What is a VAT Security Bond and am I required to give one?
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Why do HMRC require payment of a Security for Tax?
The Tax & HMRC Investigations Team at Old Bailey Solicitors have noticed a marked increase in “Notices of Requirement and VAT Security” in recent years. This is a procedure whereby HMRC can request payment of a security (cash deposit or bond) from a company in respect of tax likely to fall due as the company continues to trade.
The requirement to pay a security can arise in relation to VAT, PAYE, National Insurance and other forms of taxation. However, the requirement most commonly arises in respect of VAT.
HMRC will generally request that a security be paid in cases where they assess that the risk of tax going unpaid is significant. This will usually follow where a company has been liquidated or been sold out of administration, usually in circumstances where tax went unpaid, and HMRC suspects that the formation of a new company is a mechanism for side-stepping the payment of tax – so called “Phoenix syndrome”.
What is the legal basis for HMRC’s requirement of a security?
HMRC are most likely to require payment of a security in respect of VAT. The power to make that requirement arises under para 4(2) of Schedule 11 Value Added Tax Act 1994.
Section 72(11) of the same Act makes it an offence to continue to trade (to supply goods or services) in contravention of a request made under para 4(2) Schedule 11.
As such, an offence is committed on each and every occasion that the company supplies goods or services after it has failed to provide the required security. The maximum fine in respect of each offence has been increased from £5,000 to £20,000 in recent years.
Can I be prosecuted if my company fails to pay the security?
The short answer is “yes” and we have recently represented both companies and individuals who are facing prosecution in these circumstances.
Where the offence has been committed by a company (a “body corporate”), s171(4) of the Customs & Excise Management Act 1971 allows for the prosecution of any Director, Manager, Secretary or similar Officer of that company. Such a prosecution may arise if it can be shown that the company failed to pay the security with the consent or connivance of the Director or as a result of that Director’s neglect. As such, it is not uncommon to see HMRC prosecutions of both the company and its directors and / or officers.
How do HMRC calculate the level of security?
HMRC state that it is their policy to require a security based on their assessment of the amount of tax likely to fall due and likely to go unpaid. To some extent this must be based on evidence of historical trading patterns and tax liabilities. The security requested may also include sums currently due in respect of VAT. The courts have held that the requirement must be a proportionate response to the level of risk and that HMRC must not go further than is necessary to attain their objectives (to secure correct tax collection and to prevent evasion).
What are my options if I am (or my company is) required to provide a security?
The options for a company that has been required to provide a security in respect of tax are as follows:
1. the company can make the required cash deposit to HMRC or it may provide a bond from an approved financial institution. However, making this payment or arranging such a bond may prove impracticable for a new business, especially one that has struggled to meet its tax liabilities in the past;
2. the company can cease trading so as not to commit a criminal offence; or
3. an appeal can be made to the VAT Tribunal to have the requirement modified or withdrawn. An appeal must be lodged within 30 days of service of the requirement by HMRC. Where an appeal is lodged, within time, there is an expectation that HMRC will not seek to prosecute for a failure to provide the security until the appeal has been determined.
How can Old Bailey Solicitors help?
If your company has received a “Notice of Requirement and VAT Security” which you consider to be unfair or disproportionate, contact Rod Hayler or Camilla Rents from our Tax and HMRC Investigations Team for advice regarding the appeal process.
If your company has failed to provide the required security and you have received a Postal Requisition to attend the Magistrates’ Court, we can assist you to prepare your defence or to advance mitigation before the court in order to reduce any potential financial penalty.