“56. … 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 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 purchases, 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’.” 60. … 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, it is for the national court to refuse that taxable person entitlement to the right to deduct.” (Emphasis added.)
“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.”
“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”
“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 with the fraudulent evasion of VAT…” (Emphasis added.)
“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.” (Emphasis added.)
“... a trader has chosen to ignore the obvious explanation as to why he was presented with the opportunity to reap a large and predictable reward over a short space of time.”
“The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”
“…Second, the Kittel test applies to the taxable person. The taxable person was Olympia (the company). The question, therefore, for the Tribunal was not what a director of Olympia knew or ought to have known, but what the company itself knew or ought to have known. The knowledge of a director of the company may, to be sure, be attributed to a company, but there may be other knowledge (for example that of a senior employee) which, on the facts ought also to be attributed to the company...”
“there is nothing in Kittel which would lead to the conclusion that HMRC has to show that the transaction provides tangible assistance in carrying out the fraud” and, at [48], that: “Lack of knowledge of the specific mechanics of a VAT fraud affords no basis for any argument that the decision of either tribunal was wrong in law: what is required is simply participation with knowledge in a transaction ‘connected with fraudulent evasion of VAT’…”
“[37] In my judgment, there are likely to be many cases in which a participant in a sophisticated fraud is shown to have actual or blind-eye knowledge that the transaction in which he is participating is connected with that fraud, without knowing, for example, whether his chain is a clean or dirty chain, whether contra-trading is necessarily involved at all, or whether the fraud has at its heart merely a dishonest intention to abscond without paying tax, or that intention plus one or more multifarious means of achieving a cover-up while the absconding takes place.”
“However, in my judgment, 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 [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.”
“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. 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 whether 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.” (Emphasis added.)
“(6) An assessment under subsection (1), (2) or (3) above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided for in section 77 and shall not be made after the later of the following - (a) 2 years after the end of the prescribed accounting period; or (b) one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge, but (subject to that section) where further such evidence comes to the Commissioners’ knowledge after the making of an assessment under subsection (1), (2) or (3) above, another assessment may be made under that subsection, in addition to any earlier assessment.” (Emphasis added.)
“1. The Commissioners’ opinion referred to in section 73(6)(b) is an opinion as to whether they have evidence of facts sufficient to justify making the assessment. Evidence is the means by which the facts are proved. 2. The evidence in question must be sufficient to justify the making of the assessment in question: C & E Commissioners v Post Office[1995] STC 749 , 754G. 3. The knowledge referred to in section 73(6)(b) is actual, and not constructive knowledge: C & E Commissioners v Post Office at p755D. In this context, I understand constructive knowledge to mean knowledge of evidence which the Commissioners do not in fact have, but which they could and would have if they had taken the necessary steps to acquire it. 4. The correct approach for a Tribunal to adopt is (i) to decide what were the facts which, in the opinion of the officer making the assessment on behalf of the Commissioners, justified the making of the assessment, and (ii) to determine when the last piece of evidence of these facts of sufficient weight to justify making the assessment was communicated to the Commissioners. The period of one year runs from the date in (ii): Heyfordian Travel Ltd v C & E Commissioners [1979] VATTR 139, 151; and Classicmoor Ltd v C & E Commissioners[1995] V & DR 1, 10.1.27. 5. An officer’s decision that the evidence of which he has knowledge is insufficient to justify making an assessment, and accordingly, his failure to make an earlier assessment, can only be challenged on Wednesbury principles, or principles analogous to Wednesbury … (see Classicmoor … at 10-11,and more generally John Dee Ltd v C & E Commissioners[1995] STC 941 , 952 per Neill LJ). 6. The burden is on the taxpayer to show that the assessment was made outside the time limit specified in s 73(6)(b) of the 1994 Act.”
“The relevant evidence of facts is that which was considered, in the opinion of the Commissioners, to justify the making of the assessment. The one-year time limit runs from the date when the facts constituting the evidence came to the knowledge of the Commissioners. … An opinion as to what evidence justifies an assessment requires judgment and in that sense is subjective; but the existence of the opinion is a fact. From that it is possible to ascertain what was the evidence of facts which was thought to justify the making of the assessment. Once that evidence has been ascertained, then the date when the last piece of the puzzle fell into place can be ascertained. In most cases, the date will have been known to the taxpayer, as he will be the person who supplied the information.”
“evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge”, and that: “…The tribunal cannot substitute its own view of what facts justify the making of an assessment but can only decide when the last of those facts was communicated or came to the knowledge of the officer.”
“Other business support service activities not elsewhere classified”
“We have examined a number of transaction supply chains, and our enquiries have found evidence to indicate that from month ending 05/04/18 to 05/10/19£1,538,760 of these transactions associated with your supplier Simplify Contracting Services Ltd., VAT has not been accounted for within the supply chains, therefore potentially giving rise to a fraudulent tax loss. I have detailed below the payments made to the above company which have been traced in transactions chains commencing with a VAT loss. This information has been obtained from HMRC’s Construction Industry Scheme (“CIS”) system… [Table showing the relevant sums] ….Please note that we may verify any input tax you have claimed or will claim in relation to transactions involving this company. You should be aware that the European Court of Justice has confirmed 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.” (Emphasis added.)
“Your message is ready to be sent with the following file or link attachments: Terms and conditions Certificate of Incorporation Certificate of Insurance Certificate VAT Company Details Data Sharing Agreement SMP Invoice SMP Invoice”
“Please confirm the following with Ms Todorova: • Whether there was another employee doing the company’s day to day activities when she was on maternity leave • List of current employees and their NI numbers • All the addresses of the company and their principal place of business. We are aware of 2 addresses that have been declared to us which are [the North London address] which is their principal place of business and [an address in Enfield]. As per our system, the company’s [North London address] shows a returned mail signal- please confirm if they’re still trading from this address. Attached is an invoice from SMP issued to Mr Reilly at [a different North London address] – we are not aware of this address and are required to know whether the company also operates from these premises. • Which company paid the workers supplied to W.Reilly Ltd by SMP Support Services Ltd. Transactions with labour providers and detailed VAT reports The transactions to labour providers on CIS started in April 2016. Therefore I’m requesting forth documents below, as well records for more recent periods. I already hold detailed VAT reports and bank statements for some periods and have noted this below: • Detailed VAT report for VAT quarters 05/16 to 02/20, 08/20 to 05/21 (05/20 report has already been provided to us) • Bank statements from March 2016 to August 2020, March 2021 to May 2021 (September 2020 to Feb 2021 bank statements already provided to us) I would require the following documents relating to previous transactions with CIS subcontractors: • Last 5 purchase invoices and due diligence done in relation to: • Simplify Contracting Services Ltd • Global Outsourcing Ltd • Unity Contracting Services Ltd • Ardent Tide Ltd • Safe Labour Supply UK Ltd • SMP Support Services Ltd We discussed any changes in business procedures and you mentioned W.Reilly Ltd now have a more robust due diligence process after receiving the tax loss letters. I will discuss this further during our upcoming meeting. This meeting was mainly to review transactions with labour providers used previously, due to the high amount of tax loss letters issued. I am aware that you are familiar with the HMRC leaflets ‘Advice on applying supply chain due diligence principles to assure your labour supply chains’ and ‘10 things about due diligence: supply chain assurance’- please forward these leaflet to Ms Todorova to ensure due diligence is done on the company’s supply chains to reduce the risks of tax losses as much as possible if they do plan to use labour providers in the future. Below is the link to access both these leaflets: [Link] Due to W.Reilly Ltd. receiving 3 tax loss letters which show the link to the due diligence leaflet, they have the responsibility of following the leaflet to ensure that further tax losses do not take place and contact HMRC on the number/email/postal address provided at the top of the letter. If it is found that there has not been a change in due diligence procedures of their labour providers after receiving each tax loss letter, HMRC will decide whether they knew or should have known there was fraud in their supply chains and will assess up to 4 years, to disallow input tax in relation to these transactions.” • Whether there was another employee doing the company’s day to day activities when she was on maternity leave • List of current employees and their NI numbers • All the addresses of the company and their principal place of business. We are aware of 2 addresses that have been declared to us which are [the North London address] which is their principal place of business and [an address in Enfield]. As per our system, the company’s [North London address] shows a returned mail signal- please confirm if they’re still trading from this address. Attached is an invoice from SMP issued to Mr Reilly at [a different North London address] – we are not aware of this address and are required to know whether the company also operates from these premises. • Which company paid the workers supplied to W.Reilly Ltd by SMP Support Services Ltd. • Detailed VAT report for VAT quarters 05/16 to 02/20, 08/20 to 05/21 (05/20 report has already been provided to us) • Bank statements from March 2016 to August 2020, March 2021 to May 2021 (September 2020 to Feb 2021 bank statements already provided to us) I would require the following documents relating to previous transactions with CIS subcontractors: • Last 5 purchase invoices and due diligence done in relation to: • Simplify Contracting Services Ltd • Global Outsourcing Ltd • Unity Contracting Services Ltd • Ardent Tide Ltd • Safe Labour Supply UK Ltd • SMP Support Services Ltd [Link] (9) On22 April 2022 , Ms Kar made an amended request for less documents: “…I have found it reasonable to request the VAT and bank records for the last 4 years. I will review the transactions with labour providers first before moving on to more recent transactions and therefore will be requiring the following for the last 4years: I’ve reviewed again the documents that are held by HMRC and therefore my amended request would be for: • The answers to the below questions • Detailed VAT reports for 05/18 to 08/20 as this will cover all transactions with labour providers (The 05/20 VAT report has already been submitted to us and therefore not required to be re-submitted) • Bank statements from May 2018 – July 2019 and August 2020 (Those for August 2019 – July 2020 have already been submitted to us and therefore not required to be re-submitted) Due diligence in relation to: • Simplify Contracting Services Ltd • Global Outsourcing Ltd * • Unity Contracting Services Ltd • Ardent Tide Ltd • Safe Labour Supply UK Ltd • SMP Support Services Ltd” • The answers to the below questions • Detailed VAT reports for 05/18 to 08/20 as this will cover all transactions with labour providers (The 05/20 VAT report has already been submitted to us and therefore not required to be re-submitted) • Bank statements from May 2018 – July 2019 and August 2020 (Those for August 2019 – July 2020 have already been submitted to us and therefore not required to be re-submitted) • Simplify Contracting Services Ltd • Global Outsourcing Ltd * • Unity Contracting Services Ltd • Ardent Tide Ltd • Safe Labour Supply UK Ltd • SMP Support Services Ltd” (10) On20 May 2022 , Chartergates emailed HMRC responding to the email of22 April 2022 and questions from the meeting on8 March 2022 and advised that due diligence, banking and VAT report documents were being provided. A further email from Chartergates was sent on the same day to request a “dropbox” as the relevant documents were too large to be sent by email. The email included the following responses to questions posed by HMRC during the meeting on8 March 2022 : “1. Whether there was another employee doing the company’s day to day activities when Ms Todorova was on maternity leave. Yes, John McCarthy. 2. List of current employees and their NI numbers. Lidiya Todorova [NI number] and W Reilly [NI number] 3. All the addresses of the company and their principal place of business… …. Until recently, [the North London address] was the registered office and principal place of business. However, as of4 May 2022 , the registered office has been changed to [an address in Waltham Cross]. Mr Reilly previously retained an office at [the different North London address] - however, W Reilly Ltd no longer rents such an office from this address. 4. Which company paid the workers supplied to W. Reilly Ltd by SMP Support Services Ltd. SMP Support Services Ltd. Trading Levels Please note that our client believes that its trading levels have been reduced by approximately 50% as a result of the pandemic.”
“As discussed, I still do not have sufficient evidence to show whether W. Reilly Ltd knew or should have known that their tax loss transactions were connected to VAT fraud. Therefore the investigation will be to obtain evidence to decide this, especially as the company received 3 tax loss letters. The original tax loss letters, both issued22 June 2020 show an estimate of the tax loss using payments on W.Reilly’s CIS return, to these companies. This was calculated using best judgement in absence of detailed VAT reports from W Reilly Ltd who weren’t being investigated at the time. However as I now have access to the detailed VAT reports, I’ve calculated a new figure for both the tax losses and have attached the new letters showing the amended amounts below: Simplify:£228,756 SMP:£72,393 You will see that they have been issued to Ms Todorova at her new business address [address] which you notified me of in your previous email. Please ensure this address is changed by Ms Todorova using her online VAT account before our next meeting, as this will prevent correspondence from any HMRC department being sent to the incorrect address. If we decide based on our analysis of the documents received that the company knew or should have known their transactions were connected to fraudulent tax losses, an assessment will be raised to disallow the input tax relating to the tax loss letters received in relation to Simplify Contracting Services Ltd and SMP Support Services Ltd…”
“As per your detailed VAT report, transactions with the above trader relating to invoices between and have been linked to a tax loss. This tax loss letter in relation to the above trader replaces the one issued22 June 2020 which was calculated using your CIS return payments, in absence of detailed VAT reports, which is enclosed with this letter. The transactions relate to invoices from14 June 2018 to24 September 2019 and total£1,271,878 with a VAT loss of£228,756 . [There was the same warning regarding the denial of input tax as was included in the earlier tax loss letter (see [30(12)] above).]” (b) In the letter relating to SMP, she said this: “As per your detailed VAT report, transactions with the above trader relating to invoices between and have been linked to a tax loss. This tax loss letter in relation to the above trader replaces the one issued22 June 2020 which was calculated using your CIS return payments, in absence of detailed VAT reports, which is enclosed with this letter. The transactions relate to invoices from26 September 2019 to24 December 2019 and total£433,963 with a VAT loss of£72,393 . [There was the warning regarding the denial of input tax as was included in the earlier tax loss letter (see [30(12)] above).]” (15) On10 June 2022 , Ms Kar emailed Chartergates with a revised request for information. Again, she asked for both purchase and sales invoices for various companies with which the appellant had contracted. As regards Simplify and SMP, she asked for only the purchase invoice for8 August 2019 for£51,379 for Simplify. (16) On2 August 2022 , Chartergates provided by “dropbox” the requested information and responded to HMRC’s questions as follows: “[As regards action following the Global loss letter and due diligence processes] On receiving the tax loss letter in relation to Global Outsourcing Ltd in September 2018, our client’s first course of action was to cease continued and ongoing trade with the relevant supplier immediately. The same position was subsequently adopted in June 2020, when further tax loss letters were received in relation to Simplify Contracting Services Ltd and SMP Support Services Ltd. In addition to the above, we understand that our client reacted to the first tax loss letter by re-acquainting itself with HMRC’s due diligence guidance, as highlighted in the relevant tax loss letter and accordingly, proceeded to undertake appropriate and detailed due diligence on suppliers, which it believed was in line with HMRC’s guidance on due diligence at the relevant time. In undertaking such detailed due diligence, our client was mindful of the need to ensure that it was trading with genuine suppliers. Our client also recognised the importance of detailed due diligence as a means of verifying the integrity of the relevant supply chains. In April 2021, we were instructed to assist our client with the current and ongoing HMRC enquiry…our client instructed us to review the ongoing due diligence practices and procedures of the business, with a view to improving the same, as necessary. In this regard, we undertook such a review for our client and in light of our client’s requirements, we proceeded to draft a bespoke due diligence policy (inclusive of a risk assessment), together with a supplier due diligence questionnaire. Following further discussions with our client regarding the same, we understand that the aforementioned policy and questionnaire were integrated into and given effect within our client’s business processes and procedures in September 2021. We note that our client has taken a significant interest and appropriate practical steps in ensuring the integrity of its suppliers, as well as the authenticity of its supply chain. In this regard, we draw your attention to the sample selection of due diligence undertaken by our client in relation to some of its suppliers since September 2021. We also understand from both our client and from the records previously supplied to HMRC by our client, that during the period between June 2020 (when the tax loss letters were received by our client in relation to Simplify Contracting Services Ltd and SMP Support Services Ltd) and September 2021 (when our client integrated its new due diligence policy and supplier due diligence questionnaire into the business), there was an extremely limited and arguably, insignificant use of labour providers/ suppliers by our client… In fact, we understand that the only labour provider/ supplier engaged by our client during this period was Anchor Recruitment Ltd (due diligence undertaken by our client in relation to this supplier is provided, as indicated below). Indeed, we submit that our client’s minimal use of labour providers/suppliers during this period was in view of the risks associated with labour providers/suppliers (as outlined by HMRC in the aforementioned tax loss letters) and as recognised and understood by our client on its reading and interpretation of the relevant HMRC guidance relating to due diligence and use of labour providers. We also draw your attention to Clause 5.3 of our client’s due diligence policy, which entails responsibilities in cumbent on our client’s director as regards the ongoing maintenance and updating of the policy and procedures relating to due diligence, in accordance with changes to HMRC’s guidance on due diligence and any associated legislative amendments. We submit that this highlights our client’s continued commitment to undertaking accurate and adequate due diligence. It must also be borne in mind, that the above changes to our client’s policy and procedures relating to due diligence were made against the backdrop of a complex set of personal and global circumstances….” [As regards whether SMP sub-contracted to another trader who paid the workers] Our client was not aware of any sub-contracting arrangements between SMP and other suppliers. Our client had a contractual arrangement with SMP and in this regard, it was of the understanding that SMP was responsible for paying the relevant workers. [As regards checks on the directors or credit checks done for Simplify and SMP] Such checks were not undertaken by our client; however, our client understands that as part of the factoring facility with Barclays Bank (mentioned above), relevant checks of this nature were undertaken by Barclays Bank. Ultimately, our client understands that as part of the factoring facility, Barclays Bank undertook detailed checks in relation to our client, its customers and its suppliers and this included checks in relation to directors of the relevant businesses. [As regards the role of Mr McCarthy when Ms Todorova was on maternity leave] Our client has advised that Mr McCarthy’s role was “contracts manager” for the business.” [As regards whether SMP sub-contracted to another trader who paid the workers] [As regards checks on the directors or credit checks done for Simplify and SMP] [As regards the role of Mr McCarthy when Ms Todorova was on maternity leave] Our client has advised that Mr McCarthy’s role was “contracts manager” for the business.” (17) On8 August 2022 Ms Kar wrote to the appellant as follows: “Firstly, it has been brought to our attention that prior to receiving the tax loss letter relating to Global Outsourcing Ltd in 2018, W.Reilly Ltd have received several notifications of deregistration of VAT for their previous suppliers which are known as veto letters. These were issued between 2007 and 2011 and had with them enclosed the due diligence guidance (albeit in a different format to the current one as it is updated from time to time). I attach these letters for reference. Even though the company implemented a more detailed due diligence policy in September 2021, due to the number of times due diligence guidance was provided to them and the procedures only being changed after receiving the third tax loss letter in June 2020, we have decided to raise an assessment based on the principle that the trader knew or should have known they were connected with fraudulent transactions. I will discuss the options available should you disagree with the assessment when it is raised. The assessment will consist of the tax loss relating to suppliers Simplify Contracting Services Ltd and SMP Support Services Ltd. within the last 4 years….”
“You should protect your business by undertaking checks to understand: • where your workers are coming from • how they’re being paid • the legitimacy of those arrangements We can’t tell you exactly what checks you should make because these will vary depending on how your business operates. What to check You need to undertake checks within 4 key areas to ensure: • your supplier of labour is legitimate and has no history of non-compliance • you understand and approve the labour supply chain • agency workers are paid their contractual rate and it complies with the National Living Wage (NLW)/National Minimum Wage (NMW) • you’re doing all you can to eradicate modern slavery and illegal working in your supply chains These checks are not exhaustive. If you don’t undertake checks You need to be aware of the following: If HMRC finds non-compliance or fraud in your supply chain It’s likely to cost you more. If it can be shown that you knew or should’ve known that transactions you entered in to were connected with fraudulent evasion of VAT, you’ll lose the right to recover the tax paid on these transactions. Failure to carry out appropriate checks will be one of the factors that HMRC will take into account in considering whether you knew or should’ve known of the VAT fraud… …. Guidelines to help you undertake the checks You need to identify which checks are appropriate to protect your business and the services provided by third party suppliers. You will decide when you’ll carry them out, and how often. The examples given are guidelines to help you avoid getting involved with high-risk businesses and individuals. Make sure you keep a detailed record of all the checks you undertake. Make sure your supplier is legitimate and doesn’t have a history of non-compliance Checks that can help you find out include: • making sure your labour supply is commercially sustainable so it can meet statutory tax obligations and make a profit • checking the history of the labour supply business - if a previous business failed because it didn’t pay its tax debts, what changed to stop this happening again • adding a clause in the contract requiring labour suppliers to show evidence of the VAT and PAYE returns filed and payments they’ve made to HMRC • checking that appropriate licences are held and in order, for example a Gangmaster Licensing Authority (GLA) licence or a Security Industry Authority (SIA) licence • verifying the suppliers’ VAT registration details by calling Telephone: 03000 538254 before you use them and making regular checks of all VAT registration numbers afterwards • telling HMRC about your payroll or staffing outsourcing arrangements Make sure you understand and are able to approve the supply chain Actions you can take to help you establish this include: • adding a clause in the contract requiring your authorisation of further sub-contracting before any of the supplies to be made are sub-contracted to a third party labour provider • adding a clause in the contract that travel and subsistence arrangements between the workers and the labour supplier comply with HMRC • adding a clause in the contract preventing the use of offshore intermediaries • where workers supplied by agencies are being treated as self-employed, decide if the agency rules apply • ensuring the agency has complied with employment intermediary reporting requirements and get evidence of submitted reports to HMRC where they don’t operate PAYE (this includes where they use an umbrella company).”
“visiting the trader and obtaining records for the relevant period(s) and conducting credibility checks to verify that the VAT return has been applied correctly and that there is sufficient evidence to support input tax and zero rating. The whole supply chain is traced (from top to bottom), so far as possible, and analysed to confirm whether fraudulent tax losses exist from defaulting or missing UK or EU traders.” (4) He also said that the due diligence education advice and tax loss letters provided to the appellant between 2007 and 2018 referred to due diligence checks that the appellant could make on their suppliers and supply chain. The letters and links to due diligence checks confirmed the appellant could have undertaken some of the following checks, which were shown in the education leaflets and links: “Knowing your supplier’s workforce – who provides the workers, who the workers are, what their employment status is, who is responsible for paying them, are they allowed to work in UK, checking whether the workers are paid their contractual rate and that it complies with the National Minimum Wage.” “Taking a sample check of agency worker’s pay slips and checking who is responsible for paying your workers.” “Knowing how long your supply chain is – check the supplier exists, check details of any onward subcontracting.” “Knowing their suppliers – An aim of due diligence and risk assessment is to enable the taxable person to make a judgement on the integrity of their supply chain, the suppliers and the customers within it.” “Adding a clause into a contract requiring authorisation before further subcontracting to a third party.” “Ensure the supplier is operating a PAYE scheme and that it is correct.” (5) He accepted that HMRC’s guidance does not carry the force of law, and that the checks suggested are not exhaustive. That is consistent with Ms Emory’s evidence (as set out below). He confirmed that the guidance states that failure to carry out checks is only one of the factors HMRC will consider when assessing the “knew or should have known” test. He said this provides a sort of list of objective factors and a number of factors would be considered before a decision is made by HMRC. (6) In his statement Mr Harris said that (a) the appellant had not conducted checks to see whom the workers were paid by as regards both Simplify and SMP and whether either supplier had subcontracted further. The appellant failed to check payslips on a sample of the workers as recommended in the due diligence links and letters previously issued, and (b) the appellant was already on warning following the issue of the Global letters, so to act in the same way, opened the business up to the same risks of tax losses and supply chain fraud, and (c) the appellant almost instantly moved onto using SMP as its labour supplier and again did not carry out any further checks, which would have indicated fraud risks due to the connected companies. At the hearing, he confirmed that he had no personal knowledge of this and was relying on the HMRC guidance which, as noted, does not provide an exhaustive list of due diligence steps a business may take. He accepted that it sets out only a suggested list and a business has to decide what is relevant and appropriate and the guidance does not state that every business must do every check. He said checks have to be relevant and reasonable for the business to take if aware of fraud risk in any particular sector. He accepted that at the time when HMRC were looking at this they did not say to the appellant that it must check its suppliers’ payslips and any sub-contracting arrangements. He said this is in the 2017 guidance though. He accepted that he was not saying that the appellant knew of fraud and ignored it and there is nothing in the bundles showing that. He accepted that in the appellant’s case: (a) workers physically turned up on site for work; (b) the appellant had worker onboarding/induction arrangements; (c) the appellant had an on-site induction process; (d) the appellant required very granular due diligence on workers and their right to work; and, (e) this was not a case where the appellant did no checks. (7) He was asked why the fact that the appellant enhanced its due diligence steps in 2021 is relevant. He agreed that the appellant had not said that it actually knew anything was wrong in their dealings with Simplify/SMP. Rather his/HMRC’s stance is that the appellant should have spotted something or asked for something/done further checks. He said, in effect, that HMRC look for the warning signs/the objective factors and assess what a business could do to make checks and whether it neglected to do such checks with the information which it had before it. In his view, the appellant did not do enough in terms of checks. He confirmed that he is not saying they saw proof of fraud and carried on anyway. (8) It was put to him that the appellant would not automatically be shown information from Simplify and SMP on tax compliance and how workers are paid. He said that this is something they could ask for; he does not know what a business might supply. He accepted that, in his experience it is fair to say that it is not usual for a supplier to provide its internal workings regarding tax compliance to an enterprise such as the appellant. He accepted that the appellant was physically procuring labour for sites and getting them there and getting projects completed. (9) He accepted that the fact that the appellant operates in a high-risk industry does not mean every supplier is fraudulent or that every customer must assume that (Ms Emory confirmed this as well). He said that this is background/context of which a business should be aware - in this industry risks are high for fraud and it is prudent to have that in mind when considering what checks to make as well as in reviewing checks made to make an objective decision on whether to continue trading with that business. He accepted that, in the context of the provision of labour supply to construction sites, a business must carry out checks regarding the actual sites for workers, and whether they have the legal ability and permission to work in terms of the right papers and documents as well as looking at who pays the workers, ensuring they are being paid at market rate and who is supplying them. (10) It was put to him that gross payment status for CIS purposes can be removed for a number of reasons, including administrative reasons. He said he does not know about certain areas of CIS. He knows that such status can be removed due to compliance issues and/or for the late filing of returns. He accepted that non-compliance with the requirements of CIS may simply be down to poor administration and does not necessarily mean the business is involved in fraud (Ms Emory also confirmed this). He said the loss of gross payment status is an indicator to check further but does not mean fraud of itself. He accepted that the fact that Simplify/SMP were a major supplier in terms of labour provided does not reveal anything about their conduct as regards fraud. He accepted that when Ms Todorova was informed of the tax losses in relation to Simplify and SMP in June 2020, she ordered the appellant to stop trading with immediate effect with the appellant’s biggest suppliers which meant the appellant was thereby likely to suffer a loss. He accepted that the appellant was so concerned that it tried to engage a solicitor to investigate the situation. It was put to him that is consistent with a business seeking to avoid risk and being responsible. He said he could not talk to this. When pressed he said it is something to take account of as a factor. (11) In his witness statement Mr Harris said that there were 15 transactions where the VAT claimed far exceeds 20% of the net amount. However, none of the relevant invoices on their face showed VAT grossly over 20%, and the fraud and VAT defaulter status of SMP and Simplify was something HMRC was able to discover by looking at a number of records and sources (as was confirmed by Ms Emory). Mr Harris was unable to explain the calculations underpinning the tables in his witness evidence. Ms Todorova said that HMRC had applied its calculations by using figures from the cashbook information provided by the appellant – as opposed to actual invoices. Mr Harris was not able to explain where in the tables he had provided it is shown that invoices contain VAT of over 20%. He said he had seen discrepancies but he was not able to explain necessarily that column or calculations that underpin it – he could not calculate what the differential is. (12) In his statement Mr Harris set out that (a) Companies House information showed that Simplify and SMP shared the same director in Ms Nicola Scrambler at the time the transactions were undertaken. This could have been checked by the appellant when entering into an agreement with SMP to ascertain who the company officers were, but no information was provided to show any checks were made or that they acted on any adverse results, where there were risks of tax default by SMP and that they were clearly associated to Simplify, (b) HMRC held details of SMP’s Derby address which was the same as shown on Companies House and the insurance certificate. There is no evidence that the two different addresses were questioned by the appellant, (c) the insurance certificates provided for both Simplify and SMP were with the same insurance broker “Sutton Wilson” which also showed the same insured address in Derby. This was not questioned when the appellant obtained the due diligence from SMP, as it would have shown the connection between Simplify and SMP, and (d) the data sharing agreements for both Simplify and SMP are created in the same document format and show the same business addresses. Each were signed by the same compliance manager, G Towers and were agreed and signed by Ms Todorova. This would have shown the connection between Simplify and SMP and indicates that the appellant had met with the same compliance manager to review and sign these documents. The appellant did nothing to verify that SMP was a credible company that would pay its tax, when it started trading with SMP from26 September 2019 , two days after their last transaction with Simplify on24 September 2019 . (13) He accepted that companies such as SMP and Simplify can be linked for lots of reasons such as due to shared resources and administrative functions, office addresses, and shared support staff but that linkage does not of itself automatically show that they are fraudulent. He said that if businesses are linked or the same persons are involved, a customer should want to see what it is dealing with and if it is a “phoenix”
“because due diligence could have been better, the trader should be fixed with knowledge”
“It is not sufficient it was more likely than not that the transaction was connected to fraud. It requires that fraud is the only reasonable explanation.”