Red Rose Payroll Ltd v The Commissioners for HMRC [2025] UKFTT 878 (TC)

[2025] UKFTT 00878 (TC)Case No TC09590
FIRST-TIER TRIBUNAL
TAX CHAMBER
Venue Sitting in ManchesterHearing Heard on: 20-25 June 2025Date Judgment date: 18 July 2025
Appeal reference: TC/2022/12045
TC/2022/12046
Keywords: Missing Trader Intra Community (“MTIC”) fraud in the temporary labour market, Whether the Appellant knew or ought to have known that the relevant transactions were connected with fraud. Held: no.Axel-Kittel v Belgium; Belgium v Recolta Recycling [2006] ECR 1-6161 and Mobilix Ltd (In Administration) v HMRC considered and applied.
Before
HHJ MALEK (SITTING AS A TRIBUNAL JUDGE)DUNCAN MCBRIDE
Between
RED ROSE PAYROLL LTDAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondentsMr David Bedenham, of counsel, instructed by Independent Tax for AppellantMr Colm Kelly, of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for RespondentsDECISION

Introduction &Grounds of Appeal

[1]In this decision when we refer to the Appellant we mean Redrose Payroll Ltd (“RRP”) and vice versa. When we refer to the Respondents we mean The Commissioners for His Majesty’s Revenue and Customs (“HMRC”), and vice versa.[2]The Appellant appeals four decisions:(1) a decision dated 20 May 2022 to de-register the Appellant as its VAT registration had been used solely or principally for fraudulent purposes (i.e. the Ablessiobasis or decision);(2) a decision dated 20 May 2022 denying the Appellant the right to deduct input tax as it knew or should have known that it was participating in transactions connected with the fraudulent evasion of VAT (i.e. the Kittelbasis or decision);(3) a VAT assessment dated 20 May 2022, assessing a total of £7,191,003 in VAT in respect of periods 05/20 to 11/21 inclusive( the “Assessment”); and(4) a penalty issued to the Appellant pursuant to section 69C, Value Added Tax Act 1994 (the “VATA”) in the amount of £2,157,300.90(the “Penalty”).

THE LAW

[3]The relevant legal framework is well established and there is no dispute between the parties in relation to the applicable law.[4]The legal basis for the right to deduct input tax is set out in Article 17 of the Sixth Council Directive and Articles 167–168 of Directive 2006/112/EC, and is implemented domestically through sections 24-26 of the VATA. These provisions establish that a taxable person is entitled to deduct input tax incurred on goods or services used for the purposes of their taxable business activities. The entitlement arises when the tax becomes chargeable and may be set against output tax due. If the input tax exceeds the output tax, the taxpayer is entitled to a repayment.[5]However, the European Court of Justice in Axel Kittel v Belgium and Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] STC 1537 (“Kittel”), established that a taxable person who knew or should have known that their purchase was connected with the fraudulent evasion of VAT must be treated as a participant in that fraud and is thereby denied the right to deduct input tax.[6]The rationale, as articulated at [57]–[58] of Kittel, is that such a person aids the fraud and becomes its accomplice, and that denying the right to deduct serves a preventative function. The ECJ confirmed at [59] and [61] that national courts must refuse the right to deduct where, having regard to objective factors, the taxable person knew or should have known of the connection to fraud.[7]This principle has been adopted in domestic law by the Court of Appeal in Mobilx Ltd (in liquidation) v HMRC [2010] EWCA Civ 517; [2010] STC 1436 (“Mobilx”).At[52], Moses LJ held that a trader who fails to deploy available means of knowledge does not meet the objective criteria for deduction. At [59], he emphasised that the test includes those who “should have known” from the surrounding circumstances that their transactions were connected with fraud. At [64], he stated that such a trader is to be treated as knowingly involved in the fraud. He further cautioned Tribunals not to focus unduly on whether a trader acted with due diligence [82]. Even if appropriate questions were asked, the trader cannot ignore the broader context if the only reasonable explanation is fraud. At [72] and [83], the Court endorsed a series of indicative questions to assess whether a trader should have known of the fraud.[8]The parties accept that the burden of proving that the Appellant knew or should have known that it’s transactions were connected with fraud is on Respondents and that the standard of proof is the balance of probabilities.

THE ISSUES

[9]In respect of the Kittel denial there was, in the end, no issue between the parties that there has been a tax loss as a result of fraudulent evasion and that the Appellant’s relevant transactions were connected with that fraud. We are, accordingly, only required to determine the following two issues:(1) whether the Appellant knew or ought to have known that the transaction chains were connected with the fraudulent evasion of VAT; and(2) whether the transaction chains were part of an orchestrated overall scheme to defraud the revenue.[10]It was common ground that the relevant input tax was incurred by Appellant on purchases that it made from Red Rose Payroll (WM) Ltd (“WM”) and that the Respondent’s decision to deny RRP this input tax was made on the Kittel basis.[11]It is accepted that the Penalty decision is parasitic on the Kittel decision. If HMRC fail to prove their Kittel case, the Penalty appeal must also be allowed. If, however, the Respondents are able to prove their Kittel case, the Tribunal must still consider whether it should reduce the Penalty pursuant to s70 VATA 1994.[12]It is also accepted that the Ablessio de-registration decision is based on the same allegations as the Kittel decision. Therefore, if the Respondents fail to prove their Kittel case, the Ablessio appeal must also be allowed. However, if the Respondents are able to prove their Kittel case, the Tribunal must still consider whether(1) the Appellant was “using its VAT registration solely or principally for abusive or fraudulent purposes” and(2) the Appellant’s de-registration is proportionate.[13]It follows then that we need, first of all, to consider the two issues set out at paragraph 9 above in relation to the Kittel decision before turning, if necessary, to any other matters.

THE EVIDENCE & FINDINGS OF FACT

[14]As is usual in these cases we had before us a voluminous amount of documentary evidence. However, thankfully, by the start of the hearing the parties were able to considerably narrow the issues by agreeing that the relevant transactions were connected with fraud. This meant that it was no longer necessary for us to hear from Officer Emery or Officer Houghton whose evidence dealt with the fraudulent evasion of VAT by WM.

The Respondents’ evidence

[15]Officer Jack Ashford was, at the relevant time, based in HMRC’s Fraud Investigation Service, specialising in labour fraud in construction and payroll company fraud. He was responsible, since March 2021, for the investigation into RRP.[16]Mr Ashford’s evidence was directed to the decision by HMRC to deregister RRP for VAT, to deny its entitlement to input tax under the Kittel principle, and to impose penalties under sections 69C and 69D of the VAT Act 1994. His statement is supported by extensive documentary exhibits and is based on both his own enquiries and the findings of his colleague, Officer Matthew Houghton, who investigated RRP’s principal supplier, WM.[17]Mr Ashford states, and it is common ground, that RRP submitted VAT returns for the periods 05/20 to 11/21, claiming input tax totalling £7,191,003. It is also not contentious that HMRC traced this entire sum to transactions connected with the fraudulent evasion of VAT. Further, it is agreed that RRP’s sole supplier during this period was WM, which was determined to be a fraudulent defaulter. Mr Ashford asserts, which is disputed, that RRP either knew or should have known of this connection.[18]At paragraph 53 of his witness statement Mr Ashford sets out the factors which, in HMRC’s view, justified the deregistration of RRP for VAT / denial of an entitlement to input tax under the Kittel principle. He was cross-examined extensively on these factors and it is fair to say that he had to make significant concessions. That should not necessarily be viewed, in these sorts of cases at least, as representing some sort of failing on the part of HMRC. We accept that some of the information, explanation and evidence that we now have before us was not necessarily available to Mr Ashford when he first made his decisions. Mr Ashford was a refreshingly honest and candid witness. He was not defensive and answered the questions put to him both fully and fairly. He is to be commended for doing so.[19]The first factor that Mr Ashford relied upon in his statement was that RRP’s business model lacked commercial sense, with RRP acting simultaneously as customer and supplier to WM. However, he accepted that after having read Mrs Walmsley’s explanation in her witness statement the model now made sense to him.[20]The second factor related to the naming of WM. The director of RRP claimed that the similarity in company names was to avoid confusion among workers. Whilst in his witness statement he considered this explanation to be implausible, he accepted, during cross examination (after having now understood the business model) that workers might be confused if they were being paid by someone other than their statutory employer, WM.[21]In relation to the third factor he accepted that when referring to VAT accounts in his statement he was referring to the internal reports provided by RRP. In those records there was reference to input tax on supplies from “Compupay Services Ltd”, a company with which RRP had no trading relationship. Whilst Mr Ashford maintained that this was a “bit odd” he accepted Mrs Walmsley’s explanation and further accepted that this did not go to showing whether the Appellant knew or ought to have known of the connection with VAT fraud.[22]Likewise, the fourth factor, (the entirety of the £7.19 million of input tax claimed by RRP being traced to fraudulent VAT evasion) was accepted by Mr Ashford as not one that would go to show whether the Appellant knew or ought to have known of the connection with fraud.[23]The fifth factor (all the payroll services being outsourced to WM) was accepted as an error on Mr Ashford’s part. The payroll services were in fact outsourced by WM to RRP and he further accepted, after having read the evidence filed on behalf of the Appellant, that RRP had a genuine commercial role.[24]The sixth factor (failure by RRP to protect itself from supply chain fraud after multiple attempts by HMRC to educate it) relied upon by Mr Ashford was abandoned by him during cross examination because he conceded that the only education that he, Mr Ashford, could be referring to could only have taken place after the relevant events.[25]In relation to the seventh factor (despite being informed both verbally and in writing that WM had been deregistered for VAT, RRP continued to trade with it until issued with a tax loss letter) Mr Ashford conceded that:(1) he had told Mrs Walmsley not to pay across any VAT to WM after the latter had been de-registered for VAT,(2) That, in fact, RRP had not paid across any VAT to WM after being asked not to, and(3) If no VAT was paid then it could not be fraudulently evaded.[26]In relation to factor eight (inadequate due diligence by RRP on WM) Mr Ashford conceded that introduction by a trusted colleague could be a form of due diligence.[27]Whilst factor nine in his witness statement made reference to the fact that RRP was both a customer of and supplier to WM (seemingly reinforcing HMRC’s view that the transactions were contrived) Mr Ashford accepted that this was a mistake on his part flowing from a failure to understand the business model.[28]The tenth factor (RRP permitted its bank account to be used for the movement of funds on behalf of a Malta-based company, Red Rose Human Resource Solutions Ltd (the “Maltese Company”), before transferring those funds to the personal account of that company’s director) was also, effectively, abandoned. This was because Mr Ashford accepted that neither the Maltese Company nor it directors had anything to do with the purchases or supplies in this case and that the reference to the Maltese Company did not help establish a connection with fraud.[29]Nevertheless Mr Ashford maintained, under cross examination, his decisions, conclusions and assessments with regards to the Appellant as set out at paragraph 2 above.

The Appellant’s evidence

[30]Mrs Janet Walmsley and Ms Katijah Shabir gave evidence on behalf of the Appellant. Ms Shabir’s evidence was not challenged and she was, therefore, not required to be tendered for cross-examination. Mrs Walmsley was cross-examined. Their evidence is summarised below.

Mrs Janet Walmsley

[31]Mrs Janet Walmsley, aged 64, is a director and 50% shareholder of RRP, having been appointed as director on 6 September 2021. Her husband, Stuart Walmsley, holds the remaining shares and was the sole director at the time of RRP’s incorporation in September 2019. Mrs Walmsley has a background in FCA and regulatory consultancy, with experience in payroll operations dating from 2016. We accept that she had, until around 9 April 2021, no knowledge of “supply chain fraud” and did not know that it was prevalent in the labour supply industry. Her evidence, which we accept, was that whilst she was aware that the “CIS” sector could be “risky” her role in regulatory compliance and consulting had not previously brought her into contact with “supply chain fraud”.[32]Mrs Walmsley stated that RRP was established as a small, family-run business, with a team she had previously managed in other payroll-related roles. She described RRP’s function as providing back-office payroll services, including processing timesheets, reconciling bank transactions, and liaising with recruitment agencies.

Charlie Vause, Ian Hamilton and WM

[33]Mrs Walmsley explained that she had met Mr Charlie Vause in around 2016 at another role and that in late August 2019 he asked her if she would be interested in a CIS business opportunity. It was at that point that she had decided, together with her husband, to incorporate RRP. Her role was to manage the resources and processes of the business as well as to carry out the compliance function. She was assisted by Ms Shabbir in the book-keeping function. Mr Vause’s role was to introduce business to RRP. The latter did not have a shareholding in RRP and nor did he act as a director in relation to it. He was not paid by RRP for the work that he carried out and the introductions that he made to it.[34]In September 2019 Mr Vause identified a business opportunity for RRP with UK Professional Services Limited (“UKPSL”). Between September 2019 and December 2019 Mrs Walmsley spoke with Jeremy Robino (who claimed to be the owner of UKPSL) several times and attended three meetings with him in London. She and her husband, Mr Walmsley, decided that they did not trust UKPSL, and they decided not to work with it. She says that she checked UKPSL on Companies House and was suspicious because Mr Robino was not a director; his two young sons were the directors; and when she questioned him he was evasive.[35]Mr Vause also contacted Ian Hamilton at IAH Services Ltd, in January 2020, on behalf of RRP, to see if he could start a business relationship between RRP and IAH Services Ltd (“IAH”). Mr Hamilton was introduced to Mrs Walmsley by telephone as a director of IAH. She did not meet him in person, but says that this was largely due to the COVID restrictions in place at the time. Mrs Walmsley says that she understood, at the time, Mr Hamilton to be a qualified accountant (albeit she accepted that she had never, either at the time or subsequently, checked by consulting a professional register or making enquiries of any professional body).[36]Mr Hamilton left a favourable impression upon Mrs Walmsley. He appeared to be very knowledgeable about payroll and a bit of a workaholic. He approached RRP with a proposal that it provide outsourced payroll bureau services to IAH, which was seeking to expand its operations but lacked the internal capacity to manage high-volume payroll processing.[37]Mrs Walmsley said that RRP was well-positioned to meet this demand, having developed a reputation for accuracy, speed, and compliance in payroll administration. She describes RRP as possessing a team with extensive experience in processing payroll for numerous recruitment agencies, utilising various software platforms and banking systems. According to Mrs Walmsley, RRP’s operational strengths included rigorous internal controls, adaptability to client-specific requirements, and a commitment to high service standards, all of which were essential to maintaining agency relationships and ensuring regulatory compliance.[38]Mrs Walmsley characterises Mr Hamilton’s proposal as a conventional commercial arrangement within the payroll industry, whereby one entity subcontracts payroll processing to another with greater operational capability. She notes that such outsourcing is commonplace and unremarkable in the sector.[39]It was agreed, she states, that Mr Hamilton and his team (including, apparently, Mr Vause now) would be responsible for client acquisition and relationship management, whilst RRP would provide the underlying payroll processing and administrative support. The financial arrangement involved RRP receiving a percentage of the gross timesheet values processed, which included an administrative fee passed on to the agencies. Mrs Walmsley explains that this fee structure was designed to incentivise agency loyalty and varied depending on the complexity of the work and the nature of the agency relationship.[40]Mrs Walmsley further states that Mr Hamilton undertook responsibility for pension arrangements and for ensuring that all workers were paid under IAH’s PAYE reference. She confirmed that this division of responsibilities was standard industry practice. She also confirms that due diligence was conducted on IAH, including a review of its incorporation documents, VAT registration, and insurance policies, all of which were found to be in order. She was not concerned at the time regarding the legitimacy of IAH or its operations.[41]Following a telephone discussion between Mrs Walmsley, Mr Hamilton and Mr Vause, WM was incorporated on 4 March 2020 by Mr Hamilton or his associates. Mrs Walmsley explains that the naming convention—closely resembling that of RRP—was deliberate, intended to avoid confusion among temporary workers who might otherwise be unsettled by discrepancies between the names appearing on their payslips, P45s, P60s, pension records, and bank statements. She states that this practice was consistent with industry norms and based on her experience and discussions with senior figures in the recruitment sector.[42]Mrs Walmsley conceded during cross-examination that Mr Hamilton was not a director or shareholder of WM and yet she accepted that he not only appeared to be in control of WM’s operations (including banking and payroll administration), but also that she thought of WM as Mr Hamilton’s company. Despite this she never met or communicated with the sole director of WM, Mr Stephen Davis – not even remotely. Whilst she said that this was not necessarily problematic in the “payroll industry” she accepted that it could be a “red flag”.[43]She further accepted that, with hindsight, the fact that Mr Vause disclosed that Mr Hamilton was doing this with other companies represented a “wider problem”. She accepted that she was not given a reason as to why Mr Hamilton was not a director of WM, but said that she had no basis for concluding that WM was not legitimate – she had done the only due diligence possible on a newly incorporated company and confirmed that Mr Hamilton was not “struck off”. She further agreed that Mr Vause had not done his own due diligence on WM.[44]Nevertheless, Mrs Walmsley did not accept that any reasonable person would have refused to go into business with WM until the issue with regards to Mr Hamilton and WM had been “bottomed out”. She argued that it was very “fluid” in the payroll industry and that businesses might have different companies and bank accounts so as to ensure, essentially, some redundancy around payments.[45]When asked if it was legitimate to conceal who is running a company Mrs Walmsley replied that she knew Mr. Hamilton was running WM and she never had any reason to contact Mr Davis. She denied that the situation was similar to when she had been introduced by Mr Vause to UKPSL. In that instance she dealt with a Mr Robino, who represented himself, she says, as the owner and director of UKPSL. However, her suspicions were aroused upon reviewing UKPSL’s records at Companies House, which revealed that Mr Robino was not listed as a director; instead, the directorships were held by his two young sons. When she questioned Mr Robino about this anomaly, he responded evasively.[46]It was agreed that six recruitment agencies, initially processed under RRP’s PAYE reference, would be transferred to WM’s PAYE. Mr Hamilton was able to offer rebates to these agencies to secure greater volumes of business—an incentive RRP could not afford. Mrs Walmsley notes that such rebates are commonplace in the payroll industry and are often decisive in agency decision-making.[47]Mr Hamilton also offered to fund the development and hosting of a website for RRP. From July 2020, RRP obtained an industry accreditation known as “Professional Passport,” which was displayed on the website and served to reassure recruitment agencies and end clients of RRP’s compliance with employment legislation. The accreditation process involved audits of RRP’s contracts, policies, payroll systems, and regulatory compliance, with follow-up reviews conducted quarterly.[48]In December 2020, Mr Hamilton requested RRP’s urgent assistance after CSP and Vital, two recruitment agencies, lost their payroll provider. RRP commenced work on 23 December 2020. Mrs Walmsley states that all commercial arrangements were agreed between Mr Hamilton, Mr Vause, and the directors of CSP and Vital, and that RRP was not involved in those negotiations. The work was complex and time-sensitive. In June 2021, Mrs Walmsley requested and secured an increase in RRP’s processing fee.[49]Mrs Walmsley describes the operational structure in detail. When new clients were introduced, responsibilities and procedures were set out in comprehensive email correspondence. Mr Vause regularly updated RRP on deadlines and procedural changes, often following up with telephone calls. Mrs Walmsley encouraged her team to engage actively in these discussions. Her own role was hands-on, involving oversight of service delivery, resource planning, and financial management.[50]Mr Hamilton and his colleague Matt, whom Mrs Walmsley believed to be employed by him, liaised directly with clients and relayed any changes in process requirements. Mr Hamilton was deeply involved in day-to-day operations, including the design of spreadsheets for holiday and AWR calculations, invoicing, bank reconciliations, and payroll queries. He appeared to exercise control over WM’s banking arrangements and was able to authorise immediate payments.[51]The only formal written communication between RRP and CSP or Vital, aside from invoicing, occurred in January 2022, when Mrs Walmsley contacted the agencies regarding unpaid VAT. As to the six agencies originally referred by Mr Vause, Mrs Walmsley states that she handled most of the communication, with some involvement from Mr Vause. Contracts were issued, though not all were returned signed.[52]Communication with The Recruitment Group (“TRG”) was initially conducted by Mr Vause and his colleagues at WM, but later transitioned to Mrs Walmsley following the appointment of a new Finance Director at TRG. No concerns were raised by TRG or the six smaller agencies during the trading period. Mrs Walmsley did not communicate with CSP or Vital, as they were considered clients of WM. She asserts that the processes were transparent and robust, with daily reconciliations and oversight by RRP’s accountants.[53]When asked, during cross-examination, why RRP had accepted payments from third party companies for services delivered to WM, Mrs Walmsley said that she knew that Mr Hamilton had other companies and it would not be unusual in the industry. Mr Hamilton always paid on time and there was never a dispute.

Accountants

[54]Mrs Walmsley further says that RRP relied on its accountants, Harold Sharp, to ensure compliance with VAT, Corporation Tax, and furlough regulations. The accountants had full access to RRP’s Xero accounting system and received quarterly bank statements. They were consulted frequently and approved all VAT returns. At no time did they raise concerns regarding RRP’s trading relationship with WM.

VAT deregistration

[55]Mrs Walmsley addressed the issue of the VAT deregistration of WM, stating that she was first informed of the deregistration by HMRC on 27 January 2022. She asserted that RRP ceased paying VAT to WM immediately upon receiving this notification and ceased trading with WM altogether following a meeting with HMRC on 11 March 2022. She denied any prior knowledge of VAT irregularities and maintained that all payments made to WM prior to 27 January 2022 were made in good faith. During cross-examination it was put to Mrs Walmsley that RRP had continued to deal with WM even when the latter had been de-registered for VAT. Mrs Walmsley explained that the payroll had to be processed and thousands of workers paid, but the accountants had been consulted and her understanding from Mr Ashford was that RRP should not pay across any VAT to WM post the notice of de-registration. She had, upon receiving notice of WM’s de-registration for VAT telephoned Mr Hamilton who had assured her that he “would sort it out”. She had further been comforted by the fact that RRP had itself been de-registered in error and then subsequently returned to the register. She had, as result, paid invoices from WM without the VAT.

Knowledge of connection with fraud

[56]Mrs Walmsley denied any suspicion that the transactions were connected with fraud. She stated that the arrangements appeared to her to be consistent with standard industry practice in outsourced payroll services and that she had no reason to doubt the legitimacy of WM’s operations. At no point, she states, was there any indication that WM was experiencing financial difficulty or acting improperly. The revelation by HMRC that WM had failed to pay VAT came as a profound shock.

Ms Katijah Shabir

[57]Ms Shabbir was, at all relevant times, the Appellant’s Finance Manager. She holds a First-Class Honours degree in Business Accounting and has worked in finance roles since 2014. She joined Wise Move Consulting in 2016 and transitioned to RRP in 2019, following its incorporation by Janet and Stuart Walmsley.[58]Ms Shabbir described her responsibilities at RRP as encompassing payroll processing, bank reconciliations, VAT returns, and the preparation of management accounts. She stated that RRP relied on the services of its external accountants, Harold Sharp (“HS”), who had full access to RRP’s Xero accounting system and were involved in reviewing transactions and advising on VAT treatment. She maintained that no concerns were raised by HS in relation to the transactions between RRP and WM.[59]Ms Shabbir confirmed that RRP’s role was limited to back-office and payroll support, and that the ultimate recipients of labour were identified by WM, not by RRP. She did not suggest that RRP had any direct contractual relationships with those recipients. She further stated that instructions regarding invoicing and service provision were received from individuals named Ian and Charlie, neither of whom, on her account, were directors of WM. She did not indicate that any verification of their authority was undertaken.[60]In relation to the VAT deregistration of WM, Ms Shabbir acknowledged that RRP continued to pay VAT on invoices issued by WM between 4 January and 26 January 2022, when formal notification of the deregistration was received. She stated that these payments were made in good faith and without knowledge of the deregistration, and that advice was sought from HS upon discovery of the issue.[61]Ms Shabbir did not give evidence of any independent due diligence undertaken by RRP into the commercial standing or VAT compliance of WM, nor did she address any prior warnings or educational efforts by HMRC directed at Mrs Walmsley.[62]Ms Shabbir concludes her evidence by saying that she had no reason to suspect that the transactions between RRP and WM were connected with fraud.

Discussion

[63]Mr Kelly, whilst maintaining the arguments set out in his skeleton argument, focussed on three key submissions in his oral closing.[64]Firstly, he submits that Mrs Walmsley is an intelligent professional with experience of FCA regulatory work and someone who was aware of the risk of fraud with CIS workers. We tend to agree. However, this does not translate into a knowledge or awareness of the risk of “supply chain” fraud. Mrs Walmsley’s evidence on oath, which was not (perhaps could not be) seriously challenged by the Respondent, was that she was not so aware. Given the absence of any evidence to the contrary and Mrs Walmsley’s maintenance of the position under cross examination, we accept this to be the true position.[65]Secondly, Mr Kelly submits that Mrs Walmsley failed to carry out proper due diligence into WM and Mr Hamilton. Mrs Walmsley had accepted that it was best practice to ascertain who both the shareholders and directors of companies were before doing business with them. If she had done so in this case, she would have found that Mr Hamilton was neither a director not a shareholder of WM and, just as had been the case with Mr Robino, this should have raised a red flag. Further, Mrs Walmsley had made no effort to contact Mr Davis and Mr Vause had not carried out any due diligence into WM or Mr Hamilton either. Again, had she asked the right questions or probed further she might have found significant red flags.[66]We do not accept Mrs Walmsley’s attempts to draw a distinction between the fact that Mr Robino had told her that he was a director (only for that not to be the case), but in the case of Mr Hamilton for him to never have told her that he was a director. The point is that in Mr Robino’s case she had tried to find out who the directors of UKPSL were. In the case of WM she did not. The question is why not? Some explanation might be found in the fact that RRP was already dealing with IAH and Mrs Walmsley had already been provided with a due diligence “pack” in relation to IAH by Mr Vause and found this to be satisfactory. This coupled with Mr Hamilton’s apparent knowledge of the sector and the fact that she was introduced by Mr Vause to him may have caused her to lower her guard. We would have been very interested to hear what Mr Vause had to say about his role in all of this; but, for reasons not given to us, he was not called as a witness (by either party).[67]Mrs Walmsley’s position is not helped by her suggestion that she knew that Mr Hamilton “had” a number of other companies and that he was not the director or shareholder in relation to any of them. To the extent that she sought to suggest that acting as “shadow” director (in particular) or as a “shadow” shareholder (which in the case of the latter would render any declaration as to the significant ownership or control of a company potentially false and/or meaningless) was “normal” in her industry, we emphatically reject such an assertion. Absent a cogent explanation, any attempt to obscure the ownership or control of a company cannot be regarded as consistent with ordinary commercial practice. Mrs Walmsley neither sought nor received any explanation from Mr Hamilton.[68]Thirdly, Mr Kelly points to the fact that the Appellant accepted numerous payments from other “Hamilton companies” in relation to services provided to WM without any proper query. We accept, of course, that contracts can be concluded by two parties and a third party (who is not a party to the contract) may discharge a financial obligation of one of the contracting parties. This can and does happen in the business world, especially where one of the contracting parties is part of a group of companies. However, this was not the case here and the Appellant made (on its own evidence) no attempt to establish any relationship between the paying entities and WM. The Appellant appeared to be concerned solely with the receipt of payment in the correct amount and within the expected timeframe, without further inquiry as to the identity or authority of the payer.[69]It seems, therefore, fairly clear to us, and we agree with the submission, that RRP failed to carry out proper due diligence on WM in two key respects. Firstly, RRP failed to properly identify who it was providing services to. Secondly, it failed to establish who it was being paid by or attempt to discover the reason behind third party payments.[70]As we have set out earlier in this decision, and for the avoidance of doubt, we reject the assertion that Mrs Walmsley had background knowledge about “supply chain” fraud in the labour industry prior to the relevant transactions.[71]We further reject, on the evidence, that HMRC had provided, prior to the relevant transactions, any meaningful education to RRP about “supply chain” fraud in the industry or around due diligence.[72]Nor do we accept that there was no commercial logic to the Appellant’s existence in the transaction chains involving the supply of labour. Mrs Walmsley’s evidence (and for that matter Mr Ashford’s concession during cross examination) was clear on the point.[73]Lastly, we reject the notion that the Appellant’s decision to continue to trade with WM after being notified of WM’s deregistration indicates that RRP knew or ought to have known that its transactions with WM were connected to fraud. The evidence shows that:(1) The letter to RRP from HMRC indicated that WM had been de-registered for VAT because HMRC suspected that WM’s transactions were connected with fraud, not that WM had committed VAT fraud.(2) RRP had itself been wrongly and mistakenly de-registered for VAT.(3) RRP had sought professional advice from its accountants on the VAT position on receipt of HMRC’s letter.(4) RRP made contact with WM and refused to pay any VAT across to WM, but agreed to pay invoices without VAT.(5) Officer Ashford had advised Mrs Walmsley not to pay any VAT to WM; not to stop trading with it.(6) RRP did not, in fact, pay across any VAT to WM after being notified of WM’s de-registration for VAT.[74]This means that the only factor indicative of knowledge or tending to show that the Appellant ought to have known that the transactions were connected with fraud is the lack of proper due diligence highlighted above. However, as this tribunal held in PTGI International Carrier Service Limited v HMRC [2022] UKFTT 20 (TC) at [61]:
“The proper question for us to ask ourselves is not “Did the Appellant carry out proper due diligence?”; but “Did the Appellant have the means at its disposal of knowing that by its purchases it is participating in transactions connected with fraudulent evasion of VAT?”
Proper due diligence might be part of the means available to the Appellant. It is not the only means and that is why Moses LJ in Moblix encouraged the courts not to unduly focus on the question of whether the Appellant has acted with due diligence.”[75]The point about due diligence and the context referred to in Moblix is that “tick box” due diligence is not enough. So, it will not be open to a trader to carry out superficial due diligence and expect that to, necessarily, be sufficient. The corollary of that is that inadequate due diligence, on its own, will not be enough to establish that the trader ought to have known but had, in effect, turned a blind eye to the connection with fraud. It may be a starting point (and often a good one), but it will rarely be all that is required. As that is all HMRC has been able to establish in this case, we have come to the inevitable conclusion that the Respondents have failed to establish the burden upon them to show that the Appellant’s transactions with WM were connected with VAT fraud or that the Appellant ought to have known that they were so connected.

Orchestrated overall scheme to defraud HMRC

[76]It also follows from what we have said above HMRC are unable to establish that the Appellant knowingly participated in an overall and orchestrated scheme to defraud the Respondents. The lack of due diligence is insufficient to establish knowledge on the balance of probabilities.

Other issues

[77]Given our findings on the Kittel decision it is unnecessary for us to go on to consider the Albesio, Assessment or Penalty decisions.

Conclusion

[78]For the reasons given we allow the appeal.

Right to apply for permission to appeal

[79]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.

Cited in 4 later judgments