The recent case of The Distinctive Pub Company (Stratford) Limited TC01992, published on 1 June 2012, serves as a timely reminder that new VAT registrations and transfers of going concerns may be required to provide security to HMRC to enable them to continue to trade where a previous business has defaulted.
The following observations were made by HMRC with regard to the transfer of the business comparing the Company with its predecessor:
(1) The trading address was the same.
(2) The trading style was the same.
(3) There was no break in style between the two businesses.
(4) The old business and assets were purchased from the administrators as a “Pre-pack sale”.
(5) The purchase of the business and its assets from the administrators over a period of time was an indication that the business was not adequately funded causing concern that the VAT may be at risk.
(6) The contracts of the employees were transferred to the Company.
(7) Two directors of the Company were both directors of the old business.
(8) The old business failed in January 2011 owing VAT debts of £62,067 plus direct taxes.
(9) The old business had a history of VAT arrears dating back to February 2004, had several time to pay arrangements with the HMRC Debt Management Unit, had several unpaid cheques and had 20 periods of default surcharge from 1997.
(10) Returns were rendered late without payment; the last return rendered was for 03/10.
The appellant was a pub to whom HMRC referred to in a letter as a “cash trader” which had “received the VAT declared on returns, but chosen not to pass it over to HMRC by the due date as legally required”.
At the time the request for security was made by HMRC the business had not submitted its first VAT Return, but by the time of the review it had been submitted albeit late. The subsequent return was filed and the VAT paid on time. The company stated it would submit monthly VAT returns and in the circumstances the amount of security was re-calculated on the basis of these returns to £7,650.
The Company appealed to the Tribunal on the grounds that a period of regularly monthly returns and payments over 12 months will prove that the business was not going to default again.
Paragraph 4(2) of schedule 11 VATA HMRC 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” him “if they think it necessary for the protection of the revenue”.
The jurisdiction of the Tribunal in an appeal against a requirement to provide security is only supervisory. It cannot substitute its own decision for that of the Commissioners. The only question the Tribunal can ask is whether the actions and decision of HMRC were unreasonable. For the appeal to be successful, it would have to be shown that the Commissioners took into account some irrelevant matter or had disregarded something to which they should have given weight.
The Tribunal found that HMRC acted reasonably and had not taken irrelevant matters into account or failed to take into account all relevant matters at the time the decision to issue the Notice for Security was made. The Appeal was dismissed.
This case clearly demonstrates that the Tribunal’s jurisdiction in security cases is supervisory and beyond determining whether HMRC have acted reasonably, they have no power to substitute their own decision. The requirement to provide security should be given consideration when transferring businesses as going concerns or from a pre pack sale.