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Natural Beauty Products, Bridgend

Volume 174: debated on Monday 18 June 1990

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Motion made, and Question proposed, That this House do now adjourn.— [Mr. Nicholas Baker.]

10.4 pm

I do not know how many unacceptable faces there are to VAT enforcement but I know that in the case of Natural Beauty Products in my constituency I have come across an ugly and costly one for the company's banker, its directors, work force, creditors and—a savage irony—for the VAT collectors themselves.

The whole matter came to a head on 30 January of this year when a VAT official from the Swansea office walked into the Natural Beauty Products factory on the Bridgend trading estate and demanded the immediate payment of some £43,000, following a final demand sent to the company three days before. He was told that the company had virtually completed a refinancng package and he even spoke to a representative of the Australian company with ultimate responsibility for it. It was made clear to him that the whole deal would be settled the following week and that a further check on the accuracy of the claim could be made by telephoning Barclays bank in Cardiff, which was the company's debenture holder and by the far the largest creditor.

The VAT official did not speak to Barclays bank but he spoke to someone from the Inland Revenue who confirmed that it had a £9,000 levy on the company's fixed assets and was not proceeding against Natural Beauty Products for a much larger debt of £93,000. An arrangement had been reached with the company to repay this sum over a 10-month period.

This official, acting in what I can only describe as a blinkered, inflexible and even dictatorial manner, with no apparent thought for the consequences of his action, then ordered a Transit van and requested a VAT supervisor to attend and oversee the removal of equipment, goods and stock from the factory—which, incidentally, had a value of over £800,000. He did this in spite of an immediate offer of £10,000 across the table and the repayment of the remainder of the debt within a maximum of 10 working days—the longest time that the directors considered would be needed to complete the refinancing and pay their VAT debt.

The VAT official continued with his plan for the removal of materials. A van arrived and the goods were loaded and removed. The directors were informed that the VAT official would return the following day to complete the seizure of the goods considered necessary to enable the VAT debt to be paid in full.

At this stage, to try to salvage something from the havoc wreaked by this inflexible and blinkered VAT official, the directors contacted Barclays bank and requested that an administrative receiver should be appointed to enable the company to be sold as a going concern. The company ship had already endured just over a year in very rough, stormy waters; franchise deals in the United Kingdom which had turned sour had forced the company to become directly involved in retailing, just at the time when interest rates began to soar. This meant that the company was soon financially overstretched. However, by January 1990, according to the administrative receiver, the company had
"disposed of its loss-making activities in an orderly fashion"
—that is, the company was about to launch itself into calmer waters. Unfortunately, the action of the VAT official from Swansea led to the company ship hitting severe VAT rocks, and it was damaged beyond repair.

Twenty-seven people lost their jobs at that stage in the company's life, leaving only 20 employees on the books. Thirty-three employees had already been forced to leave the company the previous November as part of the exercise to make the company shipshape. The company was just about to retrieve its fortunes, but all its hopes were dashed by an inflexible VAT official.

I made inquiries of other accountants to find out whether such action was unusual. My inquiries provoked some rather surprisingly savage responses. One accountant—not the one who was involved in the administrative receivership of the company—said that VAT officials sometimes acted as the fascists of the financial world. One case was cited in which VAT officials were not even prepared to reschedule a debt of less than £1,000 when the company involved was prepared to pay 60 per cent. immediately and the balance when the next VAT bill was due.

The VAT official in question acted inflexibly and was perhaps too rigorous in following the guidelines set down by Customs and Excise in its document "Aims of Enforcement Action", which state:
"Whatever action is contemplated, however, there is a simple guiding principle which is always to be borne in mind —DELAY COSTS MONEY."
Unfortunately, in this case delay cost the taxpayer, the workers, the creditors, the bank and the Government a great deal of money. What were the consequences of that? In the end, the VAT officials got their money—£36,000, because the company had a rebate due of more than £7,000. Twenty-seven people lost their jobs. Also, £37,000 in wages was lost as a result of that action. Some of that money will be recouped through the workings of the Employment Protection Act 1975, but not all of it. Trade creditors lost £500,000, excluding the VAT write-off. Poor old Barclays bank has probably lost about £250,000, but, perhaps most ironic of all as a result of that intemperate action, the VAT officials have lost more than the amount they got by acting so speedily against Natural Beauty Products. In gaining their £36,000 they lost about £75,000, which is the VAT write-off of the creditors of Natural Beauty Products who lost their money because of the action that was taken by the VAT official.

Virtually all the creditors had already agreed with Natural Beauty Products to reschedule their debts over a year or to take a single payment less than what they were actually owed. That was the situation on the day on which the VAT man arrived and the tragic events unfolded.

I was concerned about that, so I tabled some questions to the Treasury to try to elicit some information and to discover whether what had happened in my constituency happens all over the country. I wanted to know whether the insistence of VAT officers when collecting debts was forcing other companies into receivership. I specifically wanted to know what had happened during the past three years. My question on 16 February was:
"how many companies were forced into receivership because of Custom and Excise action to recover outstanding value added tax payments in each of the last three years, and the current financial year"?
I was told:
"None."—[Official Report, 16 February 1990; Vol. 167, c. 423.]
However, as the House now knows, because of the insistence of a VAT official, who wanted his money there and then, a company in my constituency was forced to call in the administrative receiver simply to keep the company going.

If the VAT official decided that the company was lost beyond all hope, I must advise him that he was badly mistaken. Within 10 days of the administrative receiver advertising in the Financial Times for companies interested in buying Natural Beauty Products, he had received 160 replies. Within six weeks, he had determined that there was one company that had an extremely good chance of putting Natural Beauty Products back into a healthy trading position. Within a fortnight, that deal had been completed and by the beginning of May, a company called Brown and Johnson, which is better known in the high street for the Poundstretcher shops that it runs, had taken over the company and within a week the 20 employees had been augmented by another eight, such was the health of Natural Beauty Products and the loyalty of those who had previously bought from it, such as the Betterware company.

I am pleased to report that the company will now survive. However, because of the inflexibility and intemperate behaviour of one VAT official, Natural Beauty Products' previous trade creditors have lost £500,000, the bank has lost £250,000 and the Treasury has lost £75,000—which is much more than the £36,000 that it eventually received.

Perhaps the VAT official was working to strict instructions. My purpose in asking for this debate which, as you know, Mr. Speaker, I have now been seeking for more weeks than I care to remember—of course, I am pleased to have it at last—is to try to persuade the Treasury to set aside its poor imitation of Pontius Pilate when trying to deceive the public by saying that it has never caused a company to go into liquidation by insisting on the immediate repayment of a VAT debt, and to urge it to take some action to prevent that happening in the future.

To some extent, I believe that what I am seeking is already happening. Earlier today I telephoned a number of accountants to check what was happening on the VAT scene. I was told that over the past few months VAT officials in Swansea have adopted a much more flexible approach to the rescheduling of debts. I do not know whether that is a coincidence or the result of the questions that I have asked about the fate of Natural Beauty Products, but I am glad that it is happening.

I should like the Treasury first to amend its guidelines in its document entitled "Aim of Enforcement Action", so that the phrase "Delay costs money" is not emblazoned across it, because the Treasury is, indeed, losing money now. Indeed, in this case it lost a lot of money by insisting on the action that its official took. Secondly, I should also like the Treasury to amend the Insolvency Act 1985, which I believe may have been consolidated in another Act in 1986. The crucial amendment to the previous legislation occurred in 1985. Until then, both the Inland Revenue and VAT had a preferential claim on a company's debt for one year. For some obscure reason, in 1985, an amendment in the House of Lords changed the limit for VAT from one year to six months.

If there was something wrong in principle with VAT having any preferential claim, the claim period should have been got rid of altogether. To bring it down to six months quite arbitrarily and make it more difficult for the Inland Revenue to reclaim its debts seems grossly unfortunate. It was perhaps one element that led to the rigid and overbearing approach of the VAT official who visited my constituency and the company, Natural Beauty Products.

I hope that the Minister's response will contain some words of encouragement about a more flexible approach from VAT officials, a commitment to change the guidelines in "Aim of Enforcement Action", and a consideration of returning to the position in which the Inland Revenue and VAT both had one year in which to make a preferential claim for debts owed them by companies. I thank you, Mr. Speaker, and the assembled hosts for listening so carefully.

10.22 pm

I congratulate the hon. Member for Bridgend (Mr. Griffiths) on securing this debate and on the assiduous interest that he has shown in the issue.

We all recognise the vital role that small businesses play in the economy. Obviously, no one likes to see a business in financial difficulty. Customs make every effort to avoid taking enforcement action against traders who do not pay their VAT debts and use enforcement action only as a last resort. However, Customs has a responsibility to protect the Revenue and to ensure that traders who pay their taxes promptly are not disadvantaged.

With value added tax, enforcement action is designed to ensure that traders who fail to pay tax on time do so as soon as possible. There are two steps to be taken in the enforcement routine. These are the establishment of the debt due from the trader and the start of appropriate recovery action. Both those steps were taken in the case of Natural Beauty Products of Bridgend.

All VAT-registered traders have a legal obligation to render returns and pay any tax due on or before a given date. That is known as the due date and is normally, as the hon. Gentleman knows, one month after the end of the tax period. If, however, a trader fails to render a return by the due date, an assessment is issued, in the majority of cases by the computer at Southend-on-Sea.

Natural Beauty Products, in the hon. Gentleman's constituency, was registered for value added tax from 16 October 1984. The company manufactures toilet preparations, a high proportion of which were exported and, therefore, liable to tax at the zero rate. As it was expected that the company would normally receive repayments of tax, VAT returns were made monthly.

VAT returns were received on 8 and 19 January 1989 showing a payment of tax due from the company of £29,294·61 and a further return on 6 February 1989 showed a repayment of £8,346·72. As no money had been sent, a demand notice for immediate payment of the balance of £20,947·89 was sent to the company on 7 March 1989. Cheques were received for £10,473·95 and £10,473·04, but one was subsequently returned by the bank as unpaid. Further VAT returns were made by the company, but again no money was sent. The balance of tax owed by the company for the period ended 30 April 1989 was £11,428·44 and a further demand notice for immediate payment was sent to the company on 24 July 1989.

When a trader fails to pay tax, schedule 7 paragraph 6(4) of the Value Added Tax Act 1983 makes provision in England, Wales and Northern Ireland for distress to be levied on the goods and chattels of the debtors. Distress is a means of recovering debts by taking possession of traders' goods, with certain restrictions, as security for the debt and enables their sale if the debt remains unpaid. Customs does not own the goods even though they may be in its possession and custody; they continue to be owned by the trader until they are sold.

Distress is levied by an authorised officer and distress for recovery of VAT takes precedence over any other distress except one levied by the Inland Revenue. It has been found to be a most cost-effective method of recovering tax as few traders are prepared to allow the distraint on their goods and subsequent removal and sale. The price obtained in a forced sale is usually significantly lower than that received when the goods are sold in the normal course of business. Distress can be levied for debts that arise from an assessment issued because of an under-declaration of tax or a failure by the trader to render returns. There must be a 30-day delay before distraint can be levied in respect of the former.

The decision to distrain takes into consideration the size of the debt, and larger debts are given priority. Before distress is begun a demand notice of immediate payment is sent to the trader, either direct from the computer at Southend or from the local VAT office. Delivery can be made by hand when the tax may be at risk and an urgent levy is required. Normally, payment by cheque is acceptable but, dependent upon the debtor's history of payment, cash or banker's draft may be stipulated.

If, after allowing time for the trader to respond to the demand notice, the trader pays none or only part of the debt, an officer of a rank not below that of senior executive officer signs a warrant and authorises a named officer to levy distress. The former must be satisfied that there are sufficient assets available to justify the distress and the utmost care is taken to avoid impairing the business of other traders.

In most cases a bailiff is employed to assist the officer named in the warrant, particularly in estimating the realistic value of the goods. The bailiff, however, is not authorised to levy distress on behalf of Customs. Distress may be levied by the authorised officer accompanied by a colleague. Whenever possible, the proprietor, partner, director or company secretary is seen.

In this case, there was no response from the company; since it had already received a demand notice of immediate payment, a distress warrant was signed and the company"s premises were visited by an officer of Customs and Excise accompanied by a bailiff on 24 August 1989. At that visit Mr. K. G. Ueber, the managing director of the company, completed a post-dated cheque for the tax debt to 30 June and stated that a repayment of tax would be due for July.

The July return, however, was received by Customs not in July but on 13 September, and it showed not a repayment, as Mr. Ueber had claimed, but a payment of tax due from the company of £8,166·21. The post-dated cheque was also returned by the bank as unpaid for the second time on 27 July. A demand notice for immediate payment was sent on 30 January 1990 for a total VAT debt to 31 October of £43,053·46. Again, there was no response.

The company premises were visited for the second time on Thursday 1 February by an officer of the Customs and Excise and a bailiff. A meeting took place at 10 am and lasted several hours.

Mr. Ueber, the managing director, and Mr. Besant, the company accountant, were interviewed and full payment was promised for Monday 5 February. This was accepted on condition that the debt would be secured by the levy of distress on various company assets. Further questioning of Mr. Ueber at the same meeting, however, revealed that the Inland Revenue and a number of trade creditors already held distraint orders in respect of various company assets. Still at the meeting, Customs spoke to the High Court sheriff's officer in Cardiff who informed it that warrants in excess of £100,000 had been issued to trade creditors.

Still at the meeting, the Inland Revenue confirmed on the telephone that it had instructed its bailiff to remove the assets under its distraint. Still at the meeting, with Mr. Ueber's permission, Customs spoke to a prospective financial backer in Australia who said that he would be unable to forward sufficient funds to pay the VAT debt by 5 February.

The company's bankers—still at the meeting—advised the company on the telephone that they would not advance more than £10,000 of the £43,053·46 Customs debt by 5 February. It was clear beyond doubt to Customs officials at the meeting that Mr. Ueber had no means of paying the debt by 5 February as he had claimed.

In view of the company's previous poor payment record, the officers considered that the Revenue was at risk and finished products, including goods bought in for resale, were removed. To ensure that manufacture could continue, raw materials, machinery and office equipment were not removed. When Customs returned to the premises on 2 February to supervise the continued removal of the goods, it was found to be locked and no employees were present. It was later established that Barclays bank had appointed an administrative receiver, under the terms of the debenture, on that date.

If an administrative receiver, liquidator or trustee in bankruptcy takes control of the business before the sale of the assets, Customs is prepared to accept an undertaking from the insolvency practitioner. Provided that he agrees to pay the VAT debt and levy costs from the sale of the goods, they are released into his charge to be sold with other distress assets. The debtor is entitled to request a professional valuation of distrained goods before sale. If the appraisal shows that the realistic value far exceeds the debt plus costs, some of the goods are restored to him. When the auctioned goods are liable to VAT, the auctioneer accounts for the tax on the sale direct to Customs.

After discussions between Customs and the receiver, it was agreed that no further goods would be removed. To ensure that the most advantageous price would be realised, those in Customs' possession were to be returned for sale together with the business. This was provisional upon the receiver paying the current VAT debt from the proceeds of the sale. On 17 May the receiver advised Customs that the company had been sold as a going concern and he took possession of the distrained goods on 7 June for supply to the new owner. This ensured a higher sale price than would have been obtained by a forced sale auction by Customs.

In view of the poor payment record of the company, Customs was justified in securing its debt by distraint procedure. It was obvious from discussion with the Australian backer and the reluctance of the bank to advance more than £10,000 that the full debt could not be paid by 5 February. The demise of the company was mainly due to its inability to meet the repayment requirements of the bank debenture and the subsequent appointment of the administrative receiver. The removal of finished goods by Customs would not have adversely affected the continued manufacturing potential of the company. The action of the bank, however, is an indication of the company's poor financial state and further supports the view that the actions of Customs officials were legitimate.

I have sought to outline the background from the Customs angle and I am grateful to the hon. Gentleman for enabling me to do that. He asked about the possible amendment of the 1985 Act. A reduction in the preferential pay rate for VAT from one year to six months did not influence the actions of Customs in this case.

The hon. Gentleman was concerned that Swansea had not been flexible, but from what I have seen I do not think that that is so. The guidelines followed by the people at Swansea were correct. The hon. Gentleman said that the company was getting back on its feet. However, at the time of the crucial visit on 1 February, Customs officials did not think that that was the case. In any event, the staff were on, I think, a three-day week and no production was evident during that visit.

Question put and agreed to.

Adjourned accordingly at twenty-seven minutes to Eleven o'clock.