IC Blue Ltd v Her Majesty's Revenue & Custom [2009] UKFTT 40 (TC)

FTT-Tax
IC Blue Ltd v Her Majesty's Revenue & Custom
[2009] UKFTT 40 (TC) · 2009-04-08
[1]TC00018 VALUE ADDED TAX- import VAT – Simplified Import VAT Accounting ("SIVA")- trader refused entry into scheme – business did not satisfy financial viability as net assets less than average VAT liability – appeal dismissed. MANCHESTER TRIBUNAL CENTRE I C BLUE LTD Appellant - and - THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS Respondents Tribunal: David Porter (Chairman) Rayna Dean (Member) Sitting in public in Manchester on 22 February 2009 Andrew Lucas, Managing Director, and John Kennington, Finance Director, appearing for the Appellant David Griffiths, of counsel, instructed by the Acting Solicitor for HM Revenue and Customs for the Respondents © CROWN COPYRIGHT 2009 DECISION I C Blue Limited ("the Appellant") appeals against the Respondents' decision refusing to allow the Appellant to operate the Simplified Import Vat Accounting (SIVA) contained in a review letter dated 23 January 2007. The Respondents say that the Appellant has insufficient liquidity to support its liability to VAT and as a result there is a risk that the VAT might not be paid in the event of the Appellant ceasing to trade. The Appellant says that, as they are effectively a repayment trader, there can be no risk to the Revenue[2]David Griffiths appeared for the Respondents accompanied by Diane Evans the reviewing officer. He provided a bundle for the tribunal. Andrew Lucas and John Kennington Directors of the Appellant appeared for the Appellant[3]We were referred to the following cases: Martin Yaffe International Limited-v-Her majesty's Revenue and Customs C00197 and Cargo Gateway Limited-v- The Commissioners of her Majesties Revenue and Customs C00257[4]The Facts The Appellant was registered for VAT on 28 August 2003 and at the time of the review had been trading for a period in excess of 3 years. The Appellant carries on the trade of a distributor of electronic components. The majority of the trade is by way of exports to counties outside the EU, which is exempt for VAT purposes, and to countries in Europe which are zero-rated for VAT purposes. As a result the Appellant is always in a repayment position. The Appellant had approached its bank to see if it could provide appropriate security, but the costs were prohibitive. The Appellant had also offered to pay an appropriate amount in advance to secure the liability. The Respondents had not been able to allow that. The Appellant's records indicated the maximum monthly import VAT in the period to 31 August 2006 was £11,139. The accounts to 31 August 2005 and 2006 produced to Mrs Evans for the purposes of the application revealed tangible fixed assets of £27,687 and £24,822 respectively. For SIVA purpose tangible assets are assessed at 50% of their declared value for realisation purposes. This meant that the tangible assets were worth £13,843 and £12,411 respectively. Mr Kennington stated in a letter of 25 January 2007:
" … The bank has no debentures or security over the company's assets. The loan that makes up the vast majority of the long term loans is a small firms loan guarantee which is 75% guaranteed by the Department of Industry"
However, Mr Griffiths produced to the tribunal details of the register of charges at Companies House which revealed a Debenture dated 28 April 2004 in favour of HSBC. This secured a small firms loan and in the event of the Debenture being called in £25,000 would have to be paid by the company being the extent of the loan of £100,000 not covered by the 75% guarantee. The Appellant stated that the Fixed Charge of 24 April 2004, registered at Companies House, related to a proposed factoring arrangement which never took place. Mr Lucas said that the Charge no longer existed. Mr Lucas also accepted that the Fixed Charge needed to be removed from registration at Companies House. We accept that that charge no longer exists. Mr Lucas also confirmed that although the overdraft was £31,294 at the time of the application for SIVA the Appellant's facility was £50,000. Mrs Evans said that the Respondents ignore stock and cash at Bank as both can easily be removed. Further debtors have to be substantially discounted as they are unlikely to be realised at anything like their full value in the event of the Respondent ceasing to trade. The debtors amounted to £218,870 in the accounts and the Respondents suggested that on a forced sale they would be of minimum worth and take time to collect. Mrs Evans stated in her review letter of 23 January 2007 that the normal business practice was to use the net assets as security for the VAT liability in the event of the company failing. In view of the liability under the debenture of £25,000, the overdraft and the likely receipts from the debtors there would be insufficient net assets to secure the VAT liability and on that basis she refused the application. She also stated in her review letter that:
".. VAT paid on the import of goods is considered to be a Customs Duty and, therefore not connected with your domestic VAT records"
The meaning of this was not clear to us and Mrs Evans explained that there was no right of set off for the Respondents against the repayment of VAT arising from the failure to pay the VAT on the imports as the VAT would be paid to Customs so that the set off could not be applied..[5]The Law SIVA only applies to VAT payable on importation. Approval to use it removes the need for security for VAT where payment of the VAT, that would otherwise be payable, is deferred. The legal basis for SIVA is Regulation 4 of the Customs Duty Deferred Payment Regulations 1976 as amended and also, and in particular, as modified by Regulation 121A of the VAT Regulations 1995 in relation to VAT chargeable on importation of goods from places outside the member states which reads as follows:
"4 (1) A person who wishes to be approved for the purposes of these regulations shall apply to the Commissioners in such form and manner as they shall determine, furnish appropriate security (which may be nil if there is no risk to the payment) for payment on payment day of the amount of customs duty in respect of which he seeks deferment, and make arrangements with the Commissioners for payment of that duty on payment day."
VAT on importation from outside the member states is subject to the legislation relating to customs duties by section 16 of the VAT Act 1994, hence the absence to any reference to VAT in the modified version of regulation 4 even though it applies to VAT, and regulation 121A of the VAT Regulations makes it clear that the modification only applies to VAT on importation from outside the member states[6]Summing up Mr Griffiths submitted that the net assets of the Appellant, less the balance of the guaranteed loan, the overdraft, including a recovery for the debtors, were insufficient security for the Appellant's ongoing VAT liability in the event of a default by the Appellant. Mrs Evans had acted reasonably in refusing to allow the Appellant to enter the SIVA scheme. The tribunal has to consider whether Mrs Evans acted reasonably at the time of her decision on 23 January 2007 and, if they did not agree, then their powers were to refer the matter for further review. Mr Lucas accepted that the Appellant could never have sufficient assets because of the type of business it operates. As, however, the Appellant was always entitled to a repayment he failed to see how the Respondents could be at risk. The Appellant had also offered to pay some security as a deposit In the circumstances Mrs Evans had acted unreasonably in refusing the application for SIVA The Decision[12]The Respondents' decision is an "ancillary matter" falling within paragraph 1(m) of Schedule 5 to the Finance Act 1994. The tribunal's jurisdiction is conferred on it by section 16 of that Act. Subsection (4) limits our powers: We may allow an appeal against a decision as to an ancillary matter only if we are satisfied that the reviewing officer "could not reasonably have arrived at it" and, if we do allow the appeal , we can do no more than direct a further review. We agree with the observations of Mr Bishopp in Martin Yaffe International Limited-v- Her majesty's Revenue and Customs C00197who stated at paragraphs 7 and 8:
"7. The issues we must address relate to the circumstances in which the Respondents can properly exercise the power to revoke or vary such authorisation. Save for the indication that, if there is no risk to the Revenue the security may be nil (with the obvious implication that if there is such a risk, it may not be set at nil) and for the indication that revocation or variation of an existing authorization may be only for good cause, the statutory provisions offer no guidance. It follows, therefore, that the grant variation and revocation of permission are matters within the Respondents' discretion. 8. It is too well-established a proposition to require authority that any body which exercises a discretion is entitled to follow a policy when doing so, the more so when, as here, several officers will exercise the discretion on its behalf and there is a public interest in consistency of application. The policy must respect the purpose of the statutory provisions granting the discretion, and cannot be so strict that, in practice, no real discretion can be exercised."
It is unfortunate that there is no facility within the SIVA scheme for a deposit to be lodged with the Respondents by way of security. Since there is not, the evidence shows that the Appellant has insufficient assets to provide appropriate protection to the Respondent. The net worth of the assets for the purposes of the scheme is approximately £12-13,000. Although this in itself is sufficient to cover the £11,000 liability the overdraft of £50,000 and the residuary liability of £25,000 on the guaranteed loan means that no monies will be available for the Respondents to cover the VAT liability in the event of a default. The cash at bank and the stock are not taken into account as they can be readily disposed of by the Appellant in the event of financial difficulties. Although the debtors are reasonably substantial there is no guarantee as to how many of them would be paid and there would be a considerable delay in their realisation. We cannot think that Mrs Evans observations concerning the repayment can be right. Any VAT due prior to the payment under SIVA cannot be paid to Customs and Excise and must, we think, be paid to the Respondents. If that is the case it would mean that a right of set off would be available to the Respondents. We accept, however, that if in any period the Appellant ceased to be a repayment trader, for any reason, then the Respondents would be at risk. Although we consider Mrs Evans has not addressed the repayment matter adequately in her letter we do not accept that her view would have been any different if she had done so. We have therefore decided that Mrs Evans acted reasonably at the time of her refusal to allow the Appellant to enter the SIVA scheme and we dismiss the appeal. We do, however, acknowledge the Appellant's frustration at being unable to take advantage of the scheme now or in the future and would suggest it discusses with the Respondents the possibility of some other form of security whether through their bank or a reputable insurance company. Mr Griffiths made no request for any costs and we therefore award none. DAVID S PORTER CHAIRMAN Release Date: 8 April 2009 MAN/07/7006