A & A Contractors Midlands Limited & Anor v The Commissioners for HMRC [2026] UKFTT 1093 (TC)

[2026] UKFTT 01093 (TC)

Case No TC 09964

FIRST-TIER TRIBUNAL

TAX CHAMBER

Venue Birmingham

Hearing Heard on: 16 to 20 June 2025, 1 June 2026

Date Judgment date: 27 July 2026

Appeal reference: TC/2022/13413

TC/2023/00208

TC/2023/07894

VAT—Denial of entitlement to deduct input tax on transactions which trader knew or should have known were connected to fraudulent evasion of VAT (Kittel)—Cancellation of VAT registration (Ablessio)—Assessment to VAT when entitlement to deduct input tax is denied on such grounds—Penalty for transactions connected with VAT fraud (s 69C VATA)—HMRC decision to make director personally liable to pay penalty imposed on company (s 69D VATA)

Before

TRIBUNAL JUDGE DR CHRISTOPHER STAKER KC

TERENCE BAYLISS

Between

A & A CONTRACTORS MIDLANDS LIMITEDAppellant

KANWARVIR SINGHAppellant

THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondent

Rohan Singh, tax adviser for Appellant

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

DECISION

[1]The appeal against the decision of the Respondents dated 25 October 2022, upheld in a review conclusion letter dated 19 December 2022, to deny the entitlement of A & A Contractors Midlands Limited to deduct input tax claimed for periods 08/19 to 05/22, is allowed in part. The right to deduct input tax is to be denied only in relation to the transactions entered into by A&A after 24 June 2020.

[2]The appeal against the decision of the Respondents dated 21 July 2022, upheld in a review conclusion letter dated 13 October 2022, to deregister A & A Contractors Midlands Limited from VAT with effect from 18 July 2022, is dismissed.

[3]The appeal against the decision of the Respondents dated 25 October 2022, upheld in a review conclusion letter dated 19 December 2022, to assess A & A Contractors Midlands Limited to VAT for periods 08/19 to 05/22, is allowed in part. The amount of the assessment is reduced to correspond with the decision in paragraph 1 above.

[4]The appeal against the decision of the Respondents dated 27 October 2022, upheld in a review conclusion letter dated 19 December 2022, to issue a penalty assessment to A & A Contractors Midlands Limited pursuant to s 69C of the Value Added Tax Act 1994, is allowed in part. In calculating the penalty, the amount of the potential lost VAT is to be reduced to correspond with the decision in paragraph 1 above. The calculation of the penalty is otherwise unchanged.

[5]The appeal against the decision of the Respondents dated 10 January 2023, upheld in a review conclusion letter dated 31 March 2023, to make Kanwarvir Singh personally liable to pay all of the penalty imposed by the decision in paragraph 4 above on A & A Contractors Midlands Limited, is allowed in part. The amount of the penalty that Kanwarvir Singh is liable to pay is reduced to correspond with the decision in paragraph 4 above.

[6]If the parties are unable to agree on the amendments to the decisions under appeal required to give effect to this decision, any party is at liberty to request the Tribunal within 90 days of the date of release of this decision to determine the matter remaining in dispute.

REASONS

[1]The first Appellant, A & A Contractors Midlands Limited (“A&A”), is in the business of providing concreting work on construction sites. The second Appellant, Kanwarvir Singh (“KS”), is the sole director of A&A. At material times, A&A used its own employees to carry out some of its concreting work, and for some of its work it sub-contracted to other companies (its “suppliers”) for the supply of construction labour. All of A&A’s suppliers defaulted on their VAT obligations. The position of HMRC is that all of A&A’s suppliers engaged in the fraudulent evasion of VAT leading to a tax loss, and that each of the transactions entered into by A&A with its suppliers was connected to that tax loss. Having concluded that A&A knew or should have known at the time of each of those transactions that they were connected to the fraudulent evasion of VAT, HMRC issued(1) a decision to deny the entitlement of A&A to deduct input tax in respect of the transactions in question,

(2) a decision to cancel the VAT registration of A&A,

(3) a decision to assess A&A to the input tax that A&A had deducted in respect of those transactions,

(4) an assessment of a penalty payable by A&A under s 69C of the Value Added Tax Act 1994 (“VATA”) in consequence of the decision to deny the entitlement to deduct input tax, and

(5) a decision notice under s 69D VATA that KS is personally liable to pay 100% of the penalty imposed on A&A. A&A appeals against decisions (1)-(4) and KS appeals against decision (5).

[2]In this decision, the Tribunal finds that each of the transactions entered into by A&A with its suppliers was indeed connected to the fraudulent evasion of VAT and connected to a tax loss. However, the Tribunal finds that it has not been established on a balance of probability that the Appellant knew or should have known of this at the time that the Appellant first began transacting with its suppliers. The Tribunal finds that it was only about a year after the transactions first commenced, once the Appellant had received notification from HMRC that the Appellant’s transactions with one of its suppliers had been traced to tax losses, that A&A was obliged to make reasonable enquiries to ascertain the trustworthiness of its suppliers. That obligation extended to all of its suppliers, given the similarity of the suppliers, the supplies, and the transactions. The Tribunal finds that the Appellant thereafter continued to transact with its suppliers without undertaking such reasonable enquiries, and concludes that the Appellant should have known from that point that the further transactions entered into thereafter were connected to the fraudulent evasion of VAT.

[3]The Tribunal accordingly allows the appeal in part, finding that the quantum of decisions (1), (3), (4) and (5) should be reduced to reflect the finding that for an initial period, the Appellant could not be expected to know of the connection to the fraudulent evasion of VAT. The Tribunal dismisses the appeal against the decision to cancel the VAT registration of A&A.

Background facts

[4]The first Appellant, A & A Contractors Midlands Limited (“A&A”), was incorporated on 7 January 2019. The second Appellant, Kanwarvir Singh (“KS”), is and always has been its sole director. In this decision, references to the “Appellant” are, according to context, references to A&A or KS or both.

[5]A&A was registered for VAT with effect from 19 March 2019. It was registered with the Construction Industry Scheme (“CIS”) on 8 May 2019, and was awarded gross payment status for CIS on 19 June 2019.

[6]A&A is in the business of providing concreting work on construction sites as a sub-contractor of construction companies (the Appellant’s “customers”).

[7]At times material to this appeal, A&A had employees, and filed PAYE returns in respect of these employees. The Appellant says that some of the concreting work supplied by A&A to its customers was performed by these employees. HMRC state that the precise nature of any tasks performed by A&A’s employees is a matter outside of HMRC’s knowledge, but that no issue arises with this point.

[8]For other concreting work supplied to its customers, A&A used construction labour supplied to it by other companies (the Appellant’s “suppliers” or “sub-contractors”). A&A paid its suppliers for the work undertaken by these workers. The suppliers charged VAT on their invoices to A&A, and A&A claimed this VAT as input tax in its VAT returns. A&A also declared its payments to its suppliers in its CIS returns.

[9]In the VAT periods from 08/19 to 05/22, A&A sub-contracted to eight such suppliers for the supply of construction labour. These companies are referred to in this decision respectively as “B Ltd”, “C Ltd”, “BW Ltd”, “G Ltd”, “K Ltd”, “X Ltd”, “J Ltd” and “D Ltd”.

[10]In June 2019, A&A began sub-contracting to the first of these suppliers, B Ltd. The first invoice issued to A&A by B Ltd, dated 8 July 2019, was for work done in the week ending 16 June 2019. That invoice was included in A&A’s VAT return for 08/19.

[11]In about October 2019, A&A also began sub-contracting to C Ltd. The first invoice issued to A&A by C Ltd was dated 8 October 2019 and was included in A&A’s VAT return for 11/19.

[12]In about November 2019, A&A further began sub-contracting to BW Ltd. The first invoice issued to A&A by BW Ltd, dated 1 January 2020, is stated to be for work done in the “week ending” “Nov-Dec” 2019. That invoice was included in A&A’s VAT return for 02/20.

[13]On 18 February 2020, HMRC’s Fraud Investigation Service sent A&A a “VETO letter” in respect of a company referred to in this decision as “E Ltd”. A “VETO letter” is a notification sent by HMRC to a trader (in this case A&A) to advise that another business (in this case E Ltd) has been deregistered for VAT. This VETO letter, and all other VETO letters referred to in this decision, contained a warning that “there is no right to deduct VAT where the person making the claim either knew or should have known of a connection with fraudulent evasion of VAT”, and that HMRC have “identified increasing problems with fraud and unpaid taxes with businesses in your trade sector”, and referred to HMRC guidance entitled “Use of Labour Providers - Advice on due diligence”, to which the letter provided a hyperlink. There is no suggestion that the Appellant in fact ever traded directly with E Ltd, which was a sub-contractor of C Ltd.

[14]The Appellant thereafter ceased trading with C Ltd. The last two invoices issued to A&A by C Ltd are both dated 27 February 2020 and are for identical amounts. One was included in A&A’s VAT return for 02/20, the other in A&A’s VAT return for 05/20. C Ltd was paid a total of £455,571 by the Appellant in VAT periods 11/19 to 05/20, which included £75,928.50 of VAT which was recovered by the Appellant as input tax.

[15]In about March 2020, A&A additionally began sub-contracting to G Ltd. The first invoice issued to A&A by G Ltd, dated 27 March 2020, is stated to be for work done in the week ending 8 March 2020. That invoice was included in A&A’s VAT return for 05/20.

[16]In about May 2020, A&A began sub-contracting also to K Ltd. The first invoice issued to A&A by K Ltd, dated 14 July 2020, is stated to be for work done on 31 May 2020, 7 June 2020 and 14 July 2020. That invoice was included in A&A’s VAT return for 08/20.

[17]On 17 June 2020, HMRC sent A&A a VETO letter in respect of C Ltd.

[18]On 22 June 2020, HMRC sent A&A a “tax loss letter” in respect of C Ltd. A “tax loss letter” is a notification sent by HMRC to a trader (in this case A&A) to advise that transactions with a business with which they have traded (in this case C Ltd) have been traced to tax losses. This tax loss letter, and all other tax loss letters referred to in this decision, also contain a warning that there is no right to deduct VAT where the person making the claim either knew or should have known of a connection with fraudulent evasion of VAT, that HMRC have “identified increasing problems with fraud and unpaid taxes with businesses in your trade sector”, and that “Companies which fail to prevent representatives acting on their behalf from criminally facilitating tax evasion can be prosecuted” for offences under the Criminal Finances Act 2017. The tax loss letters also contain a hyperlink to the HMRC guidance referred to above.

[19]The Appellant last sub-contracted to BW Ltd in early August 2020. The last invoice issued to A&A by BW Ltd, is dated “START AUGUST”, but does not indicate the dates on which the relevant work was actually undertaken. That invoice was included in A&A’s VAT return for 08/20. BW Ltd was paid a total of £620,885.30 by the Appellant in VAT periods 02/20 to 08/20, which included £103,480.88 of VAT which was recovered by the Appellant as input tax.

[20]On 7 August 2020, HMRC sent A&A a tax loss letter in respect of B Ltd.

[21]On 13 August 2020, HMRC sent A&A a VETO letter in respect of BW Ltd.

[22]On 24 August 2020, HMRC sent A&A a VETO letter in respect of B Ltd.

[23]On 8 September 2020, HMRC sent A&A a tax loss letter in respect of BW Ltd.

[24]The Appellant last sub-contracted to B Ltd in about October 2020. The last invoices issued to A&A by B Ltd are dated 18 October 2020, and were included in A&A’s VAT return for 11/20. B Ltd was paid a total of £441,040.01 by the Appellant in VAT periods 08/19 to 11/20, which included £73,506.67 of VAT which was recovered by the Appellant as input tax.

[25]The Appellant last sub-contracted to K Ltd in February 2021. The last invoice issued to A&A by K Ltd, dated 1 March 2021, is stated to be for work done on dates between 31 January and 21 February 2021. That invoice was included in A&A’s VAT return for 05/21. K Ltd was paid a total of £591,192.60 by the Appellant in VAT periods 08/20 to 05/21, which included £98,532.10 of VAT which was recovered by the Appellant as input tax.

[26]The Appellant last sub-contracted to G Ltd in March and April 2021. The last invoices issued to A&A by G Ltd are dated 14 and 31 March 2021, and 7, 11 and 18 April 2021. G Ltd was paid a total of £1,166,453.55 by the Appellant in VAT periods 05/20 to 05/21, which included £169,335.25 of VAT which was recovered by the Appellant as input tax.

[27]In about April 2021, A&A began sub-contracting to X Ltd. The first invoice issued to A&A by X Ltd, which is not dated, is stated to be for work done in the weeks ending 18 and 25 April 2021. That invoice was included in A&A’s VAT return for 05/21.

[28]On 22 June 2021, HMRC sent A&A a VETO letter in respect of G Ltd.

[29]On 5 August 2021, HMRC sent A&A a VETO letter in respect of K Ltd.

[30]The Appellant last sub-contracted to X Ltd in October 2021. The last invoice issued to A&A by X Ltd, dated 22 October 2021, is stated to be for work done in the week ending 14 October 2021. That invoice was included in A&A’s VAT return for 11/21. X Ltd was paid a total of £772,718.75 by the Appellant in VAT periods 05/21 to 11/21, which included £3,000 of VAT which was recovered by the Appellant as input tax.

[31]On 30 September 2021, HMRC opened a compliance check into A&A’s VAT returns, PAYE and National Insurance contributions records and CIS records from 1 September 2020.

[32]On 15 October 2021, HMRC sent A&A an information notice under paragraph 1 of Schedule 36 to the Finance Act 2008.

[33]In about October 2021, A&A began sub-contracting also to J Ltd. The first invoice issued to A&A by J Ltd, dated 21 October 2021, is stated to be for work done in the week ending 3 October 2021. That invoice was included in A&A’s VAT return for 11/21.

[34]On 10 December 2021, HMRC sent A&A a further information notice.

[35]On 20 January 2022, HMRC sent A&A a VETO letter in respect of X Ltd.

[36]In January 2022, A&A began sub-contracting to D Ltd. The first invoice issued to A&A by D Ltd, dated 14 February 2022, is stated to be for work done in the week ending 16 January 2022. That invoice was included in A&A’s VAT return for 02/22. The last invoice issued to A&A by D Ltd, dated 12 April 2022, is stated to be for work done in the week ending 8 April 2022. That invoice was included in A&A’s VAT return for 05/22. D Ltd was paid a total of £154,253.60 by the Appellant in VAT periods 02/22 and 05/22, which included £10,992 of VAT which was recovered by the Appellant as input tax.

[37]The Appellant last sub-contracted to J Ltd in November 2021. The last invoice issued to A&A by J Ltd, dated 14 February 2022, was included in A&A’s VAT return for 02/22.

[38]On 16 March 2022, KS and his accountant, Mr Dhanjal, attended a virtual meeting with HMRC officers to discuss the Appellant’s trade.

[39]On 25 March 2022, HMRC also sent the Appellant a request to provide additional documents by 8 April 2022.

[40]On 25 March 2022, HMRC also sent A&A a VETO letter in respect of J Ltd.

[41]On 21 July 2022, HMRC issued a decision to deregister A&A for VAT, with effect from 18 July 2022, on the ground that A&A was principally or solely registered to abuse the VAT system by facilitating VAT fraud (the “deregistration decision”). This is one of the decisions that is the subject of the present appeal proceedings.

[42]On 28 July 2022, HMRC sent A&A a VETO letter in respect of D Ltd.

[43]On 13 September 2022, HMRC sent A&A a tax loss letter in respect of D Ltd.

[44]On 13 October 2022, HMRC issued a review conclusion letter, upholding the deregistration decision.

[45]On 25 October 2022, HMRC issued a decision to refuse the entitlement of A&A to the right to deduct input tax in respect of the invoices issued to it by B Ltd, C Ltd, BW Ltd, G Ltd, K Ltd, X Ltd and D Ltd, in VAT periods 08/19 to 05/22, on the ground that A&A knew or should have known that it was participating in transactions connected with fraudulent evasion of VAT (the “input tax denial decision”). This is also one of the decisions that is the subject of the present appeal proceedings.

[46]On 25 October 2022, in order to give effect to the input tax denial decision, HMRC issued a notice of VAT assessment (the “VAT assessment”). This is the third of the decisions that is the subject of the present appeal proceedings.

[47]On 27 October 2022, HMRC issued to A&A a notice of penalty assessment (the “penalty decision”) pursuant to s 69C of the Value Added Tax Act 1994 (“VATA”). This is the fourth of the decisions that is the subject of the present appeal proceedings.

[48]On 7 November 2022, the Appellant appealed to the Tribunal against the deregistration decision (appeal no. TC/2022/13413).

[49]On 19 December 2022, HMRC issued a review conclusion letter, upholding the input tax denial decision, the VAT assessment and the penalty decision.

[50]On 10 January 2023, HMRC issued a decision notice under s 69C VATA that KS is personally liable to pay 100% of the penalty imposed on A&A (the “company officer penalty decision”). This is the fifth of the decisions that is the subject of the present appeal proceedings.

[51]On 13 January 2023, the Appellant appealed to the Tribunal against the input tax denial decision, the VAT assessment and the penalty decision (appeal no. TC/2023/00208).

[52]On 31 March 2023, HMRC issued a review conclusion letter, upholding the company officer penalty decision.

[53]On 23 April 2023, KS appealed to the Tribunal against the company officer penalty decision (appeal no. TC/2022/07894).

[54]On 6 July 2022 and 10 August 2023, the Tribunal directed that appeal nos. TC/2022/13413, TC/2022/07894 and TC/2022/07894 shall proceed together and be heard together by the same Tribunal.

[55]On 21 November 2024, the Appellant filed a response to a “Fairford direction” of the Tribunal, requiring the Appellant to set out matters that the Appellant accepts in this appeal and matters that the Appellant does not accept (see Fairford Group plc & Anor Revenue And Customs

[2014] UKUT 329 (TCC)

at [44]-[50]).

[56]The main hearing of this appeal took place from 16 to 20 June 2025, before a Tribunal constituted by Tribunal Judge Christopher Staker and Tribunal Member Terence Bayliss. Oral evidence was given by the following witnesses called by HMRC who had provided witness statements (“WS”):(1) P O’Neill, HMRC officer (“PON”)

(2) L Sinnamon, HMRC officer and the following witnesses called by the Appellant who had provided witness statements: (3). KS, the second Appellant (4). GS Dhanjal, the Appellant’s accountant.

[57]The hearing bundle also included witness statements of the following HMRC officers, who the Appellant did not wish to cross-examine:(1) BJ McGinty

(2) JA D’Cruz

(3) L McNally

(4) C Morris

(5) A-M Hammouda.

[58]A&A confirmed at the hearing that it continues to trade, notwithstanding that it has been deregistered for VAT. The position of HMRC at the hearing was ultimately that a trader that is deregistered for VAT is not prohibited from continuing to make taxable supplies above the threshold for VAT registration, but must inform HMRC that it is doing so. HMRC contend that A&A has not properly informed HMRC that A&A is continuing to do so, since the revelation of this fact in the course of the present Tribunal proceedings is not the proper way of so informing HMRC. This is an issue that the Tribunal is not called upon to decide.

[59]After the hearing, on 26 June 2025, additional questions were sent in writing by the Tribunal to the parties. Written responses of HMRC and the Appellant were filed on 11 July 2025 and 11 August 2025 respectively, and an addendum was filed by HMRC on 13 August 2025.

[60]On 14 August 2025, both parties agreed that there should be further oral submissions in the case. The Tribunal asked the parties to provide further information in advance of any decision by the Tribunal on whether to direct a further hearing. Responses were provided by the parties on 3 October 2025. The Tribunal then directed that there be a further oral hearing in the appeal.

[61]The Tribunal Member, Mr Terence Bayliss, passed away on 11 January 2026. The parties agreed to this appeal continuing with the Tribunal reconstituted as the judge sitting alone. The significant contribution of Mr Bayliss to the Tribunal’s work on this appeal is acknowledged.

[62]A further oral hearing was held on 1 June 2026, for which the parties filed further skeleton arguments.

[63]HMRC submit that the appeals against all of the decisions should be dismissed. HMRC argue that all the circumstances of A&A’s trade lead to the conclusion that A&A entered into transactions that it knew from the outset were connected to the fraudulent evasion of VAT, or at the very least, that it should have known of that fact, and that as KS was the sole person responsible for A&A’s trading, that company’s actions are attributable to him.

[64]The Appellant submits that all of the five decisions appealed against should be set aside. The Appellant argues that KS had absolutely no knowledge that the eight suppliers were engaging in any form of VAT/tax fraud, that there is no evidence at all to sustain any finding that A&A participated in any such plan or scheme or that it ought to have known of any fraud being committed, that A&A carried out due diligence, and did its best at a difficult time, and that HMRC’s claims against it are completely misconceived. The law The law relevant to the input tax denial decision Relevant legislation

The law

[65]Section 25(2) VATA provides that a taxable person is entitled at the end of each prescribed accounting period to credit for their allowable input tax, and is entitled then to deduct that amount from any output tax that is due from them.

[66]Section 42(3), (4) and (4A) of the Taxation (Cross-border Trade) Act 2018 states that one of the consequences of the provision relevant to the law relating to VAT made by the European Union (Withdrawal) Act 2018 is that “the principle of EU law preventing the abuse of the VAT system (see, for example, the cases of Halifax and Kittel) … continues to be relevant, in accordance with that Act, for the purposes of the law relating to value added tax”, and that that principle may accordingly continue to be relied upon in determining any matter relating to VAT.

Application of law

[67]The legislation in paragraph 66 above refers to the judgment of the Court of Justice of the European Union (“CJEU”) in Joined Cases C-439/04 and C-440/04, Kittel v État belge and État belge v Recolta Recycling SPRL, ECLI:EU:C:2006:446 (“Kittel”). According to that case, a trader loses the right to deduct input VAT in respect of a purchase where it is established, on the basis of objective evidence, that it knew or should have known that it was, by that purchase, taking part in a transaction connected with fraudulent evasion of VAT. This is so, irrespective of whether or not it profited by the resale of the goods. (See Kittel at [51], [55]-[56], [59]-[61]; also Mobilx Ltd v HM Revenue & Customs

[2010] EWCA Civ 517

;

[2010] STC 1436

(“Mobilx”) at [16]-[44], [86], [87].)

[68]In this context, “fraudulent evasion of VAT” means dishonestly engaging in conduct, or dishonestly omitting to perform a legal duty, with the deliberate intent thereby to avoid paying VAT that a person knows is due. The intent must exist at the time of the act or omission in question. There need not be any positive act of deceit face to face with HMRC. (See by analogy R v Bajwa

[2011] EWCA Crim 1093

[2012] 1 WLR 601

at [91]-[93]).(1) If a trader knows that VAT returns are due but deliberately does not submit them because it does not want to pay the VAT, then from that moment onwards the trader is in law evading the tax (R v Dealy

[1995] 1 WLR 658

, at 665). This illustrates that, in order to engage in “fraudulent evasion of VAT” in this context, a person need not act in concert with others: a single person acting alone can engage in “fraudulent evasion of VAT”.

(2) An act or omission will be “dishonest” if by ordinary standards the mental state of the person acting or omitting to act would be characterised as dishonest, even if that person subjectively does not consider it to be dishonest (Ivey v Genting Casinos t/a Crockfords

[2017] UKSC 67

[2018] AC 391

at [62]-[63], [74]).

[69]A trader “should have known” that a transaction was connected with fraudulent evasion of VAT if it should have known this from the circumstances surrounding the transaction, and in particular, if the only reasonable explanation for the transaction is that it was connected with fraud (Mobilx at [59]-[60], [86], [87]). In determining whether this is the case, inferences may be drawn where appropriate from all relevant circumstances as a whole (Mobilx at [82]-[83], [86], [87]; Davis & Dann Ltd v HM Revenue and Customs

[2016] EWCA Civ 142

(“Davis & Dann”) at [60], [107], [108]; CCA Distribution Ltd v Revenue and Customs

[2017] EWCA Civ 1899

at [46] and [68]; Cheema Construction Services Ltd v Revenue and Customs

[2025] UKFTT 92 (TC)

(“Cheema”) at [22]-[23]). It is not necessary that the trader had the means of knowing how the fraud that actually took place occurred or other specific details of the fraud (Fonecomp Ltd v HM Revenue and Customs

[2015] EWCA Civ 39

at [51], [57], [58]).

[70]However, it cannot be said that a trader “should have known” that a transaction was connected with fraudulent evasion of VAT if the trader was “merely knowingly running some sort of risk that there might be such a connection”, or if the trader should have known merely that it was more likely than not that there was such a connection. To deny the right to deduct input tax in such cases would infringe the principle of legal certainty, as a trader in such circumstances would find it difficult to gauge the extent of the risk or to foresee whether HMRC would assert against it that the risk of fraud was so great that it should not have entered into the transaction. A trader must be in a position to know, before it enters into the transaction that, if it does so, it will not be entitled to deduct input VAT. (Mobilx at [55]-[56], [60], [86], [87]; GSM Export (UK) Ltd & Anor v Revenue & Customs

[2014] UKUT 529 (TCC)

at [16] and [19] (second sentence)).

[71]A trader “should have known” that a transaction was connected with fraudulent evasion of VAT if the trader had the means of knowledge but chose not to deploy it (Mobilx at [52], [61], [86], [87]), or failed to make enquiries (Davis & Dann at [63]-[64], [107], [108]). Thus, if a trader deliberately avoids finding out facts which it would prefer not to know (for instance, if it suspects that there is something wrong, but asks no questions for fear of discovering inconvenient facts), then it “should have known” of the facts that it would have known but for its deliberate avoidance of knowledge (compare, for instance, Cheema at [19]).

[72]However, traders are not generally required to undertake complex and far-reaching checks as to their suppliers. If they were, HMRC’s own investigative tasks would thereby be impermissibly transferred to traders. In some situations, legislation may impose specific due diligence obligations on traders. However, there is no such legislation applicable in the present case: the HMRC guidance entitled “Advice on applying supply chain due diligence principles to assure your labour supply chains” does not indicate that due diligence is compulsory, but states that “It is recommended that you carry out due diligence checks” (emphasis added). In the absence of specific legislative requirements, traders are not required to undertake due diligence checks on every single supplier before entering into any transactions with that supplier, much less due diligence checks on all suppliers higher up in the supply chain. It would be inconsistent with general principles to require this in every case. In the absence of specific legislative requirements, it is only when there are indications pointing to an infringement or fraud that a trader may be obliged to make reasonable enquiries about another trader from which it intends to purchase goods or services in order to ascertain the latter’s trustworthiness. (Compare Joined cases C-80/11 and C-142/11, Mahagében kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Foigazgatósága, ECLI:EU:C:2012:373at especially [59]-[65];

Case C-101/16

, SC Paper Consult SRL v Direcția Regională a Finanțelor Publice Cluj-Napoca, ECLI:EU:C:2017:775 at especially [51]-[61]; R (Seabrook Warehousing Ltd) v Revenue And Customs

[2019] EWCA Civ 1357

at [135]-[146], [154], [155]).

[73]In cases where there are indications pointing to an infringement or fraud such as to oblige a trader to make reasonable enquiries to ascertain the trustworthiness of a supplier, and where the trader fails to make such enquiries, the position is as follows. It would be artificial to answer the question whether the trader should have known that the transaction was connected to fraud by reference to what the result of the required enquiries would have been if the trader had made them. The specific enquires that must be made in such circumstances are not prescribed, and different reasonable traders might adopt different approaches to the making of such enquiries. It will therefore often not be possible to know precisely what enquiries a trader would have made if the trader had discharged the obligation to make enquiries. Furthermore, it will often not be possible to know what the result of any particular enquiry would have been, had it been made. For instance, if a trader had made enquiries of a supplier, it cannot be known how long the supplier would have taken to respond, or what response the supplier would have given. The Tribunal therefore considers that where a trader is obliged to make enquiries to ascertain the trustworthiness of a supplier, and fails to do so, it must be concluded that the trader should have known of any fraud with which its transactions with that supplier are connected, unless the trader can establish that no reasonable enquiry would have put the trader in a position where the trader should have known this.

[74]HMRC bears the burden of proving knowledge or means of knowledge (Mobilx at [81], [86], [87]). The standard of proof is the balance of probabilities (Cheema at [28]). HMRC must prove to that standard(1) that there was fraudulent evasion of VAT (not merely that there may have been);

(2) that the trader’s purchases on which input tax is to be denied were connected with that fraudulent evasion of VAT (not merely that they might have been); and

(3) that the trader knew or should have known that its purchases were connected with fraudulent evasion of VAT. HMRC do not have to eliminate all possible reasonable explanations other than fraud, but may need to counter any specific alternative explanations advanced by an appellant (AC (Wholesale) Ltd v Revenue and Customs

[2017] UKUT 191 (TCC)

at [29]-[30].) The law relevant to the deregistration decision Relevant legislation

The law relevant to the deregistration decision

[75]Paragraph 9 of Schedule 1 VATA provides that a person who is not liable to be registered for VAT will on request be so registered if they satisfy HMRC that they make taxable supplies or are carrying on a business and intend to make such supplies in the course or furtherance of that business.

[76]Paragraph 13(2) of Schedule 1 VATA provides that HMRC may cancel a registered person’s VAT registration if HMRC are satisfied that they have ceased to be registerable.

[77]Section 42(3), (4) and (4A) of the Taxation (Cross-border Trade) Act 2018 is described in paragraph 66 above.

Application of law

[78]The legislation in paragraph 66 above refers to the judgment of the CJEU in

Case C-255/02

, Halifax plc v Commissioners of Customs & Excise, ECLI:EU:C:2006:121 (“Halifax”). According to that case, it is a principle in the sphere of VAT that legislation does not cover abusive practices, defined as “transactions carried out not in the context of normal commercial operations, but solely for the purpose of wrongfully obtaining advantages provided for by … law”. An abusive practice exists only if the transactions in question result in the accrual of a tax advantage the grant of which would be contrary to the purpose of VAT legislation, and if it is apparent that the essential aim of the transactions concerned is to obtain a tax advantage (Halifax at [69], [74], [75]).

[79]A refusal to register a person for VAT or a decision to deregister a person for VAT “must be based on sound evidence giving objective grounds for considering that it is probable that the VAT identification number assigned to that taxable person will be used fraudulently”, and “Such a decision must be based on an overall assessment of all the circumstances of the case and of the evidence gathered when checking the information provided by the undertaking concerned” (

Case C-527/11

, Valsts ieņēmumu dienests v Ablessio SIA, ECLI:EU:C:2013:168(“Ablessio”) at [34]).

[80]“HMRC have power to deregister a taxable person who takes part in transactions connected with the fraudulent evasion of VAT and knew or should have known that fact, even if they also make or intend to make supplies unconnected with fraud, provided that is a proportionate step in the circumstances. Deregistration in those circumstances would not of itself breach the EU principles of proportionality, fiscal neutrality or legal certainty.” (Impact Contracting Solutions Ltd v Revenue and Customs

[2025] EWCA Civ 623

(“Impact Contracting Solutions”) at [83], [84], [85].)

[81]In an appeal against a decision to deregister a person for VAT on the basis of this principle, the Tribunal has a full appellate jurisdiction, the burden of proof being on HMRC to show that deregistration was appropriate (Impact Contracting Solutions at [69], [84], [85]; Manhattan Systems Ltd v Revenue and Customs

[2017] UKFTT 862 (TC)

at [36]-[46]).

The law relevant to the VAT assessment

[82]Where HMRC finds that the right to deduct input VAT has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively (Kittel at [55].) This has not been disputed in these proceedings.

The law relevant to the penalty decision

[83]Section 69C VATA provides that a person (T) is liable to a penalty if they enter into a transaction involving the making of a supply by or to T, and if(1) the transaction was connected with the fraudulent evasion of VAT by another person,

(2) T knew or should have known that the transaction was connected with the fraudulent evasion of VAT by another person, and

(3) HMRC have issued a decision (a “denial decision”) in relation to the supply, which prevents T from exercising or relying on a VAT right in relation to the supply, which is based on the facts which satisfy (1) and (2) in relation to the transaction, and which applies a relevant principle of EU case law. “Relevant principle of EU case law” is defined for purposes of this provision in s 69C(6) VATA to include the principle established in Kittel (denial of the right to deduct input tax).

[84]The penalty payable under s 69C VATA is 30% of the potential lost VAT (s 69C(7)-(8)), subject to mitigation under s 70 VATA.

The law relevant to the company officer penalty decision

[85]Section 69D(1) VATA provides that where a company is liable to a penalty under section 69C, and the actions of the company which give rise to that liability were attributable to an officer of the company, the officer is liable to pay such portion of the penalty (which may be equal to or less than 100%) as HMRC may specify in a decision notice given to the officer. Section 69D(10) VATA specifies that “officer” includes a director. Findings of fact General

Findings of fact

[86]The Tribunal proceeds on the basis that its decision on each individual issue must take account of the totality of the evidence in the case, and that it would be artificial to consider particular issues or events in isolation (Red 12 Trading Ltd v Revenue & Customs

[2009] EWHC 2563 (Ch)

at [108]-[110]). In relation to each finding in this decision, the Tribunal sets out only the evidence and reasons most pertinent to that finding, but this does not mean that the Tribunal has not taken account of the totality of the evidence in the case when making that finding. Although the burden is on HMRC to prove matters that are disputed or not accepted by the Appellant, in relation to matters where the HMRC evidence has not been expressly contested by the Appellant, and where that evidence is accepted by the Tribunal, it is unnecessary to set out the contents of that evidence. The relevant evidence is identified in the HMRC witness statements, skeleton arguments, and post-hearing submissions. Some findings of fact in this decision are further supported by additional evidence or considerations that are not expressly referred to in this decision. The Tribunal takes into account that some of the material events occurred at a time when the businesses concerned were operating under difficulties arising from the Covid-19 pandemic. In determining whether the Appellant “should have known” of a connection to fraud, the Tribunal applies an impersonal standard of the reasonable businessperson; that is to say, the Tribunal asks whether the reasonable businessperson would have concluded that the trader ought to have known that the only reasonable explanation for the transactions was that they were connected with fraud (S & I Electrical Plc v Revenue and Customs

[2015] UKUT 162 (TCC)

at [64]).

B Ltd

[87]A&A’s transactions with B Ltd in respect of which A&A claimed input tax were connected with tax loss. The Appellant accepts this.

[88]The Tribunal furthermore finds that the tax loss was caused by fraudulent evasion of VAT. That tax loss was caused by omissions of B Ltd to perform the legal duty to submit VAT returns and to pay any VAT due.(1) B Ltd was incorporated on 14 August 2014, and was registered for VAT on 12 October 2018 with effect from 14 August 2018. It submitted its first three VAT returns, for 11/18, 02/19 and 05/19, but thereafter failed to submit VAT returns for 11/19 (for an extended 6-month period), 02/20 or 05/20 before being deregistered for VAT by HMRC on 14 August 2020 and then dissolved on 18 May 2021. B Ltd never made any VAT payments to HMRC and did not respond to requests for information from HMRC. HMRC issued assessments to B Ltd following a comparison between the figures declared on the 02/19 and 05/19 VAT returns and CIS payments declared by B Ltd’s customers, but B Ltd made no payments in respect of the assessments.

(2) B Ltd therefore did not submit VAT returns or pay VAT to HMRC in the period in which A&A paid VAT on the invoices issued to it by B Ltd (see paragraphs 10 and 24 above), despite the fact that CIS records of B Ltd’s customers indicate that from 08/19 to 01/20, B Ltd obtained payments as a sub-contractor (including from the Appellant) in a total amount of £2,532,294.

[89]Those omissions had the deliberate intent to avoid paying VAT that B Ltd knew that it was liable to pay. By ordinary standards, this intent would be characterised as dishonest.(1) B Ltd did not file VAT returns after 05/19. It never made any payments of VAT. Companies House records indicate that it never filed any annual accounts. HMRC records indicate that it did not submit any corporation tax returns.

(2) It is implausible that the failure of B Ltd to pay VAT to HMRC was due to ignorance, oversight, negligence, or inability to pay. (a) The director of B Ltd had applied for registration of B Ltd for VAT and CIS, and B Ltd initially filed three VAT returns, so the director can not have been unaware of the obligation of B Ltd to file VAT returns and pay VAT. (b) Given the amounts involved, and the period over which no VAT returns were filed, it is implausible that the director could have simply “overlooked” the outstanding VAT returns and VAT payments due. It is to be expected that any person who genuinely intended to pay the VAT owing, but could not do so due to lack of funds, would have communicated with HMRC about the situation.

C Ltd, BW Ltd and G Ltd

[90]The Appellant accepts that A&A’s transactions with C Ltd, BW Ltd and G Ltd were all connected with both the fraudulent evasion of VAT and tax loss.

K Ltd

[91]A&A entered into transactions with K Ltd. The Appellant accepts this.

[92]The Tribunal finds that those transactions were connected with tax loss caused by omissions of K Ltd to perform the legal duty to submit VAT returns and to pay any VAT due.(1) K Ltd was incorporated on 29 September 2017. On 15 August 2019, it commenced CIS registration as a contractor. It was registered for VAT with effect from 21 June 2019, and was granted CIS gross payment status on 16 December 2019. It submitted VAT returns for 08/19, 11/19, 02/20, 05/20 and 08/20 only. It was deregistered for VAT on 30 July 2021, and its CIS gross payment status was cancelled on 25 October 2021. It has not been dissolved.

(2) The VAT ledger record of K Ltd shows that on 7 October 2020, immediately prior to submitting its VAT returns for 05/20 and 08/20, K Ltd had an outstanding VAT liability to HMRC of £22,936.14. That liability increased when K Ltd filed its VAT returns for 05/20 and 08/20 on that day. Payments made by K Ltd thereafter were insufficient to cover even the amount outstanding immediately prior to the filing of the 05/20 and 08/20 returns. The amounts of VAT paid by A&A on the invoices issued to it by K Ltd in VAT periods 08/20 to 05/21 were therefore never paid by K Ltd to HMRC.

[93]Those omissions had the deliberate intent to avoid paying VAT that K Ltd knew that it was liable to pay. By ordinary standards, this intent would be characterised as dishonest. The Tribunal therefore finds that the tax loss was caused by the fraudulent evasion of VAT.(1) CIS records of K Ltd’s customers show that K Ltd was paid via CIS £2,217,770 in the period from December 2019 to September 2021. Its VAT returns up to 08/20 show total outputs of £603,074 meaning that K Ltd received £1,629,971 in CIS payments that it failed to declare to HMRC in VAT returns. However, records indicate that K Ltd had no workforce, and K Ltd’s own CIS returns indicate no payments to sub-contractors. This led HMRC to conclude that K Ltd must have used an off-record workforce to complete any work.

(2) It is implausible that all this could have occurred due to ignorance, oversight, negligence, or inability to pay, given especially the amounts involved, and the period over which no VAT returns were filed (see paragraph 89(2)(b) above).

X Ltd

[94]A&A entered into transactions with K Ltd. The Appellant accepts this.

[95]The Tribunal finds that those transactions were connected with tax loss caused by omissions of X Ltd to perform the legal duty to submit VAT returns and to pay any VAT due.(1) X Ltd was incorporated on 1 February 2019 and was registered for VAT with effect from 29 January 2020. It was deregistered with effect from 17 November 2021. It has not been dissolved.

(2) X Ltd commenced CIS registration as a sub-contractor on 30 March 2020, and was CIS granted gross payment status on 5 January 2021. Its gross payment status was cancelled on 22 September 2021.

(3) X Ltd submitted VAT returns for the periods between 05/20 and 11/21.The returns for 08/20 and 11/20 showed outputs of £12,250 and £26,874 and all other returns were nil returns.

(4) The supplies of construction labour made by X Ltd to the Appellant were subject to the domestic reverse charge, and these have not been included in the HMRC input tax denial decision. The one transaction that the Appellant entered into with X Ltd on which VAT was charged (a sale of equipment) is dated 22 October 2021 and is stated to be for supplies in the week end 14 October 2021. This supply was included in the Appellant’s VAT return for 11/21. The VAT returns of X Ltd in this period were nil returns, such that the VAT charged by X Ltd on this supply was not returned or paid to HMRC.

[96]Those omissions had the deliberate intent to avoid paying VAT that X Ltd knew that it was liable to pay. By ordinary standards, this intent would be characterised as dishonest. The Tribunal therefore finds that the tax loss was caused by the fraudulent evasion of VAT.(1) CIS records indicate that X Ltd received £3,266,714 but submitted nil contractor returns and had only had 9 employees, who could not have completed this amount of work. X Ltd failed to declare this level of work in its VAT returns.

(2) It is implausible that this could have occurred due to ignorance, oversight, negligence, or inability to pay, given especially the amounts involved, and the period over which no VAT returns were filed (see paragraph 89(2)(b) above).

J Ltd

[97]A&A’s transactions with J Ltd in respect of which A&A claimed input tax were connected with the fraudulent evasion of VAT by J Ltd. The Appellant accepts this.

[98]However, the transactions of J Ltd with A&A took place after the introduction of the domestic reverse charge (s 55A VATA), so that the input tax associated with those transactions does not form part of the input tax denial decision or VAT assessment that are the subject of the present appeal.

D Ltd

[99]A&A’s transactions with D Ltd in respect of which A&A claimed input tax were connected with tax loss. The Appellant accepts this.

[100]Those transactions were connected with tax loss caused by omissions of D Ltd to perform the legal duty to submit VAT returns and to pay any VAT due.(1) D Ltd was incorporated on 24 September 2019 was registered for VAT with effect from 13 December 2019. It was deregistered from VAT with effect from 22 July 2022. It has not been dissolved but is in liquidation.

(2) It submitted VAT returns for the periods from 01/20 to 12/21.

(3) D Ltd made supplies to the Appellant in VAT periods 03/22 and 06/22, after D Ltd had ceased to file VAT returns. These supplies were included in an assessment raised by HMRC. There was no response by D Ltd to that assessment. The amounts of VAT paid by A&A on the invoices issued to it by D Ltd have therefore not been returned or paid by D Ltd to HMRC.

[101]Those omissions of the director of D Ltd had the deliberate intent to avoid paying VAT that the director of D Ltd knew that B Ltd was liable to pay. By ordinary standards, this intent would be characterised as dishonest. The Tribunal therefore finds that the tax loss was caused by the fraudulent evasion of VAT.(1) After it filed its 12/21 VAT return, records show D Ltd received around £1.4 million in CIS payments.

(2) It is implausible that the failure of B Ltd to return or pay to HMRC the VAT on these supplies was due to ignorance, oversight, negligence, or inability to pay, given the amounts involved, and the period over which no VAT returns were filed (see paragraph 89(2)(b) above).

The Appellants: A&A and KS

[102]The Tribunal takes into account matters supporting the Appellant’s case, including the following.(1) There is nothing to suggest that the Appellant did not supply to its customers the concreting work that it claims to have supplied to them, or that the Appellant did not receive from its suppliers the concreting work that it claims to have purchased from them. At the hearing, HMRC confirmed that it did not put its case on the basis that this is a “no supply” case, and acknowledged that “This morning as we readied ourselves to travel to this tribunal, workers … made their way to construction sites up and down the country”.

(2) It is no part of HMRC’s case that the Appellant did not charge its customers, and declare and pay to HMRC, the correct amount of VAT on its supplies of those services to its customers. It is no part of HMRC’s case that the Appellant did not pay to its suppliers, and reclaim from HMRC, the correct amount of VAT paid by the Appellant to its suppliers, or that the Appellant otherwise failed to comply with any of its tax obligations. In response to post-hearing written questions from the Tribunal, HMRC stated that it is “not admitted or disputed” that A&A included all payments made to its sub-contractors, and all payments received from its customers, in its VAT returns and CIS returns, and that it is “not admitted or disputed” that these payments were appropriately returned in other relevant tax returns of A&A and KS (for example, corporation tax and income tax). Given that the burden of proof is on HMRC, the Tribunal proceeds on the basis that there is no evidence of any impropriety in this respect.

(3) As noted above, at times material to this appeal, A&A had employees, and filed PAYE returns in respect of these employees. It is no part of HMRC’s case that there was any impropriety regarding the Appellant’s supplies of construction labour involving its own employees. It may well be that HMRC does not concede the contrary. However, again, given that the burden of proof is on HMRC, the Tribunal proceeds on the basis that there is no evidence of any impropriety in this respect.

(4) It is not suggested by HMRC that KS or Mr Dhanjal failed to cooperate with the HMRC investigation as far as they were asked to do so.

(5) The mere fact that a one-person business makes a very large amount of money in a short space of time, or the mere fact that a successful business is established and run by a person lacking the normal qualifications and experience of those who run such businesses, does not, in an of itself, mean that the business is “too good to be true”, and that the business owner should know that its transactions must be connected to fraud.

(6) The mere fact that a business with a relatively large turnover has simple and informal business practices, involving for instance oral contracts with customers and suppliers, does not of itself mean that the business cannot be a legitimate business.

(7) HMRC have not contended positively that the Appellant was colluding in any fraud. The HMRC case is that the Appellant knew or should have known that the transactions were connected to fraud committed by others, and not that A&A or KS themselves were necessarily actively involved in the fraud. HMRC have sought to identify various “coincidences” or “proximities” that connect the Appellant to suppliers in various ways or suppliers to each other. However, the Tribunal finds that these are insufficient to prove collusion in fraud by the Appellant, and HMRC do not contend otherwise.

[103]The Tribunal takes into account that evidence is lacking in relation to certain significant matters. In particular, there is no expert or other evidence before the Tribunal about the way that the legitimate construction labour supply sector works in practice, and about the ways in which fraudulent practices in this sector are known to operate. In particular, there is no such evidence concerning the characteristics of legitimate traders in this sector (such as whether or not it is common for such traders to be small one-person companies, and if so, the size of the turnover that legitimate small one-person companies can achieve and how quickly), particularly in the case of traders providing one specific form of construction labour (concreting work). There is no such evidence before the Tribunal concerning how long supply chains might potentially be in the legitimate construction labour supply sector, or the extent to which legitimate traders in this sector may sub-contract, or the ways in which such sub-contracting is done in practice. The Tribunal cannot take judicial knowledge of such matters.Given that the burden of proof is on HMRC, the Tribunal is not prepared to draw inferences adverse to the Appellant’s case as a result of the absence of evidence of matters such as these. (Compare DMC Business Machines Plc v Revenue & Customs

[2021] UKFTT 72 (TC)

at [135]; Synectiv Ltd v Revenue and Customs

[2018] UKFTT 92 (TC)

at [117].) At the same time, any omission by the Appellant to provide evidence of particular matters cannot lead to the drawing of inferences favourable to the Appellant’s case.

[104]The Tribunal takes into account matters adverse to the Appellant’s case, including the following.(1) Although the matters stated in paragraph 102(5) and (6) above do not in and of themselves mean that a business is “too good to be true” or that it cannot be a legitimate business, these are nonetheless matters that the Tribunal can take into account, as part of the circumstances as a whole, when determining whether a trader was or should have been aware of a connection to fraud.

(2) KS did not have the qualifications and experience that one might normally expect of someone running a business with the turnover of A&A. He says as follows. Before establishing A&A, he worked in India laying concrete, and then worked in the UK in a warehouse and then on construction sites. He had never been a director of a company in the United Kingdom before. He does not have a good command of English (he gave evidence via an interpreter), and has no or limited knowledge of computers. His nephew would help him read emails.

(3) It is unclear how the Appellant’s business was able to succeed so rapidly in what appears to be a competitive sector, given that the Appellant’s suppliers were presumably also competitors. It is also not clear what value the Appellant added in the supply chain. Presumably, it would have been more efficient for the Appellant’s customers to sub-contract directly with the Appellant’s sub-contractors, rather than include the Appellant as an additional link in the supply chain. The claim that the Appellant’s business succeeded based merely on word of mouth and reputation and handing out cards on building sites seems surprising, albeit this is difficult to judge in the absence of evidence as to how the industry works in practice.

(4) KS did not appear to have the necessary time to run a business with the turnover of A&A. For instance, he said that after starting the business, he still worked on sites up to 12 or 14 hours a day, and did not take documents with him when he went home on weekends.

(5) Furthermore, KS’s role in managing the business did not appear to require a great amount of effort on his part. His oral evidence indicated that he generally did not meet customers and sub-contractors. He stated that “we don’t really see those people, we just ask them, do they need this labour and that’s it. We don’t see them, the company. So he would set the price and we would send the people. There would be -- we wouldn’t even go there. Neither he would go, nor us. Once the work is done the payment is made, that’s it”. In relation to subcontractors, he said that “There is no point in seeing them or meeting them. … Only if there is a problem in the work only done, we would meet”. He added that he had a supervisor for every job, and that the supervisor would check the time sheets, and that invoices would be made according to the timesheets. He suggested that most of the paperwork was done by his accountant, Mr Dhanjal, and that from early 2022 the Appellant had an “office worker” who worked at premises rented by the Appellant. He said “I have to only tell them how many hours the workers have done. That’s it”. He said that he made payments on behalf of the Appellant via online bank transfer, stating that “So my nephew would help me to calculate the hours and this lady [presumably a reference to the “office worker”] would help me to calculate the hours and I would only make the payments”.

(6) There are third persons appearing in the narrative who are not clearly identified, and whose precise role in events is not clear. KS said in oral evidence (contrary to what is stated in his witness statement and what is stated by Mr Dhanjal) that A&A was established by an unknown accountant to whom he was introduced by a friend of his nephew’s. KS said that he did not know the name or occupation of this friend, but only his nickname. KS said that the Appellant employed an “office worker” from early 2022, whose name was mentioned in these proceedings for the first time in KS’s oral evidence. KS said that he employed this office worker because a friend of his, who he knew only by nickname, said to him that she needed work. He also said that “my co-workers, my colleagues, from them, they insisted that I should open a company”, although he later denied that he had been asked by anyone to set up a company.

(7) The evidence presented by the Appellant contained inconsistencies. For instance, his witness statement says that he came to the UK in about 2015, while in his oral evidence he said that he came to the UK in 2009. In his witness statement, he said that A&A was set up for him by Mr Dhanjal, but in his oral evidence, he said that it was only after A&A had been set up by another accountant that he asked Mr Dhanjal to register A&A for VAT and to act as its accountant. Mr Dhanjal in his oral evidence said that this was incorrect, and that it had indeed been Mr Dhanjal who had set up A&A. These inconsistencies relate to sufficiently significant matters that they damage the reliability of the Appellant’s evidence more generally. Other problems with the Appellant’s evidence are set out in the document filed by HMRC on 3 October 2025.

(8) The Tribunal has found that in every case where the Appellant subcontracted labour from VAT-registered entities, the supplies were linked to fraudulent loss of VAT. The Tribunal agrees with HMRC that it seems difficult to explain this away as mere coincidence or misfortune.

[105]On its consideration of the evidence as a whole, the Tribunal finds that it has not been established by HMRC on a balance of probability that, from the time of the first of its transactions relevant to this appeal, the Appellant knew or should have known that the transactions were connected to fraud.(1) The Tribunal accepts that there are no particular facts or circumstances that HMRC are required to prove in order to establish that a trader knew or should have known of a connection to fraud. In some cases, the Tribunal may conclude that a trader knew or should have known this, even though it is impossible to know exactly what transpired. Nevertheless, the Tribunal can only reach such a conclusion if the evidence and circumstances as a whole enable this specific conclusion to be drawn on a balance of probability.

(2) The mere fact that there are implausibilites, inconsistencies and gaps in the evidence of an appellant will not in and of itself mean that the appellant necessarily knew or should have known of a connection to fraudulent evasion of VAT. There must be some reason why the implausibilites, inconsistencies and gaps are indicative, specifically, of knowledge or imputed knowledge of a connection to fraud. Implausibilites, inconsistencies and gaps in evidence may often lead to a conclusion that the evidence of the party presenting that evidence is unreliable. However, there must also be a reason why unreliability of evidence is indicative, specifically, of knowledge or imputed knowledge of a connection to fraud if it is to support this conclusion.

(3) In some cases, it might be found that a trader’s business was so lacking in commercial reality, and “too good to be true”, that the trader should have realised that anyone trading with it must be doing so for fraudulent purposes. In other cases, it might be found that the details of the way that a trader’s suppliers conducted business, as far as they were known to the trader, were such that the trader should have realised that the only explanation was that the suppliers were engaged in the fraudulent evasion of VAT. However, although HMRC dispute the commercial credibility of the Appellant’s business, and highlight questionable aspects about the way that the Appellant and its suppliers operated (for instance, conducting high value transactions without written contracts), in the absence of expert or other evidence about the way that the legitimate construction labour supply sector works in practice, and about the ways in which fraudulent practices in this sector are known to operate, the Tribunal is unable to conclude on a balance of probability that the Appellant’s business was from the outset “too good to be true”, or that the Appellant must have realised from the outset that the way that its suppliers operated could only be explained by fraudulent evasion of VAT.

(4) HMRC contend that KS “betrayed a lack of basic understanding of how to operate a business”, and that “on his evidence, it would have been impossible for him alone to do all of the admin required to keep this business going in any way”. However, even if that were accepted, and even if it were to be assumed that there must have been others who were involved in the running of the Appellant’s business, this would not of in and of itself mean that those others were necessarily involved in VAT fraud, or that the Appellant knew or should have known that any of its transactions were connected with VAT fraud, or that the Appellant’s business was not a legitimate business.

(5) The fact that transaction chains with eight successive traders were connected to the fraudulent evasion of VAT does not in and of itself mean that the Appellant knew or should have known from the outset that this was the case. For instance, even if it could be positively proved that the Appellant knew that the last of its transactions was connected with fraud, this would not necessarily mean that the Appellant knew or should have known that the first of its transactions was so connected at the time that it entered into the first of the transactions.

(6) HMRC contend that the Appellant’s lack of concern when told that certain transactions were connected to fraud show that the Appellant was aware of that connection from the outset. The Tribunal does not accept this. A trader that has no prior knowledge that a transaction was connected to fraud might fail to take action when informed that the transaction was so connected.

(7) HMRC appear to suggest that the Appellant’s failure to undertake adequate due diligence in respect of any of the suppliers with which it transacted before trading with them means that the Appellant knew or should have known that its transactions with them were connected to fraud. The Tribunal does not accept this. The Tribunal is unable to conclude on the evidence that the construction labour supply business is so rife with fraud that the mere fact of trading with a business in this sector of itself points to an infringement or fraud such as to require reasonable enquires to be made about that business before trading with it.

(8) While it is possible to draw inferences from the circumstances as a whole, such inferences will not allow specific findings of fact to be made unless the balance of probability standard of proof is met. Upon consideration of all of the evidence and circumstances as a whole, the Tribunal is unable to conclude on a balance of probability that, at the time that A&A first began subcontracting to B Ltd, C Ltd or CW Ltd, the Appellant knew or should have known that its transactions with those companies were connected to the fraudulent evasion of VAT.

[106]There was a significant development on 18 February 2020, when the Appellant was sent the VETO letter in respect of E Ltd. As a result of that letter, the Appellant still did not know and should not have known that all of its transactions with B Ltd, C Ltd or CW Ltd were connected with fraud. However, that letter was an indication pointing to a possible infringement or fraud somewhere in one of A&A’s supply chains. The circumstances were such as to oblige A&A to make reasonable enquiries with a view to establishing whether E Ltd indeed featured in one of its supply chains and if so which, and whether A&A’s transactions in that particular supply chain were connected to VAT fraud. However, the failure of the Appellant to undertake such enquiries does not of itself mean that the Appellant should have known at that point that its transactions with one or all of its suppliers were connected to the fraudulent evasion of VAT.(1) E Ltd was not a supplier of the Appellant, but a supplier of one of the Appellant’s suppliers. The VETO letter did not indicate in which of the Appellant’s supply chains this company was situated.

(2) The VETO letter stated that E Ltd had been deregistered for VAT from 4 February 2020, the date on which it had been compulsorily dissolved by Companies House. The VETO letter did not in terms indicate that the VAT deregistration or the dissolution of the company necessarily had any connection with tax loss or fraud. However, it necessarily implied this, and also implied that the Appellant may be aware of this. It referred to Kittel, and stated that HMRC “may verify any input tax you have claimed or will claim in relation to transactions involving this business”, and that the letter was “without prejudice to any enquiries we may be making on any other transactions which you have already been involved in and which may be in a chain of transactions where VAT has gone unpaid”. The letter referred to HMRC “guidance to businesses which use labour providers” entitled “Use of Labour Providers: advice on due diligence”, and stated that the Appellant should undertake due diligence checks if it decided to replace E Ltd.

(3) The terms of the letter were such that they should have led the Appellant to suspect that there was somewhere in one of its supply chains a company called E Ltd that might have been involved in VAT fraud.

(4) The Appellant did not itself have any dealings with E Ltd. It was clear from the VETO letter that E Ltd had now been dissolved and that A&A’s future transactions would therefore not feature E Ltd in its supply chains. The Tribunal does not consider that the letter provided the Appellant with such indications pointing to an infringement or fraud as to oblige a reasonable trader at that stage, for purposes of the principles in paragraphs 69-72 above, to make immediate enquiries specifically into the trustworthiness of its direct suppliers, B Ltd, C Ltd and CW Ltd. However, the Tribunal considers that the indications given to the Appellant by the letter were such as to oblige a trader to make reasonable enquiries with a view to establishing whether E Ltd indeed featured in one of the Appellant’s supply chains and if so which, and whether the Appellant’s transactions in that particular supply chain were connected to VAT fraud.

(5) The Appellant did not undertake such enquiries. However, this does not mean that the Appellant should have known at that stage that its transactions with one or all of its suppliers were connected to the fraudulent evasion of VAT. The obligation was at that stage confined to seeking to ascertain the supply chain in question and any possible connection to fraud in that particular supply chain. The supply chain in question was in fact the supply chain involving C Ltd. The Appellant ceased trading with C Ltd almost immediately thereafter in any event (see paragraphs 13-14 above).

(6) That letter must however have given the Appellant a much heightened sensitivity to the risks of VAT fraud in the sector, and to the risk that it could unintentionally find itself in supply chains connected with fraudulent evasion of VAT.

[107]The situation changed again on 17 and 22 June 2020, when HMRC sent A&A the VETO letter and tax loss letter in respect of C Ltd, which was one of the Appellant’s direct suppliers. Those letters provided the Appellant with such indications pointing to an infringement or fraud as to oblige the Appellant for purposes of the principles in paragraphs 69-72 above to make reasonable enquiries in relation to all of the suppliers with which it had entered into similar transactions for similar supplies in similar circumstances (which now included also G Ltd and K Ltd).(1) C Ltd was one of the Appellant’s direct suppliers, with which the Appellant transacted directly.

(2) The tax loss letter stated expressly that “We have identified that all of your recent transactions involving the following supplier have been traced back to fraudulent tax losses”. It also stated that “we may verify any input tax you have claimed or will claim in relation to transactions involving this company”, and drew attention to the “increasing problems with fraud and unpaid taxes with businesses in your trade sector”, and to HMRC’s guidance on due diligence.

(3) These letters provided indications pointing to an infringement or fraud, and had the practical effect, in accordance with the principles in paragraphs 69-72 above, of requiring the Appellant to make reasonable enquiries about C Ltd in order to ascertain the latter’s trustworthiness, before conducting any further business with C Ltd.

(4) The Tribunal additionally finds that these indications pointing to an infringement or fraud further required the Appellant to make similar reasonable enquiries about B Ltd, BW Ltd, G Ltd and K Ltd, before transacting any further business with them. From the perspective of the Appellant, these were similar companies in respect of which the Appellant had entered into similar transactions in similar circumstances, in respect of similar supplies. The tools at HMRC’s disposal and the effect of the Kittel principle itself would be of limited effect if a trader, on receiving a VETO letter and/or tax loss letter in respect of one supplier, could without consequence simply cease transacting with that supplier and instead transact with a materially similar supplier for similar services in similar circumstances without making any enquiries to establish the trustworthiness of the new supplier. If that were the case, HMRC would be placed in a position of “attempting to play ‘catch up’, trying to close the proverbial stable door after the horse has bolted” (compare Impact Contracting Solutions at [56], [84], [85]). The Tribunal finds that once a trader receives notification from HMRC that its transactions with one of its suppliers has been traced back to fraudulent tax losses, the trader is obliged (in the sense in paragraphs 69-72 above) to make reasonable enquiries to ascertain the trustworthiness not only of that supplier, but also of any similar suppliers with which it enters into similar transactions for similar supplies in similar circumstances. This was all the more so in the present case, given that the Appellant had received the earlier VETO letter in respect of E Ltd.

(5) The fact that the Appellant may have considered that it had undertaken due diligence on B Ltd, C Ltd, BW Ltd, G Ltd and K Ltd before first commencing to transact with each of them is irrelevant. Receipt of the VETO letter and tax loss letter in respect of C Ltd showed that any earlier due diligence done on C Ltd had been inadequate to avoid a possible connection with VAT fraud. On receiving the letters in June 2020, the Appellant was obliged (in the sense in paragraphs 69-72 above) to undertake updated and significantly more rigorous enquiries in relation to all of these companies.

[108]After receiving the VETO letter and tax loss letter in respect of C Ltd, the Appellant did not undertake any updated enquiries about B Ltd, C Ltd, BW Ltd, G Ltd and K Ltd in order to ascertain their trustworthiness, but nonetheless continued to enter into transactions with them. The Appellant’s submission dated 2 October 2025 expressly acknowledges this. Indeed, the Appellant continued to enter into transactions with B Ltd, G Ltd and K Ltd even after subsequently receiving further VETO letters in respect of B Ltd and BW Ltd.

[109]As a result of the Appellant’s failure to conduct such enquiries, the Tribunal concludes that from the time of receipt of the tax loss letter in respect of C Ltd, the Appellant should have known that its transactions with B Ltd, C Ltd, BW Ltd, G Ltd and K Ltd were connected with the fraudulent evasion of VAT (see paragraph 73 above). Allowing two days for receipt of that tax loss letter dated 22 June 2020, the Tribunal finds that the Appellant should have known this from 24 June 2020.

[110]As to the Appellant’s subsequent transactions with X Ltd (see paragraphs 27 and 30 above), given the number of further VETO letters and tax loss letters in respect of other suppliers that the Appellant had received by the time that it began transacting with X Ltd, the Appellant was certainly under an obligation to make reasonable enquiries to establish the trustworthiness of X Ltd before trading with it. By this stage, “reasonable” enquiries would have involved a much higher level of scrutiny than that required on 24 June 2020.

[111]The Appellant did not undertake reasonable enquiries with this level of scrutiny.(1) The due diligence undertaken by the Appellant on X Ltd (WS PON para. 112; Transcript, day 2 (“T D2”), p. 49 line 20-p. 52 line 24) consisted of only three VAT return summaries (for 08/20, 11/20 and 01/21 respectively) and a print-out of a CIS Summary document showing CIS deductions for October to December 2020.

(2) This was not an effective check to ensure that the Appellant’s transactions with X Ltd would not be connected to fraudulent evasion of VAT. Traders engaging in VAT fraud, or engaging in transactions connected with VAT fraud, may well file VAT returns and pay VAT, and file CIS returns and make CIS deductions.

(3) There is no evidence that the Appellant undertook other steps of the kind referred to in the HMRC guidance, such as checking whether X Ltd could demonstrate commercial features as expected, checking the credibility of the director in control of X Ltd, and checking the history of X Ltd and its business.

(4) The Appellant furthermore continued to conduct business with X Ltd without undertaking any further checks even after receiving yet further VETO letters in respect of G Ltd and K Ltd, which should have alerted the Appellant to a need for an even higher level of scrutiny still.

[112]As to the Appellant’s transactions with J Ltd, the due diligence undertaken by the Appellant consisted of receiving from J Ltd copies of its certificate of incorporation, CIS registration document and VAT certificate (Appellant’s submission dated 2 October 2025). KS also says that that he obtained a list of 17 workers at J Ltd’s site with National Insurance numbers (WS KS, para. 60).

[113]As to the Appellant’s transactions with D Ltd, it is recalled that the first invoice issued to A&A by D Ltd is stated to be for work done in the week ending 16 January 2022. The due diligence undertaken by the Appellant prior to trading with D Ltd consisted of receiving from D Ltd, by email dated 1 February 2022, copies of three of the latter’s VAT returns (for 03/21, 06/21 and 09/21 respectively) and a copy of D Ltd’s VAT account showing activity from 11/20 to 02/22 (HB 3333-3336; T D2, p. 101 line 14-p. 103 line 2). These documents therefore appear to have been received by the Appellant only after D Ltd had already begun making supplies to the Appellant in January 2022.

[114]It appears that the Appellant also received from D Ltd copies of the latter’s CIS contractor returns for the months ending 5 February 2022 and 5 March 2022 (WS PON para. 114; HB 3355-3362; T D2, p. 103 lines 3-26). These postdate the 2 February 2022 email of D Ltd, and were presumably sent to the Appellant subsequently. The Appellant also received a copy of a print-out of an employee PAYE breakdown for January 2022 dated 9 February 2022, and a timesheet for week ending 26 December 2021 showing hours for 6 workers for the week (WS PON para. 114 and Exhibits PON152 and PON153). The Appellant says that it also received a copy of D Ltd’s VAT certificate (Appellant’s submission dated 2 October 2025).

[115]For the reasons given in paragraph 111(2)-(3) above, receiving these documents from J Ltd and D Ltd did not amount to an effective check to ensure that the Appellant’s transactions with X Ltd would not be connected to fraudulent evasion of VAT, and certainly not a check at the level of scrutiny that the Appellant was obliged to undertake by this stage if it wished to continue trading with these companies. The Tribunal does not accept that negotiating prices with D Ltd or knowing the name of its director could somehow constitute a sufficient check of its trustworthiness (compare T D2, p. 90 line 14-p. 93 line 23).The Tribunal finds that the receipt of these documents from J Ltd and D Ltd did not constitute reasonable enquiries into the trustworthiness of those companies with the level of scrutiny that was required at this stage.

[116]As a result of the Appellant’s failure to conduct enquiries of the kind that it was required to conduct, the Tribunal concludes that from the time that the Appellant began transacting with X Ltd, J Ltd and D Ltd, the Appellant should have known that those transactions were connected with the fraudulent evasion of VAT (see paragraph 73 above).

The appeal against the input tax denial decision

[117]It follows from the findings above that the Appellant should be denied the right to deduct input tax only in respect of the transactions it entered into with its suppliers after 24 June 2020.

The appeal against the deregistration decision

[118]The Tribunal finds that it was proportionate and appropriate for the Appellant to be deregistered for VAT pursuant to the Ablessio principle.(1) The Ablessio principle allows for deregistration where there is “sound evidence leading to the suspicion that the value added tax identification number assigned will be used fraudulently” (Ablessio at [34] and [39]).

(2) In this context, a VAT number is “used fraudulently” if the trader in question has entered into transactions connected with the fraudulent evasion of VAT and should have known of that connection with fraud for purposes of the Kittel principle. The Tribunal has found above that this has been established.

(3) It is immaterial that the actual VAT default is by another party, or that the trader has an intention to make certain untainted supplies in the future (see Impact Contracting Solutions). The fact that the Appellant is still in business, and is today still entering into similar transactions that have not been shown to be connected to VAT fraud, is therefore not a bar to deregistration.

(4) The words “will be used fraudulently” in Ablessio imply that there must be sufficient reasons to conclude that the VAT number will be used in transactions connected to fraudulent evasion of VAT in the future, and not merely that it has been used in such transactions in the past. However, Impact Contracting Solutions suggests that Ablessio finds that a deregistration decision can be based solely on past conduct, stating that such a decision can be made where (1) the trader knew or should have known that it was taking part in transactions connected with the fraudulent evasion of VAT, and (2) deregistration is a proportionate step on the facts (Impact Contracting Solutions at [58], [84], [85]). In any event, where it is established that a VAT number has been used in the past in transactions connected to fraudulent evasion of VAT, that in itself is “objective grounds for considering that it is probable that the VAT identification number assigned to that taxable person will be used fraudulently” in the future (Impact Contracting Solutions at [67], [84], [85]) in the absence of circumstances providing sufficient grounds for satisfaction that what happened in the past will not be repeated in the future. On the evidence before it, the Tribunal is not persuaded that there are any particular such circumstances in this case.

(5) The Tribunal has found that after the Appellant received the VETO letter and tax loss letter in respect of C Ltd in June 2020, it should have made reasonable enquiries to establish the trustworthiness of all of its suppliers, who were similar suppliers making similar supplies in similar circumstances. As the Appellant received increasing numbers VETO letters and tax loss letters in respect of increasing numbers of its suppliers, its level of irresponsibility in failing to make such enquiries became correspondingly greater. The Appellant transacted with B Ltd even after receiving both a VETO letter and a tax loss letter in respect of B Ltd itself (see paragraphs 20, 22 and 24 above). In October 2021, the Appellant continued to transact with X Ltd without undertaking any updated enquiries or due diligence after receiving VETO letters in respect of G Ltd and K Ltd (see paragraphs 27-30 above). By that stage at the very latest the Appellant had displayed such a lack of responsibility in the face of reasons to suspect that its transactions with its suppliers were connected to VAT fraud that deregistration clearly became a proportionate step on the facts, absent any sufficiently weighty countervailing considerations.

(6) The Tribunal takes into account the circumstances as a whole, but finds no other circumstances before or after the deregistration decision of sufficient countervailing weight. Even if the Appellant was always up to date with its VAT and other tax returns and payments, this is something expected of all taxpayers and traders in all circumstances, and this is not something that addresses the risks with which the Kittel principle is concerned. Although it is said that deregistration will be catastrophic for the Appellant’s business, this alone would not make a decision disproportionate, since that is the natural consequence of many deregistration decisions.

(7) As the Tribunal has a full appellate jurisdiction in relation to this issue, it is immaterial whether the original HMRC decision may have been based on different reasoning. The Tribunal finds that HMRC have discharged their burden of showing that deregistration was proportionate and appropriate.

The appeal against the VAT assessment

[119]The appeal against the VAT assessment stands or falls with the appeal against the input tax denial decision. That is to say, HMRC are entitled to assess the Appellant to any amount of input tax that has been properly denied pursuant to the Kittel principle. As the amount of input tax denied has been reduced as a result of the appeal against the input tax denial decision being allowed in part, the amount of the assessment is reduced correspondingly.

The appeal against the penalty decision

[120]The appeal against the penalty decision stands or falls with the appeal against the input tax denial decision. That is to say, the Appellant is liable to a penalty calculated as a percentage of the amount of any input tax that has been properly denied pursuant to the Kittel principle. As the amount of input tax denied has been reduced as a result of the appeal against the input tax denial decision being allowed in part, the amount of the penalty is reduced correspondingly. The Tribunal finds no reasons for mitigating the penalty under s 70 VATA.

The appeal against the company officer penalty decision

[121]The Tribunal understands that it is common ground that the `appeal against the company officer penalty decision stands or falls with the appeal against the penalty decision, that is to say, that it is accepted that KS is liable to pay 100% of whatever penalty is imposed on A&A by the penalty decision. In any event, the Tribunal is not persuaded that there is any reason for reducing the penalty below 100% of the penalty imposed on A&A.

[122]However, as the amount of the penalty payable by A&A has been reduced as a result of the appeals against the input tax denial decision and penalty decision being allowed in part, the amount of the penalty to which KS is personally liable is reduced correspondingly.

Additional matter

[123]Although this decision does not state the names of the companies referred to in paragraphs 9 and 13 above, no order for anonymity has been made. This decision simply omits any reference to their names because they were not parties to these proceedings, and were not able to respond to anything said about them in the proceedings, and knowledge of their names is not necessary in order to understand to the decision. The findings of fact in this decision relating to these companies are made for purposes of this appeal only, to which only A&A, KS and HMRC are parties, and these findings are not binding on those other companies.

Right to apply for permission to appeal

[124]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: 27 July 2026