Zed-UK Limited & Anor v The Commissioners for HMRC [2025] UKFTT 801 (TC)

[2025] UKFTT 00801 (TC)Case No TC09567
FIRST-TIER TRIBUNAL
TAX CHAMBER
Tribunal Hearing Centre
Alexandra House
Parsonage Gardens
Venue ManchesterHearing Heard on: 11-14 February 2025Date Judgment date: 9 June 2025
Appeal references: TC/2022/02348
TC/2022/11060
TC/2023/08626
VALUE ADDED TAX - Kittel denial - Whether First Appellant actually knew that transactions were connection to fraud? - No - Whether First Appellant should have known of connection to fraud? - Yes - Appeal dismissed
PENALTY ASSESSMENT - VAT Act 1994 section 69C - Whether conditions satisfied? - Yes - Appeal of First Defendant dismissed.
PERSONAL LIABILITY NOTICE AGAINST SECOND APPELLANT - Withdrawn by HMRC
Before
TRIBUNAL JUDGE CHRISTOPHER MCNALLMRS SHAMEEM AKHTAR
Between
ZED-UK LIMITEDAppellant(a company registered in England and Wales with number 07820573)AppellantMR ZISHAN MOHAMMED ZAHOOR CHOUDRYAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondentMr Nigel Gibbon, solicitor for AppellantMr Joshua Carey of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for RespondentsDECISION
[1]The first appellant is Zed-UK Limited ("Zed"). The second appellant is its director, Mr Zishan Choudry.[2]This appeal is against the following decisions, in chronological[3]These are the transactions: Date Details Net VAT 1 3 Feb 2021 Apple airpods 80,620 16,124 2 8 Feb 2021 Apple airpods 139,000 27,800 3 4 Mar 2021 Apple airpods 94,800 18,960 4 8 Mar 2021 "Misc IT products" 492,465 98,493 5 8 Mar 2021 Apple airpods 166,370 33,274[4]A decision to make Mr Choudry personally and 100% liable for the Company Penalty under section 69D VATA 1994 (a Personal Liability Notice) was withdrawn by HMRC.

Issues to be determined

[5]It is not in dispute that there was a VAT loss; and that this loss was occasioned by fraud. Nor is it in dispute that the denied transactions were (not 'might have been') connected with this fraudulent VAT loss.[6]This means that the only disputed aspect of the Decision is whether the Appellant had the requisite knowledge or means of knowledge.[7]Therefore, the issues to be determined by the Tribunal are:(1) Whether Zed knew or should have known that its transactions with Digi were connected to fraud;(2) Whether Zed is liable for the Company Penalty.

Burden and standard of proof

[8]HMRC bears the burden of proof, albeit only to the civil standard (that is, the balance of probabilities; or, put differently, whether something is likelier than not).

The Law

[9]There is no material dispute as to the relevant law. This is well-known and can be set out in relatively short order.[10]The right of a taxable person to deduct input tax is contained within sections 24-29 of VATA 1994, reflect and transpose the corresponding European Community laws contained within Articles 167 and 168 of the VAT Directive.[11]The right to deduct input tax will be lost where a taxable person "knew or should have known" that his transaction was connected with the fraudulent evasion of VAT. This is a test that was originally laid down by the Court of

Justice of the European Communities ("CJEU") in Kittel, where the CJEU said:

"56. In the same way, 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. 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. 59. Therefore, 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'. […] 61. By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT."
[12]This is known as the "Kittel" Principle, which was elaborated on by Moses LJ sitting in the Court of Appeal in Mobilx Ltd v HMRC [2010] EWCA Civ 517; [2010] STC 1436 ("Mobilx") where he stated:
"43. A person who has no intention of undertaking an economic activity, but pretends to do so in order to make off with the tax he has received on making a supply, either by disappearing or hijacking a taxable person's VAT identity, does not meet the objective criteria which form the basis of those concepts which limit the scope of VAT and the right to deduct (see Halifax at [59] and Kittel at [53]). A taxable person who knows or should have known that the transaction which he is undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and, equally, fails to meet the objective criteria which determine the scope of the right to deduct. […] 52. If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. 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]In Mobilx the Court of Appeal warned against attempts to improve upon the principle laid down in Kittel:
"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."
[14]In relation to the phrase "the only reasonable explanation" used in Mobilx, this does not purport to change the test in Kittel:
"[... ] 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:"
GSM Export (UK) Ltd v HMRC [2014] UKUT 529 (TCC) per Proudman J at Para [19].[15]Many cases on VAT fraud are ones which call for consideration of "circumstantial" evidence. The right approach to this was set out by the Court of Appeal in Mobilx, citing Christopher Clarke J. in Red 12 Ltd v HMRC [2009] EWHC 2563; [2010] STC 589 who 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."
[16]A taxpayer does not need to know "the specific details of the fraud being perpetrated". In Fonecomp Ltd v HMRC [2015] EWCA Civ 39; [2015] STC 2254 per Arden LJ (as she then was).[17]It is dishonest for a person deliberately to shut their eyes to facts which they would prefer not to know. If he or she does so, then they are taken to have actual knowledge of the facts to which they shut their eyes. Such knowledge has sometimes been described as "Nelsonian" or "blind-eye" knowledge": see Lord Scott in Manifest Shipping Company Ltd v Uni-Polaris Shipping Company Ltd [2001] UKHL 1; [2003] 1 AC 469:
"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'."
[18]In Mobilx Moses LJ said that the surrounding circumstances can establish sufficient knowledge to treat the trader as a participant, but that 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 focusing 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."[19]In Mahagében kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Foigazgatósága (C-80/11 and C-142/11) [2012] STC 1934 the CJEU said the following with regard to due diligence:
"60. It is true that, when there are indications pointing to an infringement or fraud, a reasonable trader could, depending on the circumstances of the case, be obliged to make enquiries about another trader from whom he intends to purchase goods or services in order to ascertain the latter's trustworthiness. 61. However, the tax authority cannot, as a general rule, require the taxable person wishing to exercise the right to deduct VAT, first, to ensure that the issuer of the invoice relating to the goods and services in respect of which the exercise of that right to deduct is sought has the capacity of a taxable person, that he was in possession of the goods at issue and was in a position to supply them and that he has satisfied his obligations as regards declaration and payment of VAT, in order to be satisfied that there are no irregularities or fraud at the level of the traders operating at an earlier stage of the transaction or, second, to be in possession of documents in that regard. 62. It is, in principle, for the tax authorities to carry out the necessary inspections of taxable persons in order to detect VAT irregularities and fraud as well as to impose penalties on the taxable person who has committed those irregularities or fraud. 63. According to the case law of the court, member states are required to check taxable persons' returns, accounts and other relevant documents (see EC Commission v Italy (Case C-132/06) [2008] ECR I-5457, para 37, and Dyrektor Izby Skarbowej w Bialymstoku v Profaktor Kulesza, Frankowski, Jówiak, Orowski (Case C-188/09) [2010] ECR I-7639, para 21). 64. To that end, Directive 2006/112 imposes, in particular in art 242, an obligation on every taxable person to keep accounts in sufficient detail for VAT to be applied and its application checked by the tax authorities. In order to facilitate the performance of that task, arts 245 and 249 of that directive provide for the right of the competent authorities to access the invoices which the taxable person is obliged to store under art 244 of that directive. 65. It follows that, by imposing on taxable persons, in view of the risk that the right to deduct may be refused, the measures listed in para 61 of the present judgment, the tax authority would, contrary to those provisions, be transferring its own investigative tasks to taxable persons."
[20]The case law indicates that it is necessary to guard against over-compartmentalisation of relevant factors, and to stand back and consider the totality of the evidence.[21]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 in CCA Distribution at [91]. Accordingly, the whole can end up stronger than the individual parts.

The evidence

[22]We read witness statements from:(1) Mr Zishan Choudry (31 May 2024, and 6 February 2025)(2) Mr Julian Cook (formerly Officer Cook, but since retired) (29 February 2024)(3) Officer Elaine Emery (10 February 2025)(4) Officer Stephen Sharrock (6 December 2024) (adopting the statement of Officer Sally Sharrock, below)(5) Officer Sally Sharrock (16 February 2024)[23]We heard Mr Cook give oral evidence, and he was cross-examined by Mr Gibbon. At the time, he was a Higher Officer with HMRC's Fraud Investigation Service in Birmingham, having worked for HMRC since 1976. Subject to some qualifications set out in detail below, we accept his evidence.[24]Mr Choudry gave oral evidence, and was cross-examined in detail. The Tribunal also asked some questions. This gave us an excellent opportunity to assess the quality and cogency of his evidence.[25]Our overall impression was that Mr Choudry was an ambitious, but naive, young man. He may well have some technical IT skills, but in our view these were not matched by corresponding business skills, and especially the caution needed in dealing with persons or entities which he did not know. In our view, Mr Choudry was excited by the prospect of doing big deals for large amounts of money; but that sense of excitement obscured the need - which he knew of - to pause and reflect on the bona fides of his counterparties, and the commercial integrity of the deals.[26]Both in cross-examination, and even in re-examination, Mr Choudry struggled with some of the questions which he was being asked. At times, this appeared evasive. At other times, he simply seemed not to understand the situation which he was being asked to address, and, despite his educational accomplishments, seemed hopelessly out of his depth.[27]Indeed, this leads us to express scepticism as to whether the true governing 'business mind' of Zed was not Mr Zishan Choudry at all, but was someone else. Who that someone else was - whether his brother, or his father (both of whom were directors at the time of the denied deals, and until 14 September 2021, but neither of whom provided any witness statements), or someone else - we are simply unable to say. But the first Appellant - Zed - chose only to advance evidence from Mr Choudry (who has been its sole director since 15 September 2021) even though it is clear that his brother Zill-E-Elahi Zahoor Choudry (said to have been doing 'the buying and selling', and a co-director at the time of the denied deals) would have had useful evidence to give. Mr Choudry's oral evidence was that he and his brother were '50/50' splitting the deals which were in issue in this appeal.[28]Ultimately, we did not find Mr Choudry to be a credible witness. Even making allowances for the passage of time since the denied deals, his evidence was very patchy indeed, and unsatisfactory in much of its detail. It was a fair point that, in both cross-examination and re-examination, when presented with documents, it seemed as if it was the very first time that he was looking at them. We shall make more detailed findings as to his evidence below.

Zed

[29]Zed was incorporated on 24 October 2011 and registered for VAT with effect from 1 April 2013. Its director was Mr Choudry, the second Appellant, who had graduated in IT not long earlier, and said that he wanted to be an IT wholesaler and supplier, and was selling goods on EBay.[30]At the time, Zed's estimated turnover was £80,000: that is to say, not far in excess of the threshold for compulsory registration. It declared that it did not intend to buy goods in the EU in the following 12 months.[31]At a visit by HMRC officers in June 2013, Mr Choudry was issued with VAT Notice 726 and the leaflet "How to spot a missing trader fraud". The officers remarked that the business had not really started, and so it was difficult to draw definitive conclusions about the credibility of MTIC risk at that point; that Mr Choudry's answers about why the company would be profitable, and why customers would choose to buy stock from it, seemed to lack credibility 'as he had no real answer'; there was no 'real business plan' in place; and there did not seem to be any reason why the company would succeed against its competition. HMRC's view at the time was that, although there were MTIC risk factors, it could also 'merely signal lack of experience at running a business'. Mr Choudry was 'strongly warned' about the dangers of MTIC fraud.[32]In February 2015, HMRC undertook a 'desk-based' audit of Zed's VAT returns for 07/13 to 04/14, and discussed the trading activity with Mr Choudry by email. Zed told HMRC that it had been the victim of fraud, with a potential loss of £15,000 and USD 20,000.[33]A second HMRC visit took place in April 2016, prompted by an inquiry from the German tax authorities about sales of computer servers made to a company called Tradeo GmbH. The Appellant told HMRC that he had been trading with Tradeo since 2012, had undertaken due diligence, and had spoken to its director.[34]From this, it can be seen that Zed, in 2013 and 2016, had direct contact with HMRC about its trading activities; had been given information to allow it to identify missing trader fraud; and had been put on notice that its needed to verify the identity and commercial bona fides of its counterparties.

digi

[35]On 17 December 2020, a person identified as 'Roger Digi C' 'WhatsApp'd' Zed 'out of the blue' to introduce itself. A Know Your Client pack was submitted on 5 January 2021. Even acknowledging that the UK was in the midst of the so-called 'Christmas lockdown', rendering travel and face-to-face meetings impracticable (or even illegal), there was no bar to meetings using widely available video platforms. But no such meeting took place. Mr Choudry said that it 'didn't cross his mind' to have a video call. We reject this evidence as improvisatory and trying to make things appear more benign in hindsight than they really were.[36]The failure to have a video call was a serious failing by Zed, because, at the very least, this would have allowed Zed to check that the person it was dealing with was the person whose passport they held. As matters transpired, it cannot have been, because Mr Green's identity had been hijacked by a fraudster or fraudsters unknown, who were the real person or persons behind Digi. It is now known that the picture on the passport is not the picture of the passport holder. It can remain only a matter of speculation whether, if a video call had taken place, whether the person appearing on the screen would have been the same person as shown on the passport photograph, or would have been able to explain the discrepancy.[37]Mr Choudry told HMRC, at a meeting on 16 June 2021, that contact witn Digi 'was via email mostly'; but we have not seen any such emails. He also told HMRC that his brother had spoken to the person identifying himself as Mr Green; but we did not hear evidence from his brother.[38]We do not agree with HMRC that the presence of VAT at a rate of 5% on a utilities bill put forward by Digi - charged to what was said by Digi to be its principal place of business - should necessarily have put Zed on notice that Digi was occupying residential premises rather than commercial premises. It seems to us that this point goes too far, and requires too much knowledge of differential tax rates from the taxpayer.[39]A deal and its terms were concluded at some point over the 2020/21 holiday season. Mr Choudry could not remember the negotiation (such as it was - the only evidence being which a small spatter of WhatsApp messages three messages weeks apart) but said that his brother could have explained it. That is likely correct, because his brother was the person in WhatsApp contact with Digi. But, in reality, there is no evidence of anything approaching a meaningful negotiation. The only outcome of this process, such as it was, was a change in price of £1 per unit. That is suggestive that demand was not a driving factor behind price; but some other factor was.[40]Zed's first purchase invoice from Digi is dated 5 January 2021 (being accounted for in VAT period 01/21, is not a deal which is part of this appeal). Zed had some diligence documents dated that same day, including an incorporation certificate dated 18 February 2016, a VAT certificate dated 15 December 2020 (with an Effective Date of Registration of 1 October 2018) and a photocopy of Roger Green's passport. Digi indicated that a trade reference (only one of the two which Zed usually required) from Unicorn Shipping in West Drayton could be obtained. There is no such reference in writing, and there is no written evidence that Zed took up that reference.[41]On 7 January 2021, Zed and Unicorn Shipping Ltd were in contact with each other about a supply of goods from Digi.[42]Zed bought Apple Airpods from Digi on 3 February 2021 for £80,620 net, plus £16,124 VAT. There was no evidence of any meaningful negotiation.[43]Zed bought Apple Airpods from Digi on 8 February 2021 for £139,000 net, plus £27,800 VAT. There was no evidence of any meaningful negotiation.[44]Zed bought Apple Airpods from Digi on 4 March 2021 for £94,800 net, plus £18,960 VAT. There was no evidence of any meaningful negotiation.[45]On 5 March 2021, HMRC cancelled Digi's VAT registration, with effect from 17 February 2021. The effect of that was that HMRC would not permit input tax deduction after 17 February 2021.[46]Zed bought 'Miscellaneous IT products' and Apple Airpods from Digi in two deals on 8 March 2021. There was no evidence of any meaningful negotiation. These were for £492,465 net plus £98,493 VAT for the 'miscellaneous IT products' and £166,370 net plus £33,274 for the Apple airpods.[47]That is to say, within about two months of first dealing with Digi, which had appeared 'out of the blue' Zed undertook, in rapid sequence, a run of three orders amounting to about £753,000 with VAT of about £150,000. These were deals for six-figure sums. Digi's VAT figures for 03/21 (monthly accounting) were £838,525 inputs and £940,377 outputs. These were the highest figures for any month in the periods 06/20 to 06/21. In 05/21 and 06/21 - that is to say, after the Digi trade had stopped - Zed's VAT figures were down into the single thousands for inputs and low double digits for outputs. That shows the amount of Zed's trade which was coming from the Digi deals.[48]On 26 March 2021, HMRC wrote to Zed about Digi, informing Zed of Digi's de-registration on 17 February 2021.[49]On 8 April 2021, HMRC conducted a telephone interview with Mr Choudry, who said that he did "the accounts, finance and wholesale, pretty much run the business; my brother does the buying and selling; and my father is a silent partner".[50]On 12 April 2021, HMRC requested documents relating to the denied transactions.[51]The transactions with Digi were ostensibly conducted on an 'ex works' basis, meaning that the customer themselves transported from Digi. Zed did not see the goods.[52]Payment was being made via Currency Cloud.[53]In an email sent on 29 April 2021, Mr Choudry said that Zed had checked on Digi by speaking to the logistics company, who confirmed the identity of Digi's director, said to be one Roger Green.[54]Mr Choudry told most of the communications with Digi were done by email, but he had spoken to Mr Green once, when Mr Green phoned him.[55]On 13 May 2022, Digi was wound-up.[56]Zed showed HMRC a company check report, which was produced after the relevant transactions. It suggested that Digi's business was "wholesale of furniture, carpets and lighting equipment", and, from a first year net worth of about £105,000, was, within 3 years, turning over more than £13.5m by 2019.[57]It is not in dispute that Digi was a defaulter. It was filing nil returns (and eventually, in August 2021, was assessed to VAT of about £2.9m). It does not matter that the loss brought about by Digi is greater than those with which Zed was involved, in the sense that there is no need to 'match' or 'allocate' the tax loss. It is notable that, perhaps as early as 2019, HMRC was in possession of some information which raised the possibility that Mr Green was not in fact a director at all (namely, a complaint by the real Mr Green that he had received a Corporation Tax bill for Digi) but was someone whose identity had been stolen. It is now clear that Digi was in the control of a fraudster.[58]Companies House records, available to Zed and Mr Choudry at the relevant times, showed that Digi (company number 10011922) was incorporated in 2016 as "Vision and Enterprise Ltd"; had been threatened with being struck off in May 2017; later changed to 'Trace Payroll Solutions Ltd'; changed its name again in April 2018 to Digi. It had had a succession fo registered offices: one which appeared to be a residential address in Liverpool; then an office address in Harbour Exchange, London, then an office address in Heywood, Oldham. A Mr Roger Raymond Green was recorded as having become a person with significant control on 17 October 2018, and remained so throughout (a change on 12 October 2019 seems to have been only to change his title from Mr to Dr).[59]At the time, Mr Green was also listed in the 'Officers' section of Companies House as the sole director (this listing was expunged by Companies House on 20 April 2021, using its statutory powers, when it became clear that the real Mr Green's identity had been hijacked).[60]Digi's confirmation statement filed on 9 May 2020 recorded its primary business as "wholesale of furniture, carpets and lighting equipment". This is something which Zed should have spotted; and, having spotted, explored.[61]Its annual report for the year ended 31 August 2019, filed on 28 November 2019, showed Mr Green as its sole director, with an increase in turnover from about £9.9m in 2018 to £12.9m in 2019 (or a year-on-year increase of about 30%), with a corresponding increased, and exceptionally healthy, gross profit (from £5.2m to £6.9m). Those accounts were apparently audited. The increase in turnover does excite interest; and Zed should have been asking itself, and Digi, questions as to why Zed should suddenly have become of interest to a company ostensibly as prosperous and successful as Digi.[62]Had Digi's filing history been thoroughly considered, as it should have been, then legitimate questions arose. The answers to those were potentially relevant to its financial standing and bona fides. For example, the circumstances in which it had been threatened with striking off; why it had moved office (and city) several times; why it had run through so many directors; and why it had at one stage apparently been involved in the 'payroll solutions' business.[63]Digi's filing history, properly considered, would also have revealed its dramatic increase in turnover - from £105,450 in 2016 to £13.5m (or about 130 times more) in 2019. It was a legitimate inquiry for Zed to have asked itself and Digi how a new business with no established presence in the industry could have accomplished this; especially since it was in a similar business to Zed, which had not been able to experience such as increase in turnover.[64]It was put to Mr Choudry that he did not critically think whether Digi was a company to trade with. We agree with this characterisation. We do not think that he did. It was also put to him that the checks which were done were 'window dressing'. We agree with this characterisation. We think that the checks which were done were limited and pastiche, at best.

the buyers

[65]Zed had two overseas wholesaler customers for the products which it was buying from Digi.[66]Ourea Baltic SIA was based in Latvia. Zed's due diligence showed that it was engaged in 'non-specialised wholesale trade - wholesale of textiles', but no-one at Zed asked why it was buying electronic goods. In period 02/21, the denied transactions make up about 97% of Zed's total outputs.[67]Pantheon Distribution GmbH was based in Austria, but with a trade reference from Slovakia. Pantheon said that Zed had contacted it. In period 03/21, the denied transactions make up about 99% of Zed's total outputs.[68]Zed purchased 8532 items of stock, and, on the face of it, was able to sell every single item to Ourea or Pantheon, without any apparent implementation hazard such as losses or breakages, short orders, or wrong items being delivered. This is striking, given that Zed was selling 'ex works', so that it never saw or handled the goods, meaning that it had no opportunity to examine them.[69]Hence, Zed's situation - looked at objectively - was that Digi had appeared from nowhere; with goods to sell; that Zed had found a receptive market abroad; which sales, within weeks, accounted for almost the entirety of Zed's total outputs. Zed - looked at objectively - was suddenly, and for no obvious reason, in the middle of a large volume of trade between a willing seller and willing buyers.[70]The mere fact of back-to-back trading, in and of itself, is not determinative of knowledge of connection to fraud. But it is a relevant feature in assessing the whole 'basket of evidence' in circumstances where Zed had been expressly warned by HMRC that 'back-to-back' sales were a potential indicator of fraud and thereby called for a degree of vigilance.[71]Zed has not called any oral evidence from its buyers, and it is clear that the buyers would have had useful evidence to give, especially as to the circumstances in which they became involved with Zed; and as to their view as to the commerciality of the denied transactions. This is not met by the provision of a letter from a director. We were not given any good explanation as to why no evidence had been obtained from any such witnesses.[72]We do not consider that we need to make any adverse findings concerning the presence of at least one other wholesaler in the chain (because Digi was not an authorised distributor); which itself puts in question the overall economic rationale of the denied transactions, because it is impossible to see what value Zed was adding.

Conclusions on the Kittel decisions

[73]Arguments as to whether HMRC should have acted with more celerity in warning Zed of the dangers of trading with particular counterparties; failed to prevent the fraudulent trading of the defaulter; or failed to tell Zed that Digi was alleged to be a fraudulent defaulter, are not justiciable in this Tribunal. It is quite irrelevant to that determination for the Tribunal to consider whether HMRC could have done more to prevent fraudulent trading: see Ronald Hull Junior Ltd v HMRC [2018] UKFTT 198 (TC) at [78] (Judge Mosedale). The Tribunal's jurisdiction is simply this: it must allow the Appellant's appeal unless it is satisfied, to the appropriate standard, that the Appellant knew or ought to have known that the denied transactions were connected to fraud.[74]In our experience, cases of this kind, by their very nature - where the taxpayer says not only that it is not an active participant in the fraud, but could not reasonably have been expected to have known of connection to fraud - are often decided on evidence which is, on one view, circumstantial.[75]In this case, there is no single feature of the evidence which, in and of itself, gives a conclusive answer. Our assessment exercise therefore has to be multi-factorial. We must consider and weigh up the totality of the evidence, documentary, written and oral.[76]The first deal with Digi was loss-making for Zed. HMRC invite us to consider this as evidence of actual knowledge of connection to fraud - in effect, as either a pre-planned loss, or a testing of the waters to see how quickly, if at all, HMRC would look into it. We do consider this deal - although not one of the denied deals - to be suspicious; and we did not find Mr Choudry's evidence in relation to it convincing.[77]We are not minded to give any weight to HMRC's reliance on the use of the banking platform 'Currency Cloud' as an indicator of connection to fraud. We were told that Currency Cloud has been regulated by the FCA since 2015. The guidance placed before us about "Alternative Banking Platforms" dates from June 2013, and so was 7 years old at the time of the denied transactions. Things moved on between 2013 and 2020, and at an increasing pace of change. Given, by 2020, the prevalence of internet-only banking providers (being banking providers without a 'high street' presence at all) and providers who readily remit money across borders, it simply seems incongruous for HMRC to have advanced this argument. Mr Cook's evidence that he would not trust a bank unless he could go to its local branch is, we respectfully observe, an attitude, even by 2020, somewhat out of date.[78]Nor are we minded to give weight to HMRC's case, advanced by Mr Cook in his evidence, that a prudent trader would necessarily demand to know where its supplier had in turn obtained its goods, and that such information could be obtained through entry into a Non-Disclosure Agreement. We have not encountered this happening, even in relation to unimpeachably legitimate deals; which means to say that we are not persuaded that it is a part of ordinary commercial practice. It seems to us that this argument therefore goes too far.[79]We do have regard and give weight to the poor quality of the evidence of Mr Choudry. We have already made some general comments above about this. More particularly:(1) We still do not readily understand how he moved from importing fishing hooks and CPU thermal paste sachets, storing these in his parents' home and garage, breaking them down into smaller units and selling them online via Amazon and Ebay, to the sort of deals which are under consideration in this appeal;(2) His explanation that this had come about because he had 'drive and ambition' does not satisfactorily answer how, trading in those sorts of items from his parents' home, he came to be a participant in the wholesale market in high value goods;(3) His evidence that he became interested in building computers, even if true, does not explain wholesale buying and selling of Apple airpods;(4) There was no written business plan; hence, no apparent consideration, even in outline, of the likely potential costs, risks, and benefits of engaging in deals of this kind;(5) We reject his evidence that he did not know anything about the risk of fraud when he entered the wholesale market for high value electronic goods. This knowledge was widespread; and Mr Choudry had himself been the earlier victim of fraud;(6) We considered that the poor quality of his evidence as to how he came to be a participant in the wholesale market for high value electronic goods was in part because he was trying to pretend to us that he had been a participant in this market for longer than he actually had been; rather than a relatively recent arrival in that market.[80]His evidence was poor when it came to the details of his actual business. This throws real doubt on whether he was a person who was prepared to engage in fraud, or to turn a blind eye to it:(1) He could not satisfactorily explain how the risk necessarily attendant on high value goods being bought and sold without being seen or inspected by Zed was to be dealt with. On the face of it, Zed was entirely reliant on inspection reports from goods handlers, but did not know how those were prepared or their scope. For example, Mr Choudry did not know whether those goods handlers unpacked or unwrapped palletised items;(2) Mid-way through the hearing, Zed put an undated set of printed Terms and Conditions before us. These were not previously in evidence. Even taking these at face value, Mr Choudry could not explain, in any cogent or persuasive way, how these actually worked. There was no evidence that Zed had ever sought to rely on them, even in circumstances where they would obviously have been relevant (for example, the alleged loss by UPS of a master carton containing 60 boxes of Apple airpods being sent to Ourea in Latvia, which - contrary to its own terms - Zed said that it had ''had to refund" to the tune of £8,682);(3) Although Mr Choudry acknowledged and understood that it was important for a business to protect itself from VAT fraud, he could not explain, beyond 'doing general research into it', any details of what a trader would have done to check up about VAT fraud in the market;(4) This was despite the fact that Zed had been the victim of several frauds in 2013/2014, and had sustained financial loss, including a fraud where a company was 'cloned' by fraudsters: that is to say, a fraud materially identical to the circumstances in which Digi found itself. Mr Choudry accepted that the 2013/14 fraud put Zed 'on high alert', but could not explain how, if at all, Zed had changed or improved its procedures to stop the same happening again;(5) Mr Choudry understood that back-to-back deals were exactly one of the things which HMRC had warned him and Zed about, but this did not seem to have triggered any caution in relation to the Digi deals;(6) He could not satisfactorily explain why Zed had, in broad terms, ceased trading in December 2020. His explanation was that no-one was selling stock in December 2020. But December 2020, as the first Christmas of the Covid-19 Pandemic, was, in the United Kingdom, a particularly doleful time, given what became known as the 'cancelled Christmas'. We did not find it credible that Zed was unable to source any stock in December 2020. It was put to him, fairly, by Mr Carey, that his answer was 'completely incredible'. His answer - that he had 'nothing to say to that' - was no answer at all;(7) It was similarly incredible that, the day after telling HMRC, in early 2021, that Zed was no longer able to secure EU deals, Zed was doing a deal with a buyer in Latvia;(8) We reject Mr Choudry's evidence that the denied deals and their terms were being negotiated via Skype or email. No such evidence was placed before us. We reject Mr Choudry's evidence that no evidence of negotiation had been produced 'because no-one had asked'. This was a clear part of HMRC's case, and had been for many months before the hearing. It was entirely obvious evidence for Zed to have produced;(9) We reject Mr Choudry's professed lack of understanding that Digi's drastic escalation in turnover could be an indicator of fraud. Indeed, Mr Choudry eventually accepted that Digi's increased annual turnover - to over £13m - whilst ostensibly under the sole direction of Mr Green, should probably have raised 'a red flag'.[81]The above, taken as a whole, certainly gives rise to the real possibility that Zed's trades were being orchestrated - by somebody - to align with the availability of supplies from a fraudulent supplier, namely Digi.[82]When it came to the split between Zed's wholesale and retail sales activities - an important matter when the wholesale activities potentially raise risks of a different character and magnitude to retail activities - Mr Choudry's evidence was extremely vague. It generated the real impression that he did not really know how a business like Zed worked; nor indeed how Zed itself was operating. He could not satisfactorily explain the split between wholesale and retail sales. His evidence as to the percentage split between wholesale and retail was confused and confusing: that simply should not have been the case from a competent businessman. There was an impression that Mr Choudry was a passenger in the deals - that is to say, a largely passive observer as title to the goods and the money passed through Zed.[83]Mr Choudry could not give satisfactory evidence about Zed's pricing policy; whether generally or in relation to these particular deals. Mr Choudry was driven to accept in the course of cross-examination that, without the VAT element, the denied deals were all at a loss cumulatively. This gives rise to a strong inference that the driver of the denied deals was the incidence and recoverability of VAT. Mr Choudry could not explain why, given the presence of other parties (including any unidentified authorised distributor, from whom Digi - not itself an authorised distributor - must have been, whether directly or indirectly, obtaining the Apple airpods), all of whom would be expecting to make a profit, why Zed was not, without the incidence and recoverability of VAT, making a profit.[84]Mr Choudry was asked a key question. This was what value he and Zed were adding to these deals. This is an entirely reasonable and principled question to have asked a director giving evidence in relation to his business and these deals. Mr Choudry's response, after an extremely long pause, was that he could not answer the question. This was extremely telling. It exposed a pervasive lack of intelligible commerciality, when it came to Zed's involvement, in relation to the denied deals.[85]It was put to Mr Choudry that he was 'making a habit of ignoring VAT Notice 726' when it came to the denied deals. He emphatically denied this. We reject this evidence. The question is a fair characterisation of what was actually happening. Specifically, and in terms of VAT Notice 726 Section 6:(1) There was no real engagement with Digi's history in the trade;(2) A seller and buyer contacted Zed within a short space of time with offers to sell and buy goods of the same specification and quantity;(3) Digi offered at least one deal which carried no commercial risk for Zed, because it was not required to pay for the goods until payment had been received from the customer;(4) The margins on the deals look as if there is a consistent or predetermined profit margin - regardless of the date, quantities or specifications of the goods traded;(5) High value deals were being offered by Digi, which was a relatively newly established supplier with minimal trading history;(6) Normal commercial practices were not adopted in negotiation of prices;(7) Zed did not know - because it was not routinely checking or having checked the detail such as the IMEI numbers - whether the goods being traded were the self-same goods which had previously been supplied to it;(8) One of the inspection reports from Interken, dated 10 March 2021, relating to Nintendo Switches, said that the IMEI did not match the packaging, but Zed did nothing in response to this;(9) For the same reason, Zed did not know whether the goods were in good condition and not damaged;(10) For the same reason, Zed did not know whether the goods, which were to be exported to the EU, had UK specifications.[86]In our view, there is an adverse inference to be drawn from the failure of Mr Choudry's brother to give evidence. He was a director at the relevant time. Moreover, in circumstances where, in Mr Choudry's own oral evidence, Zed was 'in reality' him and his brother, with whom the deals in question '50/50' split, with them buying and selling alongside each other, and making decisions 'jointly', then Mr Zill Choudry would definitely have had useful evidence to give. Emails to HMRC in 2021 were signed jointly by Mr Choudry and his brother ('Zishan & Zill'). The Trading Application Form completed in relation to Ourea describes Zed's 'Owner/CEO' as 'Zishan/Zill Choudry', and describes Mr Zill Choudry as Zed's 'Authorised Purchase Manager' and 'Authorised Sales Manager'.[87]Mr Choudry's explanation that there was no witness statement from his brother because 'it wasn't asked for' is simply not credible. The best inference is that Mr Choudry's brother was not willing to give evidence to us because he was not prepared to corroborate what Mr Choudry was saying. It is also notable that Mr Zill Choudry was present in court when Mr Zishan Choudry was being cross-examined, and when points were being taken as Mr Zill Choudry's his failure to have given evidence. Even then, there was no attempt by Zed to provide a witness statement from him and/or to call him to give oral evidence.[88]Applying the guidance set out above as to the correct approach to evidence, including to circumstantial evidence, we do not consider there to be sufficient evidence - just about - that Zed actually knew of the connection to fraud.[89]However, in our view, and looked at overall, there were sufficient warning indicators to satisfy us, to the appropriate standard, that Zed should have known of the connection to fraud.[90]We reject the Company's position, set out in its Grounds of Appeal, that Zed 'was completely unaware of any such fraudulent activity'. We are satisfied that Zed ought to have been aware of such fraudulent activity.[91]Therefore, its appeal against the denial decisions is dismissed.

The company penalty

[92]Section 69C of the VAT Act 1984 provides as follows: "(1) A person (T) is liable to a penalty where—(a) T has entered into a transaction involving the making of a supply by or to T (“the transaction”), and(b) conditions A to C are satisfied. (2) Condition A is that the transaction was connected with the fraudulent evasion of VAT by another person (whether occurring before or after T entered into the transaction). (3) Condition B is that T knew or should have known that the transaction was connected with the fraudulent evasion of VAT by another person. (4) Condition C is that HMRC have issued a decision (“the denial decision”) in relation to the supply which— (a) prevents T from exercising or relying on a VAT right in relation to the supply, (b) is based on the facts which satisfy conditions A and B in relation to the transaction, and(c) applies a relevant principle of EU case law (whether or not in circumstances that are the same as the circumstances in which any relevant case was decided by the European Court of Justice). (5) In this section “VAT right” includes the right to deduct input tax, the right to apply a zero rate to international supplies and any other right connected with VAT in relation to a supply. (6) The relevant principles of EU case law for the purposes of this section are the principles established by the European Court of Justice in the following cases— (a) joined Cases C-439/04 and C-440/04 Axel Kittel v. Belgian State; Belgium v. Recolta Recycling (denial of right to deduct input tax), and (b) Case C-273/11 (b)Mecsek-Gabona Kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága (denial of right to zero rate), as developed or extended by that Court in any other cases relating to the denial or refusal of a VAT right in order to prevent abuses of the VAT system which were decided before the coming into force of section 42 of TCTA 2018 (7) The penalty payable under this section is 30% of the potential lost VAT. (8) The potential lost VAT is— (a) the additional VAT which becomes payable by T as a result of the denial decision, (b) the VAT which is not repaid to T as a result of that decision, or (c) in a case where as a result of that decision VAT is not repaid to T and additional VAT becomes payable by T, the aggregate of the VAT that is not repaid and the additional VAT. (9) Where T is liable to a penalty under this section the Commissioners may assess the amount of the penalty and notify it to T accordingly. (10) No assessment of a penalty under this section may be made more than two years after the denial decision is issued. (11) The assessment of a penalty under this section may be made immediately after the denial decision is made (and notice of the assessment may be given to T in the same document as the notice of the decision). (12) Where by reason of actions involved in making a claim to exercise or rely on a VAT right in relation to a supply T— (a) is liable to a penalty for an inaccuracy under paragraph 1 of Schedule 24 to the Finance Act 2007 for which T has been assessed (and the assessment has not been successfully appealed against by T or withdrawn), or (b) is convicted of an offence (whether under this Act or otherwise), those actions do not give rise to liability to a penalty under this section[93]The Tribunal has the power, where a person is liable to a penalty under section 69C, to reduce this penalty to such amount (including nil) as we think proper; but the Tribunal cannot take into account the sufficiency of funds available to any person for paying any VAT due or the amount of the penalty; the fact that there has been no significant loss of VAT; or the fact that the person liable to the penalty or a person acting on their behalf as acted in good faith: see VAT Act 1984 section 70(4).[94]In its Notice of Appeal against the Company Penalty, the Company contended that Conditions A and B were not satisfied. The Appellant made no submissions as to Condition C. The Company did not seek to argue that the appeal should have been reduced, or that there were any factors giving rise to mitigation.[95]Condition A is satisfied.[96]Condition B is also satisfied, for the reasons already set out above.[97]There is no challenge to Condition C.[98]The Company's appeal against the Company Penalty is also dismissed.

Right to apply for permission to appeal

[99]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: 09th JUNE 2025

order

(1) A decision issued on 10 November 2021 to deny input tax of £150,727 for three transactions between Zed and a company called Digi C Associates Ltd ('Digi') in 03/21, applying the Kittel principle;(2) A decision issued on 14 January 2022 to deny input tax of £43,924 for two transactions between Zed and Digi in 02/21, applying the Kittel principle;(3) A decision dated 6 May 2022 to issue a section 69C VAT Act 1994 (VATA 1994) penalty against Zed for £58,395 (being 30% of the input tax denied in the preceding two decisions: £13,177 plus £45,218) (the "Company Penalty").