The risks of failing to give security for VAT
The High Court judgment in the Pugsley case is a salutary warning to tax advisors that there is no ‘legitimate expectation’ of independent review into giving security for VAT if offer not properly accepted. David Bloom and Nathaniel Rudolf QC examine the ruling in this article, originally published in Accountancy Daily on 21st April 2022.
In Pugsley & Anor v DPP  EWHC 425 (Admin), the Divisional Court considered an appeal by way of a case stated against the refusal of a district judge to stay a prosecution as an abuse of process. There seems to be an increased appetite to prosecute taxpayers for non-payment of VAT securities and this recent case serves to highlight key points for the professional advisor.
In Pugsley, a sole director (Stephen Pugsley) and his company (Red Lion Hoj) were prosecuted in the magistrates’ court for failing to comply with the VAT security regime, specifically for not paying a VAT security in the amount of £18,232.79, pursuant to the Value Added Tax 1994 (VATA), s72(11).
The individual and corporate defendants both initially entered not guilty pleas. They subsequently argued that they had, through their advisors, properly required HMRC to conduct an independent review of the decision to issue the VAT requirement as HMRC had made that offer and, as that had not occurred, it was an affront to justice to be prosecuted for non-payment.
The district judge held that this did not amount to an abuse of process and guilty pleas were entered by Pugsley and his company who were each fined £1,000 and ordered to pay costs and compensation.
The appeal to the High Court was to determine whether the district judge had erred in law in the interpretation of the statutory provisions and HMRC’s conduct.
VAT Security Regime
The statutory provisions relevant to the VAT security regime provide that:
‘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 the payment of any VAT that is or may become due from (a) the taxable person; or (b) any person by or to whom relevant goods or services are supplied.’ (VATA 1994, Sch 11, para 4(2))
Where HMRC has cause to believe that current and/or future payments of VAT will not be made by a person as they become due, HMRC may decide to serve on the person or body corporate a Notice of Requirement (NoR). Once paid, the security is held by HMRC.
If there is a current VAT debt on file, the security may be used to offset that debt. If future payments of VAT are not paid when they become due, HMRC is able to take the payment from the security held. In this way, the security regime operates to secure payments due to the public purse.
The security is required immediately but the person or body corporate has 30 days to:
1. provide further information to the original HMRC decision-maker; or
2. accept any offer by HMRC for an internal review by an officer not previously involved in the matter; or
3. lodge an appeal to the independent First-tier Tribunal (Tax) (FTT).
A criminal offence is committed when a taxable person or a body corporate (or an officer thereof) makes or receives taxable supplies after having been served with an Notice of Requirement if he/she/it does not pay the security amount. However, HMRC’s policy is not to prosecute pending any review or appeal.
The questions raised by the case stated were whether the lower court was 1) correct to
determine that HRMC was not required to conduct an independent review of their decision to require a security for the payment of VAT; and 2) correct to conclude that the failure to conduct an independent review did not amount to an abuse of process.
Lady Justice Whipple, sitting with Mrs Justice Collins Rice answered both questions in the affirmative. Key to the court’s decision was the fact that first appellant wrote to the HMRC officer within the 30-day period stating, ‘I would like to put forward a case for the consideration of reviewing the decision…’.
The court confirmed that the appellants had been offered three options by the HMRC officer: a local reconsideration, an independent review, or an appeal to the tribunal.
The appellants failed to state that they accepted the offer of an independent review within the requisite time period, which nullified their subsequently claimed legitimate expectation that they were entitled to such a review and that the consequential criminal proceedings were an affront to justice. This case is a salutary warning to the taxpayer and his advisors to say promptly and unequivocally which option the taxpayer wishes to pursue, if any, on receipt of a demand to make a VAT security payment. Generalised or mixed language will not do.
The court held over the question of whether, in law, HMRC was required by statute to offer an independent review and the implications of the answer to that question.
Thus, it remains to be seen whether, in circumstances where the taxable person or body corporate (usually through their advisors) does accept the offer of an independent review and makes taxable supplies, whether an abuse of process arises if HMRC does not conduct that review.
In a recent case conducted by the authors this very argument was sought to be taken. It was submitted that HMRC had not conducted the independent review as required, instead opting for local reconsideration, and then prosecuted the defendants upon a failure to pay the security after taxable supplies were made.
The Crown Prosecution Service (CPS) asserted the magistrates’ court was the wrong forum to argue what is known as ‘limb 2’ abuse of process, that is where it would be unfair to try a defendant as being an affront to justice such as, for example, where a defendant had a legitimate expectation that they would not be prosecuted, could not be litigated in a magistrates’ court.
However, after the decision in Mansfield v DPP  2 WLR 229 that misconception has been laid to rest. In the author’s case, due to the unavailability of a witness, the CPS discontinued the matter before the argument could be heard.
What is clear is the importance of getting it right first time so that no one – taxpayer or HMRC – is in any doubt what is being asked for. If the offer of an independent review is being taken up, say so clearly.
For the law-abiding taxpayer seeking to avoid a criminal conviction, the associated reputational damage and financial costs, these provisions may otherwise become very quickly very important. So too for the tax advisor seeking to avoid professional negligence claims if their advice proves incorrect.
About the authors
David Bloom is a senior associate solicitor with Sonn McMillan Walker solicitors and Nathaniel Rudolf QC practises from 25 Bedford Row Chambers and is a fee paid judge of the First Tier Tribunal (Tax Chamber).