Security for VAT

There are two circumstances in which HMRC can serve a notice on a trader requiring the trader to give security in relation to VAT.

The first instance is where a refund is claimed, and where that refund may be large, unusual or one where the Revenue will need time to verify its veracity. Unless the trader provides security, usually in the form of a guarantee by an approved bank or building society, the Revenue will not release the credit in question.

The second situation, relevant here, is where HMRC have reason to believe that there is a risk of VAT going unpaid by a trader. This might be where the business concerned has previously failed to comply with its VAT obligations or where persons connected with the business have a record, whether in relation to the current business or another one, of being penalised or prosecuted for a VAT offence.

In the main, HMRC tend to serve notices of requirement to give security where HMRC feel that one, or more, persons involved with a current trader have been involved in phoenixing. There is, however, no need for the Revenue to show that a deliberate burying of a past business has been undertaken as a way of avoiding VAT liabilities. Therefore, in a climate where many businesses are at risk of failure through no fault of their own, the same security requirements could equally be sought by HMRC should the individuals behind those failed ventures subsequently seek to start a new business which requires a VAT registration.

Where HMRC deem security to be required by them, they will ask for a cash deposit or a bank guarantee, etc. equivalent to six months’ estimated net VAT liability where the business submits quarterly returns, or four months’ net liability where the business submits monthly returns.

HMRC will expect to hold the security for at least two years in the case of quarterly traders, and at least one year in the case of monthly traders. During the retention period, the security will be applied in settling any VAT liability which goes unpaid by the trader.

Notices of requirement to give security can be appealed by the trader to the First Tier (previously the VAT tribunal) but the court only has the power to review the basis of HMRC’s decision to seek  the security, and to determine whether the decision was reasonable in accordance with the Wednesbury criteria. Therefore, unless it is found that HMRC have acted unlawfully or irrationally, the court has no standing to quash the notice.

Failure to comply with a security notice is not, in itself, an offence, but the making of taxable VAT supplies without having first complied with such a notice is a criminal offence, triable summarily and with a fine of up to £5,000 per offence, i.e. each taxable supply (but subject to a maximum of £10,000 for two or more offences tried on the same indictment). Individuals can be prosecuted and fined where they are not trading themselves but are responsible for an incorporated body which is making supplies without having first complied with a notice requiring security.

Whilst HMRC are generally restrained in their use of such notices, their impact on failed entrepreneurs can prove to be draconian in their effect.Individuals contemplating starting over with a new business should be aware that significant non-compliance with VAT obligations, whether with intent or otherwise, could have the consequence that they become de facto barred from starting a new business due to the lack of means by which they can provide HMRC with the required security.