If a business goes under and owes VAT to HMRC, they have the power to demand a security (deposit) before they will let any new company trade. For example, Company A gets into financial difficulties because one of its largest customers goes bust owing them £500K. After a few months trying to trade through its difficulties Company A goes into liquidation owing HMRC £40k in unpaid VAT.
Two of the three directors of Company A buy the assets and take on a few of the staff of their old company and start trading as Company B. Within a couple of months of starting to trade they get a letter from HMRC demanding a security of £35k 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 business the Government has said it will do all it can to help them, but this has not got through to HMRC, who are imposing more security demands than ever.
There have been a number of Tribunal cases over the years which have shown that HMRC must make certain checks on the new business before imposing a security, however, these are rarely done. In most cases if a business can show that HMRC has been negligent, they will back down and withdraw the security.
So what are the sort of things you should look for?
Where a Director has been involved in a business that has gone into liquidation with debts outstanding to the Commissioners, 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.
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 Company A above where their main customer went bust.
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 has not made these enquiries you should challenge any security that is imposed.
HMRC are also supposed to make detailed enquiries into the financial position of the new company. The failure to do this would indicate that HMRC are not in a position to accurately assess any potential risk to the revenue posed by the new company. If HMRC had taken this action, he would not, inevitably, have reached the same conclusion and so the imposition of a security would be unreasonable.
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 of these examples, they should obtain professional advice and challenge HMRC.
Comment: If, after reading this article, you feel you have a semblance of a defence to any HMRC security demand, do please get in touch with us. We are very proud of the fact that we still have a 100% success rate in these cases after more than 7 years of trading! A successful appeal would also see most or all of your costs being reimbursed by HMRC (at least until such time as the planned restructuring of the VAT Tribunal system goes through).