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Everyone wants security. HMRC no less that anyone else – the Commissioners are after all, allegedly, mortal and human like the rest of us.

HMRC’s Commissioners have the power, where they determine a risk to “the revenue”, i.e. VAT, to issue a Notice of Requirement (NOR) to pay or deposit a sum (the security) against liability for VAT – Para 4(a) to Sch 11 VATA states:

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, or further security, for payment of any VAT that is or may become due.

The prerequisite is that they have to “think” and as with any decision requiring thought, the decision to issue an NOR must be reasonable and proportionate in all the circumstances.

And this is important – because criminal sanctions can be imposed if a taxpayer continues to make taxable supplies in the face of a NOR which he has not satisfied.

Challenging such a decision is akin to bringing a JR – the same principles are engaged but the forum is less expensive because it takes place before the Tribunal (don’t for one moment read that as less rigorous, the examination of “all the circumstances” is a thorough one).

The most common scenario in which an NOR is issued is the archetype “phoenix” – a business folds owing money to creditors, mainly HMRC, and then resurrects carrying on essentially (sometimes exactly) the same business in exactly the same way under the same directors/partners etc as before. HMRC gets a fit of the heebygeebies and bangs out an NOR. In such circumstances the NOR is often understandable and usually justifiable.

However, not all NORs are equal and sometimes HMRC gets it wrong – as in the case of Aria Technology Limited (ATL), a matter in which I was instructed and whose appeal was allowed.

It was an unusual NOR appeal not least because of the value of the security demanded (a whopping £638,000 – reduced from an original demand of £850,600.00). The demand was made during the course of associated MTIC proceedings which are still not resolved. It also raised issues of estoppel – so far as the Appellant was concerned HMRC had undertaken not to pursue any debt recovery action, including issue of a NOR, in relation to VAT withheld by it consequent to HMRC’s refusal to repay input tax it alleges is vitiated by MTIC fraud about which ATL knew or ought to have known.

The Tribunal states quite categorically in its decision that it does not condone the withholding of VAT in the manner adopted by ATL, however, it did come to the conclusion that ATL was reasonably entitled to think that, so long as no more that the amount of denied input VAT was owed to HMRC, ALT would not be subject to recovery proceedings or a NOR. Accordingly, only the sum denied in relation to MTIC was ever likely to be at risk – not all VAT going forward. That ought to have been taken into consideration but wasn’t, had it been the sum demanded by way of security would have been significantly lower.

Further, the decision making officer failed to take account of the impact such a high demand would have had on ATL’s ability to keep trading and in particular its ability to maintain its appeal against the MTIC denial. The Tribunal had this to say:

The requirement could well have presaged an end to any chance on the part of the appellant of having the matters concerned in those [the MTIC] proceedings fairly dealt with. A suspicious mind might have concluded that that was indeed the respondents’ intention. The tribunal would naturally be reluctant to draw any such conclusion. It must be said however that Mr Reeves stated in his evidence to the tribunal that the matter of the MTIC proceedings and the Notice of Requirement were to his mind quite separate matters.

Following a meeting with MTIC investigators (who approached him with the ATL file) the Tribunal found that Mr Reeves

…apparently decided in short order to process with the issue of the Notice of Requirement… What he does not appear to have done… is to make any relevant enquiries in the substance of the appellant and its creditworthiness so as to enable him to form a view as to the risk, if any, it might pose to the revenue. There is absolutely no mention anywhere in this security proceeding of the financial accounts of the appellant…or any other credit information… having been obtained and considered by the respondents. This does seem to the tribunal to be extraordinary in the particular circumstance of this appellant who had gone to some trouble to explain what it was doing and why.

The manner in which Mr Reeves undertook the assessment of the amount of security required seems also to have the hallmarks of one which was not greatly concerned with balancing the risk with the potential damage to the appellant’s business.

It was also noted by the Tribunal that the initial calculation of £850,000 included 6 months future VAT liability and arrears but, significantly, not the amount in dispute in the MTIC (suggesting that there was no perceived risk in relation to that sum). HMRC also failed to take into consideration the fact that ATL sometime made large repayment claims.

Accordingly, the Tribunal found that the process of deciding to issue the NOR – the thinking bit – was flawed and involved a failure to take account of relevant matters and the sum demanded was in excess of that reasonably required to secure the risk to the revenue. It therefore needed to be revisited – that is a matter for the Commissioners alone.

As at the date of writing, 9 April 2014, this decision is still within the time limits for appeal.

I should add that this is not the highest sum demanded as NOR in which I have been instructed since leaving the (not so) comfy environs of HMRC’s Solicitor’s Office. The highest was in excess of £1.5M – it was issued in the context of a Special Investigation branch enquiry into offshore employment agencies and had to be withdrawn when HMRC failed to defend the appeal in a timely and proper manner. It seems that the investigation teams within HMRC are looking to deploy their full arsenal in an attempt to close the tax gap. However, the ends do not justify the means.

I am enjoying my role as Gamekeeper to HMRC’s (sometimes) Poacher.

You can read the full decision here