witnesses. His first witness was the officer of HMRC responsible for the initial Notice of Requirement dated 9 March 2006, Mr David Price. Mr Price told the tribunal that he had concluded that the Appellant represented a real revenue risk if allowed to trade without the provision of security. He presented a "chain chart" to the tribunal, constructed from information obtained from Companies House, from which it could be seen that the Appellant was a so-called "phoenix" company which appeared to have taken over aspects of the business of a failed company, Amac Manned Services Ltd, which had become insolvent in 2005 owing tax of £39,611.06, not including interest.
6. Mr Price drew the connection that Mr Hutton, now director of the Appellant was company secretary of the failed company, and his partner Kathleen Jenner, now company secretary of the Appellant, was director of the failed company. He also pointed out that she had been the director of another failed company, A M S Northern Ltd, which had become insolvent in 2002 owing tax of £25,720.99.
7. Mr Price told the tribunal that he had calculated the original requirement for security of £41,000 on the basis of the performance of the company from the ashes of which the Appellant appeared to have risen. He accepted that in the light of reconsideration of the amount of the security required of the Appellant, the figure originally required was too great.
8. Mr Haley's other witness was Mrs Ruth Morris, also an officer of HMRC. She was asked to reconsider the requirement for security. She took into account that the trading level of the Appellant was said to be only some £900 + per week; that the Appellant's VAT return for its accounting period 01/06 – the only return available to her – showed a tax liability of £6,700; that the Appellant had applied to go onto the VAT flat-rate scheme; and that the return had been rendered on that basis in anticipation of the application being granted. She arrived at the sum to be required by way of security by adding to the admitted liability of £6,700 (which had not been paid) 17.5 per cent of the Appellant's net outputs allowing for notional direct tax, amounting to £8,000 over six months, thus giving a total of £14,700.
9. Mrs Morris reconsidered the justification for requiring security independently of Mr Price. She noted that the £6,700 remained unpaid. She shared Mr Price's concerns about the revenue risk. So she sent the Notice of Requirement dated 21 March 2006.
10. The Appellant, however, continued to protest at the security required. Mrs Morris looked further at the position. She was constrained to accept that the Appellant qualified for the flat-rate scheme for VAT, from its commencement of trading in 2005, seeing that this had been authorised separately by HMRC. She awaited the Appellant's VAT return for its accounting period 04/06. That was not rendered in time, so she recalculated the liability according to the 01/06 return but on the basis of entitlement to the benefit of the flat-rate scheme. (The £6,700 tax due had by then been paid.) She arrived at the figure of £7,300 contained in the Notice of Requirement under appeal.
11. Mrs Morris explained that she admitted an error in her calculation, which was that she had adopted the £6,700 tax declared and that she had arrived at an average daily liability using a period of 162 days as a divider. In fact, she told the tribunal, the period should have been 191 days. That had the effect of reducing the pro rata liability for six months to a rounded-down figure of £6,380.00, on the basis of quarterly returns. The corresponding four month figure, acceptable to HMRC on the basis of monthly returns, would be £4,270.00.
12. Mr Haley told the tribunal that those figures were the security now required by HMRC and that to that extent the figure contained in the Notice of Requirement under appeal was overstated.
13. Mr Hutton then gave evidence. He was steadfast in maintaining that the Appellant was invoicing, then as now, about £1,000 per week. He said that HMRC had progressively accepted that the level of trading of the Appellant fell far short of that of the company it had replaced. Mr Hutton accepted that the Appellant was in some respects the trading successor to the failed company. The Appellant had for a period used the trading name of the failed company and had serviced some of its contracts.
14. Mr Hutton accepted that HMRC were justified in requiring security. He appreciated and did not attempt to deny the perception that the Appellant was a "phoenix" company as alleged, but stressed that trading was on a much smaller scale than before. He told the tribunal that the Appellant's argument was as to the amount of security. He said that in his submission, security of about £4,000 would be appropriate.
15. In making his concluding submissions, Mr Haley said that there was ample justification for the security requirement. This was, and was accepted by the Appellant as being, a "phoenix" situation, in which Mr Hutton and Ms Jenner were continuing to trade in the wake of their previous, insolvent company. As to the amount of the security, he submitted that Mrs Morris was entitled to take the approach that she did, relying upon the 01/06 return. There was a history of late payment of tax and late rendering of returns. She did what she could with the information available, against a background of non-compliance by the Appellant with its accounting obligations.
16. However, Mr Haley accepted that the Notice of Requirement was wrong in requiring £7,300, and invited us to accept £6,380.00 as the correct figure.
17. Mr Hutton reiterated that £4,000 was the security that the Appellant felt was appropriate. We could not help observing that £4,270 was the figure sought by HMRC on the footing of monthly VAT returns made by the Appellant. Mr Hutton said that he was happy for the Appellant to make monthly returns, and Mr Haley indicated that monthly returns would be acceptable to HMRC.
18. We conclude, as Mr Haley submitted, that HMRC acted entirely reasonably in requiring security in this case, as indeed Mr Hutton appeared to accept. We regard this as the classic "phoenix" situation, which was never really in doubt before us.
19. Equally, however, the amount of security required was overstated in March 2006, and it has taken this appeal for the appropriate amount of security to be finally arrived at, which by itself has justified the appeal. At the end of the day, the parties are almost in agreement, the Appellant offering £4,000 on the footing of monthly returns, and HMRC indicating £4,270 as acceptable.
20. We have decided that the right amount of security is indeed the amount sought, which has been justified by HMRC as correct, on the basis of a calculation properly linked directly to the Appellant's 01/06 return. We adopt that calculation as justifiable in all the circumstances and we uphold it.
21. It follows that this appeal succeeds to the extent that we hold that the security required should have been £6,380.00 on the footing of quarterly returns and £4,270.00 on the footing of monthly returns, monthly returns being the preferred solution expressed by the Appellant. Save to that extent, the appeal is dismissed.
22. No application was made by either party for costs, which has saved us from the task of deciding where the burden of costs should lie in this case, in which there has in the end turned out to be some measure of agreement between the parties.

MICHAEL JOHNSON

CHAIRMAN
Release Date: 20 February 2007

MAN/2006/0520