A new trader often receives a ‘notice of requirement to give security’ if HMRC doubt his competence, solvency or integrity, for example if he or a related person has a poor VAT compliance record or a criminal record. Therefore all persons who actively manage the business should give evidence in person at any hearing, to help the tribunal decide whether they are competent, solvent and honest.
A new trading company can be part of the ‘phoenix syndrome’ where an individual has traded through the medium of a limited company, which then becomes insolvent with unsettled VAT liabilities. Later the same individual restarts the same or a similar trade using the new company and even perhaps the same address and fixed assets. Sometimes the new company’s directors and members are different, but are mere ‘fronts’, as only the individual takes an active role in the new company’s activities. In due course the new company also may become insolvent, but HMRC hope that any security they have received will cover any VAT liabilities, penalties, interest and surcharges.
Also, some persons seek to reclaim large amounts of input tax prior to making any positive-rated taxable supplies, so HMRC sometimes argue that they need security to protect the revenue.
Overseas traders often have to provide security if they have few assets in the UK on which HMRC can distrain to collect unpaid VAT liabilities.
An existing trader often has to provide security if his or a related person’s compliance record is poor or if he commits a serious criminal offence.