Example – HMRC
security demand
OldCo Ltd gets into financial difficulties because one
its largest customers goes into liquidation owing them £300,000. After a few months trying to trade through
its difficulties, OldCo also goes into liquidation owing HMRC £40,000 in unpaid
VAT.
Two of the three directors of OldCo buy the assets,
take on a few of the staff of their old company and start trading through NewCo
Ltd. Within a couple of months of
starting to trade they get a letter from HMRC demanding a security of £35,000
for between one and two years, or they will not let them trade.
This is the last thing a new business needs, and in some cases they simply close down. But what can they do about it?
In these days of financial pressure on small businesses, the government has said it will do all it can to help them, but this has not got through to HMRC as they are now imposing more security demands than ever.
Case law
There have been a number of tribunal cases over the years which have shown that HMRC must make certain checks on a new business before issuing a security demand. However, these are rarely done. In most cases, if a business can show that HMRC has been negligent in undertaking these checks, they will back down and withdraw the security demand.
So what are the sorts of things you should look for? Let’s look at the circumstance in which the taxpayer has successfully challenged HMRC. I have grouped them under similar circumstances, so that you can assess whether the security demand has been issued incorrectly.
Where a director has been involved in a business that has gone into liquidation with debts outstanding to HMRC, but has not been directly responsible for the financial mismanagement of the previous company, the tribunal has ruled that it is unreasonable of HMRC to require security from a new company that he becomes involved with.
For example, the old company was financially mismanaged by the finance director and the new company is run by the old sales director and personnel manager. They did not have direct responsibility for the finances of the old company, so HMRC would be wrong to ask for a security. The leading cases in this field are:
- Greyhound Transport (UK) Ltd, LON/94/1365A (13216);
- Soundmethods Ltd, MAN/96/353 (14523); and
- Central Catering Equipment Ltd, MAN/96/536 (14605).
Tribunals have also ruled that where the liquidation of a company has occurred for reasons outside the control of those running a business, it is unreasonable for HMRC to require a security, as in the example of OldCo above where their main customer failed.
This is a common circumstance at this time, and if a business can show that some of its customers have gone into liquidation forcing it out of business as part of the recession it could probably successfully challenge the imposition of a security demand. The leading cases in this field are:
- Deltaview Ltd, LON/84/540 (1832, 1876);
- Firepower Builders Ltd LON/88/301Y (3358); and
- Extrastable Services Ltd MAN/95/2059 (13911).
HMRC is also supposed to make detailed enquiries into the financial position of the new company. Failure to do this would indicate that HMRC is not in a position to accurately assess any potential risk to the revenue posed by the new company. If HMRC had taken this action, they would not, inevitably, have reached the same conclusion and so the imposition of a security would be unreasonable. The leading case in this field is:
- C&E Commrs v John Dee Ltd, CA [1995] STC 941
Tribunals have also indicated that where a new business is financially sound, and has rendered its VAT returns on time and with full payment of the tax due, it is not reasonable for HMRC to request security from the new company. If HMRC have not made these enquiries, the business should challenge any security that is imposed. The leading cases in this field are:
- Exact Electronics Ltd, LON/92/2754A (11391);
- Deltaview Ltd, LON/84/540 (1832, 1876); and
- C Hickson & Others (t/a Flury’s), LON/93/1723A (11455)
In many cases, HMRC will have made no enquiries into the new business at all, and simply imposed a security requirement as a matter of routine. Any business that receives a security demand should take account of the above, and if they feel that they come under one these examples they should obtain professional advice and challenge HMRC.
Even if HMRC have good reason to impose a security demand on a business, there is still a good chance that the size of the original demand can be substantially reduced. One area where the size of the demand can be reduced is if the actual turnover of the new business is lower than that shown on the original VAT 1, so that the size of the demand can be reduced proportionately.
Negotiating with the officer dealing with the security demand can also be beneficial. In one case I negotiated, the original security demand for £96,000 down to £7,000.
Practical Tip :
If your business receives a security demand and the circumstances fall into one of the categories above, it is possible to have it completely withdrawn. However, even if this is not the case, it is often possible to negotiate with HMRC and have it dramatically reduced.
