Harry Construction Limited v The Commissioners for HMRC [2025] UKFTT 799 (TC)

[2025] UKFTT 00799 (TC)

Case No TC09565

FIRST-TIER TRIBUNAL

TAX CHAMBER

Hearing Heard on: 27-28 February, 3-6 and 14 March 2025

Date Judgment date: 30 June 2025

Taylor House, London

Appeal reference: TC/2019/05033

VALUE ADDED TAX – Kittel – whether taxpayer knew or should have known that transactions were connected with VAT fraud – yes – documents affecting to be VAT invoices – whether meeting the requirements of reg.14, Value Added Tax Regulations 1995 – no – whether decision not to allow input tax claims based on those documents reasonable – regulation 29(2) VAT Regulations 1995 - yes – appeals dismissed

Written submissions on: 6 June 2025

Before

TRIBUNAL JUDGE MARK BALDWIN

MRS JANE SHILLAKER

Between

HARRY CONSTRUCTION LIMITEDAppellant

THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondent

Tim Brown of counsel, instructed by Evelyn Partners LLP for Appellant

Laurence Harris of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for Respondents

DECISION

Introduction

[1]This is an appeal by Harry Construction Limited (“HCL”) against the following two decisions taken by HMRC on 1 February 2019: (1). a decision to deny HCL the right to deduct input tax totalling £705,741 in the VAT periods 10/15-07/18 on the basis that it knew or should have known that its transactions upon which the input tax reclaim was based were connected with VAT fraud; and (2). a decision to deny HCL the right to deduct input tax totalling £222,246 in the VAT periods 10/15, 01/16, 04/16, 07/16, 10/16, 01/17, 04/17, 07/17, 10/17, 01/18 and 07/18 on the basis that the invoices from UP Construct Ltd (“UP”) upon which the input tax reclaim was based were invalid. We will refer to the appeal against the first decision as the “Kittel Appeal” and the appeal against the second decision as the “VAT Invoice Appeal”.

[2]We heard evidence and submissions over the course of 7 days spread over the end of February and beginning of March 2025. In addition, some questions occurred to us as we wrote our decision and we asked the parties for their written submissions on those issues, which we received on 6 June.

[3]Except on one or two points, there is no real dispute between the parties as to the law applicable to either decision/appeal and we summarise this below, together with our analysis of the position where there is a difference of opinion.

The Kittel Appeal: The Law

[4]The starting point is that a taxable person has a right to deduct “input tax”, which includes VAT on supplies made to it for the purposes of its business; Articles 167 and 168 of Council Directive 2006/112/EC of 28th November 2006 on the common system of VAT (the “PVD”).

[5]However, that right can be lost where the taxable person knew or should have known that the purchases on which input tax was incurred were connected with the fraudulent evasion of VAT; see the European Court of Justice (“the ECJ) judgment in the joined cases of Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (C-439/04 & C-440/04). At [56] of Kittel, the ECJ stated:

“…a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods.”

[6]The rationale for the above approach was set out by the ECJ at [57]-[58]:

“57. That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice. 58. In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.”

[7]At [59], the ECJ concluded:

“... it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity.’”

[8]A number of cases in domestic courts have elaborated on aspects of the “Kittel test”. Of particular relevance to us are the points discussed below.

[9]HMRC do not have to prove that HCL knew or should have known either the details of the fraud or the identities of the fraudulent defaulters; see Megtian Ltd (In Administration) v HMRC

[2010] EWHC 18 (Ch)

at [37]-[38] per Briggs, J. In Fonecomp Ltd v HMRC

[2015] EWCA Civ 39

;

[2015] STC 2254

the Court of Appeal (Arden LJ) said:

“51. … the holding of Moses LJ [in Mobilx (discussed below)] does not mean that the trader has to have the means of knowing how the fraud that actually took place occurred. He has simply to know, or have the means of knowing, that fraud has occurred, or will occur, at some point in some transaction to which his transaction is connected. The participant does not need to know how the fraud was carried out in order to have this knowledge. This is apparent from paras [56] and [61] of Kittel cited above. Paragraph [61] of Kittel formulates the requirement of knowledge as knowledge on the part of the trader that ‘by his purchase he was participating in a transaction connected with fraudulent evasion of VAT’. It follows that the trader does not need to know the specific details of the fraud.”

HMRC are only required to prove, on the balance of probabilities, that the taxable person knew or should have known that its transactions were connected with fraud, which is to be judged by what it subjectively knew (for the purposes of the ‘knew’ aspect of the Kittel test) or objectively could have known (for the ‘should have known’ aspect of the Kittel test).

[10]HMRC are not required to prove dishonesty on the part of the taxable person. The Court of Appeal in HMRC v E Buyer UK Ltd; HMRC v Citibank NA

[2018] 1 WLR 1524

considered whether an allegation of knew or should have known was an allegation of dishonesty against the appellant and conclusively stated that it was not. The Chancellor commented, at [85]:

“The key point, in my judgment, is that, whilst HMRC can, of course, allege that a taxpayer has acted dishonestly and fraudulently in relation to the transactions to which it was a party, they do not need to do so in order to deny that taxpayer the right to reclaim input tax under the Kittel test.”

[11]Although HMRC do not need to prove dishonesty on the part of the taxable person, the presence of an overall scheme to defraud is a relevant factor. This can be seen in a number of cases, such as HMRC v Pacific Computers Limited

[2016] UKUT 350 (TCC)

and CF Booth Ltd v HMRC

[2017] UKFTT 813 (TC)

. The question addressed in those cases was why, if there was an orchestrated fraud, the orchestrators would involve an unknowing party, the obvious answer being that they would not do that. The presence of an overall scheme to defraud can also be relevant where what is alleged is that the taxable person should have known that the transactions were connected with fraud, as we can see from these passages from the decision in Tower Bridge GP Ltd v HMRC

[2019] UKFTT 176 (TC)

“1411. As the Tribunal has concluded that all of the Appellant’s transactions that are subject to this appeal were part of such an overall scheme to defraud the Revenue, the Tribunal is also entitled to ask – why is it that the orchestrators of this scheme chose CFE to be involved? Why were so many different suppliers who were engaged in the fraud attracted to CFE? 1412. One answer is: because CFE knew the purpose of the transactions. However, the Tribunal has not been satisfied of this. 1413. The Tribunal finds the more likely answer to be: the fraudsters knew that CFE would trade with anyone with a certificate of incorporation, not investigate or conduct effective enhanced due diligence into transactions that appeared extraordinary, make insufficient enquiries if any of the companies they were using to facilitate the fraud and would be unlikely to report any suspicions to the authorities. 1414. Again, the existence of an overall scheme is of relevance to whether the Appellant should have known that the transactions were connected with fraud. These were not one-off deals or small sums of money being dealt with. 1415. Another way of looking at it is this: if the existence of the overall scheme to defraud the Revenue was obvious from its cumulative features by 15 June 2009, how and why is it that CFE failed to understand what it was part of? Again, the existence and features of an overall scheme to defraud the Revenue go to the question of whether the Appellant should have known that the transactions were connected with the fraudulent evasion of VAT. 1416. The Tribunal therefore does not agree with the Appellant’s approach, which is that once the connection with fraud is established then all evidence relevant to those limbs is irrelevant. The Tribunal is persuaded that the existence of an overall scheme is relevant to CFE’s means of knowledge. 1417. But for the exclusion of hindsight properly understood (which is not the same as reliance on fact established after the event), the Tribunal does not confine itself in answering the means of knowledge question in Kittel to facts only demonstrably known to the Appellant at the time of the transactions. To do so would ignore the binding authorities such as Mobilx.”

Should have known/only reasonable explanation

[12]In Mobilx Limited (in Liquidation) v HMRC

[2010] EWCA Civ 517

(‘Mobilx’), the Court of Appeal considered the “should have known” limb of the Kittel rule. At [52],Moses. LJ. observed that “should have known” will extend to cover a trader who “has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT …. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.”

[13]A failure to deploy means of knowledge could arise through a trader simply being insufficiently rigorous in the way it carries on business. It could also arise because someone deliberately shuts their eyes to facts which they would prefer not to know. If they do so, they are taken to have actual knowledge of the facts to which they shut their eyes. See, for example, Beigebell Ltd (No.2) v HMRC

[2023] UKFTT 363 (TC)

and Cavendish Ships Stores v HMRC

[2020] UKFTT 257 (TC)

. Such knowledge has been described as “Nelsonian” or “blind-eye” knowledge”: see the judgment of Lord Scott in Manifest Shipping Company Ltd v Uni-Polaris Shipping Company Ltd and others

[2001] UKHL 1

“112. ‘Blind-eye’ knowledge approximates to knowledge. Nelson at the battle of Copenhagen made a deliberate decision to place the telescope to his blind eye in order to avoid seeing what he knew he would see if he placed it to his good eye. It is, I think, common ground – and if it is not, it should be – that an imputation of blind-eye knowledge requires an amalgam of suspicion that certain facts may exist and a decision to refrain from taking any step to confirm their existence. Lord Blackburn in Jones v Gordon (1877) 2 App Cas 616, 629 distinguished a person who was ‘honestly blundering and careless’ from a person who ‘refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind – I suspect there is something wrong, and if I ask questions and make farther inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover’. Lord Blackburn added ‘I think that is dishonesty’.”

[14]Although a trader can be taken to know what they could find out (what they have the means of knowing), it is not sufficient that a trader should have known that they might be taking part in a transaction connected with the fraudulent evasion of VAT, that they were running the risk that they might be a participant in such an arrangement; Moses LJ in Mobilx at [56].

[15]At [59]-[60], Moses LJ concluded:

“59. The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who “should have known”

. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel. 60. The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”

[16]One of the areas of difference between the parties was whether it is necessary for HMRC to show that the taxpayer knew (or should have known) that VAT fraud was present in the supply chain or whether it is enough if they knew (or should have known) that fraud/wrongdoing (which would likely include VAT fraud) was present in the supply chain. This difference arises from the use by Moses LJ of the phrase “only reasonable explanation” in the passage just cited. This is one of the issues on which we invited the parties’ written submissions, and we consider that point further at [234]-[245] below.

Proof/circumstantial evidence

[17]In terms of questions of proof, Moses LJ indicated in Mobilx (at [81]) that the burden of proof (that a trader’s state of knowledge was such that his purchase is outwith the scope of the right to deduct) must plainly be on HMRC. However, in terms of what might establish the trader’s level of knowledge, he observed (at [82]) that:

“[Saying that the burden of proof is on HMRC] is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. … Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.”

[18]At [79], Moses, LJ had drawn attention to the significance of the fact that Mobilx knew that the business in which it was engaged was rife with MTIC fraud. It knew that those transactions which could be traced by HMRC had led back to fraud in the past in a trade where fraud was rife. It chose not to change the way it conducted its trade. He concluded that, based on those findings, the true and only reasonable conclusion was that Mobilx ought to have known that the only realistic possibility, as it continued to trade in that manner, was that its purchases would be connected with fraudulent evasion of VAT and not merely that its transactions were more likely than not to be connected with fraud.

[19]In Red 12 Trading Ltd v HMRC,

[2009] EWHC 2563 (Ch)

(“Red 12”) Christopher Clarke J made some important comments on how the Tribunal should approach the evidence in cases such as this. He said:

“[109] Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and "similar fact" evidence. That is not to alter its character by reference to earlier or later transactions but to discern it. [110] To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile telephones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands. [111] Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.”

[20]Other cases (Davis & Dann Ltd v HMRC

[2016] EWCA Civ 142

[2016] STC 1236

(“Davis & Dann”) and CCA Distribution Ltd v HMRC

[2017] EWCA Civ 1899

(“CCA”)) emphasise, as a facet of the guidance in Red 12, the need to guard against over-compartmentalisation of relevant factors, and to stand back and consider the totality of the evidence. The need to consider all the evidence together is particularly important when it comes to circumstantial evidence, as this passage from the FtT’s decision in Promeridian Services Ltd v HMRC,

[2025] UKFTT 29

6 (TC), (“Promeridian”) makes clear:

“24. In considering circumstantial evidence, the Tribunal should take care not to restrict itself to considering each piece of evidence alone and in isolation from the others. This is because circumstantial evidence is not a chain, where a break in one link breaks the chain, but is a cord: one strand of the cord might be insufficient to sustain the weight, but three strands together might be sufficient: see R v Exall (1866) 4 F&F 922, per Pollock CB, cited with approval by the Upper Tribunal CCA Distribution at [91]. Accordingly, the whole can end up stronger than the individual parts: see the decision of Judge Christopher McNall in Wholesale Distribution Ltd v HMRC [2024] UKFTT 00514 (TC) at [49].”

The Kittel Appeal: The Evidence

[21]There are four questions to be answered in relation to each of HCL’s disputed input tax claims in the Kittel Appeal. These are:(1) Was there a VAT loss?

(2) If so, was it occasioned by fraud?

(3) If so, were HCL’s transactions connected with such a fraudulent VAT loss?

(4) If so, did HCL know, or should it have known, of such a connection?

[22]Effectively, answering the first three of these questions involves looking at transactions in the supply chains which led to HCL and asking whether any of those transactions generated a fraudulent VAT loss.

[23]Before considering the supply chains in detail, we should say a little about the VAT loss alleged to have taken place in this case. Many of the cases dealing with the Kittel doctrine concern missing trader intra-community (or “MTIC”) frauds, where goods are traded cross-border in a complicated way; see Christopher Clarke J’s description of how an MTIC fraud works in Red 12 at [2] – [11]. The fraud alleged in this case is much simpler. It involves the business at the beginning of a supply chain defaulting on its VAT (and often also other tax) obligations and (in colloquial terms) disappearing with the VAT it charged to its customers and should have paid to HMRC. For this VAT fraud to work, it does not require the knowledge or knowing cooperation of anyone else down the chain; the fraudster (missing/defaulting trader) simply walks away with the VAT it charged its customers without accounting for it to HMRC. This is not a case where a person in HCL’s position “down the line” needs to play a part for an overall fraudulent scheme to work and where there is a risk, if that person does not do whatever is expected/needed, the scheme will fail.

[24]Officer Hammouda explained how VAT (and other tax) frauds operate in the context of labour supplies in the construction industry. Typically, a lead contractor will require workers, and a subcontractor will supply them. The subcontractor may not have a big enough workforce (employed or “labour only” subcontractors) on record and will engage one or more further subcontractor/s to supply workers. The supply may be subcontracted again several times. The profit margin for businesses providing subcontracted labour is generally low as they are simply making a further supply of services they have bought in without adding anything. So, although the value of the supplies being made may be high, the net VAT payable to HMRC throughout the chain is negligible. There may be several layers of subcontractor, but ultimately the subcontractor at the bottom of the chain (who would be entitled to receive payments gross under the CIS) will receive its payments without deduction of tax and will charge VAT on its supply. This VAT will be reclaimed higher up the chain. This bottom subcontractor will default on its tax obligations, often direct tax as well as VAT, resulting in a tax loss to the exchequer.

[25]It may be helpful at this point to explain what we mean by certain terms we will use. First, a “defaulting trader” is the VAT registered entity in a transaction chain which makes a taxable supply charging VAT at the standard rate and disappears or deliberately fails to account for VAT due to HMRC. A “buffer trader” is a VAT registered trader which sits in a chain of transactions between the defaulting trader and the trader sought to be made liable under the Kittel principle (here HCL).

[26]HCL accepts HMRC’s analysis of the supply chains we are concerned with, which are as follows:(1) Mbite Contractors Ltd (‘Mbite’) to Birkum Solutions Ltd (‘BSL’) to Vikx Ltd (‘Vikx’) to WTV Ltd (“WTV”) to HCL;

(2) Mbite to BSL to Cross Line Ltd (‘Cross Line’) to WTV to HCL;

(3) Franpisa Limited (‘Franpisa’) to Birsin Ltd (‘Birsin’) to Vikx to WTV to HCL;

(4) Franpisa to Birsin to Cross Line to WTV to HCL;

(5) MSDI Ltd (‘MSDI’) to East Focus Ltd (‘East Focus’) to Cross Line to WTV to HCL;

(6) Jas V Ltd (‘Jas V’) to Cross Line to WTV to HCL;

(7) MSDI to East Focus to WTV to HCL;

(8) Mid Cross Ltd to Stoneforce Services Ltd to WTV to HCL;

(9) Creesma Ltd to Banssi Solutions Ltd to WTV to HCL;

(10) JLA Contractor Ltd to D1 Ltd (‘D1’) to HCL;

(11) TZB Services Ltd to D1 to HCL;

(12) Track Construction 1 Ltd to D1 to HCL.

[27]HCL accepts that there has been a VAT loss in each of these transaction chains and that there was a connection between that default and HCL’s purchases.

[28]HCL also accepts that the VAT losses arose through dishonesty on the part of the defaulting traders (usually, those at the beginning of the supply chains listed in [26]), except where East Focus and Cross Line are defaulting traders.

[29]A question arose during the hearing, which we discuss below, as to whether the loss occasioned by East Focus’s default is a VAT loss.

[30]HMRC does not allege that WTV was a defaulting trader. For its part, HCL does not accept that WTV, when acting as a buffer trader, was acting dishonestly or knowingly as part of an overall scheme to defraud the revenue, or that each of the chains (alone or taken together with the other chains) represents an orchestrated overall scheme to defraud the revenue. HCL’s assertion that East Focus and Cross Line were not acting fraudulently also supports (Mr Brown says) their argument that there is no overall fraudulent scheme here.

[31]We heard live evidence from four HMRC officers and from Mr Singh, the director of HCL. We found the HMRC officers to be reliable witnesses who frankly answered the questions put to them, including giving concessions which were not helpful to HMRC’s case. Mr Singh was a more problematic witness. Except in one regard, we do not consider that he set out to mislead us or tell untruths, but he had a tendency to resort to stock answers (along the lines of HCL had done all the due diligence it could and the current situation is largely/entirely of HMRC’s making for not telling HCL what to do, especially in the case of D1) and was not as frank in his answers as the HMRC witnesses.

[32]We also had an electronic hearing bundle, of some 6,818 pages, and we refer to important documents in that bundle from time to time.

[33]Mr Harris asked the Tribunal to direct that the FtT decision in DJJ Services Ltd v HMRC,

[2025] UKFTT 00255 (TC)

(“DJJ”), be admitted in evidence as that case refers to HCL and other parties involved in this case. He submitted that the findings in that decision are relevant to matters in issue before us, in particular the question of the existence and level of any orchestrated fraud, and more generally the state of HCL’s knowledge. It also refers to members of the Laxman family, and we will see that family referred to here in due course. Mr Brown objected to this application, which he said was late (although the decision was only released on 24 February, the appeal had clearly been running for some time) and unfairly prejudicial to HCL. Mr Harris was a little opaque about exactly what he hoped this decision would establish and what he was asking us to make of it. In the end, following a short adjournment for Mr Harris and Mr Brown to discuss the application between themselves, Mr Harris withdrew his application. Given that, we have tried to put out of our minds anything we learned from reading the decision in DJJ while hearing Mr Harris’s application to admit it, including the points he later made by reference to it in his closing submissions.

Officer Stephen Sharrock

[34]Officer Sharrock gave evidence about D1. He had no personal involvement with that company and his evidence is based on his review of relevant documents and records held by HMRC.

[35]D1 was incorporated on 26 July 2016. Its stated business was “Construction of commercial buildings”. In early December 2016 D1 applied for VAT registration. It gave its main business activity as “Concrete work for construction companies” and estimated its annual turnover as £300,000. It was registered for VAT on 13 December 2016. (Officer Hammouda noted in her witness statement that D1’s VAT returns showed it having half the first year’s estimated income in the first month of trading and that payments remained uncharacteristically high for a new start-up company.)

[36]HMRC held two meetings with D1 in September 2017 and April 2019. The importance of due diligence checks was discussed, but the meeting notes do not record any discussion of VAT fraud or of HMRC’s labour provider note being mentioned or provided. At the meeting in September 2017 the director of D1 said that the company had previously had five employees but there were currently none, except for the director, and D1 used sub-contractors to provide workers.

[37]On 19 June 2019 HMRC raised an assessment on D1 to recover £561,139.85 input tax claimed by D1 on the basis that D1 knew or should have known about fraudulent tax losses in its supply chain. HMRC’s records do not show that the assessment was ever appealed or paid. In the relevant periods, D1 supplied labour to HCL.

[38]Also on 19 June 2019, HMRC wrote to D1 to tell it that its VAT registration would be cancelled with effect from 1 May 2020. The reason given was that DI was using its VAT registration solely or principally for fraudulent purposes.

Officer Lee Nevin

[39]Officer Nevin gave evidence in relation to UP. Under a previous name, UP was registered for VAT with effect from 23 September 2013. On its registration application it gave its main business activity as the supply and provision of personnel (temporary employment agency). The estimated turnover for the following 12 months was £150,000. UP’s VAT returns submitted for the first 15 months of trading indicated that 100% of their sales were made at the standard rate of VAT. Thereafter, approximately 20% to 40% of its sales were treated as zero-rated.

[40]In its 05/15 return UP declared outputs of £2.637 million, followed by £9.579 million in the period 08/15 and £9.788 million in the period 11/15.0

[41]During an assurance visit in 2019 HMRC examined sales invoices that had been treated as zero-rated in periods 05/15 to 12/18. It was noted that the invoices described the services that were provided as “valuation fee”. HMRC made enquiries with UP to establish what these valuation fee services consisted of in order to ensure that the services provided were correctly zero-rated. UP failed to supply HMRC with evidence that the supplies in question were zero-rated and HMRC issued an assessment for undeclared VAT. UP requested a review of the assessment by an officer not connected in the case. The assessment was upheld by the review officer, but the assessment was reduced (to £11,066,512) because the assessment was calculated as 20% of the invoiced amount when it should have been 1/6.

[42]On 18 October 2019 HMRC deregistered UP because they had failed to provide evidence that they were making taxable supplies.

[43]HMRC requested VAT records for the periods 02/16 to 04/17 so that a compliance check could be carried out. The VAT records were not provided, so on 29 November 2019 HMRC issued an assessment (for £4,211,891) disallowing the input-tax credit for the returns in question.

[44]On 27 November 2019 the High Court issued a winding up order placing UP in liquidation. HMRC made an insolvency claim of £16,218,790.26.

Officer Gavin Stock

[45]Officer Stock gave evidence in relation to East Focus. The company was VAT registered with effect from 19 October 2015. On its VAT registration application its trade was described as floor and wall covering and its annual turnover was estimated as £100,000.

[46]East Focus submitted VAT returns for periods 11/15, 02/16, 05/16, 08/16 and 99/99 (final period). The 05/16, 08/16 and 99/99 (final period) were nil returns. The 11/15 return showed net VAT due of £68.32 and the 02/16 return showed net VAT due of £159.21. Outputs in those two periods were £31,592 and £106,797 respectively.

[47]On 4 May 2016 HMRC made an unannounced visit to East Focus’s principal place of business as it had made payments to a company already under investigation by HMRC. No one was present at the premises.

[48]Between 10 May 2016 and the time when East Focus was de-registered, there were various email exchanges between HMRC officers and one of the directors of East Focus and a number of failed attempts to meet with the director, who said that he was detained abroad because of his father’s deteriorating ill-health. The director was able to send some information and documentation to HMRC. In particular, on 8 July 2016 a Mr Amarjit Singh sent an email to HMRC in which he provided copies of the VAT return for VAT periods 11/15 and 02/16 and CIS returns for periods 5 March 2016, 5 April 2016, 5 May 2016 and 5 June 2016. While East Focus filed nil VAT returns for 05/16 and 08/16, the CIS returns showed East Focus making payments of £327,191 in the month to 5 March 2016, £266,355 in the month to 5 April 2016, and £363,945 in the month to 5 May 2016.

[49]Officer Stock said that there had never been any face-to-face contact between HMRC and the director of East Focus since the company became VAT registered, despite attempts by HMRC officers to meet up with the director. The last contact from the company was on 28 December 2016 when it submitted a nil return for VAT period 99/99 (final period). He said that, to his knowledge, between March 2016 to December 2016, there was no attempt to pay the VAT due on the company’s sales.

[50]On 12 December 2016 HMRC de-registered East Focus and backdated the de-registration to 19 October 2015.

[51]On 12 December 2016 HMRC sent a demand for a sum charged as VAT for £567,961.80 to East Focus. This was because East Focus issued sales invoices to customers (including WTV and Cross Line) with VAT included when they were not authorised to do so. This amount was never paid to HMRC. Officer Stock agreed that the amount assessed was the VAT charged on the invoices issued by East Focus between 19 October 2015 and 12 December 2016, and that those invoices were valid VAT invoices when issued. He agreed that HMRC had sent a demand for that money under paragraph 5(2), Schedule 11 VATA because, once HMRC have decided that this is not VAT, they cannot issue a VAT assessment.

[52]He noted that the company had not delivered VAT returns for the periods 05/16 and 08/16 in time.

Officer Hammouda

[53]Officer Hammouda summarised HMRC’s relevant dealings with HCL.

[54]HCL applied for VAT registration in March 2009.

[55]On 21 June 2012 HMRC wrote to HCL advising on due diligence to be adopted when using a labour provider. The letter began by observing that:

“It is good commercial practice for all businesses to carry out checks to establish the credibility and legitimacy of their supplies, customers and suppliers. However, these checks will need to be more extensive in business sectors where there are greater commercial risks or vulnerability to fraud and other criminality.”

[56]It went on to note that HMRC had “identified increasing problems with fraud and unpaid taxes through the use of labour providers” in sectors including the construction industry. A HMRC notice (“Use of Labour Providers – Advice on due diligence”) was enclosed with the letter and the notice gave details of the kind of due diligence checks businesses should be undertaking (and fully recording) to avoid dealing with high-risk businesses and individuals.

[57]A version (September 2012, so clearly not the one enclosed with this letter) of this notice was in the hearing bundle. On the first page it made these observations:

“It is good commercial practice for all businesses to carry out checks to establish the credibility and legitimacy of their supplies, customers and suppliers. However, these checks will need to be more extensive in business sectors where there are greater commercial risks or vulnerability to fraud and other criminality. You should seek to avoid involvement in supply chains where VAT and/or other taxes will go unpaid.”

[58]At the top of the second page, it commented (in large, coloured type):

“Where it can be shown that you knew or should have known that transactions you entered into were connected with fraudulent evasion of VAT, you will lose your right to recover the VAT incurred on those transactions.”

[59]The note tells readers that HMRC cannot tell traders what checks to make and, “You should ask the most appropriate questions required to protect yourself in the particular circumstances of your individual transactions.” The note gives a number of examples of checks a trader might carry out on its labour providers and questions it might find the answers to including:(a) Undertake regular checks on workers' status to work in the UK, timesheets, payslips etc.

(b) How many workers for hire do they employ in total?

(d) Is the business paying its workers the National Minimum Wage?

(e) Do [the workers being supplied] have the right to work in the UK?

(f) What checks are carried out by the Labour Provider on their workers?

(g) Are any of [the workers being supplied] self-employed, ie registered for the Construction Industry Scheme — CIS? Although HMRC were unable to find a copy of the version of this note that was in use in June 2012, Mr Brown accepted that there would have been no significant differences between that version and the one issued in September 2012, and we proceed on that basis.

[60]On 3 July 2012 HMRC sent HCL a “veto letter” in relation to its use of a business called Call Premier. The letter told HCL that Call Premier had been deregistered for VAT purposes and continued, “Please note that any input tax claimed in relation to transactions involving this company may be subject to verification.” It went on to say that HMRC had “identified increasing problems with fraud and unpaid taxes” and to explain that it is “good commercial practice for all businesses to carry out checks to establish the credibility and legitimacy of their supplies, customers and suppliers”. The letter drew attention to HMRC’s Notice “Use of Labour Providers – Advice on due diligence” and provided a link to access it. HCL was told that the notice “includes details of the kind of due diligence checks businesses should be undertaking (and fully recording) to avoid dealing with high-risk businesses and individuals.” It concluded by advising HCL “to contact HMRC to verify the VAT Registration Numbers and status of your current Labour providers and any other Providers you may use in the future, prior to their use” and provided the telephone number of a HMRC office which could be used to do this.

[61]On 4 July 2012 HMRC began to investigate HCL because it had made payments totalling £466,199 to Call Premier.

[62]On 9 August 2012 HMRC visited HCL’s accountants. Mr Singh was present for most of the meeting. The meeting note records that:

“Since Call Premier, a new labour provider, Temp Force Ltd has started to be used. Temp Force Ltd [Unique Tax Reference number (“UTR”)] was verified by Harry Construction Ltd on 9th July 2012. The accountant advised that to date payments of £154,199.02 have been made to Temp Force Ltd. The first invoice received from Temp Force Ltd is numbered 1 and dated 26th July 2012, for a gross value of £49,629.60. The invoice is for “measured work carried out at Civic Centre Brent and site clearance floor 5 to 9 had to grind down 20mm”

. Mr Singh stated that no labour had been provided with regard to this invoice. I asked if Mr Singh thought it was unusual that the invoice was number 1, Mr Singh stated that he did not think that this was unusual as he had been advised that Temp Force Ltd, with every new customer they took on started with invoice number 1.”

[63]The note goes on to record that until about a year previously all workers were on HCL’s payroll. The number of workers varied with demand. It then recorded the following: “This system changed because the staff/workers were not being reliable. Therefore it was decided to start using a labour provider. Mr Singh stated the he uses the same workers, that they used to be on the payroll of Harry Construction Ltd, they then went, on their own decision to the payroll of Call premier Ltd, then onto the payroll of Temp Force Ltd, again on their own decision.“

[64]The note records that the due diligence letter and leaflet sent on 21 June 2012 were discussed and another copy of the due diligence leaflet was provided. The accountant told HMRC that he did not know what due diligence checks were carried out, apart from the checks that he carried out with HMRC on the UTR of contractors used. Mr Singh told HMRC that he did not carry out any due diligence checks on either customers or suppliers, this was done by the accountants. Finally, the note records that “No due diligence was carried out on the labour agencies used, Call Premier or Temp Force Ltd. No references obtained, no financial checks have been carried out. The directors of both Call Premier and Temp Force Ltd called Harvinder Singh and offered their services, this is how the contracts started.” Mr Singh said that he would take and keep copies of workers’ passports. Although Mr Singh was not present throughout this meeting, he was clearly present at (and participating in) the due diligence discussion.

[65]On 23 August 2012 a veto letter was issued to HCL informing them that their supplier Temp Force had been deregistered for VAT with effect from 23 August 2012. This was in the same terms as the letter sent in relation to Call Premier.

[66]On 27 June 2013 HMRC visited HCL, again at the accountants’ offices. As far as labour provision is concerned, the note records:

“To provide labour the company First Choice Employment Ltd is used. The contact in this company is a “Deepesh Laxman”

. He also uses named individuals as shown on the CIS return. The following due diligence has been carried out on First Choice; Questionnaire produced by Harry, completed by First Choice. Contract in place. Director visited ppob of First Choice taking a photo of their premises. Since 2011 a supervisor timesheet has been introduced and is used with regard to First Choice.”

[67]In September 2017 Officer Hammouda began an investigation into HCL prompted by a VAT repayment being shown on its VAT return. The enquiry process involved officers tracing back through the chain transactions leading to HCL with a view to identifying whether all VAT had been fully accounted for or if there had been a tax loss at the top of the chain.

[68]Officer Hammouda explained that records of payments generated through the Construction Industry Scheme (“CIS”) were used to trace chains of payments and supplies. Officer Hammouda explained the operation of the CIS. In particular, she explained that sub-contractors could apply for gross payment status (allowing them to receive payments to which CIS applied without any deductions being made) if they met a turnover and a compliance test. She then commented that “Unfortunately, the systems are granting the Gross Payment Status a little too early and in a lot of cases before the threshold's been reached. … [U]nfortunately with it having gone electronic in the applications, they are quite often granted without anybody seeing them, it's automatically granted. So a lot of companies are attaining the Gross Payment Status before they've reached a threshold.” Indeed, she observed that gross payment status “can literally be granted within days of setting up a company.”

[69]Officer Hammouda said that she accepted that HCL carried out the work it invoiced to its clients.

Officer Hammouda’s evidence about WTV and HMRC’s dealings with HCL about WTV

[70]In her witness statement dealing with WTV, Officer Hammouda says that WTV was incorporated in January 2015 when it described its main business activity as “Temporary employment agency activities”. On 17 June 2015 Mrs Davinder Laxman was appointed as a director.

[71]On 18 June 2015 WTV applied to be VAT registered. It described its main business activity as “Floor and Wall Covering” with the accompanying description given as ‘Laying, tiling, hanging or fitting floor and wall covering”. The estimated annual turnover was stated as £110k. However, WTV’s CIS records show its actual turnover for the first twelve months of trading to be £1,185,695. The total turnover for the period of trading was £3,439,474 of which £3,409,876 was received from HCL and only £29,598 was received from other customers.

[72]A charge was placed on WTV’s assets on 16 April 2018. The charge was signed by Davinder Laxman and witnessed by Diven Laxman of 36 Canterbury Road, B71 2LB. Officer Hammouda described Diven Laxman in her witness statement as “the director of First Choice Employment the previous supplier to HCL”. (In fact, the director of First Choice (as recorded at Companies House) is one Deepesh Laxman.) In response to the suggestion that the Director of First Choice was the brother of Diven Laxman, Mrs Laxman’s husband, Mr Singh was consistently emphatic that he had no knowledge of whether/how there was any personal relationship between these individuals.

[73]WTV came to the attention of HMRC as part of a labour supplier investigation. The initial investigation was undertaken by a team in Leicester.

[74]HMRC’s note of a meeting with WTV’s accountants in March 2016 records the accountant telling HMRC that the company was run by Mrs Laxman, the sole director, who dealt with the main contractor (HCL) and the subcontractors. The company only had one other employee, a part-time accountant. Mrs. Laxman refused to attend any meetings with HMRC, sending the accountant instead, and only ever produced some of the requested records.

[75]WTV received numerous veto letters in relation to its suppliers, starting on 22 December 2015. Every subcontractor, except for two individuals, was a defaulting trader or a missing trader. Nine of the eleven suppliers to WTV have been compulsorily deregistered.

[76]Mr Brown took Officer Hammouda through some of the correspondence and other dealings between WTV’s advisers (a firm of accountants called PKF Francis Clark) and HMRC starting in February 2016. A note of a meeting with HMRC on 30 March 2016 records:

“The company is run by Mrs D Laxman (DL) sole director who is paid a monthly salary and deals with meeting with main contractor (Harry Construction) and the subcontractors. DL discusses and tenders with Harry Construction and also agrees the contracts with the subcontractors. … The company owns no vehicles or large plant. Large plant items and any materials are supplied directly to site by Harry Construction. … CC asked what previous experience DL had in construction. ZS said that prior to setting up the company DL had worked for a recruitment labour agency where she would meet clients and set up the contracts for the labour required. … CC asked if the company carried out any due diligence in respect of the main contractor Harry Construction and the subcontractors it engaged. ZS said that they had checked Companies House, VAT certificates, UTR’s, visited the sites, met with the subcontractors and also the main contractor. … CC said that he had looked at the profit ratio between the outputs and inputs on the VAT return and noted that it was around 3.5% which he thought was rather low for this type of business. ZS said that it was this low because DL was trying to get her foot in the door and as the company’s reputation grew she hoped that the profit margin could be increased.”

[77]HMRC’s enquiry went on for several months. Officer Hammouda only took over in December 2017. On 18 January, shortly after suggesting a meeting with a director of WTV on 14 February, Officer Hammouda cancelled WTV’s VAT registration with effect from 31 January on the basis that WTV was “using its VAT registration solely or principally for fraudulent purposes”. The grounds Officer Hamouda gave for reaching this conclusion included the fact that, despite receiving tax loss letter letters and being told by HMRC about the risks of VAT fraud in the sector, WTV did not carry out any meaningful due diligence and instead just carried on trading with the same counterparties. On 25 January 2018 she denied WTV’s right to recover input tax on certain transactions on the basis that they were connected with the fraudulent evasion of VAT and WTV knew, or should have known, that. Officer Hammouda could not explain what had happened to cause her to take these steps before the suggested time for the meeting.

[78]On 31 January an employee of PKF Francis Clark called Officer Hammouda about the deregistration. Officer Hammouda was unable to have a detailed discussion with her as it would involve discussing the affairs of other taxpayers.

[79]A formal request for an independent review was received from CIS Tax Advice on 12 February 2018. The review conclusion upheld the assessment and Officer Hammouda notes that the review decision was not appealed to the tribunal.

[80]On 29 September 2017 HMRC wrote to HCL about recent transactions with WTV. Observations in the letter include:

“We’ve identified that some of your recent transactions have been connected with tax losses. In particular, a failure to account for VAT by suppliers earlier in the transaction chain. … For certain purchases from this supplier, we’ve found that at least one participant in the supply chain has failed to meet its VAT liability.”

HMRC referred to their leaflet ‘Use of Labour Providers - Advice on due diligence’, provided a link to access it and the author of the letter went on to say that, “I strongly recommend that your staff with responsibilities for engaging and administering labour providers read this leaflet. Relevant staff should do some or all of the proposed due diligence checks, as and when deemed necessary. This will help to minimise the risk of you being connected with any possible subsequent failures.”

[81]We reviewed the November 2016 version of this leaflet in the hearing Link:https://webarchive.nationalarchives.gov.uk/ukgwa/20161127130418/https://www.gov.uk/government/publications/use-of-labour-providers/use-of-labour-providers-advice-on-due-diligence . The leaflet begins by telling readers that HMRC “continues to find non-compliance, illegal working practices and fraud in labour supply chains across business sectors” and that:

“You should protect your business by undertaking checks to understand: - where your workers are coming from - how they’re being paid - the legitimacy of those arrangements We can’t tell you exactly what checks you should make because these will vary depending on how your business operates.”

[82]Readers are warned of the risks if HMRC finds non-compliance or fraud in a supply chain; in particular, “If it can be shown that you knew or should’ve knownthat transactions you entered in to were connected with fraudulent evasion of VAT, you’ll lose the right to recover the tax paid on these transactions.”

[83]Businesses were told to undertake checks in four key areas in order to ensure:(1) your supplier of labour is legitimate and has no history of non-compliance

(2) you understand and approve the labour supply chain

(3) agency workers are paid their contractual rate and it complies with the National Living Wage (NLW)/National Minimum Wage (NMW)

(4) you’re doing all you can to eradicate modern slavery and illegal working in your supply chains.

[84]The leaflet then gives examples of steps businesses might take, including:(1) making sure the labour supply is commercially sustainable so it can meet statutory tax obligations and make a profit

(2) checking the history of the labour supply business - if a previous business failed because it didn’t pay its tax debts, what changed to stop this happening again

(3) adding a clause in the contract requiring authorisation of further sub-contracting before any of the supplies to be made are sub-contracted to a third party labour provider

(4) adding a clause in the contract requiring labour suppliers to show evidence of the VAT and PAYE returns filed and payments they’ve made to HMRC

(5) checking that appropriate licences are held and in order, for example a Gangmaster Licensing Authority (GLA) licence or a Security Industry Authority (SIA) licence

(6) verifying the suppliers’ VAT registration details by calling HMRC before using them and making regular checks of all VAT registration numbers afterwards

(7) telling HMRC about payroll or staffing outsourcing arrangements

(8) checking workers are actually paid their contractual rate, that it complies with the NLW/NMW and that the latest rates have been used. This is because any business charging less than the suggested hourly cost of supply suggests unsustainable practices

(9) taking a sample check of agency worker’s pay slips

(10) checking that the PAYE reference is the right one for the business employing the staff

[85]Officer Hammouda agreed that, in general and with the possible exception of “a couple of instances” regarding WTV where onward supply was mentioned, there is no evidence that HCL knew of the length of the supply chains in question.

[86]On 3 October 2017 HMRC sent a further copy of the due diligence letter to HCL.

[87]On 17 October 2017 there was a further meeting between HMRC, HCL and its accountants. In terms of how he met WTV, the meeting note records Mr Singh telling HMRC:

“he met Davinder Laxman and Zahid Sujawal. He met Davinder on site and went to his premises. HS said she runs it from home Zahid meets and talks on a daily basis. … Davinder? HS contact new clients always look for website WTV phoned and offered a deal, I get to know first. She brought Zahid with him he works as operational manager checked company went to premises it’s a terraced house I took info posted to accountants all ok to go.”

[88]In the meeting Mr Singh asked Officer Hammouda about the due diligence steps he should be taking and the note records the following exchange:

“HS asked if AH had any advice and AH advised she was not able to advise exactly what due diligence as companies would just produce what was on the list, but just checking the VAT number and status is not sufficient. More can and should be done as things change and move.”

[89]In the meeting Mr Singh explained that HCL had a very limited workforce, five or six people in the office and on-site. He went on to say that there were approximately forty people on site, and he did not know them, but the site manager did. Mr Singh said that HCL only carried out due diligence on people who worked for HCL. Anyone from an agency was not checked.

[90]In the meeting Mr Singh gave Officer Hammouda a folder of due diligence information. The due diligence folder provided by HCL held names and addresses of purported workers. Officer Hammouda said that, on first inspection, this folder appeared to be thorough, but a closer review showed that the majority of the workers had not been paid by HCL, either through PAYE or CIS schemes. Some appeared to have been paid by UP, but none of them were paid by companies in the supply chains which are involved in the Kittel Appeal. None of the information had been verified.

[91]Mr Singh told HMRC that his due diligence on the subcontracted labour providers would involve a trip to their premises and taking a copy of a passport and proof of address. The due diligence material supplied in relation to WTV comprised a photocopy of the director’s passport and a copy of the front page of a bank statement from June 2015.

[92]Further due diligence on WTV was provided to HMRC in September 2021. This included:(1) An email dated 27 July 2015 giving WTV’s bank details;

(2) an email dated 3 August 2015 from Davinder Laxman informing “Harry” that WTV had been registered for gross payments under CIS

(3) A CIS gross payment verification certificate for WTV

(4) An email exchange between Mr Singh and an employee of BND asking him to “verify this subcontractor” and a reply with a CIS verification certificate (requiring net payments)

(5) A sub-contract for WTV in relation to work at Old Oak Common dated 20 November 2015.

(6) An email of 6 July 2015 from WTV to HCL attaching its VAT certificate, PAYE and accounts office reference letter from HMRC, CIS monthly return showing their UTR reference from HMRC, Employers liability insurance certificate, and company incorporation certificate.

(7) An email of 13 July 2015 from Mr Singh to Mr Devshi at BND asking him to “do the all necessary checks and verify with HMRC and get back to me. This company has been doing some works on one of our project in London and the payment will be due for them by next week.”

[93]The hearing bundle contains a pre-qualification questionnaire (“PQQ”) dated 8 July 2015 completed by Davinder Laxman on behalf of WTV. This contained a section headed “Supply chain management”, which asked about processes in place to select, evaluate and monitor WTV’s supply chain, all of which were answered.

[94]On 13 December 2017 Davinder Laxman wrote to HCL on behalf of WTV to respond to what she described as HCL’s concerns “about certain correspondence that you have received from HMRC, recently, concerning the disallowance of input tax in relation to invoices WTV Ltd sent you”. She sought to reassure HCL, saying that that WTV was “trading legitimately”, VAT had been correctly accounted for and paid, and HMRC had not taken any steps to “disallow” any VAT invoices issued to HCL by WTV or to disallow any VAT claimed by WTV.

Officer Hammouda’s evidence about HCL’s dealings with her about D1

[95]On 5 January 2018 HCL’s accountant emailed Officer Hammouda and his email included the following paragraph:

“In the meantime, our client has taken on a new labour provider D1 Trade Ltd for which CIS gross status and VAT number have been verified with HMRC. This included speaking with HMRC on 2nd January 2018 and details of the labour provider was given. We were given 18VAT2194 as a reference for this call.DI Trade Ltd company number is 10295652, VAT number is 256917177, UTR number 4076216695.”

[96]Mr Brown challenged Officer Hammouda about her failure to respond to this. She agreed that one of the key points in the labour providers' advice on due diligence is that traders tell HMRC about the staffing outsourcing arrangements. She agreed that this is what HCL did, but HMRC did nothing about it for several months until they disallowed input tax incurred by HCL on supplies from D1. Officer Hammouda said that she would not necessarily have known that D1 was under investigation at that time; it was not her investigation.

[97]We should just pause here and observe that, while much was made by Mr Singh (during his cross examination) and Mr Brown of Officer Hammouda’s supposed failure to reply to this email, nowhere is Officer Hammouda asked to do anything. She is told that HCL has a new supplier (D1) and given a lot of information about the supplier, but she is not asked to do anything in response. We do not consider it fair to criticise Officer Hammouda for not doing something she was never asked to do in the first place.

Officer Hammouda’s evidence about Cross Line

[98]Officer Hammouda also gave evidence about Cross Line (a supplier to WTV). All of Cross Line’s transactions during the period of assessment involved supplies from Birkum. Her decision to deny Cross Line’s input tax was based on her determination, following investigation, that Birkum was a fraudulent defaulter. This is not disputed. Cross Line has traded with other companies both before and after the appeal period, including others that have been identified as fraudulent defaulters.

[99]Cross Line applied for VAT registration in September 2015. It said that its main business activity was ‘Wall and Floor Tiling’, with the accompanying description given as ‘Laying tiling, hanging or fitting floor and wall covering’. Its estimated turnover was declared as £110k. While the company’s outputs were initially in this region, the company’s trade increased dramatically and rapidly from the 06/17 period onwards. Following a break in trading activity during the 03/17 period, the company’s turnover suddenly increased significantly, growing roughly fivefold from the 06/17 period to the 09/17 period, and then continuing to grow each quarter until deregistration.

[100]On 4 May 2016 HMRC undertook an unannounced visit to Cross Line’s principal place of business. The notes of the visit indicate that officers spoke with a receptionist who informed them that the office used by Cross Line was currently unoccupied. During the visit they discovered that there were a number of uncollected letters for Cross Line, including some from HMRC. The officers left a notice of inspection, together with a letter asking Cross Line to make contact, with the receptionist, who advised that the normal procedure was to email the company when post was received.

[101]On 19 May 2016, as no contact had been made by the company, action was taken to deregister the company for VAT, effective from the date of registration, and a letter was sent to Cross Line informing it of this. Officer Hammouda understands that, on or around 20 May 2016, contact was made with Cross Line as a result of which deregistration was suspended.

[102]Discussions and correspondence followed with a firm of accountants. It was in the course of this correspondence that Cross Line told HMRC that HCL was the main contractor who supervised their workers; see [107] below.

[103]Finally, in September 2018, Officer Hammouda decided to deregister Cross Line for VAT, and to deny its right to deduct input tax in relation to the 06/17, 09/17, 12/17 and 03/18 VAT periods. The reason given for deregistration (in her letter of 17 September 2018) was that Cross Line was using its VAT registration solely or principally for fraudulent purposes. One of the main grounds for her conclusion was that “All suppliers are defaulters, that can’t be a coincidence”.

[104]On the same day she wrote to Cross Line denying its right to recover input tax on the basis that the supplies of labour to it in these periods were connected with fraudulent evasion of VAT and Cross Line knew or should have known that it was participating in a transaction connected with fraudulent evasion of VAT. Cross Line appealed this decision. However, Cross Line went into liquidation and the liquidators decided not to continue with the appeal.

Officer Hammouda’s evidence about the cost of labour

[105]Turning to the cost of labour supplied to HCL, Officer Hammouda said that some of the invoices from WTV to HCL show that WTV charged HCL £12.50 per hour for labour supply. In her witness statement she said that this was below the Association of Labour Providers (“ALP”) recommended rate of £10.26 in March 2018. Clearly, that is not right; £12.50 is higher than £10.26. Her real criticism of the rates charged was that the rate charged did not allow a sufficient margin for all the companies involved in the chain, but Mr Brown suggested that, even with four companies in the chain, there was a 50p per hour mark-up/margin each.

Officer Hammouda’s views on HCL’s due diligence

[106]Officer Hammouda described the due diligence materials HCL collected as “generic”, meaning it was material such as a VAT registration certificate, a copy of the director’s passport, in some cases insurance or CIS registration. She commented that HCL did not “test the actual risks”, by which she meant the length of elongated supply chains and the risk of “Phoenix” companies, although she accepted that there was no suggestion of any “Phoenix” company activity in this case. She agreed that the checks HCL carried out were “very important” checks on the existence and VAT/CIS registration of its immediate supplier.

[107]Mr Brown asked what other checks could be carried out, particularly if HCL was unaware of a long supply chain. Officer Hammouda referred to instances where HCL were aware of sub-contracting. On 29 November 2016 HMRC received an email from a firm of accountants forwarding answers, stated to be from Cross Line to questions raised by HMRC during their investigation of Cross Line. This included the following:

“You have advised that the main contractor supervises the workforce supplied by Crossline Ltd whilst they are on site. Can you now please supply the name and contact details (including telephone number) of this individual together with the name of the main contractor they are working to. The main contractor is Harry Construction Limited and the telephone number is 01895 831 619 and the person to contact is Harry Singh.”

[108]Officer Hammouda agreed that this exchange shows that the workers knew who the main contractor was; it does not say that HCL knew that the workers supplied by WTV in fact came from Cross Line.

[109]Officer Hammouda suggested that HCL could have carried out credit checks. Although they would not have indicated the length of the supply chains, they would have “given more insight into the credibility of the business”. Mr Brown observed that WTV had paid all VAT due on time and no credit was being offered by any party in relation to these transactions.

[110]Officer Hammouda’s criticism of HCL is that they made no attempt to investigate whether there was a supply chain. HCL did not check to see whether the contractual prohibition on onward subcontracting was being complied with. As she put it, “You can speak to the workers on the -- actually on site, spot checks, visit some of the sites. I mean, it doesn't have to be weekly or monthly, but spot checks every now and then. Speak to the workers that are actually doing the work for your contract. That would establish who is paying them, are they being paid the proper amount. It would encompass a whole raft of questions.”

[111]Officer Hammouda agreed that there is nothing to suggest that Mr Singh “actually knew, but there was a lot that could have been done to have warned him that this was going on”.

Mr Singh

[112]Mr Singh said that he came to the UK from India in 2005 and worked as a site labourer. He took a course on site management, covering matters such as supervising workers, managing work and health and safety. He gained a lot of experience in concrete finishing and became a supervisor. In April 2007, he decided to invest in a construction company, however he did not feel confident enough to become a Director. His fiancée’s father, Mr Kuljit Singh, who was a bus driver, offered to help and was appointed as a Director. HCL was incorporated on 27 April 2007 with Mr Kuljit Singh as a Director and Mr Singh as a shareholder. Mr Singh’s fiancée, now his wife, was appointed as Company Secretary. Mr Kuljit Singh was unable to cope with the driving hours as well as with the duties of a Director of a company and decided to resign in July 2007. Mr Singh’s friend Mr Desraj Pal, whom he was living with at the time, offered to be a Director after Mr Kuljit Singh resigned, as he had experience in the construction sector.

[113]Mr Singh said that, once the business started flourishing, Mr Desraj Pal started to show his true colours and was not paying the workers on time or visiting sites. This affected the business’s activity as well as its relationship with workers and customers, as the workers were complaining to customers that they are not being paid on time and they were refusing to perform their tasks. Mr Pal also had health issues at this time. Before dismissing Mr Desraj Pal as a Director, he discussed his frustration with a distant relative Mr Mohinder Kang, who told him that such behaviour could eventually lead to the loss of contracts and the workforce. Mr Singh then terminated the Directorship of Mr Desraj Pal and appointed Mr Mohinder Kang. Mr Kang was happy to help Mr Singh until he was ready to take responsibility himself. In December 2008 Mr Singh became the sole Director, with his wife continuing as a Company Secretary.

[114]HCL applied to be VAT registered in March 2009. Business was going well and HCL’s accountant advised that, given the level of turnover, the company should be VAT registered. Mr Singh said that he had discussed VAT with previous directors, including Mr Kang, who told him that there was no need to register given turnover at that time. Despite that, Mr Singh said that he had no real knowledge or understanding about VAT in the construction industry until he spoke to his accountant.

[115]At the time HCL’s main business activity was concrete placing and the provision of labour. In the VAT application the declared business was building construction and provision of labour with a view to expanding the activity. HCL mainly carried out concrete placing and if a client required labour then they facilitated this too on a cost plus basis.

[116]In 2010-/11 work levels peaked, and Mr Singh realised that he needed extra resources to service clients properly. Mr Singh was approached by other companies offering services. He explained that his contact details are on his van and HCL has a Linkedin profile and other businesses would call to see if HCL had any needs they could supply. He said that he did the same with potential customers.

[117]Mr Singh said that he only became aware of the practice of subcontracting labour in the construction industry around 2011/12 and he only became aware of the problem of VAT fraud in the construction industry when he received Officer Hammouda’s letter in October 2017.

Mr Singh’s evidence about Call Premier, Temp Force and events in 2012/13

[118]Call Premier approached HCL offering to supply labour. They called a few times before Mr Singh engaged with them. He had projects at a number of sites in the UK and HCL was struggling to get the right people to do the work. They told Mr Singh what work they'd been doing in the industry and they showed him examples. Mr Singh looked at their profile and work and was happy with it. He took all the details from them, carried out checks, and was very happy with the result. He explained that the checks were looking at their live projects, who they working with, and paperwork such as their VAT number, UTR, passports, and utility bill, looking at where they were running their business from. Mr Singh gave all that information to HCL’s accountants to check.

[119]Mr Singh said that HCL gave Call Premier a small job to start with, they did a good job and Mr Singh gave them a lot of work from that point.

[120]HCL received a “veto” letter from HMRC about Call Premier on 2 July 2012. Mr Singh was concerned by this and spoke to HCL’s accountants. They made enquiries of Call Premier about what had happened, but they did not co-operate and the accountants told Mr Singh to have no more dealings with them.

[121]The veto letter noted that "HMRC has identified increasing problems with fraud and unpaid taxes through the use of Labour Providers..." and went on to say "Please note that any input tax claimed in relation to transactions involving this company may be subject to verification." Mr Singh agreed with Mr Harris that “input tax” is a VAT concept and Mr Harris put it to Mr Singh that his statement that he had read this letter did not sit easily with his statement that he did not know about VAT fraud in the construction industry until 2017.

[122]Before this, HCL had received a due diligence letter from HMRC (dated 21 June 2012). Mr Singh does not recall reading it at the time.

[123]On receipt of HMRC’s first letter regarding due diligence Mr Singh contacted his accountants who assured him that all relevant due diligence checks were carried out, and that they retained evidence of all the relevant checks carried out. All the letters received from HMRC were sent to the accountants for advice, as the business was relying on them for advice and support related to its tax affairs.

[124]HCL were also approached by another supplier, Temp Force, whom they engaged with. Prior to starting work with them, HCL requested information/documentation, such as the VAT registration certificate, UTR number, Director’s identification documentation, bank details. This information was then passed on to the accountants for verification. The accountants reverted advising of the company’s CIS status and Companies House registration and saying that it was all good.

[125]Temp Force was engaged about a week after HCL learned of Call Premier’s deregistration, but Mr Singh could not recall whether he was first approached by Temp Force before or after he learned of Call Premier’s deregistration.

[126]Some of the labour provided by Call Premier were already engaged on some of HCL’s projects and they decided to move to Temp Force.

[127]On 23 August 2012 HCL received another “veto” letter from HMRC, this time about Temp Force. HCL terminated dealings with Temp Force when they received the letter informing them that Temp Force had also been deregistered. They contacted Temp Force to find out what had been going on, but did not receive any information.

[128]Again, Mr Harris asked Mr Singh what he thought was happening here. He repeated his statement that he did not know about VAT fraud at the time. He said HMRC’s letter gave no indication that there was any fraud involved here. He drew a distinction between VAT and input tax (which is what HMRC had said they might want to validate where supplies from Temp Force were concerned) and VAT itself (which Mr Singh agrees is a tax). Mr Singh said that he still did not understand the nature of the fraud HMRC were concerned by.

[129]Mr Harris challenged Mr Singh’s assertion that he did not know anything about what was going on and what led to his right to recover VAT being challenged. His exposure to this kind of fraud would have been clear to him from the first letter he received from HMRC. Mr Singh was adamant that the first he knew of this was Officer Hammouda’s letter in 2017. Mr Singh asked why, if HMRC are saying that the checks were not done properly, they did not provide guidance; all they do, he complained, is say that whatever he does is inadequate.

[130]Call Premier and Temp Force were not the only companies which reached out to Mr Singh. He regularly got messages with propositions or enquiries from traders. Mr Harris asked why Mr Singh chose those two companies ad Mr Singh agreed that price would be a factor.

[131]Turning to HMRC’s visit on 27 June 2013, Mr Singh told HMRC that HCL was then exclusively using a company called First Choice Employment Ltd where the contact is “Deepesh Laxman”. He described the due diligence carried out on First Choice as including the completion by First Choice of HCL’s questionnaire, Mr Singh visited First Choice’s place of business and took a photograph of it. Due diligence is carried out on individual workers, including checking their CCS card, passports and visas to check their right to work. Written contracts were in place.

[132]Mr Harris noted that the surname "Laxman" has cropped up in this case already and suggested that Deepesh Laxman, the director of First Choice Employment, was related to Davinder Laxman, the director of WTV. As already noted, Mr Singh was adamant that he was (and still is) unaware of any relationship between the directors/owners of WTV and First Choice.

Mr Singh’s comments on HCL’s due diligence

[133]As part of the due diligence checks, HCL asked its potential subcontractors to complete a Pre-qualification questionnaire (“PQQ”). The PQQ was designed to assess the subcontractor’s Health and Safety awareness as well as to see if the subcontractor has processes and procedures in place to deliver a quality product/service. Also, it was meant to look at the positive experience in the sector.

[134]In addition to completing the PQQ, a subcontractor was required to provide its VAT Registration Certificate (if applicable), UTR number, certificate of incorporation (if applicable), Director/proprietor’s identification documentation, insurance certificate, copy of a bank statement to confirm the bank details provided in the PQQ are correct and that they belong to the business. Once this information was received from the subcontractor, it was sent to the accountants for verification. They carried out the necessary checks and reverted advising the results obtained, such as CIS status, VAT number validity, Companies House registration (if applicable). In most cases the accountants confirmed that everything was in order. Mr Singh assumed that, if a business was VAT registered, HMRC had conducted some checks on that business and, if a business had a bank account, the bank also conducted some checks.

[135]Mr Singh (or his manager Mr Barrett) visited the sites HCL was working on every week to check on standards and progress. The main purpose of the visits was to make sure the work was being carried out properly. He did not know the workers personally or have a personal conversation with them. However, Mr Singh referred us to one occasion in 2015 (in his witness statement, he referred to this as one “of many” instances but only spoke to and provided evidence of this one) where a worker approached him to say that he had not received payment. When he raised this with Davinder Laxman, she assured Mr Singh that the payment had been made and she provided him with the evidence of payment. Mr Singh exhibited an email from Davinder Laxman to him which provided proof of the relevant payment (a confirmation from HSBC of money being sent from WTV’s bank account to the individual in question). Mr Singh says that this showed that there was no reason for him to think that HCL was not dealing with WTV only.

[136]We have already seen ([74] above) that WTV did not have any operational employees, so we find this cash transfer (from WTV to someone Mr Singh says is a site operative) quite curious. Given that WTV employed no site operatives, why did it transfer money to one? Taking this incident at its face value, and accepting everything Mr Singh says about it, all it demonstrates is that on one occasion Mr Singh took up with Davinder Laxman a grievance from a worker who approached him and that WTV addressed that grievance itself, despite not employing the worker. This incident does not evidence HCL proactively validating its supply chain. At best, it shows WTV taking care not to do anything that would alert Mr Singh to the fact that it had no workforce of its own when faced with a grievance from a site operative.

[137]He explained that, whenever a worker comes on site, an induction process is carried out by the main contractor. All operatives are required to take their evidence of identity, their right to work in the UK evidence, and their CSCS (Construction Skills Certifications Scheme) (or relevant) card to show competency in that trade. Copies are made of the documents and retained on file. Only once they have provided these documents and these have been verified by the main contactor are they are then allowed to attend the induction. After this the RAMS (Risk assessment method statement) and instructions are provided to commence works. In the construction industry, no worker is permitted on site without having an induction completed. The induction is part of the health and safety measures operated by the main contractor on a site. HCL was merely a subcontractor, and the induction was always carried out by the main contractor.

Mr Singh’s evidence about WTV

[138]HCL engaged with WTV in 2015 to supply it with labour. At the time Mr Singh was negotiating two big projects (Lillie Square, where McAlpine was the main contractor, and Ballymore Royal Wharf) with PC Harrington, a big sub-contractor which went into liquidation. The two main contractors called Mr Singh to see if he could do the concrete placing. Mr Singh said that this was a really good opportunity to work for a main contractor, but he had to reassure them that he could do the work. It was around then that the Director of WTV, Davinder Laxman, contacted Mr Singh by phone out of the blue looking for work and offering her business's services.,

[139]He met her and asked for references and looked at a couple of their jobs. Mr Singh asked her to complete a PQQ (Pre-qualification questionnaire) and send the information and documentation necessary for HCL to verify WTV prior to start of any work. Upon receipt of this information, Mr Singh forwarded this information to the accountants and asked them to carry out the necessary due diligence checks. They reverted advising the CIS status obtained, Companies House registration and confirming that everything looked fine.

[140]He was satisfied with what he received and gave WTV a small piece of work, which he was happy with, and things developed from there. Where other suppliers let him down, he gave WTV their work, as WTV was reliable and produced good work. Either a new formal contract was signed between HCL and WTV or an e-mail containing the project details was sent.

[141]The notes of a meeting with Officer Hammouda on 17 October 2017 record that Mr Singh said that he “met Davinder Laxman … he met [her] on site and went to his premises.” Mr Harris suggested that this indicated that he was really talking about Diven Laxman and he was contracting with a husband and wife who both had construction companies. Mr Singh said that this was not the case at all. He put referring to “his premises” down to making an error in speech, which he does sometimes when he is nervous or stressed. He did not mean to refer to a particular male person.

[142]Just pausing here, we have not ascribed any importance to this “misgendering”. The note was prepared by HMRC and not approved by Mr Singh, so we cannot be sure it is an accurate note of what was said. Equally importantly, later in the same note we see the comment “Davinder? HS contact new clients always look for website WTV phoned and offered a deal, I get to know first. She brought Zahid with him.” It appears to us that the last word (“him”) is referring to Davinder (who took along Zahid) and, if that is right, should read “her” and this shows the author of the note or Mr Singh making a similar (but this time much more obvious) slip. Although Mr Harris placed a lot of store on this slip as showing that Mr Singh knew that WTV was not really Davinder Laxman’s business and was part of an arrangement involving Diven/Deepesh Laxman (and thus linked to First Choice), we consider that he is reading far too much into what could simply be no more than an uncorrected “typo”.

[143]Mr Singh saw Davinder Laxman most weeks on site and spoke to her (there or on the telephone) as he needed to discuss topics like upcoming jobs, other suppliers and HCL’s staffing needs. His relationship was purely professional and had no personal element. He understands now that WTV were further subcontracting for labour, but at the time he thought it was coming just from WTV, although WTV never told him that in terms. His position is that Davinder Laxman, whom he trusted and worked with for several years, was effectively going behind his back. He was not using WTV because they gave a particularly cheap supply of labour; he was paying £12/12.50 an hour which he described as “a good rate which is reasonable for both parties to make a profit”.

[144]Mr Harris pointed Mr Singh to a statement given to HMRC by Cross Line, who said that the main contractor on site supervises the workforce and gave HCL as the main contractor and Mr Singh as the point of contact; see [107] above. Mr Harris asked why a sub-contractor would know of HCL and Mr Singh if the work was not being subcontracted. Mr Singh said that he and HCL are widely known “from East London to Birmingham” and people say they work for HCL, but (he says) HCL is always third in the line of contractors and has never been a main contractor, so what Cross Line said was wrong

[145]WTV provided services to HCL until they received the tax loss letter from HMRC. On receipt of that letter, Mr Singh says that HCL immediately terminated WTV’s engagement.

[146]Mr Singh’s position is that he did not know of or understand VAT fraud in the construction industry. In his view, a company like HCL can only do so much and HMRC can do much more. They can put a stop to fraud. As he put it, “We only can do so much, we can do so much checks on them by getting verifications on VAT and tax and all that. The rest is all down to the HMRC. If they know that -- they're doing the checks on the companies, why don't they make us aware at that time?”.

Mr Singh’s evidence about D1

[147]Turning to D1, the hearing bundle contains a number of emails between Mr Singh and the director of D1, Mr Vijay Chabra (“Mr Chabra”), starting on 10 November 2017 when Mr Chabra emailed HCL saying:

“Hello there I am looking for work, i supply skilled worker & labour in all around in U.K. I do day work & price work. i supply concreter, supervisor, dumper driver, machine driver, steel fixer, joiner, ground worker, striker & labour. I done work before Birmingham,Manchester,Liverpool,Leeds,Cambridge,Wembley & Stafford London.if you need any worker contact me.”

[148]After an initial conversation, Mr Singh asked the director of D1 to email over details of the company. Mr Singh described the conversation as “a normal conversation” with someone looking for an opening and saying, "I'm looking for a work opportunity and I am in this business, I'm doing such-and-such a job, I have experience". He subsequently had a meeting with the director. On 13 November Mr Singh asked Mr Chabra for “your company portfolio with few job references if possible. Also I would like to arrange a site meeting with you this week Friday”. Subsequently there was an email exchange about D1’s insurance cover

[149]D1 supplied a copy of Mr Chabra’s passport, his 2013/14 tax return and a certificate of employer’s liability insurance, a PAYE registration letter from HMRC and certificate of incorporation. Later it supplied its bank details, a CIS registration certificate and a verification certificate (dated 2 January 2018) confirming D1 could receive payments gross.

[150]On 24 November 2017 Mr Singh asked Mr Chabra to complete HCL’s pre-qualification questionnaire and this was returned on 1 December 2017. The PQQ asked for references and Mr Singh called D1’s referees. He also visited sites D1 were working on in Nottingham and Greenford. They visited a site in Isleworth HCL were working on so that Mr Singh could explain what he was looking for workers to do. Mr Singh said that Mr Chabra told him that D1 sourced its own labourers, but Mr Harris pointed out that, in a meeting with HMRC shortly before that time, Mr Chabra had told them that D1 got all its workers from subcontractors. Mr Harris asked Mr Singh whether Mr Chabra was being more honest with HMRC than with him.

[151]Mr Singh was anxious to get labour and chased the director of D1 to supply the information he asked for. Mr Harris put it to Mr Singh that it was quite fortunate that in a short period of time before he needed men, someone cold-called him saying, "I've got a business, D1, that you can supply you with labour". Mr Singh’s reply was that this was not a cold call. This kind of approach is a very common practice in this industry. In much the same way, he makes a lot of calls trying to find business, and other suppliers do the same when they are trying to find more work. As he put it, no one is going to sit back at home and wait for a phone call offering work

[152]Mr Singh said that he had “done all the checks” on D1 and was happy with them, so he gave them a job. He also said that he sent the paperwork to Officer Hammouda before they started and she never replied for nine months.

[153]Mr Harris expressed some surprise that this was the fourth time in five years HCL had fallen foul of the same trick by a young company with no labourers on their own books, and put it to him that he knew what was happening and participated to get the benefit of cheap labour. Mr Singh denied this and said that he had carried out all the necessary checks, including asking D1 where they got their staff from and being reassured that they were engaged directly. Mr Harris suggested that HCL could have worked with more established suppliers, but Mr Singh said that D1 was two years old when he engaged with them and working for much larger companies.

[154]HCL’s contract with D1 prohibited onward subcontracting. Mr Singh said that HCL’s contract terms prohibited sub-contracting so that HCL can control quality. But there was no reason to check if there were no complaints. Mr Singh never asked workers on site who they worked for; he said that this would have gone against accepted practice.

HCL’s Submissions on the Kittel Appeal

[155]Mr Brown says that HMRC have not produced any evidence that there was an “overall scheme to defraud the Revenue” perpetrated through supply chain VAT fraud. Even if there was an overall scheme, HCL denies either knowing of it or being knowingly involved in it. There was no overall, organised and sophisticated scheme to defraud the revenue. It was an old-fashioned missing trader fraud. Those who charged VAT and failed to account for it to the Commissioners were the sole beneficiaries of the fraud.

[156]In cross-examination, Mr. Singh consistently denied he knew of any VAT fraud and that must be taken to include knowledge of an overall scheme to defraud HMRC. He says that Mr. Singh was a credible and truthful witness. HMRC have put forward no cogent evidence to support their assertion that there was an overall scheme to defraud them of VAT

[157]As far as East Focus is concerned, there was a loss to HMRC, but it was a statutory debt which remained unpaid; it was not VAT. On 12 December 2016, HMRC wrote to East Focus stating it had issued the sales invoices, which included amounts charged as VAT, when it was not authorised to do so and therefore an amount of £568,961.80 was due under paragraph 5(2) of Schedule 11 VATA. On 19 December 2016, a VAT return was received by HMRC for VAT periods 05/16, 08/16 and a final return (no date specified). They were all nil returns. HMRC allege the nil returns are evidence of fraud as no output tax was declared. The problem for HMRC is that the nil returns were correct, because East Focus had been retrospectively de-registered by the time they were submitted. HCL now accepts that there was a loss (there being a demand by letter from the Commissioners for amounts purporting to be VAT) but maintains its challenge over whether it was fraudulent and as to whether the Kittel principle can be applied to paragraph 5(2) debts.

[158]On that last point, East Focus was not entitled to issue VAT invoices (and to charge VAT) in respect of supplies made after it was deregistered, because it was not VAT registered and thus not operating within the VAT system proper. The statutory definition of “VAT” in section 96(1) VATA is “value added tax charged in accordance with this Act”’. Under the Act, VAT can only be “charged” on taxable supplies made by a taxable person (section 4 VATA). The amount sought by HMRC was by way of a debt claim, not a VAT assessment.

[159]Paragraph 5, Schedule 11 VATA 1994, allows HMRC to collect amounts due to them as a debt due to the Crown. Paragraph 5 has two separate and distinct statutory heads of entitlement: first, paragraph 5(1) deals with ‘VAT due from any person’, i.e. VAT due on taxable supplies made by a taxable person. Secondly, there is an entitlement to claim under paragraph 5(2) from a person who issued an invoice which shows a supply taking place with VAT chargeable on it; that is a separate head of claim, and does not turn on whether the invoice is a VAT invoice, the supply has actually taken place, the amount of VAT was actually chargeable on the supply at all or the person in question was a ‘taxable person’.

[160]This basic distinction (between tax and a claim that has something to do with tax but which is not a tax claim) is recognized in the recent Supreme Court decision in Skatteforvaltningen v Solo Capital Partners LLP and others

[2023] UKSC 40

. In that case it was held that the Danish tax authority’s claim could be heard, and there would be no objection that this would involve enforcing foreign tax laws, as the claim did not involve an unsatisfied claim to pay taxes due in Denmark.

[161]The Kittel principle operates within the VAT system where a transaction is connected with the fraudulent evasion of VAT. Given HMRC’s backdated deregistration (the deregistration must have occurred shortly before the “debt to the Crown” letter was issued), then the amount HMRC lost cannot be VAT for the purposes of VAT fraud as understood by Kittel.

[162]As to fraud, East Focus submitted VAT returns, that correctly identified its VAT liability, for VAT periods up to 02/16 and the nil returns for the remaining periods were technically correct if East Focus had received the letter deregistering it for VAT (dated 12 December 2016) before the returns were submitted on 19 December 2016. The non-payment of a demand for an amount purporting to be VAT is not sufficient for HMRC to prove dishonesty by East Focus, or knowledge of an overall scheme to defraud HMRC given the surrounding circumstances, which included:(1) East Focus engaged with the Commissioners for several months and provided records even though the director (and sole employee) was not in the UK and had domestic issues

(2) The VAT returns it submitted up until the date of deregistration were correct, albeit the two following VAT returns were not submitted on time;

(3) The VAT returns it submitted post deregistration were also correct; given its deregistration;

(4) The VAT invoices it had issued were correct at the time the transactions took place as it was properly registered for VAT at that time.

[163]Turning to Cross Line, it was originally deregistered for VAT on 19 May 2016 as no-one was present when HMRC Officers visited the principal place of business. The following day the deregistration was suspended following contact by Cross Line, which appointed a firm of accountants to act on its behalf. Over two years later, in September 2018, after several exchanges of information and meetings (albeit not with the director of Cross Line), HMRC finally deregistered the company. To continue to engage with HMRC, via a professional accountancy firm, is not the behaviour of a dishonest person.

[164]The tax loss attributed to Cross Line was a denial of input tax on the basis it knew or ought to have known that its transactions were connected to VAT fraud. Such an allegation does not amount to one of dishonesty unless specifically pleaded. There was no such allegation in the Kittel denial letter to Cross Line.

[165]In none of the correspondence between Cross Line and HMRC, or meetings, up until the Kittel denial letter was it informed by HMRC of the presence of VAT fraud in the industry. Cross Line appealed against the decision, but it was subsequently withdrawn by the liquidator in March 2020.

[166]None of this proves that Cross Line was dishonest when it failed to account for VAT on its supplies.

[167]As far as WTV is concerned, it declared all its transactions on its VAT returns. In none of the correspondence between WTV and HMRC, or in meetings, up until the Kittel denial letter, was it informed by HMRC of the presence of VAT fraud in the industry; some correspondence referred to “labour provider fraud”, but Officer Hammouda accepted that this can include CIS, National Insurance and PAYE frauds

[168]WTV engaged the services of two professional VAT advisers to represent it in its negotiations with HMRC. HMRC’s enquiries took two years until the decision was taken to deny input tax. There is nothing in the documents produced to suggest VAT fraud in the industry was brought to the attention of WTV until at the earliest January 2017. In addition, a negotiation of the VAT deregistration and a review of HMRC’s decision was also requested. That is not the behaviour of a dishonest person.

[169]The tax loss attributed to WTV was a denial of input tax on the basis it knew or ought to have known that its transactions were connected to VAT fraud. Such an allegation does not amount to one of dishonesty unless dishonestly is specifically alleged. The tax loss in respect of WTV was a Kittel denial; it was deregistered for VAT by HMRC on the same date. There was no allegation in the Kittel letter that WTV was dishonest in its transactions.

[170]In the absence of direct evidence. The Commissioners rely solely upon two factors to show that HCL knew of VAT fraud in the industry:(1) HCL was directed by letter to a Labour Provider Notice in 2012; and

(2) “any competent accountant, tax advisor or solicitor would have advised their client of the risk of fraud.”

[171]HCL submits there is no direct evidence at all on which HMRC can rely to prove it knew its transactions were connected with VAT fraud; it vehemently denies the accusation. Mr Singh denied any knowledge of VAT fraud in the industry until he was made aware of it by Officer Hammouda in October 2017. This is clearly a relevant factor, as recognised in the very recent decision of Promeridian at [40]. In Davis and Dann the Court of Appeal stated at [9]:

“Crucially, before they purchased the Goods, the respondents had previously been advised by HMRC of the risks of becoming involved in MTIC fraud and what to look out for.”

[172]Officer Hammouda accepted in cross-examination that none of the letters to HCL mentioned or highlighted VAT fraud, and this was not highlighted in any meetings. Mr. Singh denied ever seeing the Labour Provider Notice, and it was accepted by Officer Hammouda that the notice may not have been included in the letter sent in 2012 as there was no list of items said to be enclosed at bottom of the letter.

[173]So far as “should have known” is concerned, HMRC effectively rely upon the same facts for alleging the Appellant “ought to have known” as they do for asserting actual knowledge. However, the amounts paid by HCL to its suppliers was not below the market rate. HCL carried out significant due diligence on its suppliers WTV and D1 and concluded there was nothing to prevent it sub-contracting its supplies to them or that there was an issue relating to VAT fraud by another person, particularly bearing in mind that HCL was not aware of VAT fraud in the industry until receiving the letter from HMRC dated 29 September 2017. The checks were sufficient for HCL to believe it was dealing with a bona fide company. As in this appeal, HMRC advanced the assertion that such due diligence was not “meaningful” in Promeridian, which the FTT rejected at [101]-[108]. HCL accepts it was made aware of VAT fraud in the industry in July 2017, but it continued to be satisfied thereafter by the checks it had already carried out and subsequently carried out on D1.

[174]HCL rejects the assertion it knew individual contractors on site were not from its immediate suppliers. HMRC can only point to one contractor (Cross Line) which in written reply to HMRC stated the main contractor on a particular site was HCL. That is obviously not evidence to support the allegation.

[175]HCL was in contact with D1 six weeks prior to entering a working relationship with it and had previously carried out its checks, contrary to HMRC’s assertion that it just switched from WTV at a moment’s notice.

[176]HCL carried out site visits to its immediate suppliers.

[177]As far as CIS gross payment status (GPS) is concerned, it is well known in the industry that in order to obtain GPS individual companies have to apply for it. There are two tests which HMRC carry out before granting the application, a turnover test, and more significantly a compliance test requiring each applicant to be up to date with all its taxes and having paid on time. Although HCL does not dispute Officer Hammouda’s contention that HMRC’s computer system somehow erroneously grants GPS to applicants, the point has never been communicated to HCL or the wider construction industry. The FTT in Promeridian accepted that a trader had GPS would have given some assurance “that it was a compliant company” (at [106]).

[178]HMRC rely on the length of transaction chains as part of their case. There is no evidence to suggest Mr. Singh was aware of the length of transaction chains, what diligence was carried out (or not carried out) by other parties or amounts charged by other parties and as stated above, these factors should be ignored by the tribunal.

[179]Again, Mr Brown says that there is insufficient evidence to prove that the circumstances surrounding the transactions should have led HCL to conclude that the only reason for them was that they were connected to VAT fraud (the burden being on the Commissioners).

HMRC’s Submissions on the Kittel Appeal

[180]On the question of law relating to East Focus (whether a failure to pay a debt due to the Crown under paragraph 5, Schedule 11 VATA is a loss of VAT) Mr Harris simply says that “there is no basis to depart from the position that what was seeking to be reclaimed was – from [HCL’s] perspective at the time – VAT. Paragraph 5, Schedule 11 VATA does not materially affect the position”.

[181]On the question of dishonesty around East Focus, Mr Harris reminded us of Officer Stock’s remark in response to being asked about the technically correct nil returns, ‘Technically correct, but why didn’t the company contact HMRC because they’ve got a debt of £567,000? If they have put the returns in correctly, that debt would come down considerably because there’d be input tax to recover’.

[182]Mr Harris says that the various concessions made about the lack of specific reference to VAT fraud in the veto letters or in meeting minutes do not count for much against the overwhelming weight of the evidence from all of the chains that demonstrate a VAT loss, occasioned by fraud, connected to HCL’s transactions.

[183]HMRC rely on the following objective factors to prove that HCL had the requisite knowledge: (1). Rapid increase in HCL’s turnover despite lack of expertise and support; (2). Fortuitous timing and common fact patterns with the onboarding of First Choice Employment, WTV, and D1 (3). Family connections between First Choice Employment and WTV (4). Sequential deregistration (Call Premier, Temp Force, WTV, D1) (5). Veto Letters dating back to 2012 that were read by the Appellant (6). Lack of meaningfully increased due diligence during the relevant period (7). Remarks from subcontractors.

[184]Mr Harris says that Mr Singh is not a credible witness. He says this for two reasons. First, one of the central planks of Mr Singh’s appeal is that he was not aware of the existence of any VAT fraud in the construction industry until he received a letter from HMRC in 2017. However, on Mr Singh’s own account, he was running a very successful business; he described Harry Construction as ‘flourishing’ as early as 2008. It is an irresistible inference that by 2012 he would have had a good understanding of the workings of the construction industry. He became aware of the importance of VAT-registration when his accountant informed him, before March 2009 when registration took place. In cross-examination he said that he became aware of the existence of labour chains in the construction industry in 2011/12. He accepted that he read the veto letter of 3 July 2012 from HMRC regarding Call Premier.

[185]By 2012, Mr Singh had spent five years building a successful business of which he had sole directorship; he had exercised significant caution in the first few years taking advice from others; he had used his accountant to gain an understanding of the importance and workings of VAT; he knew that labour providers often worked in chains; he understood the meaning of ‘input tax’, he had received and read a document that explicitly warned about ‘increasing problems with fraud and unpaid taxes’ and which linked to an HMRC guidance document on the risks with Labour Providers, and he had an obvious business incentive in taking the time to understand his industry and his potential exposures. It is submitted therefore that he must have known of the existence of VAT fraud in his industry. Even allowing Mr Singh the benefit of the doubt in relation to Call Premier, on the basis that it was the first deregistration letter that he received, there is even less commercial logic to suggest that he did not know about the risk of VAT fraud by the time that Temp Force was deregistered, only a short time later.

[186]Mr Harris also pointed to what he says were evasive and circular answers by Mr Singh to difficult questions. He says that the reason for this is that Mr Singh simply does not have a better answer to key questions that point towards the reality that he did in fact know that his transactions were connected to fraud. He gives the following exchange as one example: Q: there’s a document here which you say you read at the time from 2012 that speaks of HMRC identifying increasing problems of fraud through the use of labour providers. A: Yes. Q: Were you not curious as a business owner as to what those frauds might be? A: As I said, I didn’t know there is such a VAT fraud in the industry at that time. Q: But you did know there were other types of fraud in the industry? A: They mention about the tax and all that, but I wasn’t aware of it. In a similar vein, in relation to the deregistration of Temp Force only a few weeks later on 23 August 2012: Q: What did you think was happening here? A: I didn’t know that there’s such a VAT fraud going on Q: I know you say you didn’t… A: I thought it maybe just common – could be a letter which is they deregistered VAT, could be something – they maybe owe VAT, the VAT man, you know. But there was no indication that gives me that there is a fraud going on. Q: You say there’s no indication. But the fourth paragraph says:

‘HMRC has identified increasing problems with fraud and unpaid taxes through the use of Labour Providers.’

A: There’s not VAT fraud said in there Q: Yes, but in circumstances where the previous paragraph, yes, is very clear about any input tax, yes? A: Right.

[187]Similarly, throughout Mr Singh’s evidence, he focused on his assertion that he had “done his checks”. Mr Harris pointed to this exchange as an example: Q: What you said a moment ago is that – my question was: why couldn’t you have done that, ask for a sample when you were dealing with D1? That was what I asked you, and you said “Oh, I had the PQQ document”, yes? That was your answer. A: Right. Q: I’m saying that’s not the same thing, is it? A: It is the same thing. Why not? PQQ still exist? Q: Yes, but the sample of the invoices you receive now with your current companies you deal with, the purpose of that is to make sure that you are getting regular verification of the fact that you are getting what you actually contracted for. Yes? A: Right. Q: You are not getting someone else’s labour, you are getting labour with. A: Yes. Q: You didn’t do that with D1, did you? A: That – Q: All you had was the PQQ document? A: As I said, I done my checks before, Mr Harris. I done all the due diligence before we start the supplier. We just going round in a circle.

[188]Mr Harris also pointed us to the file with details of 51 workers that Mr Singh gave to HMRC. All these workers turned out not to have been paid, or not to have been paid properly. If nothing else, this casts doubt on Mr Singh’s credibility.

[189]Turning to HMRC’s allegation of an overall scheme to defraud HMRC and that HCL did know that the transactions were connected with fraud, or - in the alternative – that in all the circumstances they should have known, Mr Harris points to what he says is the close family connection between the businesses HCL was dealing with. After the deregistration of Temp Force, in 2013 HCL was exclusively using First Choice, the director of which was Deepesh Laxman. However, the next contractor with which Harry Construction dealt – from 2015 – was WTV, the director of which was Davinder Laxman, married to Diven Laxman, who is Deepesh’s brother. Between 1 June 2015 and 31 January 2018, WTV received a total of £3,439,474, of which £3,409,876 was received from HCL. The two companies therefore had a very close working relationship. Mr Singh gave evidence that he regularly saw Ms Laxman in person, sometimes seeing her on site twice a week.

[190]Mr Harris says that Mr Singh was aware that Davinder Laxman (the director of WTV) was at all material times married to Diven Laxman of DJJ, with which HCL was then trading, and that Deepesh Laxman (of First Choice Employment) was the brother of Diven Laxman. He says this because this family relationship was not expressly challenged either in Mr Singh’s original witness statement, nor was Officer Hammouda cross-examined on the point. The family relationship is also expressly considered and referenced in DJJ Services Ltd TC/2021/03025 at [71]. In Mr Singh’s first witness statement he states at paragraph [46] that he did not inadvertently disclose that he was dealing with Mr Laxman when saying ‘He’ in reference to WTV’s director, but it was just an error in speech. It is noted that there do not appear to be any other occasions in the bundle where such a mistake is made.

[191]Mr Harris also says that Mr Singh did know that WTV’s labour was being subcontracted. He had no good explanation for why the directors of Cross Line told HMRC that the main contractor was HCL and that Harry Singh was the person to contact. His answer was ‘anyone can say, “Oh, we work for Harry Singh”, but there is always main contractor, principal contractor, there is another contractor, then I come on thirdly. So I’ve never been contractor and they put it wrong down here”.

[192]Mr Harris submits that the only reasonable explanation for the Appellant’s repeated, dealings with connected labour providers that would go on to be deregistered is their connection to fraud. He points to the comments of Christopher Clarke J in Red 12 Trading and submits that we might legitimately conclude that it is unlikely that so many of the transactions in issue can be traced to tax losses by HMRC is a result of innocent coincidence.

[193]Mr Singh placed very significant weight on his one example of a labourer approaching him on site asking for payment, and the subsequent email correspondence with Ms Laxman. In his words, he said ‘That proves the labour is coming from WTV’. Mr Harris says that, as he suggested to Mr Singh, that was incorrect. At its highest, that interaction is capable of proving that one individual was paid by WTV on one occasion.

[194]Mr Harris says that Mr Singh sought to create the impression that by the time he came to deal with WTV, he had increased the levels of his due diligence. The primary basis for this suggestion is the exhibiting of one contract for one project for each of WTV and D1. Neither of these contracts specifies the nature of the service to be provided and the documents provided do not create the basis for a finding of any material increase in the level of due diligence.

[195]Mr Singh had no adequate answer to the question of why Mr Chabra, the Director of D1, when speaking to HMRC two weeks before he cold-emailed Mr Singh, said that D1 has no employees and only used one subcontractor named JLA. Mr Harris submits that there is little commercial logic in the director of D1 being more open and honest with HMRC than with a business associate.

[196]Mr Harris says that all these factors strongly suggest that HCL participated in an orchestrated scheme to defraud the revenue and the most probable explanation for this would be the supply of cheap, off-book labour that is provided ultimately by a fraudulent defaulter whose unlawful retention of VAT offers an unfair advantage in the market.

[197]HMRC submit that the only possible explanation for the total lack of commercial rationale behind Ms Singh’s position, his evasive and inconsistent answers, and his keenness to place all responsibility upon HMRC, is that he did know at the time that his transactions were connected to fraud, or – in the alternative – that he should have known this.

The Kittel Appeal: Discussion

[198]It may be helpful at this point to set out some key relevant events in chronological order. One of the things we asked the parties to comment on in written submissions was our outline chronology, which (revised to reflect their observations in reply) runs like this:(1) In July 2012 HCL received a "veto letter" (dated 3 July) about Call Premier;

(2) HCL started to use Temp Force immediately they learned of Call Premier's deregistration. Mr Singh does not recall when Temp Force first approached him, but HMRC officers’ notes of a meeting with Mr. Singh on 9 August 2012 confirmed that HCL verified Temp Force’s UTR with HMRC on 9 July 2012 and the first invoice was issued on 26 July 2012.

(3) In August 2012 HCL received a "veto letter" about Temp Force

(4) By June 2013 (when HMRC visited HCL) HCL was exclusively using First Choice as a labour supplier;

(5) There was no evidence before us that would suggest that First Choice (or any of HCL's direct suppliers between Temp Force and WTV) had been engaging in any form of VAT impropriety.

(6) There was no explanation or evidence in the hearing bundle or discussed in the hearing about why HCL stopped using First Choice as its sole supplier of labour. One of the questions we asked when we were seeking written submissions was whether there was any explanation for this. Mr Brown provided us with a copy of a letter (dated 19 October 2016) from HCL’s accountants to HMRC which indicates that First Choice went into liquidation, seemingly owing money to HMRC. (This prompted us to look at First Choice’s Companies House filings, which indicate that First Choice went into insolvent liquidation owing HMRC just under £2.5m.) HMRC raised questions in this letter about whether HCL had properly operated the CIS as regards payments to First Choice. The letter contains an explanation of how HCL had operated CIS on these payments.

(7) HCL started to use WTV in 2015. It was using other labour suppliers (UP was the only other significant supplier) at the time.

(8) No allegation of fraud was made against UP in these proceedings, but we note that its early years turnover appears exceptionally high compared to its initial estimate and that it went into liquidation owing HMRC over £16m, having not cooperated with HMRC’s enquiries and wrongly classified over £11m worth of standard rated supplies as zero rated.

(9) On 29 September 2017 HMRC sent HCL a “tax loss letter” concerning WTV.

(10) The email trails produced in evidence indicate that D1 first approached HCL on 10 November 2017.

(11) HCL started to use D1 in January 2018.

(12) HMRC issued a letter on 18 January 2018 advising that WTV’s VAT registration would be cancelled on 31 January 2018.

(13) On 19 June 2020 HMRC wrote to D1 advising that D1’s VAT registration would be cancelled with effect from 1 May 2020. The reason given by the HMRC officer was that D1 was using its VAT registration solely or principally for fraudulent purposes.

(14) There was no evidence before us of any connection between any of Call Premier, Temp Force, First Choice, WTV or D1 except for the alleged Laxman family connection between First Choice and WTV, and the suggestion that D1 and Temp Force appearing on the scene shortly after HCL received veto letters in relation to WTV and Call Premier (respectively) indicates some connection.

[199]The first question we need to ask is whether we are confronted with an overall scheme to defraud HMRC, of which HCL was well aware. Before we can answer that question, we need to address the challenges raised by HCL in relation to particular companies in its supply chains.

Was East Focus fraudulent?

[200]The first challenge relates to whether East Focus was itself a fraudulent trader. Factors which point towards it being dishonest include the fact that it did not question HMRC’s assessment of £567,961.80. If the company had been carrying on an ordinary, honest business, it would have had significant amounts of input tax to recover, and this assessment would vastly overstate its actual liability. The fact that nothing was said by East Focus about this assessment, points towards dishonesty, as does the fact that between March 2016 to December 2016 there was no attempt to pay the VAT due on the company’s sales.

[201]We do not set a great deal of store by the various, largely failed, attempts at engagement between HMRC and the absent director before the assessment was raised.

[202]The company misdescribed its business and likely turnover in its VAT registration application. That, as Officer Hammouda suggested in relation to Cross Line, indicates an intention to fly under the radar screen. The assessment HMRC raised for £567, 961.80, all based on VAT invoices raised by East Focus, reflects a turnover many times that which East Focus estimated.

[203]Our answer to this question is, “Yes; East Focus was fraudulent.”

Did East Focus occasion a VAT loss?

[204]As far as the question whether the loss to HMRC was a VAT loss, we ourselves raised with the parties the question whether the failure by East Focus to pay its statutory debt give rise to a VAT loss.

[205]Notwithstanding Mr Brown’s arguments, we agree with Mr Harris that to say there is no longer any VAT loss here because East Focus was retrospectively deregistered before the amounts were paid to HMRC is unrealistic. The amounts comprised in the statutory debt all reflect amounts which East Focus properly charged as VAT at a time when it was VAT registered. The amounts only ceased to be capable of being assessed as VAT (and ceased to be VAT properly so-called when the clock was turned back on East Focus’s deregistration) because HCL was subsequently retrospectively deregistered. To our mind, those amounts still represent a VAT loss, because VAT was properly chargeable on them at the time when the VAT invoices were raised.

[206]The fact that, before they were paid to HMRC, the amounts ceased to be VAT properly so called as a result of East Focus being retrospectively deregistered on account of its alleged fraudulent activity should not lead to a person who is, or should be, aware of that wrongdoing being placed in a better position than they would have been if the supplier had not been retrospectively deregistered.

[207]Our answer to this question is:

“Yes; East Focus occasioned a VAT loss.”

Was Cross Line fraudulent?

[208]Turning to Cross Line, when this company applied for VAT registration, it incorrectly described its business and hugely underestimated its turnover.

[209]It is not correct to say, as Mr. Brown did, that no allegation of dishonesty has been made against Cross Line. Its VAT registration was cancelled on the basis that it was using its registration solely or mainly for fraudulent purposes. One of Officer Hammouda’s main grounds for her conclusion was that all of Cross Line suppliers were defaulters and that could not be a coincidence. It is true that she also denied Cross Line’s right to recover input tax on the basis that it knew or should have known that its transactions were involved in the fraudulent evasion of VAT, but there can be no doubt about why the company was deregistered.

[210]We know from Officer Hammouda’s unchallenged evidence that, in the period we are concerned with (when Cross Line was making supplies to WTV which were then absorbed in WTV‘s supplies to HCL), Cross Line had one supplier and that supplier was a fraudulent trader. If we add this to the misleading basis on which Cross Line applied for VAT registration, we consider it to be more likely than not that Cross Line was itself a fraudulent defaulter.

[211]We appreciate that Cross Line engaged a firm of accountants to represent it in its dealings with HMRC, that it appealed the assessment denying its right to recover input tax and that the appeal was discontinued by the company’s liquidators rather than by the original director/s of the company. We appreciate that liquidators discontinue litigation, including tax appeals, for reasons which are not always linked to the intrinsic merits of the case, and so we do not put any negative store by the fact that the appeal was discontinued.

[212]Our conclusion is based on the way Cross Line sought to fly under the radar screen when it applied to be registered for VAT and its position in the supply chain at the relevant time, having one supplier which is an accepted fraudulent defaulter.

[213]Our answer to this question is “Yes; Cross Line was fraudulent.”

Was WTV fraudulent?

[214]As far as WTV is concerned, we have seen that it signed a contract which contained a provision that WTV was not to make any assignment of the benefit of the subcontract or sublet any of the contract works without the prior written consent of HCL. WTV did exactly what it had promised it would not do. WTV only had one employee, a part-time accountant, in addition to the director. It must have known, when it signed this contract, that it could never do what it was promising (to perform the contract itself without subcontracting any element if it); it was a dishonestly run business.

[215]When WTV applied for VAT registration in June 2015, it described its main business activity incorrectly and significantly underestimated its annual turnover. Interestingly, the terms in which it (mis)described its business and its (inaccurate) turnover estimate were exactly the same as the (equally misleading) information Cross Line supplied in its VAT registration application a few months later; see paragraphs [71] and [90]..

[216]Nine of its eleven suppliers were defaulting traders or missing traders and compulsorily deregistered. We agree with Officer Hammouda that this strongly suggests contrivance.

[217]We accept that WTV used respectable external advisers and that suggests they are acting honestly, but against that we also note that the VAT assessment was not appealed, Mrs Laxman had refused to meet with HMRC during their enquiries and WTV did not produce all the information HMRC asked for.

[218]Our answer to this question is “Yes; WTV was fraudulent.”

Was there an overall scheme to defraud HMRC of which HCL was aware?

[219]There is no documentary evidence of an overall contrived scheme to default HMRC, in the sense that there is no “smoking gun” which reveals anyone admitting to, devising or implementing such a plan in terms. That is quite an equivocal point. It is equally consistent with there being no such overall plan or with there being such a plan orchestrated by someone who knew how to do it properly without leaving a trace. We are, inevitably, left analysing circumstantial evidence, fact patterns and similarities to form a view on the totality of the evidence, as discussed at [17]-[20]. In doing that, we need to remember that the evidence viewed in its totality may amount to more than the sum of its parts, but equally we should guard against developing an analysis based on little more than a web of innuendo.

[220]Beyond the alleged Laxman family connection there is no evidence of direct connection, in the sense of common directors or owners, between any of these companies. Mr Singh denies knowing anything about the existence of any such connection. No evidence was produced to us to demonstrate the existence of such a relationship. DJJ may well contain material relevant to this issue, but Mr Harris withdrew his application to introduce that decision, and we have put to one side anything we might have gleaned in the course of listening to Mr Harris’ application or in his closing submissions when he (wrongly in our view) sought to reintroduce DJJ. We do not think that we can deduce such a connection from this supposed family relationship not being expressly challenged either in Mr Singh’s original witness statement or in Officer Hammouda’s cross-examination. We have already dealt with the meeting note where Mr Singh is said to have misgendered Davinder Laxman and thus revealed his knowledge of the family relationship. There is insufficient evidence for us to find such a familial relationship, and so we proceed on the basis that no such relationship exists.

[221]It is also the case that the rates charged to HCL for labour services are on their face the type of rate one might expect. That, however, as Mr Harris said, is a relatively neutral factor. If there is tax fraud in a chain, the benefits of that fraud can be shared, and indeed might be expected to be shared, in other, more concealed ways. In that connection, we do accept that no evidence was produced which suggested, still less proved, that this had taken place.

[222]We have Mr. Singh’s very clear denial of involvement in or knowledge of VAT fraud in this case. As we have already indicated, however, we do not find Mr Singh to be an entirely satisfactory witness. Put bluntly, we do not believe him when he says that he did not know anything about VAT fraud in the construction industry before 2017. That is a wholly improbable statement. HCL and its advisers were provided with HMRC’s labour provider guidance at least twice in 2012 and that guidance was discussed in a meeting in August 2012 at which Mr Singh was present. On his own evidence, he was very cautious and thorough when he set up HCL. Against that background, it simply beggars belief that, having come very close to having input tax recovery denied because of the presence of fraud in VAT supply chains on two occasions in such a short space of time, he would not investigate what had gone on so that he could take care to try to avoid it happening again. We consider that Mr Singh knew about VAT fraud in the construction industry at least from the summer of 2012 and was not telling the truth when he said he did not.

[223]Of course, it does not follow from Mr Singh telling us that he was unaware of VAT fraud in this period that everything else he says to us is equally untrue, but it does mean that we should approach his evidence with care.

[224]In any event, we have not reached our conclusion on this point simply by disbelieving Mr Singh’s denials of knowing about VAT fraud in the construction industry until 2017; the reason why we have concluded that there was an overall plan to defraud HMRC and that HCL was a knowing party to it is simply the level of tax fraud or fiscal irregularity surrounding HCL.

[225]If we look at the key relevant events which we summarised in paragraph [197], we start with HCL receiving a veto letter, warning it about supplies made to it by Call Premier. That immediately causes HCL to stop using Call Premier and start using Temp Force. HCL was using Temp Force in time to receive an invoice at the end of July 2012, and it was only at the beginning of that month that it received the veto letter about Call Premier. It is, we consider, a strange and unsettling fact the HCL moved very quickly from one VAT defaulter to another.

[226]By the middle of 2013 HCL has settled into using First Choice as its sole labour supplier. As we noted in paragraph [197], there was no evidence before was that would suggest that First Choice was engaging in any form of VAT impropriety. However, the reason why HCL stopped using First Choice as its sole supplier of labour was that First Choice went into insolvent liquidation. This was not discussed in the hearing, and it is unfortunate that we did not have more evidence around what happened with First Choice, but the letter Mr Brown provided to us makes it very clear that First Choice went into liquidation owing money to HMRC, and Companies House filings indicate that First Choice‘s debt to HMRC was very substantial and was its only liability of substance. In the absence of evidence on this point, it would be wrong for us to assume that First Choice had engaged in fraudulent or dishonest conduct which caused that debt to arise, but clearly something must have gone seriously wrong with First Choice‘s tax compliance arrangements for an unsatisfied tax debt of that level to be run up in a company which had virtually no other (non-tax) debts.

[227]First Choice‘s demise caused HCL to start to use WTV. We have already explained why we consider that WTV and two of its substantial suppliers (the only two where the question of fraud was challenged) were all fraudulent enterprises.

[228]HCL’s only other significant supplier in 2015 was UP, and we have seen UP’s serious VAT defaults.

[229]Again, it is noteworthy and unsettling that HCL moved on to use as a sole provider of labour a company (First Choice) which subsequently went insolvent owing a large debt to HMRC alone and then moved on to use a VAT defaulter (WTV) and another company (UP) which went insolvent seemingly owing HMRC an enormous amount of money.

[230]In September 2017 HMRC sent HCL a tax loss letter in relation to WTV. Not surprisingly, this caused HCL to stop using WTV and start to use D1 instead. The email traffic produced in evidence suggests the D1 first approached HCL in the middle of November 2017, which gave HCL time to carry out due diligence on D1 in time to start using D1 in January 2018. Although D1 approached HCL before WTV was deregistered, something which did not take place until the middle of January 2018, HCL had already received a tax loss letter concerning WTV and so it would be abundantly clear to HCL by that time that carrying on using WTV was a high-risk activity.

[231]D1 itself was under investigation by HMRC. It was subsequently deregistered on the basis that its VAT registration was being used for fraud, and the fraudulent nature of D1’s activities was not challenged. Again, it is a strange and unsettling fact the HCL moved very quickly from one VAT defaulter to another.

[232]We simply cannot accept that it is no more than a purely unfortunate coincidence that four of HCL’s principal suppliers in the period between summer 2012 and January 2018 were compulsorily deregistered and the other two (UP and First Choice) had far from straightforward tax affairs and went into insolvent liquidation apparently owing HMRC over £18m between them. In addition, it is admitted, or we have specifically found, that many companies (including Cross Line and East Focus) in the supply chains through WTV and D1 (including WTV and D1 themselves) were actively dishonest. The way that VAT fraud and tax default pervaded the supply chains leading to HCL is just not something that can be ignored.

[233]This is very much a case where the truth of the matter, and the proper analysis of each transaction and HCL’s position in relation to each transaction, can only properly be discerned by standing back and looking at the totality and overall context. Once each transaction has been set into the context of everything that has gone on since Summer 2012, the only realistic conclusion is that there was an overall scheme to defraud HMRC and that Mr Singh/HCL knew perfectly well what was going on.

[234]Our conclusion at [233] is sufficient to dispose of the Kittel Appeal. However, HMRC pleaded an alternative case (that HCL should have known of the existence of VAT fraud in the supply chain), and we turn to consider that.

[235]When we asked the parties for their further written submissions, we focused in part on aspects of the “should have known” test. Firstly, we asked the parties about the significance of what HMRC had told HCL. A significant amount of the evidence and discussion before us focused on what HMRC had, or had not, drawn to HCL’s attention about VAT fraud in the construction industry. We asked the parties for their submissions on the extent to which this might circumscribe what HCL should have known.

[236]We also asked the parties for their views on the “only reasonable explanation test” and the extent to which, if at all, it cuts down what more might describe as the straightforward Kittel test.

[237]We also drew the parties’ attention to the comments in the decision in Matrix-SCM Limited v London Borough of Newham,

[2011] EWHC 2414 (Ch)

, which have been discussed recently (albeit in a very different context) by the FtT in Roseline Logistics Ltd v HMRC,

[2025] UKFTT 427 (TC)

. In Matrix-SCM, the court had been considering the implications of a decision by the ECJ that a limitation period of 3 months provided for in the national legislation should run from “the date on which the claimant knew or ought to have known of the infringement of the public procurement rules”.

The judge held (at [13] – the emphasis below is ours) that:

“[W]here it cannot be said that a claimant knew of facts that apparently clearly indicated an infringement, the question will become whether the claimant should have known of such facts. A claimant will have constructive knowledge if, upon reasonable enquiries, it should have discovered the alleged infringement.”

[238]As far as HMRC’s information provision is concerned, HMRC say that the straightforward Kittel test should not be over refined. For his part, Mr. Brown accepts that, if HMRC had specifically informed the taxpayer about VAT fraud in their industry, then that would be a significant, but not necessarily the only, factor in the decision as to whether a trader knew or should have known of that fraud. If HMRC cannot prove that they have drawn VAT fraud to a trader’s attention, then that must be a consideration when concluding on knowledge and means of knowledge.

[239]On this question (what a taxpayer should have known and the relevance to that question of what information HMRC had provided) we do not detect much (if any) ground between Mr Brown and Mr Harris. A trader “should have known” of the presence of VAT fraud if, upon reasonable enquiries, it should have discovered the alleged infringement. The relevance of HMRC alerting a trader to the possibility of fraud is that the more precise and focused the warnings of the possibility of fraud a trader has received from HMRC, the harder it will be for a trader to justify any failure to make enquiries which might have led it to the fraud which took place. It is also important to remember that HMRC need to show that the trader should have known of VAT fraud in this case; the fact that it should have known of the possibility of VAT fraud in the abstract is not sufficient.

[240]On the relationship between the “only reasonable explanation” test and the “straightforward” Kittel test, Mr Brown points to paragraphs [60] and [64] of Moses LJ’s judgment in Mobilx, and says that the Court of Appeal was very clear that it is only a specific finding of VAT fraud within the transaction chain that permits denial of input tax. He says that the same point is made in paragraphs [56] and [61] of Kittel itself. If, he says, there are several tax frauds afoot, it is still necessary for HMRC specifically to prove that VAT fraud was included. For HMRC, Mr Harris says that paragraphs [13]-[20] of Promeridian accurately set out the relationship between the “only reasonable explanation” test and the straightforward Kittel test. Applying this approach, he says, it would be sufficient for HMRC to show that HCL should have known that fraud/wrongdoing (which would likely include VAT fraud) was the only reasonable explanation.

[241]The significance of Moses LJ’s use of the phrase “only reasonable explanation” has been the subject of quite some judicial comment. Proudman J. sitting in the Upper Tribunal in GSM Export (UK) Ltd and another v HMRC,

[2014] UKUT 0529 (TCC)

(“GSM”), expressed the view that Mobilx does not purport to change the test in Kittel:

“19. However, Mobilx does not purport to change the test in Kittel’s case. The requirement as to the taxpayer’s state of mind squarely remains ‘knew or should have known’. The reference to ‘the only reasonable explanation’ is merely a way in which HMRC can demonstrate the extent of the taxpayers’ knowledge, that is to say, that he knew, or should have known, that the transaction was connected with fraud, as opposed to merely knowingly running some sort of risk that there might be such a connection.”

[242]Similarly, in AC (Wholesale) Ltd v HMRC

[2017] UKUT 191 (TCC)

(“AC Wholesale”), the Upper Tribunal considered Mobilx and concluded that the “only reasonable explanation” test is simply one way of showing that a person should have known that transactions were connected to fraud. On this, the Upper Tribunal went on to state that:

“29. It is, to us, inconceivable that Moses LJ’s example of an application of part of that test, the ‘no other reasonable explanation’, would lead to the test becoming more complicated and more difficult to apply in practice. That, in our view, would be the consequence of applying the interpretation urged upon us by Mr Brown [Counsel for taxpayer]. In effect, HMRC would be required to devote time and resources to considering what possible reasonable explanations, other than a connection with fraud, might be put forward by an appellant and then adduce evidence and argument to counter them even where the appellant has not sought to rely on such explanations. That would be an unreasonable and unjustified evidential burden on HMRC. Accordingly, we do not consider that HMRC are required to eliminate all possible reasonable explanations other than fraud before the FTT is entitled to conclude that the appellant should have known that the transactions were connected to fraud. 30. Of course, we accept (as, we understand, does HMRC) that where the appellant asserts that there is an explanation (or several explanations) for the circumstances of a transaction other than a connection with fraud then it may be necessary for HMRC to show that the only reasonable explanation was fraud. As is clear from Davis & Dann, the FTT’s task in such a case is to have regard to all the circumstances, both individually and cumulatively, and then decide whether HMRC have proved that the appellant should have known of the connection with fraud. In assessing the overall picture, the FTT may consider whether the only reasonable conclusion was that the purchases were connected with fraud. Whether the circumstances of the transactions can reasonably be regarded as having an explanation other than a connection with fraud or the existence of such a connection is the only reasonable explanation is a question of fact and evaluation that must be decided on the evidence in the particular case. It does not make the elimination of all possible explanations the test which remains, simply, did the person claiming the right to deduct input tax know that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT or should he have known of such a connection.”

[243]In Promeridian the FtT quoted with approval the extracts from GSM and AC Wholesale set out above, although (probably wisely) without adding any further comment of their own.

[244]If, as the Upper Tribunal pointed out in AC Wholesale, HMRC are required to prove that a taxpayer should have known that VAT fraud was the only reasonable explanation, the test could prove very difficult (if not impossible) to apply. For example, as we have seen here, HMRC’s labour providers guidance identifies a groaning smorgasbord of types of fraud or wrongdoing (including VAT, but also other tax frauds and types of wrongdoing that are nothing to do with tax at all) that might be encountered in a labour supply chain. To say that a taxpayer “should have known” of the existence of VAT fraud only if all other types of fraud or wrongdoing could be discounted so that VAT fraud was the only reasonable explanation, seems to us to impose an unrealistic, potentially impossible, burden on HMRC.

[245]Moses LJ cannot possibly have intended a taxpayer to be able to say that it should not have known of the presence of VAT fraud if it is the case that they should have known that fraud/wrongdoing was the only reasonable explanation, but one or more other frauds or instances of wrongdoing were (or could be) being perpetrated in parallel, so that VAT fraud was a (but not the only) fraudulent explanation. It seems clear to us that, in the passage in his judgment beginning “If a trader should have known …”, Moses LJ was simply giving an example of the circumstances in which a trader should have known of the presence of VAT fraud, and that, if a taxpayer should have known that fraud or similar wrongdoing (which could well include VAT fraud) was a reasonable explanation, that would be sufficient to conclude that they should have known that VAT fraud was involved in the supply chain.

[246]Against that background, we turn to consider whether HCL (which for these purposes means Mr Singh) should have known that VAT fraud was to be found in the relevant supply chains. We are, of course, deciding this question on the assumption that HCL was not complicit in and did not know of the presence of this VAT fraud.

[247]Several factors seem to us to be important here. Firstly, in the summer of 2012 HCL received two veto letters from HMRC and was sent, or provided with a link to, HMRC’s labour providers guidance note. Mr Singh has no recollection of reading that note, but HMRC’s note of the meeting in August 2012 records that the due diligence note was discussed in a meeting he attended, and a further copy was provided. If, by that time, Mr Singh had not read HMRC’s guidance note, he certainly should have done, and he should have paid attention to the points raised in that note and discussed at the meeting where he was present.

[248]Secondly, in addition to the clear warnings in the guidance note, the risk of tax and VAT fraud should should have been present to Mr Singh’s mind because of the two occasions, very close together in 2012, when HCL had been warned about using particular suppliers and forced to change supplier.

[249]At the time HCL moved over to using WTV, its previous supplier (First Choice) had gone into liquidation owing HMRC a substantial amount of money and this is what caused the change of supplier. Mr Singh/HCL must have known of this, as HCL’s accountants were in correspondence with HMRC about whether HCL had correctly operated CIS on payments to First Choice and the possibility of HCL being liable had clearly been raised. Clearly, direct tax default on the part of First Choice is not evidence of VAT default, on its or anyone else’s part, but it is another occasion which should have made Mr Singh acutely aware of the risk of tax fraud in labour supply chains, even where he was dealing with people he trusted and on whom he had carried out what he thought was adequate due diligence.

[250]The guidance which was provided in 2012 discussed two types of due diligence check. The first is what one might describe as formalistic due diligence, checking VAT registration numbers, CIS status, looking at directors’ passports and collecting a file of information on a particular supplier. The second type of due diligence recommended in the case of labour supply chains is ongoing and interventionist; it involves examining the status of workers and their relationship with the person who employs them. Traders are very clearly told to find out whether their supplier employs the people they are supplying.

[251]If HCL had carried out any of these checks, it would have discovered very quickly that WTV and D1 did not employ a workforce and could not possibly be providing labour otherwise than by obtaining it from someone else. That would be a clear breach of the contract WTV and D1 had entered. So, if HCL had carried out these reasonable, prudent checks (as recommended by HMRC), it would have discovered that it was dealing with a counterparty which had been dishonest in its dealings with HCL (because the counterparty promised not to subcontract to another party) and that would have put it on enquiry. That would have led HCL through the labour supply chain, and in due course, as it followed the thread to the centre of the labyrinth and uncovered what was going on, it would have found out that its supply chain was infected with VAT fraud.

[252]The only reason HCL did not know about VAT fraud in its supply chain is that it failed to carry out any of the ongoing due diligence checks recommended by HMRC in the guidance note HCL was given, and which was discussed with HCL’s advisers and Mr Singh in the summer of 2012. Mr Singh regularly said that he was unaware of the length of the supply chains here, but that is completely irrelevant. Some basic checks on the (non-existent) workforce of HCL’s immediate suppliers (WTV and D1) is all that was needed to tell Mr Singh that all was not well.

[253]Even if Mr Singh had never seen that guidance note and even if he was also unaware of VAT fraud in the construction industry before the Autumn of 2017, we consider that the need to check the integrity of HCL’s suppliers should still have been readily apparent to Mr Singh (not only because of the number of times HCL had nearly had its fingers burned by VAT and other tax wrongdoing, but also because the need to be satisfied about the integrity of its counterparties and supply chain should be blindingly obvious to any business) and the checks he failed to carry out were reasonable, prudent checks which would have led him to the truth.

[254]We appreciate that HCL had collected a significant amount of formalistic material on WTV and D1 and that those companies had CIS gross payment status. As the tribunal noted in Promeridian, CIS gross payment status can give a degree of comfort to a counterparty. We know from Officer Hammouda’s evidence that this comfort, at least at the time we are concerned with, was rather illusory, but we accept that a person such as HCL should be able to take a degree of comfort from the fact that a business has gross payment status, is VAT registered and has a direct tax UTR. However, evidence of CIS gross payment status would just be one more piece of formalistic due diligence and it would not do away with the need for ongoing physical due diligence.

[255]For all these reasons our answer to the question whether, if it had carried out reasonable enquiries, HCL would have known that the transactions on which its disputed input tax claims were based were connected with VAT fraud is “Yes”, and it follows from this that HCL should have known that.

[256]Before we leave the Kittel Appeal, we should address Mr Singh’s repeated criticisms of HMRC for not alerting him/HCL to the presence of fraud in the relevant supply chains or giving clearer guidance on the types of due diligence check a trader should carry out. It is inevitably the case that HMRC will generally only uncover fiscal wrongdoing after it has taken place. As we have seen, HMRC issued “veto letters” to HCL (and other companies in the chains) once they had established fraudulent behaviour on the part of a trader, but they cannot be criticised for not taken steps to counter fraudulent activity they have not uncovered. The labour provider guidance note is very clear that HMRC cannot give comprehensive guidance addressing the position of every business.

[257]Traders do need to think about their supply chains. If they do not do that and do not take reasonable steps to check on the integrity of their supply chains, they run the risk, if those supply chains are infected with VAT fraud, of losing the right to recover some or all of their input tax. That risk should encourage traders to take reasonable precautions to avoid being caught up in such situations (so reducing the risk of VAT loss occurring) and it is right, if there is VAT fraud in a supply chain which creates a VAT loss, that the cost of that fraud should be borne by a trader which failed to take such reasonable steps (not just any trader in the supply chain) rather than the exchequer.

[258]HMRC might fairly be criticised here for giving out CIS gross payment status to businesses which were not entitled to it. Officer Hammouda readily accepted that failing, but it has no impact on our decision; see [254].

The VAT Invoice Appeal: The Law

[259]Regulation 29 of The Value Added Tax Regulations 1995 (“the VAT Regulations”) requires a person claiming to deduct input tax in respect of a supply from another taxable person to hold a VAT invoice or such other evidence as HMRC direct. It provides:

“(2) At the time of claiming deduction of input tax in accordance with paragraph (1) above, a person shall, if the claim is in respect of— (a) a supply from another taxable person, hold the document which is required to be provided under regulation 13;” … provided that where the Commissioners so direct, either generally or in relation to particular cases or classes of cases, a claimant shall hold or provide such other... evidence of the charge to VAT as the Commissioners may direct.”

[260]Regulation 13 of the VAT Regulations imposes a general requirement on a registered person who makes a taxable supply in the UK to a taxable person to provide that person with a VAT invoice.

[261]Regulation 14 of the VAT Regulations sets out the information a VAT invoice is required to contain. It provides: (1) Subject to paragraph (2) below and regulation 16 and save as the Commissioners may otherwise allow, a registered person providing a VAT invoice in accordance with regulation 13 shall state thereon the following particulars— (a) a sequential number based on one or more series which uniquely identifies the document, (b) the time of the supply, (c) the date of the issue of the document, (d) the name, address and registration number of the supplier, (e) the name and address of the person to whom the goods or services are supplied, (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (g) a description sufficient to identify the goods or services supplied, (h) for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency, (i) the gross total amount payable, excluding VAT, expressed in any currency, (j) the rate of any cash discount offered, (k) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (l) the total amount of VAT chargeable, expressed in sterling. (m) the unit price. …”

[262]In Deadoc Construction Ltd v HMRC,

[2015] UKFTT 0433 (TC)

, the FtT adopted (at [52]) a two-stage approach to determining whether a person was entitled to deduct input tax where it was disputed whether an invoice met the requirements in regulation 14, as follows:

“(1) Does a given disputed invoice satisfy reg 14? If we find that it does then we allow the appeal in respect of that particular invoice. (2) If not, was HMRC’s decision to refuse to exercise their discretion under reg 29 a reasonable one?”

[263]In relation to the second stage of the process, the FtT derived the following approach (set out at [54]) from the caselaw:

“(1) The jurisdiction of the Tribunal in this matter is only supervisory. (2) The Tribunal cannot substitute its own discretion for that of HMRC. (3) The question for the Tribunal is whether HMRC’s decision was unreasonable in the sense that no reasonable panel of Commissioners properly directing themselves could reasonably reach that decision. (4) To enable the Tribunal to interfere with HMRC’s decision it would have to be shown that HMRC took into account some irrelevant matter or had disregarded something to which they should have given weight. (5) In exercising its supervisory jurisdiction the Tribunal must limit itself to considering facts and matters which existed at the time the challenged decision of HMRC was taken. Facts and matters which arise after that time cannot in law vitiate an exercise of discretion which was reasonable and lawful at the time that it was effected. (6) The burden of proof lies on an appellant to satisfy the Tribunal that the decision of HMRC was unreasonable.”

[264]The FtT described that approach as “uncontroversial”, and that is the position here too. It is common ground that we should approach the VAT Invoice Appeal in the two stages explained in Deadoc.

The VAT Invoice Appeal: The Evidence

[265]In her evidence about UP, Officer Hammouda said that she had no direct contact with HCL about the invoices issued by UP before she denied the company credit for input tax on those invoices. Her contact had solely been with HCL’s accountants.

[266]Officer Hammouda said that she waited until the very last moment to allow HCL time to produce the required information, but had to raise the assessment on the 6 February 2019 before it went out of time.

[267]Officer Hammouda outlined her dealings with HCL’s accountants. This summary is based on a timeline prepared by HCL but which Officer Hammouda agrees with. Her dealings were as follows:(1) The first discussion she had with HCL’s agent was on 18 October 2017 during her first visit to the HCL’s accountants’ office in Wembley. She advised that some invoices produced for both purchases and sales weren’t good enough. She explained that the invoices need to say what they are for and have more of an explanation. She advised them to go on-line and see what needed to be included on an invoice.

(2) On 16 November 2017 she telephoned the accountants to chase up the records. They said that they had found evidence of a work force and said they needed to go through the time sheets. Officer Hammouda said that she would take that reply as being that they would get them to her soon.

(3) She telephoned again on 19 December 2017 as the records still had not been received and the accountants said that they would send them in the new year, which they did by 7 February 2018.

(4) On 28 September 2018 Officer Hammouda emailed the accountants commenting “I notice in the records that there are a lot of invoices for a company called [UP]. Please could you explain what these are for and who they are?” The accountants replied saying they had asked HCL about UP and would reply.

(5) On 7 November 2018 Officer Hammmouda asked the accountants for “a couple of invoices from [UP] for each period as a sample would be much appreciated”

(6) On 29 November 2018 Officer Hammouda confirmed that she had received some other information from the accountants but she still had to receive copies/samples of UP invoices. These were sent on 30 November 2018.

(7) On 22 January 2019 the UP finance manager wrote to the accountants (copying Mr Singh) referring to a meeting earlier that day following which she had spoken to UP’s accountants. She commented that “manually changing the description to suit each site on 780 invoices is a large workload, on top of my normal full-time work”. However, she went on to say:

“Our Accountant has advised a simpler route that will still be accepted by the HMRC. They have said to state “Construction work as agreed in the schedule of works for the above-named site” in the narrative on each invoice and as long as we provide a link/document (schedule of works) with the full description of work on, this will be accepted by the HMRC. This process will make the workload easier for both of us and means that we can reached the deadline the HMRC has given [HCL]. If you wish to consult with the HMRC and see if this is acceptable for all parties and once [HCL] has sent over the details for the schedule of works, I can start amending the invoices.”

The exact spur for this is not revealed in the timeline or Officer Hammouda’s comments, but the obvious inference is that HMRC asked HCL to obtain invoices which met HMRC’s requirements as documents that would support an input tax claim. (8) The hearing bundle contains copies of several emails between Mr Singh and the finance manager of UP about various points (scope of works, dates, values) to be included in revised invoices. Officer Hammouda considers these exchanges to suggest that UP appeared willing to amend the invoices to whatever HCL wanted rather than knowing what had been provided. (9) On 1 February 2019 Officer Hammouda wrote to HCL as follows:

“This letter relates to the denial of input tax for the periods 10/15, 01/16, 04/16, 07/16, 10/16, 01/17, 04/17, 07/17, 10/17, 01/18, 04/18 and 07/18 for the purchases from Up Construct Ltd (Universal). Input tax has been denied on the basis of invalid invoices. I will be denying all of the input tax for the periods 10/15, 01/16, 04/16, 07/16, 10/16, 01/17, 04/17, 07/17, 10/17, 01/18, 04/18 and 07/18 £222,246.00. … What you need to do Before we make an assessment of tax due, I would like to give you the opportunity to comment on my findings and calculations. If you would like to comment or give me any more information, please contact me by 8 February 2019. You can contact me by phone or letter. If I do not hear from you by then, I will take this to mean that you agree with my calculations. I will then make an assessment of the amount due and send you notice of that assessment.”

What you need to do (10) In her witness statement relating to the VAT Invoice Appeal Officer Hammouda explained that she rejected HCL’s input tax claim on the basis that the underlying invoices in question were invalid. Regulation 14 of the VAT Regulations requires a clear description of the goods or services that are being charged for. UP used a description of “Valuation Total” on all their invoices which does not identify the labour provided. (11) The accountants replied on 5 February referring to a conversation the day before regarding UP and asking for an extension in time to furnish the invoices. The writer said that “[UP] has provided [HCL] with revised documentation, I would like to consider the contents before forwarding this on to you.” (12) Officer Hammouda replied on 6 February to say that she could not provide any more time. However, she said that this would not prevent the accountants sending in the documents “once you are satisfied that they contain sufficient information and can be considered a valid invoice”. She concluded, “At this time I will review my assessments and make any necessary adjustments to them” (13) In the case of some (but not all) of these invoices, revised versions were produced and sent to HMRC in September 2021 following an alternative dispute resolution (“ADR”) process. These revised versions contained a narrative such as “Construction work as agreed in the schedule of works for the above-named site” with the site addressed on the face of the invoice. (14) Officer Hammouda identified a number of features of concern with the replacement invoices, including that among the amended invoices were a number of invoices not previously made available to HMRC. In addition, some contained inaccurate company registration numbers and VAT numbers and in some cases the bank account payment details had changed. More importantly, she was concerned by the length of time it took to produce them despite HCL having sent a schedule of work. The alternative invoices were also rejected as invalid under regulation 14. Some further invoices were produced to HMRC in 2023. (15) HCL requested a statutory review of Officer Hammouda’s decision. On 12 July 2019 the review conclusion letter confirmed her decision. The officer commented:

“Officer Hammouda has denied your claim to input tax due to the content of the invoices not meeting the conditions outlined in Regulation 14 of VAT Regulations 1995 – Contents of an Invoice. Regulation 14 of VAT Regulations 1995, SI 1995/2518 states that the invoices should contain a number of particulars, specifically Regulation 14(g) and (h) states: • a description sufficient to identify the goods or services supplied • for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency I have viewed the sample invoices provided by you and I am in agreement with Officer Hammouda that the description of the goods/services is not sufficient to meet the conditions as per Regulations 14, VAT Regulation 1995 and therefore the input tax claimed should be denied unless alternative evidence can be supplied to support the claim. From the information provided no alternative evidence was supplied by you Officer Hammouda was therefore, correct to deny your entitlement to recover VAT claimed as input tax in relation to the UP Construct Ltd invoices.”

What you need to do

[268]Officer Hammouda agreed with Mr Brown that, at the time she made her decision, she had not raised any issues about UP not having been paid by HCL. She asked for more information, but this was not forthcoming. In her words, at the time she denied input tax relief, “based on the information I've got in front of me it's an invalid invoice and I've got to deny it”. Mr Brown asked whether she had considered exercising her discretion to allow input tax credit without a valid VAT invoice and Officer Hammouda replied:

“I considered it but I didn't have the information that would back it up. We've got discretion but only if we've got the information behind it to prove it all. And I didn't have it. I had purely that invoice that said "valuation", which was invalid.”

[269]When Mr Singh was giving evidence, Mr Harris asked Mr Singh if he could explain why it took until 2021 to provide the information Office Hammouda asked for as long ago as 2017. Mr Singh explained that there was a timesheet behind each invoice (that just referred to “valuation”) and that explained how the total was arrived at. This took a lot of work on the part of HCL’s accountants.

[270]He went on to say that in 2021 amended invoices were provided to HMRC. After Mr Singh and his accountant spoke to UP, they amended the invoices (by putting more information in) and sent them to HCL, whose accountants reviewed them and sent them to HMRC. Mr Singh does not agree with Officer Hammouda’s suggestion that the revised invoices were effectively the result of conversations between him and UP to make them look better than they did when they were first submitted.

[271]Mr Singh could not satisfactorily explain why some invoices were submitted in 2023 that had not been sent to HMRC before.

HCL’s submissions on the VAT Invoice Appeal

[272]As far as the VAT invoices are concerned, the only deficiency in the invoices received by HCL from UP raised by HMRC was that the description of the service was not sufficient. The description was “valuation fee”. HMRC conducted an enquiry into UP’s transactions, which were supported by sales invoices bearing the same description “valuation fee”, to determine whether UP was correct in zero-rating a significant number of its supplies to customers (not including HCL). The description in the invoices was sufficient for HMRC to issue a VATassessment on the basis that the supplies had taken place and they were standard-rated (or to put it another way, UP could not prove they were correctly zero-rated).

[273]HMRC are riding two horses at the same time, in different directions. In one case the description on the invoice is sufficient for them to issue a VAT assessment on the basis the transactions did take place; in the other, the description is not sufficient to prove the transactions took place.

[274]Notice 700 The VAT Guide, provides an example of a completed VAT invoice at section 16.7. Although referring to goods (record players), one can see that the descriptions can be very general. In Deadoc (at [58]) the FtT accepted evidence that with construction groundworks contractors it was common practice for less information to be provided and considered that, where the customer approves and pays the invoice without challenge, that is some evidence that the invoice contains a sufficient identification of the services supplied.

[275]If the Tribunal finds the invoices were not valid VAT invoices, HCL submits that HMRC should have exercised their discretion to allow the claim for input tax on the basis there were invoices issued (albeit not valid VAT invoices), HCL paid UP the amounts on those invoices and HMRC did not seek to allege that HCL did not make onward supplies itself. The denial was therefore unreasonable.

[276]The decision by Officer Hammouda was “rushed” as she was concerned that VAT periods were going out of time. The Officer had asked for further information but took the decision before she received any. She was solely concerned whether an invoice was a valid VAT invoice and did not consider any other factors. The Officer did subsequently say that she considered exercising her discretion, but this was on the basis there was no further information coming and that she “…had purely that invoice that said “valuation”, which was invalid”. She therefore did not consider other evidence in the light of requested information not being forthcoming. That on its own is unreasonable.

[277]In any event the other factors that should have been considered were:(1) Despite not being in the Officer’s view valid VAT invoices, they were nevertheless correctly raised invoices and therefore evidence of a supply;

(2) The invoices were supported by workers’ timesheets;

(3) The invoices had been paid by HCL, or at least HMRC did not assert that HCL had not made payments to UP;

(4) HCL never contacted UP to question it was being invoiced for supplies it had never received; and

(5) Enquiries with UP by HMRC had not identified any transaction that had not occurred.

HMRC’s submissions on the VAT Invoice Appeal

[278]On the question of the UP invoices, Mr Harris says that with the information that Officer Hammouda had before her at the time of the original decision, the information provided on the relevant invoices was so lacking in description of the goods or services that the invoices were invalid. Furthermore, the invoices were invalid in such a manner as not to render unreasonable Officer Hammouda’s failure to exercise her discretion to allow them. The decision of Officer Hammouda to refuse input tax on the basis of invalid UP invoices was correct and it cannot be said that no reasonable Officer could have taken such a decision. There was an entirely proper basis to challenge the amount of detail provided in the original invoices, and the delay and manner in which the amended invoices were provided reasonably did not allay her concerns.

The VAT Invoice Appeal: Discussion

[279]In Deadoc Construction Limited v HMRC,

[2015] UKFTT 0433 (TC)

, the FtT dealt with the same issues that confront us here. In relation to regulation 14(g) (the requirement that a tax invoice contains “a description sufficient to identify the goods or services supplied”), the FtT had this to say:

“[58] How much detail must an invoice contain for it to satisfy reg 14 (g) & (h)? Without attempting to be definitive, our view is that it depends on the matters being invoiced. In relation to invoices for supplies of services, one example (one that was cited to us in evidence and in argument) is that of a professional firm (say, accountants) whose fee notes simply use a stock phrase such as “To professional services rendered in the period 1 March to 31 March 2015”

. That, it seems to us, must be adequate for the purposes of reg 14 (g) & (h). The services supplied can be identified (the professional services of a firm of accountants), as can their extent (those rendered in the month of March). Turning to invoicing of supplies of goods, one would, it seems to us, normally expect to see a narrative description of the goods that the customer could check and approve for payment – that is what reg 14 (g) & (h) requires: a description to identify the goods and give the quantity of the goods. Often the goods invoice will recite the specification from the customer’s purchase order (or if only part of the order is being satisfied, such part of it as relates to the particular goods being supplied).”

[280]In the same paragraph they accepted that payment of an invoice without challenge is some evidence of sufficient identification, but did not consider that payment was conclusive as “Part of the purpose of reg 14 is to ensure that invoices contain sufficient information to enable an independent observer (typically HMRC) to be satisfied as to the identification and quantification of the goods and services supplied.”

[281]We do not consider that an invoice which simply refers to “valuation total” comes anywhere near providing sufficient information to enable an independent observer to be satisfied as to the identification and quantification of the services supplied. We do not learn (either from the face of the invoice or from a document cross-referred to in the invoice) what was supplied (labour only or construction services), whether goods were supplied along with the services, where or when the services were supplied. Someone seeking to find out the nature and quantity of what was supplied would not even be able to begin to answer that question from the invoice or any other document it referred to, let alone reach a conclusion. The invoices clearly do not meet the requirement in regulation 14(g).

[282]Turning now to HMRC’s exercise (or not) of its discretion, the question for us is whether HMRC’s decision was unreasonable, in the sense that no reasonable panel of Commissioners properly directing themselves could reasonably reach that decision. To enable the Tribunal to interfere with HMRC’s decision it would have to be shown that HMRC took into account some irrelevant matter or had disregarded something to which they should have given weight. We must also limit ourselves to considering facts and matters that existed when the impugned decision was taken. We take these points from Deadoc at [54].

[283]The most obvious point to make here (which is different from what happened in Deadoc) is that Officer Hammouda did not in terms invite HCL to provide alternative/additional information by reference to HMRC’s published guidance on the exercise of its discretion in this area, nor did she (in terms) ever say that she had considered (but rejected) the exercise of HMRC’s discretion. Her letter of 1 February 2019 simply stated, “Input tax has been denied on the basis of invalid invoices”.

[284]It is important, however, to see that decision in context. She had clearly been looking at UP’s invoices for some time and in January had agreed with HCL that it would work on sourcing better, compliant invoices. Despite this, she had received nothing and the deadline for making a decision was fast approaching. Nevertheless, in her letter she told HCL (and its professional advisers) that she would be open to any comments before she raised an assessment of tax due. The accountants’ response was to say that UP had provided HCL with revised documentation and to ask for time to consider the contents before forwarding this on to HMRC. (We find this statement odd given that revised invoices were not then provided until September 2021 and then only after the ADR process, despite Officer Hammouda saying that she would be open to receiving revised invoices “once you are satisfied that they contain sufficient information and can be considered a valid invoice”. All of this, of course, took place after 1 February, so we do not take it into account.)

[285]We do not consider that the proviso to regulation 29(2) imposes a duty on HMRC in all cases where it is confronted with an input tax claim founded on a non-compliant invoice to consider of its own motion whether to exercise its discretion and make enquiries to enable it to do that. Here HCL was professionally advised, had been in a dialogue with HMRC for some time and was engaged on an agreed course of sourcing better, compliant invoices in time. Officer Hammouda had every reason to expect that HCL would do that before the looming deadline. In the absence of these invoices and with the deadline imminent, she indicated her intention to raise an assessment to protect HMRC’s position, but nevertheless invited comments and indicated a willingness to revisit the position if compliant invoices could later be produced.

[286]In the light of all these factors, Officer Hammouda’s decision is not one which no reasonable panel of Commissioners properly directing themselves could reasonably reach. Indeed, it strikes us as the only decision which could reconcile the interests of HMRC and HCL; it protected HMRC whilst being fair to HCL, despite HCL’s tardiness in producing the compliant invoices being the cause of Officer Hammouda’s predicament. Not only was the decision one which Officer Hammouda could reasonably reach, we consider that it was the best decision open to her in the circumstances.

Conclusions and Disposition

[287]For the reasons set out above we have decided that:(1) HCL knew, or should have known, that the transactions on which its disputed input tax claims in the Kittel Appeal were based were connected with a fraudulent VAT loss;

(2) The disputed invoices raised by UP did not meet the requirements of regulation 14 of the VAT Regulations and so, at the time of claiming input tax, HCL did not hold the document which is required to be provided under regulation 13 of the VAT Regulations;

(3) HMRC’s decision not to allow HCL to claim input tax despite not holding a valid VAT invoice was not a decision which no reasonable panel of Commissioners properly directing themselves could reasonably reach.

[288]The Kittel Appeal and the VAT Invoice Appeal are both dismissed.

Right to apply for permission to appeal

[289]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: 30th JUNE 2025