One Call Consultants Ltd & Anor v The Commissioners for HMRC [2026] UKFTT 156 (TC)

[2026] UKFTT 00156 (TC)

Case No TC09765

FIRST-TIER TRIBUNAL

TAX CHAMBER

Venue Centre City Tower, Birmingham

Hearing Heard on: 16, 17, 22, 24 September 2025

Date Judgment date: 26 January 2026

Appeal references: TC/2021/01643

TC/2021/03033

TC/2023/08660

VAT – Kittel – knew or should have known – personal liability notice – appeal dismissed

Written submissions: 28, 29 October and 5 November 2025

Before

TRIBUNAL JUDGE BLACKWELL

TERRY BAYLISS

Between

One Call Consultants LtdAppellant

Mr Lewis McGrailAppellant

THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondent

Mr Rohan Singh, of UK Law Solicitors for Appellant

Mr Joshua Carey and Ms Bianca Brasoveanu, instructed by the General Counsel and Solicitor to HM Revenue and Customs for Respondents

DECISION

Introduction

[1]This is an Appeal brought by One Call Consultants Ltd (“OCC”) and Mr Lewis McGrail (who was at all material times the sole director of OCC) against the following decisions:(1) a review conclusion, dated 15 February 2021, whereby HMRC denied OCC’s input tax on the basis of the principle established in Kittel v Belgium, Belgium v Recolta Recycling SPRL (Joined cases C-439/04 and C-440/04)

[2008] STC 1537

(“Kittel”) in VAT periods 05/19 – 02/20 in the sum of £314,401;

(2) a review conclusion, dated 15 February 2021, whereby HMRC deregistered the First Appellant from VAT with effect from 21 October 2020 on the basis it was using its VAT Registration Number (“VRN”) to facilitate fraud or abuse of the VAT system;

(3) a review conclusion, dated 16 April 2021, whereby HMRC issued OCC a penalty under s 69C Value Added Tax Act 1994 (“VATA 1994”) in the sum of £94,320.30 (reduced to £88,640.10);

(4) a review conclusion, dated 16 June 2021, whereby HMRC issued a 69D VATA 1994 penalty in the sum of £88,640.10 to Mr McGrail; and

(5) decisions, dated 8 February 2023 and 14 March 2023, issuing OCC and Mr McGrail, respectively, a section 69C and section 69D VATA 1994 penalty each in the sum of £26,391.90.

[2]The denials of input tax relate to payments made by OCC to four payroll companies:(i) Building Office Management Ltd (“BOM”);

(ii) Dry Build Solutions Ltd (“DBS”);

(iii) Powell Management & Consultancy Services Ltd (“Powell”); and

(iv) Ryfix Installations Ltd (“Ryfix”).

[3]OCC supplied recruitment services in the construction industry. HMRC accept that OCC was engaged in genuine transactions with its customers. HMRC’s case is based on the transactions with the payroll providers being connected to VAT fraud.

[4]On 18 July 2025 OCC passed a special resolution at a meeting of its members to be voluntarily wound up. A voluntary liquidator was appointed the same day. On 3 September 2025 the Tribunal wrote to the liquidator, seeking confirmation as to whether they wished to maintain the appeal. On 5 September 2025 the liquidator wrote back:

“Please note that as the Company is in liquidation, it is not in funds to instruct representation at the hearing and therefore is not in a position to appeal. We understand that Lewis McGrail is represented and will be attending. We will await the outcome of the decision.”

We will await the outcome of the decision.”

[5]During the course of the hearing the issues in dispute by Mr McGrail narrowed. In closing submissions the first three of the four limbs of the Fairford test were conceded. The only limb that remained in dispute was whether OCC knew or should have known that the transactions were connected with fraud. The Law The right to deduct input tax

The Law

[6]The right of a taxable person to deduct input tax is contained within sections 24-29 of VATA 1994. In particular:(1) section 25 of VATA 1994 requires a taxable person to account for and pay any VAT on the supplies of goods and services which he makes and entitles him to a credit of so much of his input tax as is allowable under section 26: see section 25(2); and

(2) section 26 of VATA 1994 gives effect to Article 168 of EC Council Directive 2006/112 (the “VAT Directive”) and allows the taxable person credit in each accounting period for so much of the input tax for that period as is attributable to supplies made by them in the course or furtherance of his business: see section 26(2).

[7]Those provisions reflect and transpose the corresponding European Community laws contained within Articles 167 and 168 of the VAT Directive.

The loss of the right to deduct input tax

[8]The right to deduct input tax will be lost where a taxable person “knew or should have known” that his transaction was connected with the fraudulent evasion of VAT. This is a test that was originally laid down by the Court of Justice of the European Communities (“CJEU”) in Kittel. There the CJEU stated:

“56. In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods. 57. That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice. 58. In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them. 59. Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity’. … 61. By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT.”

[9]The Kittel Principle was elaborated on by Moses LJ sitting in the Court of Appeal in Mobilx Ltd v HMRC

[2010] EWCA Civ 517

;

[2010] STC 1436

(“Mobilx”) where he stated:

“43. A person who has no intention of undertaking an economic activity, but pretends to do so in order to make off with the tax he has received on making a supply, either by disappearing or hijacking a taxable person’s VAT identity, does not meet the objective criteria which form the basis of those concepts which limit the scope of VAT and the right to deduct (see Halifax at [59] and Kittel at [53]). A taxable person who knows or should have known that the transaction which he is undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and, equally, fails to meet the objective criteria which determine the scope of the right to deduct. … 52. If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.”

[10]In Mobilx the Court of Appeal went on to sound a note of caution in relation to attempts to improve upon the principle laid down in Kittel:

“59. The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who ‘should have known’. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel.”

[11]In relation to the phrase “the only reasonable explanation” it is important to note, as confirmed by Proudman J. sitting in the Upper Tribunal in the case of GSM Export (UK) Ltd and another v HMRC

[2014] UKUT 0529 (TCC)

, that Mobilx does not purport to change the test in Kittel:

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

[12]The Court of Appeal in Mobilx (at [83]) then affirmed guidance on the treatment of circumstantial evidence in cases of VAT fraud. In doing so the Court of Appeal quoted Christopher Clarke J. in Red 12 Ltd v HMRC

[2009] EWHC 2563

;

[2010] STC 589

(“Red 12”), who had said:

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

[13]Further, in AC (Wholesale) Ltd v HMRC

[2017] UKUT 191 (TCC)

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

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

[14]A taxpayer does not need to know specific details of the fraud being perpetuated. In Fonecomp Ltd v HMRC

[2015] EWCA Civ 39

;

[2015] STC 2254

the Court of Appeal (Arden LJ) said:

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

[15]It is dishonest for a person deliberately to shut their eyes to facts which they would prefer not to know. If he or she does so, they are taken to have actual knowledge of the facts to which they shut their eyes. See, for example, Beigebell Ltd (No.2) v HMRC

[2023] UKFTT 363 (TC)

and Cavendish Ships Stores v HMRC

[2020] UKFTT 257 (TC)

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

[2001] UKHL 1

;

[2003] 1 AC 469

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

Approach to assessment of circumstantial evidence

[16]In Mobilx Moses LJ stated:

“81. It is plain that if HMRC wishes to assert that a trader’s state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion… 82. But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. … Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focusing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.”

[17]In Mahagében kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága; Dávid v Nemzeti Adó- és Vámhivatal Észak-alföldi Regionális Adó Főigazgatósága (Joined cases C-80/11 and C-142/11)

[2012] STC 1934

the CJEU said the following with regard to due diligence:

“60. It is true that, when there are indications pointing to an infringement or fraud, a reasonable trader could, depending on the circumstances of the case, be obliged to make enquiries about another trader from whom he intends to purchase goods or services in order to ascertain the latter’s trustworthiness. 61. However, the tax authority cannot, as a general rule, require the taxable person wishing to exercise the right to deduct VAT, first, to ensure that the issuer of the invoice relating to the goods and services in respect of which the exercise of that right to deduct is sought has the capacity of a taxable person, that he was in possession of the goods at issue and was in a position to supply them and that he has satisfied his obligations as regards declaration and payment of VAT, in order to be satisfied that there are no irregularities or fraud at the level of the traders operating at an earlier stage of the transaction or, second, to be in possession of documents in that regard. 62. It is, in principle, for the tax authorities to carry out the necessary inspections of taxable persons in order to detect VAT irregularities and fraud as well as to impose penalties on the taxable person who has committed those irregularities or fraud. 63. According to the case law of the court, member states are required to check taxable persons’ returns, accounts and other relevant documents (see EC Commission v Italy (Case C-132/06) [2008] ECR I-5457, para 37, and Dyrektor Izby Skarbowej w Biaymstoku v Profaktor Kulesza, Frankowski, Jówiak, Orowski (Case C-188/09) [2010] ECR I-7639, para 21). 64. To that end, Directive 2006/112 imposes, in particular in art 242, an obligation on every taxable person to keep accounts in sufficient detail for VAT to be applied and its application checked by the tax authorities. In order to facilitate the performance of that task, arts 245 and 249 of that directive provide for the right of the competent authorities to access the invoices which the taxable person is obliged to store under art 244 of that directive. 65. It follows that, by imposing on taxable persons, in view of the risk that the right to deduct may be refused, the measures listed in para 61 of the present judgment, the tax authority would, contrary to those provisions, be transferring its own investigative tasks to taxable persons.”

[18]The case law indicates that it is necessary to guard against over-compartmentalisation of relevant factors, and to stand back and consider the totality of the evidence: see Davis & Dann Ltd v HMRC

[2016] EWCA Civ 142

[2016] STC 1236

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

[2017] EWCA Civ 1899

;

[2018] STC 206

(“CCA Distribution”).

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

[2024] UKFTT 00514 (TC)

at [49]

[20]Further, it is necessary to consider individual transactions in their context, including drawing inferences from a pattern of transactions, and to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them: see Red 12 at [109] to [111]. In effect, as a facet of the guidance given in Red 12, it is necessary to guard against over-compartmentalisation of relevant factors, and to stand back and consider the totality of the evidence: Davis & Dann and CCA Distribution.

Burden and standard of proof

[21]Where HMRC rely on the Kittel Principle, it is for HMRC to prove that each element of the test set down by the CJEU is satisfied (see Mobilx at [8]), namely:(1) there was fraudulent evasion of VAT;

(2) the appellant’s purchases on which input tax have been denied were connected with that fraudulent evasion of VAT; and

(3) the appellant knew or should have known that its purchases were connected with fraudulent evasion of VAT.

[22]As the CJEU underscored at paragraph [47] of Kittel, the right to deduct is “an integral part of the VAT scheme [which] in principle may not be limited”. Accordingly, the Tribunal must, before allowing that right to be interfered with, be satisfied that HMRC have proved each element of the Kittel test in relation to each purchase that they seek to deny input tax on.

[23]It is not enough for HMRC to prove that the appellant’s purchases might have been connected with fraudulent evasion of VAT: see Hira Company Ltd v HMRC

[2011] UKFTT 450 (TC)

at [111], per Judge Poole. Rather, HMRC have to prove, on the balance of probabilities, that the appellant’s purchases were connected with fraudulent evasion of VAT.

[24]Similarly, it is not enough for HMRC to prove that the appellant knew or should have known that its purchases might be connected with fraudulent evasion of VAT, were probably connected with fraud or were likely connected with fraud. Rather, HMRC have to prove, on the balance of probabilities, that the appellant knew or should have known that its purchases were connected with the fraudulent evasion of VAT.

[25]The standard of proof is the civil standard of the balance of probabilities. As confirmed by Lord Hoffman in Re B [2008] UKHL; 35

[2009] 1 AC 11

“[13] I think the time has come to say, once and for all, that there is only one civil standard of proof, and that is proof that the fact in issue more probably occurred than not. … [70] …[the civil standard of proof] is the simple balance of probabilities, neither more nor less. Neither the seriousness of the allegation nor the seriousness of the consequences should make any difference to the standard of proof to be applied in determining the facts. The inherent probabilities are simply something to be taken into account, where relevant, in deciding where the truth lies.”

Company penalty

[26]So far as is relevant, s 69C VATA 1994 specifies: “69C Transactions connected with VAT fraud(1) A person (T) is liable to a penalty where— (a) T has entered into a transaction involving the making of a supply by or to T (‘the transaction’), and (b) conditions A to C are satisfied.

(2) Condition A is that the transaction was connected with the fraudulent evasion of VAT by another person (whether occurring before or after T entered into the transaction).

(3) Condition B is that T knew or should have known that the transaction was connected with the fraudulent evasion of VAT by another person.

(4) Condition C is that HMRC have issued a decision (‘the denial decision’) in relation to the supply which— (a) prevents T from exercising or relying on a VAT right in relation to the supply, (b) is based on the facts which satisfy conditions A and B in relation to the transaction, and (c) applies a relevant principle of EU case law (whether or not in circumstances that are the same as the circumstances in which any relevant case was decided by the European Court of Justice).

(5) In this section ‘VAT right’ includes the right to deduct input tax, the right to apply a zero rate to international supplies and any other right connected with VAT in relation to a supply.

(6) The relevant principles of EU case law for the purposes of this section are the principles established by the European Court of Justice in the following cases— (a) joined Cases C-439/04 and C-440/04 Axel Kittel v Belgian State; Belgium v Recolta Recycling (denial of right to deduct input tax), and (b) … as developed or extended by that Court in any other cases relating to the denial or refusal of a VAT right in order to prevent abuses of the VAT system which were decided before the coming into force of section 42 of TCTA 2018. (7)The penalty payable under this section is 30% of the potential lost VAT. (8) The potential lost VAT is— (a) the additional VAT which becomes payable by T as a result of the denial decision, (b) the VAT which is not repaid to T as a result of that decision, or (c) in a case where as a result of that decision VAT is not repaid to T and additional VAT becomes payable by T, the aggregate of the VAT that is not repaid and the additional VAT. (9) Where T is liable to a penalty under this section the Commissioners may assess the amount of the penalty and notify it to T accordingly. (10) No assessment of a penalty under this section may be made more than two years after the denial decision is issued. (11) The assessment of a penalty under this section may be made immediately after the denial decision is made (and notice of the assessment may be given to T in the same document as the notice of the decision). …” (a) T has entered into a transaction involving the making of a supply by or to T (‘the transaction’), and (b) conditions A to C are satisfied. (a) prevents T from exercising or relying on a VAT right in relation to the supply, (b) is based on the facts which satisfy conditions A and B in relation to the transaction, and (c) applies a relevant principle of EU case law (whether or not in circumstances that are the same as the circumstances in which any relevant case was decided by the European Court of Justice). (a) joined Cases C-439/04 and C-440/04 Axel Kittel v Belgian State; Belgium v Recolta Recycling (denial of right to deduct input tax), and (b) … (a) the additional VAT which becomes payable by T as a result of the denial decision, (b) the VAT which is not repaid to T as a result of that decision, or (c) in a case where as a result of that decision VAT is not repaid to T and additional VAT becomes payable by T, the aggregate of the VAT that is not repaid and the additional VAT.

Penalty for officer of the company

[27]So far as is relevant, s 69D VATA 1994 specifies: “69D Penalties under section 69C: officers’ liability(1) Where— (a) a company is liable to a penalty under section 69C, and (b) the actions of the company which give rise to that liability were attributable to an officer of the company (‘the officer’), 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 notice given to the officer (a ‘decision notice’).

(2) Before giving the officer a decision notice HMRC must— (a) inform the officer that they are considering doing so, and (b) afford the officer the opportunity to make representations about whether a decision notice should be given or the portion that should be specified.

(3) A decision notice— (a) may not be given before the amount of the penalty due from the company has been assessed (but it may be given immediately after that has happened), and (b) may not be given more than two years after the denial decision relevant to that penalty was issued.

(4) Where the Commissioners have specified a portion of the penalty in a decision notice given to the officer— (a) section 70 applies to the specified portion as to a penalty under section 69C, (b) the officer must pay the specified portion before the end of the period of 30 days beginning with the day on which the notice is given, (c) section 76(9) applies as if the decision notice were an assessment notified under section 76, and (d) a further decision notice may be given in respect of a portion of any additional amount assessed in an additional assessment.

(5) HMRC may not recover more than 100% of the penalty through issuing decision notices in relation to two or more persons.

(6) A person is not liable to pay an amount by virtue of this section if the actions of the company concerned are attributable to the person by reference to conduct for which the person has been convicted of an offence. In this subsection ‘conduct’ includes omissions.

(7) In this section ‘company’ means a body corporate or unincorporated association but does not include a partnership, a local authority or a local authority association.

(8) In its application to a body corporate other than a limited liability partnership ‘officer’ means— (a) a director (including a shadow director within the meaning of section 251 of the Companies Act 2006), (b) a manager, or (c) a secretary. …” (a) a company is liable to a penalty under section 69C, and (b) the actions of the company which give rise to that liability were attributable to an officer of the company (‘the officer’), (a) inform the officer that they are considering doing so, and (b) afford the officer the opportunity to make representations about whether a decision notice should be given or the portion that should be specified. (a) may not be given before the amount of the penalty due from the company has been assessed (but it may be given immediately after that has happened), and (b) may not be given more than two years after the denial decision relevant to that penalty was issued. (a) section 70 applies to the specified portion as to a penalty under section 69C, (b) the officer must pay the specified portion before the end of the period of 30 days beginning with the day on which the notice is given, (c) section 76(9) applies as if the decision notice were an assessment notified under section 76, and (d) a further decision notice may be given in respect of a portion of any additional amount assessed in an additional assessment. (a) a director (including a shadow director within the meaning of section 251 of the Companies Act 2006), (b) a manager, or (c) a secretary. Deregistration

[28]In

Case C-527/11

Valsts ienemumu dienests v Ablessio SIA EU:C:2013:168, [2013] BVC 109 (“Ablessio”) the dispositif reads as follows:

“Articles 213, 214 and 273 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that the tax authority of a Member State may not refuse to assign a value added tax identification number to a company solely on the ground that, in the opinion of that authority, the company does not have at its disposal the material, technical and financial resources to carry out the economic activity declared, and that the owner of the shares in that company has already obtained, on various occasions, such an identification number for companies which never carried out any real economic activity, and the shares of which were transferred immediately after obtaining the individual number, where the tax authority concerned has not established, on the basis of objective factors, that there is sound evidence leading to the suspicion that the value added tax identification number assigned will be used fraudulently. It is for the referring court to assess whether that tax authority provided serious evidence of the existence of a risk of tax evasion in the case in the main proceedings.”

[29]The Ablessio principle has been recently considered by the Court of Appeal in Impact Contracting Solutions Ltd v HMRC

[2025] EWCA Civ 623

;

[2025] STC 949

(“Impact”) and by the Upper Tribunal in Elphysic Ltd v HMRC

[2025] UKUT 236 (TCC)

;

[2025] STC 1370

(“Elphysic”).

[30]In Impact Falk LJ held that 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, if it is a proportionate step in the circumstances. In Elphysic it was held that there was no need to establish that the directors knew or should have known that they were facilitating a fraud where the company’s own VAT number was the very means by which the fraud was being carried out.

Evidence

[31]We heard live witness evidence in the following

[32]We have also considered the evidence contained in an electronic bundle of 13,871 pages.

[33]We have taken into account the skeleton arguments and written closings from both of the parties who appeared before us. Findings of Fact Witnesses

Findings of Fact

[34]We found Mr McGrail to be an unreliable witness. Certain parts of his testimony was directly contradicted by the evidence, specifically:(1) he claimed that in his first HMRC enquiry he had been “concluded”, implying that HMRC had found no cause for concern. However, he himself acknowledged in his email of 10 May 2018 that his payment to Goldstein Financial Services Ltd had been disallowed by Officer Kate Richards; and

(2) he claimed that HMRC “green lighted” the use of certain companies. We accept the evidence of Officer McGing that this is not something HMRC do. That is also in line with the general approach of HMRC with which Mr McGrail would be aware (see, for example, [56], [61], [94] and [120] below).

[35]We therefore place little weight on his testimony (including his firm denials of knowledge) unless supported by independent documentary evidence.

[36]We found Officer McGing to be a reliable witness in relation to the primary facts. She gave direct and clear answers to the questions which were put to her. In relation to the inferences drawn from those facts we have found her evidence to be of somewhat less assistance – as we discuss further below and summarise in the section entitled “Irrelevant facts relied on by HMRC”.

Approach to evidence

[37]In order to clearly set out our factual findings, we provide a chronological account, below, of the primary findings of fact. However, in reaching our findings we have taken account of all the evidence in the round.

Background

[38]The amounts of input tax and output tax for each of the VAT periods prior to deregistration is shown in the following table, in which the periods subject to denials are shaded light green: Period/ Length (months) Output Tax Total Output Tax Input Tax Net Tax Outputs Inputs 11/16 FP £48

£65

£30

£34

£240

£151 02.17/3 £9,691

£9,691

£6,030

£3,661

£48,456

£30,202 05.17/3 £20,137

£20,137

£31,339 -£11,202

£100,688

£158,205 08.17/3 £30,567

£30,567

£32,911 -£2,344

£152,836

£166,275 11.17/3 £43,519

£43,519

£32,696

£10,823

£217,596

£166,438 02.18/3 £62,170

£62,170

£58,526

£3,644

£310,852

£302,899 05.18/3 £66,794

£66,794

£60,326

£6,468

£333,968

£307,894 08.18/3 £101,413

£101,413

£93,721

£7,692

£507,065

£477,295 11.18/3 £107,417

£107,417

£103,006

£4,411

£539,644

£548,402 02.19/3 £72,518

£72,518

£68,097

£4,421

£379,374

£386,442 05.19/3 £49,966

£49,966

£48,035

£1,931

£249,843

£273,540 08.19/3 £90,856

£90,856

£86,786

£4,070

£456,277

£466,836 11.19/3 £100,368

£100,368

£98,988

£1,380

£501,839

£503,150 02.20/3 £108,800

£108,800

£99,665

£9,135

£543,999

£525,079 08.20/6 £119,888

£119,888

£111,353

£8,535

£599,588

£562,035 Final/99 £36,447

£36,447

£33,728

£2,719

£182,272

£169,099

Mr McGrail’s work as an electrician

[39]Prior to founding OCC, Mr McGrail worked as an electrician. Initially, when aged 19/20 he was employed by Dema Controls. He installed sensors in buildings that activated valves.

[40]Subsequently, he worked through his own personal services company L.M.G Electrical Installations Ltd (“LGM”) on various contracts, which gave him insight into recruitment practices and inspired him to start his own agency. He found that agencies had often treated him badly: promising him work and then not delivering at the last minute. He identified there to be a gap in the market for agencies that could treat the professionals whom they engaged well.

[41]The accounts of LGM show a turnover of £15,939 and a loss of £5,296 in 2015, and a turnover of £27,018 and a profit of £5,191 in 2016.

Formation of OCC

[42]On 18 August 2016, OCC was incorporated. The business was registered with the intended business activity declared as “other services activities [not elsewhere classified].” On 3 October 2017, this was changed to “temporary employment agency activities”.

[43]OCC registered for VAT on 21 September 2016. The VAT1 form indicated estimated turnover in the next 12 months would be £100,000.

[44]Mr McGrail began the business with Paul Nelson. Paul Nelson operated his own recruitment business and was recommended to Mr McGrail by his friend of 10-years, Stephen Plant, who worked for Mr Nelson. Mr Nelson acted as a mentor to Mr McGrail, sharing his experience of the recruitment industry. Mr Nelson had considerable experience of recruitment and Mr Nelson’s business had a turnover in excess of £10million.

[45]Initially, Mr Nelson handled most operational aspects, including back-office functions and payroll. Mr McGrail had limited involvement due to lack of recruitment experience and relied on Mr Nelson’s systems and staff.

[46]Mr Nelson was involved in OCC for approximately one year, leaving in September 2017. Mr Nelson and Mr McGrail decided to go their separate ways after one of Mr Nelson’s consultants tried to engage one of OCC’s clients. However, they parted on good terms. Mr Nelson was not paid for his shares, but did receive dividends whilst he was a shareholder. Since then, at all relevant times, Mr McGrail has been the sole director.

[47]After Mr Nelson left OCC, Mr McGrail managed payroll for three months with the help of his accountants. His accountants were DHBA who were also Mr Nelson’s accountants.

[48]Megan was hired as accounts assistant in late 2017. She had prior experience in accounting and CIS returns and was entrusted with day-to-day operations, including client and worker interactions.

[49]OCC’s business model aimed for 15-20% profit margins on labour supply, factoring in holiday pay, pension contributions, and finance charges. Margins varied depending on market conditions and payment terms.

[50]Sales were generated primarily through cold calling, with a staff of five making up to 500 calls per week.

[51]HMRC began an enquiry into OCC prior to Megan’s employment. Mr McGrail disclosed the investigation to her and maintained that it stemmed from his early inexperience with payroll.

[52]Mr McGrail engaged Aspire to assist with compliance. He kept Aspire informed of all suppliers used.

First enquiry

[53]In 2017, an enquiry was opened into OCC’s 05/17 and 11/17 repayment VAT returns.

[54]On 23 August 2017, during the enquiry, Officer Richards of HMRC emailed Mr McGrail asking him to specify what due diligence checks he carried out “before, and after, engaging Goldstein Financial Services Limited” by reference to their guidance, Advice on applying supply chain due diligence principles to assure your labour supply chains (the “HMRC Guidance”). Mr McGrail was provided a link to the HMRC Guidance.

[55]The HMRC Guidance emphasises that risk may be reduced by:

“knowing your suppliers – do not assume tax compliance, be vigilant for previous business failures or possible criminal intent. Check the credibility of directors and verify signatories of contract negotiations and documents are accountable office holders”

[56]The HMRC Guidance also emphasises the risk is especially prevalent with regard to outsourced payroll providers and the supply of labour. It also states that it is for the business to decide what checks are appropriate:

“It is recommended that you carry out due diligence checks to help safeguard your business from financial, operational and reputational risks. You must decide what checks are relevant, reasonable and proportionate for your own business – when you’ll carry them out, and how often. However, these checks will need to be more extensive in business sectors where there are greater commercial risks or vulnerability to fraud and other criminality. Completing these checks will also help satisfy a number of your legal obligations. This is particularly important if your business uses labour supplied by a third party such as an agency, contractor or sub-contractor, or if you outsource your payroll service.”

[57]The HMRC Guidance warns that failure to carry out due diligence could lead to the loss of the right to claim input tax.

[58]Whilst the version in the bundle is (unhelpfully, unlike in other appeals we have heard) the 2021 version of the HMRC Guidance, the schedule of updates shows that these sections have not been changed.

[59]On 6 October 2017 Officer Richards called Mr McGrail, amongst other things, to notify him of a tax loss in respect of one of his payroll providers.

[60]On 13 March 2018 Officer Richards emailed Aldridge Management Accountancy Services Ltd (“Aldridge”), OCC’s agent, the link to the HMRC Guidance. Mr McGrail accepts that Aldridge will have forwarded communications from HMRC to him.

[61]On 19 June 2018 Officer Richards emailed Aldridge stating that she had reviewed the information Aldridge sent her in May 2018 and commented:

“1. Due diligence checks for Goldstein Financial Services UK Limited, CS Outsourcing Solutions Limited and Laral Dewinter Limited: The checks referred to as carried out by HMRC in April and May 2018 only confirm that the businesses have valid VAT registration at the time of the call and do, therefore, not replace the required due diligence checks. Please provide documentary evidence of the due diligence checks that were carried out prior to starting to trade with these businesses. ..”

[62]Officer Richards is thus making clear that due diligence should be carried out prior to trading with businesses and that verifying a VAT number with HMRC is insufficient due diligence. BOM

[63]On 31 January 2019 Mr McGrail was first approached, by email, by BOM. They enclosed their 2018 company brochure. Under the heading “Contractors” that brochure states:

“Expert advice We have offices across the UK and our advisers have years of experience working with contract workers. We have helped thousands of individuals like you find the best way to manage their personal finances.”

[64]On 3 March 2019 the first payment was made to a defaulter company.

[65]On 7 March 2019 Mr McGrail wrote to Aldridge stating: “Please see below the details for the two payroll companies who we are currently using. Please can you go through the due diligence checks for them as we have been using them for the past four weeks and I wang to make sure we are properly covered.” [sic]

[66]Those two companies were Tanber Solutions Limited and BOM. On the same day Aldridge responded advising Mr McGrail to complete the form at: https://www.gov.uk/government/publications/paye-report-payroll-outsourcing

[67]On 8 March 2019 Mr McGrail made a Fraud Investigation Service report in respect of BOM. The customer copy of the submission details states the date the outsourcing began was 7 March 2019. However, in an email to Aspire on 8 July 2020, Mr McGrail says he traded with BOM between 7 February 2019 and 25 April 2019. The automated acknowledgment of the report states:

“If we need any further details, we’ll contact you by letter or phone. We may ask you to sign in to a service to provide more details but we won’t ask for your personal details by email. You’ll normally receive a response within 35 days.”

You’ll normally receive a response within 35 days.”

[68]Mr McGrail says it is the form available from the link that was forwarded. He says he did this in order to obtain clearance, not to report suspicions of fraud. We accept Mr McGrail’s evidence that he never received any response – indeed HMRC have not challenged that part of his evidence.

[69]We also accept that he filled in this form on the advice of his accountants, not to report fraud, but to carry out due diligence. It is HMRC’s website, so they could have put in evidence the historic page that the link provided by Aldridge goes to, if HMRC say it is not to this form. While the reply email refers to “Fraud Investigation Service” the submission details do not refer, or even seen to ask for, any details of matters that would give rise to suspicion of fraud. Rather it seems to expressly relate to “Business providing payroll or staffing services.” Hence we do not regard this as a “red flag”.

[70]At some point after commencing trading with BOM, Mr McGrail conducted due diligence on BOM and received:(i) a VAT certificate, showing it was registered in 1 February 2018;

(ii) company information including website, emails and payment information;

(iii) a certificate of insurance issued by Hiscox (listing the nature of the business as “Umbrella and/or Accountancy and/or Payroll Company Providing Company Formation, Accounting, Administrative, Payroll and Training Services for Workers and the Provision of Workers to Third Parties”); and

(iv) the passport of the director listed on Companies house. DBS

[71]In late April 2019 OCC engaged DBS. The engagement lasted until December 2019.

[72]At some point after engaging DBS Mr McGrail obtained the following documents by way of due diligence:(i) a certificate of registration for VAT issued on 25 March 2014, which lists the trade classification as “43310 – PLASTERING”;

(ii) a VIES VAT number validation, requested on 24 September 2019;

(iii) a copy of the contract with the signature of DBS dated 16 April 2019 (this date is printed on the document) and the signature of OCC dated 15 May 2019, the date of the contract printed at the start of the contract is 16 April 2019;

(iv) a certificate of insurance issued by Hiscox, with the same business description as for DBS, dated 19 April 2018;

(v) a copy of the front of the driving licence of the director of DBS, sent by email on 2 May 2019.

Ryfix

[73]In January 2020 OCC engaged Ryfix. At some point after engaging Ryfix Mr McGrail obtained the following documents by way of due diligence:(i) a certificate of registration for VAT (for “Ryfix Installations Ltd”) issued on 1 May 2018, which lists the trade classification (SIC code) as “49410” and business activity description as “Freight transportation by road”;

(ii) a certificate of insurance (for “Ryfix Installation ltd”) issued by Hiscox, with the same business description as for DBS, dated 4 March 2019;

(iii) a copy of the contract with the signature block of “Ry-Pay Ltd” unsigned and undated and the signature of OCC dated 13 January 2020, the date of the contract printed at the start of the contract is “This contract is made on the day of 2019” (the gaps not being completed) nor is the name of OCC entered in as the name of the client, a field which is left blank. The contract is on identical terms to that of the contract with DBS.

[74]The previous names of Ryfix were “Solelle Haulage Ltd” and “MD8S Ltd”.

[75]On 20 January 2020 Mr McGrail asked Aldridge to carry out due diligence on Ryfix, emailing Aldridge:

“Can you carry out a due diligence on the following for a service provider. These take on workers and employ them through CIS and Umbrella as we only make the initial engagement in offering them work as we are an intermediary.”

[76]On 23 January 2020 Mr McGrail asked Aspire for a quote to carry out due diligence on Ryfix. They responded on 27 January 2020 with a quote for £5,000+VAT.

[77]On 4 February 2020 Mr McGrail emailed Ryfix stating:

“Unfortunately I am going to terminate the contract due to your company not being suitable to pass our company due diligence obligations. I have found errors in your VAT documents stating that you are trading as a ‘freight transport by road’ and is not up to date. After several time of requesting this by telephone you have continued to ignore me.”

Powell

[78]From February 2020 OCC engaged Powell. At some point after engaging Powell Mr McGrail obtained the following documents by way of due diligence:(i) a PAYE submission to HMRC, dated 15 May 2020;

(ii) an email dated 17 March 2020 attaching Powell’s latest VAT return pursuant to a request from OCC of the same date;

(iii) a certificate of incorporation for Powell showing an incorporation date of 4 November 2019;

(iv) a VAT certificate dated 5 February 2020, showing a “business activity description” of “[o]ther business support service activities n.e.c.” and a VAT registration date of 1 December 2019;

(v) a VIES VAT number validation done on 7 February 2020;

(vi) a certificate of insurance issued by Hiscox, with the same business description as for DBS and Ryfix, dated 12 November 2018 (so before the date of incorporation); (vi) a copy of the contract dated 6 February 2020, signed by OCC on the same date but with the signature block of Powell unsigned and undated; a brochure for Powell sent on 4 March 2020;

(vii) an email from Powell confirming that their VAT returns were up-to-date, of 7 July (responding to a request from Mr McGrail of the same date.

[79]The brochure states:

“Powell Management & Consultancy Services has years of experience in all aspects of our company and all our services, every staff member is fully trained in HMRC legislation and regulations to ensure that all contractors are 100% compliant.”

[80]Mr McGrail repeatedly referred in evidence to the first enquiry being “concluded”, essentially suggesting it fully exonerated OCC. We do not accept that. The first enquiry resulted in an amendment to OCC’s returns.

This enquiry

[81]On 26 February 2020, Officer McGing began a supply chain investigation.

[82]Officer McGing undertook an unannounced visit to 15a Anchor Road on 9 March 2020, which revealed no signage at OCC’s registered address.

[83]Officer McGing met a former employee of OCC, Maria, who stated OCC had not declared her PAYE to HMRC resulting in her having issues with personal tax credits. Maria advised that she was never allowed to know the name of the payroll provider who used to pay the PAYE staff or the temporary workers. She added that the detail on her payslips made it difficult to narrow down the actual payroll provider used as it related to umbrella companies.

[84]No one was present from OCC, so Officer McGing hand-posted an inspection notice with CC/FS4 and a 7-day deregistration warning letter. Both were sealed in separate envelopes.

[85]On 9 March 2020 Aldridge responded stating Officer McGing had attended their address, which is OCC’s registered office, but not their principal place of business, which is Perrywell House. They also indicated they had left a voicemail for Officer McGing.

[86]Later on the same day Mr McGrail emailed Officer McGing stating that he was having surgery in Turkey and requested an interview take place towards the end of April to allow him time to recover.

[87]On 10 March 2020, Officer McGing emailed Mr McGrail, stating that due to the urgency of the enquiry, she would not be able to wait until the end of April to conduct an interview. She requested contact details of the person who would be overseeing the company in his absence. She also requested specified business records to be provided by 17 March 2020.

[88]On 13 March 2020, Aspire responded on behalf of Mr McGrail, referencing the previous enquiry. Officer McGing responded by email on the same day, and clarified that the enquiry was not a VAT audit and required direct engagement, so accessing the previous records would not be sufficient to conclude the enquiry. Officer McGing then telephoned Rhian Lloyd of Aspire, responding to a missed call. Ms Lloyd advised that Mr McGrail would return to the UK the following week and be available for interview. Officer McGing said the subject matter of the enquiry was supply chain investigations and that the construction industry was particularly risky as a sector at the moment.

[89]Also on 13 March 2019 Mr McGrail corresponded with Aldridge regarding due diligence. Mr McGrail wrote:

“Can you please confirm that this is acceptable form of due diligence and that I have carried out my checks to comply with Kate Richards.”

Aspire responded:

“I’m assuming that you should be receiving a reply from HMRC with regards to your submission to let you know if they are ok to use, have you received any reply at all?”

In response to which Mr McGrail wrote:

“Not just yet, I will await and see”

[90]Here the emphasis appears to be on satisfying HMRC, rather than the actual effectiveness of the due diligence. It does appear however that Aldridge are indicating that HMRC may indicate suppliers are approved by HMRC, which they do not do.

[91]On 20 March 2020 a telephone interview was conducted (face to face interviews were then suspended due to the Covid pandemic). The call lasted 2 hours 18 minutes. Mr McGrail described his business background, supplier relationships, and outsourcing practices. He explained that sales were factored and a payroll company was used to pay workers. Workers were sourced by Indeed and CV Library in addition to his contacts. Due diligence and VAT fraud risks were discussed.

[92]Mr McGrail confirmed that his payroll provider at the time was Powell and that he had started using them around February 2020. His point of contact was Robert Farrell, who he believed to be the director. Mr McGrail said that the previous payroll provider prior to Powell was “Rypay.” This turned out to actually be Ryfix. Mr McGrail said he engaged this company in a hurry as he had fallen out with his previous payroll provider. He stated he only used Ryfix for two weeks because he was not happy with their due diligence, their business activity was listed as “freight” so he terminated his contract with them. Previous to that his payroll provider was DBS.

[93]Mr McGrail stated he had done the following checks before using Powell:(i) VAT number via EU VAT number checker online service;

(ii) receipt of an introduction email which included VAT number and UTR etc;

(iii) viewed a copy of insurance policy documents;

(iv) CIS verification; and

(v) online checks via Companies House, to verify the person he is speaking to is the director. Officer McGing checked the Companies House website and suggested that the fact Powell was incorporated recently and had a sole director with no other directorships and a second director who was only listed as an officer for a few days would have raised questions for her.

[94]Officer McGing explained that due diligence cannot be a checklist. To be reasonable and meaningful it will differ depending on the company/individuals being checked.

[95]At the meeting Mr McGrail agreed to provide records by 26 March 2020. On 24 March 2020 Alan Nolan, of Aspire, emailed Officer McGing to say that due to pandemic restrictions this would not be possible.

[96]On 7 April 2020 Mr McGrail made a Fraud Investigation Service report in respect of Powell. The customer copy of the submission details states the date the outsourcing began was 6 February 2020. Again, Mr McGrail says it is the form available from the link that was forwarded and he did this in order to obtain clearance, not to report suspicions of fraud.

[97]On 5 May 2020 a VETO letter was issued to OCC regarding one of its clients, IDS Electrical Ltd.

[98]On 12 May 2020 a telephone meeting took place between Aspire, Mr McGrail and Officer McGing. The call lasted 1 hour 4 minutes. Mr McGrail explained he had furloughed all his staff, apart from Meghan. He accepted he had received the VETO letter. Officer McGing’s note records the following exchange, which we accept as an accurate record:

“I asked whether LM will consider working with IDS if they do ask for work. LM said he will need to look at it logically, he said that he will charge and pay output tax, but they just won’t be able to claim it back. I advised that LM should consider the whole picture where, if they were to continue to trade, he could be contributing to a company who would be trading above the VAT threshold, yet not registered for VAT. AN said to LM he needs to be aware that a company does not have its VAT number removed for nothing and that it can be one of a few things. AN added that in the main, the VAT number has been removed likely because HMRC are not satisfied with the way they are handling their VAT. LM said he understands and said he would be dubious about trading with a company without a VAT number anyway. He said that if he were to have his number removed, he would expect that he would lose trade. I stated that I cannot tell him whether to trade or not and so I am trying to give as much information as I can for him to make an informed decision.”

[99]Mr McGrail confirmed OCC was still using Powell as their payroll provider.

[100]On 13 May 2020, Officer McGing issued a formal information notice pursuant to paragraph 1 of Schedule 36 to the Finance Act 2008 requesting outstanding records and information by 22 May 2020.

[101]On 14 May 2020 Ms Lloyd, of Aspire, called Officer McGing. Miss Lloyd stated that the deadline to provide documents was unreasonably short, although some information could be provided by the deadline. It was agreed that HMRC would provide a Dropbox facility to provide the information requested. The Dropbox link was provided on 18 May 2020. There was then correspondence in which Aspire indicated it wished to challenge the information notice.

[102]On 22 May 2020 certain documents were received through the Dropbox facility. Aspire also indicated that certain other records had been sent by registered post.

[103]On 27 May 2020 Officer McGing emailed aspire indicating that no further action would be taken in respect of the information notice as OCC had complied.

[104]On 9 June 2020 Mr McGrail contacted Ms Gail Corrigan of Central Outsource. They arranged a face-to-face meeting the following day to discuss:(i) outsourcing PAYE;

(ii) due diligence and compliance; and

(iii) payments and processes.

[105]On 6 July 2020 Mr McGrail requested certain documents from Quickstep for the purposes of due diligence. He was sent these on 8 July 2020. Those documents were:(i) CIS payments to HMRC which had been deducted from all workers;

(ii) screenshot of HMRC account showing liabilities;

(iii) copy of directors’ passports

(iv) copies of all payslips; and

(v) proof of employers liability insurance.

[106]On 8 July 2020 OCC was issued with VETO letters in respect of BOM and DBS.

[107]Also on 8 July 2020 Mr McGrail engaged Aspire to provide due diligence training and policies. He paid Aspire £7,500+VAT for this. In the email correspondence Aspire note that OCC is on HMRC’s trader monitoring scheme and this means HMRC will engage in telephone conversations and may ask for records on an ongoing basis. Mr McGrail responded:

“I am more than happy to do this to get the business on track and more importantly be compliant as I can so I never have to go through this again.”

[108]On 24 July 2020 the new due diligence questionnaire was sent to Quickstep. The completed questionnaire is dated 3 August 2020. On that date Quickstep emailed OCC enclosing the questionnaire saying “[s]orry it has taken me longer to get this filled in”, in the covering email.

[109]On 3 August OCC was issued with(i) a VETO letter in respect of Ryfix; and

(ii) tax loss letters in respect of BOM, DBS and Ryfix.

[110]On the same day a Teams meeting took place between Officer McGing, Mr McGrail and Ms Lloyd and Mr Nolan of Aspire. Mr McGrail explained he used an enhanced due diligence process including a questionnaire. Mr McGrail also stated he now used Quickstep Contracting Services Ltd and Orwell Solutions Services Ltd. The due diligence was not in place when he started trading with those businesses, around 17 June 2020. The questionnaire for Quickstep had been received in the last hour. Both companies had been recommended by Gail Corrigan, who came to the office to do a pitch.

[111]At the Teams meeting Officer McGing agreed to advise Mr McGrail on the contents of the due diligence questionnaire, as he felt it was “quite a hefty document” and he would be “checking all day” if he answered every question.

[112]When Mr McGrail was asked how he came to trade with DBS, he said they sent him an email and followed up with a phone call. He could not remember who you spoke to. When asked why he stopped trading with them, he said he could not remember.

[113]When asked how OCC came to trade with BOM, Mr McGrail said he could not remember as it was so long ago. He could not remember the point of contact. He said he did not know whether they were outsourcing payroll. He also said he could not remember why he stopped trading with them.

[114]Then asked how he came to trade with Ryfix, he said it was due to a cold call. However he asked his accountant about them and they did not like them.

[115]On 4 August 2020 OCC was issued with a VETO letter in respect of Powell.

[116]On 5 August Mr McGrail emailed Quickstep with a list of 14 questions arising from the due diligence questionnaire that had been returned to him on 3 August 2020. An example of such a question was:

“It states there are two shareholders – Jant Holdings is named as one of them however can you tell me who the other shareholders are?”

[117]On 11 August 2020, Officer McGing issued a further formal information notice pursuant to paragraph 1 of Schedule 36 to the Finance Act 2008 requesting outstanding records and information by 21 August 2020.

[118]On 2 September 2020 OCC was issued with a tax loss letter in respect of Powell.

[119]On 2 October 2020 a Teams meeting took place between Officer McGing, Mr McGrail and Ms Lloyd of Aspire. Officer McGing raised numerous issues with certain of the due diligence documents she had reviewed. The meeting lasted 1 hour 57 minutes. A discussion took place about whether DBS was providing payroll or labour. Officer McGing’s note records the following:

“RL then stepped in and said it’s not a payroll bureau. She stated they are a subcontractor in the supply chain. She added they provide the labour as contracted intermediaries. I challenged this as it appears completely contradictory to the previous conversations and comment made by LM that the business provided payroll only. RL said this is a slang term used for contractors in the supply chain. LM and RL both confirmed all workers are found and engaged by the supplier and they then invoice for labour. Neither could confirm what was detailed on invoices.”

[120]At the same Teams meeting Mr McGrail asked Officer McGing if she thought the new due diligence was good. Her reply was that whilst she would discuss it, she:

“[would] not be able to give an opinion on that as an officer of HMRC for many reasons including there can always be improvements and companies would use that to potentially try and get out of sticky situations.”

[121]On 14 October 2020 a Teams meeting took place between Officer McGing, Officer Rozanowska, Mr McGrail and Ms Lloyd of Aspire. The meeting lasted 1 hour 35 minutes. During the meeting Ms Lloyd explained OCC’s business model as follows. OCC:(i) find the worker;

(ii) contact the worker with job details;

(iii) the worker’s details are given to the intermediary; and

(iv) the contracting intermediary will engage the worker and they pay them.

[122]On 22 October 2020 Officer McGing denied input tax of £314,401.00 for periods 05/19 to 02/20 on the basis of the Kittel principle. She also removed OCC from the VAT register on the basis of the Ablessio principle. On the following day she issued the assessment.

[123]On 20 November 2020 Aspire made a formal request for a review, on behalf of the appellants.

[124]On 23 December 2020, Officer McGing noted an error in the calculation for the 05/19 input tax denial and penalty and issued correspondence to OCC correcting that error.

[125]On 15 February 2021, the independent review was concluded, upholding Officer McGing’s decisions.

[126]On 16 February 2021 Officer McGing charged the penalty pursuant to s 69C VATA 1994 and issued the notification letter to OCC. On the same date she issued a letter to Mr McGrail advising that she was considering making him liable to pay the penalty pursuant to s 69D VAT 1994. Following correspondence with Aspire, on 5 March 2021 Officer McGing concluded that the actions which gave rise to the penalty were attributable to Mr McGrail and concluded that he should be made personally liable to pay 100% of the penalty pursuant to s 69D VATA 1994.

[127]Following 16 June 2021, Officer McGing’s involvement in the investigation ceased. Periods following 02/20 were considered by Officer Joanna Rozanowska. She had identified additional fraudulent tax losses of £89,773.86 for VAT periods 08/20 and 99/99. OCC were notified on 21 June 2022. Those are not the subject of this appeal.

Mr McGrail’s other companies

[128]Mr McGrail was also a director of Celebrity Aesthetics Wholesalers Ltd (“Celebrity Aesthetics”) from its incorporation on 27 April 2017 to 18 June 2018. This involved the supply of derma filler to beauticians. Mr McGrail’s role was to create the online content.

[129]Mr McGrail was also a director of Meadow Brook Management Company Midlands Ltd, the management company of the property where he lived, from 25 November 2016 until 18 June 2018.

[130]Mr McGrail was also a director of:(i) Reliance Capital Finance Ltd;

(ii) One Call Demolition Ltd;

(iii) One Call Contracts Ltd;

(iv) One Call Consultants Holdings Ltd; and

(v) One Call Property Management Ltd.

[131]We accept HMRC’s case that Mr McGrail had no background in construction, aside from his work as an electrician. HMRC say this is relevant due to the high turnover that he was able to generate – unlike with these other businesses. However, we do not consider this has any bearing on the matters we must determine. This is because HMRC have not challenged that OCC’s trades with its customers were genuine. The turnover was a result of that: not a result of the payroll contract.

Mr Farley and Mr Nelson

[132]In August 2021 Mr Nelson died. Nelson Recruitment Services Ltd (“NRS”), which he was director of, has not been the subject of a supply chain enquiry. Nor is there any evidence to show that any of the other 11 companies that Mr Nelson was a director of were the subject of a supply chain enquiry.

[133]However, Mr Nelson received PAYE income from Link 2 Recruit Ltd which was subject to a Kittel denial.

[134]Further HMRC observe, and the Tribunal accept, that a previous director of NRS is William Farley who, has been director of other entities which have been subject to Kittel denials and deregistration under the Ablessio principle. The relevant companies were:(i) Farley & Jones Recruitment Limited; and

(ii) Farley & Jones Recruitment Support Ltd. Also, Link 2 Recruit Ltd engaged some of the same fraudulent suppliers as Farley & Jones Recruitment Ltd.

[135]However, despite taking a holistic view of the evidence, we consider the connection between Mr Farley and OCC far too tenuous to be in any way informative as to whether OCC knew or should have known that the transactions were connected with VAT fraud.

Aspire

[136]Aspire were the acting agent for OCC until 1 August 2022.

[137]Aspire acted as agents for a number of companies which have been connected to a fraudulent evasion of VAT, including some within OCC’s supply chain.

[138]Aspire are also the acting agent for a significant proportion of mini umbrella companies which are directly attributable to fraudulent tax losses via abuse of the flat rate scheme. These mini umbrella companies have also abused direct tax schemes such as Employers Allowance and the Apprenticeship Levy.

[139]We have no knowledge of the number of clients for which Aspire act. Thus it could plausibly be the case that a minority of their clients are connected with fraudulent tax losses. In any event certain professionals (including, for example, highly reputable lawyers) regularly act for those engaged in tax schemes or whom HMRC has denied input tax on a Kittel basis. This does not mean that being their client is an indicator as to the client’s conduct/knowledge. Rather it shows they are in need of advice from specialists.

[140]Despite taking a holistic view of the evidence we place no weight on this factor.

Inferences from failing to call witnesses

[141]In opening HMRC suggested that we should draw inferences from OCC’s failure to call any evidence from its counterparties, “to the extent it was or is going to be suggested that this was all commercial trade and not connected with the fraudulent evasion of VAT”. HMRC said it would not be open to them to call such witnesses, as a general legal principle is that you cannot call a witness whose evidence you intend to impugn. This was not pressed in closing submissions, presumably because Mr McGrail conceded that the first three limbs of the Fairford tests were satisfied and the Kittel denial only turned on the fourth Fairford limb.

[142]Without hearing such witnesses evidence, it is unclear to us how HMRC could be confident they would need to impugn the evidence of these witnesses and so not call them. In any event, we consider that it would be unlikely that such witnesses would cooperate or attend willingly, given that it is now accepted that the first three limbs of the Fairford tests are met. A party may be naturally reluctant to compel a witnesses’ attendance, as they will be unsure what evidence they will give.

[143]In these circumstances we place no weight on the appellants not calling the payroll counterparties to give evidence.

Services provided to OCC

[144]We accept that the payroll companies provided both labour and payroll to OCC. We accept that it was reasonable for Officer McGing to doubt this, given the suggestion of Mr McGrail in interview on 2 October 2020 that payroll was a “slang” term that included labour. We find that incredible. However, from the documentary evidence drawn to our attention in closing submissions by Mr Singh, we accept that in some cases the payroll providers did also provide some labour.

[145]We find this to be of limited relevance to the issues we must determine, except that if we had disbelieved Mr McGrail with regard to this it would have further damaged his credibility.

First three stages of the Fairford steps

[146]We find that each of the Kittel denials are part of transaction chains that involve a tax loss at the start and that loss is attributable to the fraudulent evasion of VAT.

[147]We base this on the unchallenged evidence of Officer Cameron, Officer Purdy and Officer McGing’s statements in respect of Powell and Ryfix. It is clear that the loss was fraudulent as the fraudulent evaders did not file VAT returns for the relevant period.

[148]We note that Mr McGrail does not challenge this finding.

Orchestration

[149]We find that there was orchestration. Each of the defaulters was traded with, in an unbroken sequence. The entire amount of the payments made to the defaulters (and so the entire payroll payments for the period) were attributable to fraud. A couple of sequential losses might plausibly be simply unfortunate, but the circumstances of this appeal involving four sequential defaulters impels the conclusion that here the fraud was highly orchestrated.

Irrelevant facts relied on by HMRC

[150]Even taking account of all the evidence in the round, there are certain facts relied upon by HMRC which we do not consider to have any probative value in the circumstances of this case. Factors we consider irrelevant, relied on by HMRC include:(1) the underestimation of the turnover on the VAT application. At the start of a business turnover may be unclear.

(2) the high level of turnover of the business. Mr Carey put it to Mr McGrail that he must have felt “all his Christmases had come at once.” Yet HMRC accept that the transactions with clients are genuine and have not challenged them. The turnover is attributable to the transactions with clients, not to the payments made to payroll companies.

(3) that Mr McGrail previously was involved in other businesses which were not successful or (in the case of Celebrity Aesthetics) related to construction. This might be relevant if HMRC had challenged the genuineness of the transactions between OCC and contractors, which were the source of the high turnover of the business. But HMRC accepts these contracts were genuine. Hence we do not consider this relevant.

(4) the connection to Mr Farley (who has been director of entities which have been subject to Kittel denials and deregistration). On the evidence before us this is so distant and tenuous that it would be unfair and unreasonable to draw even limited inferences from it.

(5) the fact that Aspire advised OCC, in addition to advising known defaulters, for the reasons given at [139] to [140] above.

(6) that the appellants did not call the payroll counterparties to give evidence, for the reasons given at [141] to [143] above.

(7) that companies may have first had names such as “MD8S Ltd.” Rather than incorporate companies many businessmen will buy “shelf-companies” that originally have such names and then change their names.

(8) that the appellant has not provided evidence of payments to Indeed/CV Library for advertising. In closing we were directed to such payments on OCC’s bank statements.

(9) That Mr McGail made fraud investigation reports, for the reasons given at [69] above.

Relevant factors as to knowledge

[151]However, we do consider the following factors relied on by HMRC are relevant to knowledge:(1) each of the fraudulent defaulters were traded with in sequence, accounting for all of the input tax relating to payroll for the entire period.

(2) no particular reason was given for the choice of each payroll provider by Mr McGrail, other than the fact they were the provider that happened to contact him at the time when he was looking for a new provider. In evidence Mr McGrail stated that payroll providers were contacting him all the time. If the arrangement was a purely commercial one, it would therefore be surprising he did not seek to tender in some way between those providers, looking for a competitive offer in terms of price and quality.

(3) given that Mr McGrail suggested that his unique selling point was that he was treating his workers well, and paying workers on time is an important aspect of this, one would especially think that he would be attentive to the quality of the payroll company he contracted.

(4) The contracts (where they exist) with the fraudulent suppliers are highly generic and do not set out the detail of the supplies which are to be made. The contracts are also identical in content (including errors, for example “he client” instead of “the client” in clause 6.4), although the logos on the contracts differ. Mr McGrail showed himself highly observant in his evidence, picking up details such as the date of the version of HMRC’s guidance in the bundle and details of the contract. If these contracts were for genuine commercial services it is likely he would have challenged the lack of specificity. The identical nature of these contracts should have also been a red flag. We acknowledge that, as Mr Singh submits, it is possible to have industry standard terms. However, the appellant has not adduced in evidence any such industry standard terms, despite knowing HMRC’s case that it is a red flag. Given the poor drafting of the contract we find it is unlikely that these are industry standard terms. Where the contracts do not exist (so with BOM, where no contract was put in evidence) this itself is a red flag.

(5) In evidence Mr McGrail suggested that the purpose of due diligence was to know who he was contracting with. Due diligence with the four defaulters was poor and only conducted after the transactions were entered into. The content of the due diligence should have raised concern, including the Standard Industry Classification codes of the companies. Mr McGrail should also have looked into the backgrounds of the directors, including their previous experience in the construction industry, had he done so this would have prompted further enquiries. Similarly, the claims of some of the companies to have years of experience was at odds with them being recently incorporated, which should have raised further enquiries. Whilst we accept Mr Singh’s submission that they have no legal standing, the fact that a business records itself as a haulage business or plastering and then offers payroll services is something a reasonable customer of that business would query, especially when they are aware that the construction industry is a high risk area for tax fraud. Similarly, reasonable due diligence would have identified there was a tension between claimed “years of experience” in the publicity materials and the newly incorporated nature of the companies. This should have caused further questions to be asked. With regard to the quality of the due diligence we also take into account three instances that only came to our attention when writing the decision, on which we invited written submissions from the parties, being that: (i) the certificate of insurance issued by Hiscox is for Ryfix Installation ltd (not Ryfix Installations ltd); (ii) the certificate of insurance for Powell provides “Continuous cover from 12 November 2018 until the policy is cancelled” and “Endorsement Effective: 17 November 2018”. Yet it appears Powell was incorporated on 4 November 2019 Thus the insurance appears to begin one year before the company was incorporated; and (iii) the payroll contracts all refer to “he client” (not “the client”) at clause 6.4. We consider these are all matters which would reasonably have been noticed on due diligence and caused further questions to be asked. Typographical errors in a document issued by an insurance company would be red flags. There is no reason why a company that was not incorporated would be insured for pre-incorporation trading as Mr Singh’s written submissions suggest. That would make no sense contractually. Although HMRC did not pick up on these that is not the test: the test refers to the appellants knowledge. These three factors further support HMRC’s argument that Mr McGrail was collecting information without actually considering it. Whilst we take these three factors into account, and find it proper to record them, they are not “material” to our decision. In the panel’s post-hearing discussion we decided the result of the appeal in line with this decision. While writing up the decision on that basis these three additional factors were discovered.

(6) In the interview on 12 May 2020 Mr McGrail appeared happy to trade with IDS despite it being deregistered. This shows a lack of concern with VAT compliance.

(7) the fraud was highly orchestrated, it is unlikely that fraudsters would seek to involve a person without knowledge in the chain of transactions.

[152]We accept that due diligence improved in summer 2020. The due diligence on Quickstep was a marked improvement. However, at that stage Mr McGrail was alive to HMRC’s enquiry. Viewed in context, we find this improved due diligence was an attempt to plaster over what went before and try to reduce the prospect of a Kittel denial.

[153]We also acknowledge Mr McGrail cooperated with HMRC’s enquiries, providing extensive documentary evidence and sought advice and training from HMRC. However, viewing all facts in the round, and particularly having regard to timing, we likewise find this to be an attempt to plaster over what went before and try to reduce the prospect of a Kittel denial.

Conclusion as to Kittel denials

[154]Viewing the evidence in the round, for the weighty reasons discussed in the previous section, we are compelled to the conclusion that Mr McGrail and (through him) OCC knew that the transactions were connected to fraud. We therefore dismiss the appeals against the Kittel denials on that basis. Whilst we acknowledge Mr McGrail’s repeated denial of this in his evidence, we place little weight on that part of his testimony, for the reasons stated above. We also acknowledge the reporting and due diligence undertaken by Mr McGrail, but, noting the timing of this, we consider it more likely to be an attempt to gather evidence to exonerate himself on such an appeal as this, rather than to avoid being part of a fraudulent supply chain.

Conclusion as to penalties

[155]It follows that the appeal against the company penalty must also be dismissed, as the conditions in s 69C VATA 1994 are satisfied.

[156]We find that the actions of OCC which give rise to the s 69C VATA 1994 penalty were attributable to Mr McGrail, as he was the sole director during the relevant periods and was the one who decided to enter into the relevant contracts and authorised payment under those contracts.

[157]The conditions for the officer penalty under s 69D VATA 1994 are therefore met.

[158]In closing Mr Singh, for the first time, raised the issue of the possible mitigation of the officer penalty under s 70(1) VATA 1994. We understand that this was only being pursued if it was found that the appellant should have known, but did not know. In any event in the present circumstances we would not consider it appropriate, since we have found that the purpose of the appellant’s cooperation was in fact to plaster over his knowledge. Further, HMRC objected to any mitigation on the grounds that it had not been pleaded prior to the closing submissions, and they would be prejudiced as they had not had the opportunity to put relevant questions to witnesses. We also agree with this procedural objection. The request for mitigation was made as late as it could possibly be, no good reason was provided and it would be highly prejudicial to HMRC as they had not had the opportunity to put relevant questions.

[159]We therefore dismiss Mr McGrails appeal against the s 69D VATA 1994 penalty.

Deregistration

[160]On 22 October 2020 OCC was notified of Officer McGing’s decision to deregister OCC from VAT. That was confirmed in the review dated 15 February 2021, which agrees with Officer McGing’s reasons.

[161]Having found that Mr McGrail and OCC knew their VAT number was being used to facilitate fraud, we find that the deregistration was proportionate in the circumstances, as all of OCC’s payments to payroll companies were connected with fraud.

Postscript

[162]We wish to note certain aspects of the conduct of this litigation, which we hope the parties’ representatives may reflect on for future appeals. We particularly wish to comment on the bundle in this case, which was prepared by HMRC.

[163]We note that the appellant requested a paper copy of the bundle to be used by him when giving witness evidence at the Tribunal, but then seemed content to use an electronic bundle at the hearing. It is unfortunate that costs (including environmental costs) were incurred in producing a paper copy of the bundle that was not used.

[164]Even for a Kittel denial, the size of the bundle is especially large at 13,871 pages. Having unduly large bundles (the bulk of the pages which were not referred to at the hearing) unreasonably incurs legal fees in preparation for the case for both sides. It also means that the panel hearing the appeal are less able to prepare for the case, unless the pre-reading is especially focussed, stating not merely which witness statement to read but also what exhibits. By way of illustration the body of the main witness statement of Officer McGing that deals with the Kittel denials runs to 115 pages, but also exhibits 375 documents that run to a further 10,371 pages. Officer McGing has in total six witness statements.

[165]We acknowledge that some of the size of the bundle is attributable to all of the limbs of the Fairford test being in issue when the bundle was assembled. However, we observe that in similar construction industry VAT frauds that we have recently heard the relevant officers’ witness statements, with exhibits, have been about 700 pages – so about 9,500 pages less than Officer McGing’s.

[166]We note that the bundle failed, in multiple ways, to comply with the First-Tier Tribunal (Tax Chamber) General Guidance on PDF Bundles. Whilst nominally stated to be “guidance” it was mandated by the standard directions issued in this case. It is not necessary to list here the full list of faults of the bundle.

[167]However an especially egregious fault with the bundle index, which has been previously raised with HMRC on several other appeals, on which we feel compelled to comment in our decision, was that all the dates were listed in a condensed numeric format, such as “25012023” instead of “25 January 2023”. Most readers are likely to find such formatting confusing, however this is especially difficult for neuro-diverse Tribunal users.

[168]Neurodiverse readers often rely on clear visual structure and spacing to process information. “25012023” is a dense block of digits with no natural separators, which makes it harder to parse quickly. Breaking down a number string into day, month, year requires more mental effort (e.g., “25-01-2023”) compared to reading “25 January 2023”, which is instantly meaningful as a date.

[169]Official documents, such as court bundles, should aim for clarity and accessibility – perhaps especially so when they are prepared by a government department like HMRC. HMRC may wish to consider training on this topic for its litigators and others who assemble bundles.

Right to apply for permission to appeal

[170]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: 26th JANUARY 2026

order

(1) Officer McGing, an HMRC officer employed within the Fraud Investigation Service, Cardiff; and

(2) Mr McGrail.

Cited in 1 later judgment

Harlequin Brickwork Limited & Ors v The Commissioners for HMRC 2026