PAP Solutions Ltd & Anor v The Commissioners for HMRC [2026] UKFTT 761 (TC)

[2026] UKFTT 00761 (TC)Case No TC 09891
FIRST-TIER TRIBUNAL
TAX CHAMBER
Hearing Heard on: 26-29 January 2026Date Judgment date: 21 May 2026
London
Appeal references: TC/2022/13174
TC/2023/01692
TC/2024/01597
Keywords
Before
TRIBUNAL JUDGE ANNE FAIRPOTRIBUNAL MEMBER HELEN MYERSCOUGH
Between
PAP SOLUTIONS LTDAppellantAPOSTOLOS PAPADOPOULOSAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondentMr Papadopoulos, assisted by Mr Iqbal for AppellantMr Hayhurst, of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for RespondentsDECISION

Introduction

[1]The corporate appellant, PAP Solutions Ltd (‘PAP’) appeals against:(1) a denial of zero rating (19 August 2022), issued because HMRC concluded PAP either knew or should have known that the transactions were connected with VAT fraud committed by its customers; and(2) a penalty issued on 7 August 2023 under s69C Value Added Tax Act (‘VATA’) 1994 (reviewed 22 November 2023) in the amount of £29,574.90.[2]Dr Apostolos Papadopoulos (‘AP’) appeals against a Personal Liability Notice issued on 12 February 2024 under s69D VATA 1994 on the basis that the company’s actions were attributable to him as sole director.

Background

[3]PAP is a UK incorporated company established in 2013. It took over and continued the sole trader business of its sole director and shareholder, AP. PAP traded in the export of branded cigarette papers, filters, lighter products and other smoking paraphernalia to customers within the EU. It operated effectively as a one man business from a residential address in Coventry.[4]The appeal concerns 14 supplies made by PAP to two Bulgarian companies, Balioni EOOD (‘Balioni’) and Spinelo EOOD (‘Spinelo’), in the VAT periods September–December 2020. The total value of the supplies was approximately £98,583. Eight supplies were made to Balioni and six to Spinelo. PAP zero rated these supplies on the basis that they were exports to VAT registered customers located in another Member State.[5]In 2021 HMRC initially challenged 33 supplies for the period September–December 2020 and February 2021 on grounds of insufficient export evidence. That assessment was withdrawn following ADR after PAP demonstrated that some supplies were triangulation deals not requiring export evidence and HMRC accepted, on the balance of probabilities, that the remaining goods had left the UK.[6]HMRC continued to investigate the 14 transactions under appeal, which were made with two Bulgarian companies: Balioni and Spinelo. They made a number of enquiries of the Bulgarian tax authorities in respect of Balioni and Spinelo, under information gathering provisions. Replies received between May 2021 and June 2023 from the Bulgarian revenue authority stated:[7]For Balioni:(1) The company could not be found at its registered address and provided no documents.(2) It declared purchases from PAP but no sales or other purchases during its entire VAT registered lifespan.(3) The Bulgarian authorities could not confirm receipt or onward sale of the goods.(4) Its VAT registration was cancelled on 10 February 2021 by the Bulgarian tax authorities as they had been unable to locate the company or any representative in the course of a tax check.[8]For Spinelo:(1) Spinelo and its representative could not be contacted and provided no documents.(2) It declared purchases from PAP but no sales or other purchases during its VAT registered lifespan.(3) It was not registered as an employer in Bulgaria(4) No evidence of genuine commercial activity could be established.(5) Its VAT registration was cancelled on 28 May 2021 by the Bulgarian tax authority as neither Spinelo nor its representative could be contacted and it was held to be a non-compliant taxpayer.[9]Both companies had been registered in the commercial register on the same date (1 June 2020) and had been VAT registered on the same date (4 June 2020). They had similar commercial register activity entries unrelated to the goods in question, and used the same individual (Mr Dinov) to collect goods from PAP and to deposit cash into their bank accounts.[10]Payment for the 14 transactions was made partly through the companies’ Bulgarian bank accounts but also, on several occasions, substantial amounts were paid in cash (in sterling) and collected by AP in Bulgaria. AP then deposited this cash into PAPs UK business account.[11]Following correspondence between the parties, HMRC issued a decision denying zero-rating of the 14 transactions referred to above on the basis that PAP knew or should have known its transactions were part of tax fraud committed by Balioni and Spinelo and that it had not taken every reasonable step within its power to prevent its own participation in that fraud. This was the principle set out in the case of Mecsek-Gabona Kft (C-273/11). (‘Mecsek-Gabona’).[12]Following review, this decision was appealed by PAP to this Tribunal on 22 October 2022. The penalty issued to PAP was appealed following a review on 11 December 2023 and the personal liability notice issued to AP was appealed on 25 February 2024

Relevant law on zero rating

[13]Article 138(1) Principal VAT Directive 2006/112/EEC provides for the exemption of supplies of goods between traders in different member states. The UK enacted that as a zero-rating provision (i.e. "exemption with full reclaim") by s 30(8) VAT Act 1994 ("VATA 1994”):
"Regulations may provide for the zero-rating of supplies of goods, or of such goods as may be specified in the regulations, in cases where— (a) the Commissioners are satisfied that the goods have been or are to be exported to such places as may be specified in the regulations, and (b) such other conditions, if any, as may be specified in the regulations or the Commissioners may impose are fulfilled."
[14]The relevant regulation is reg 134 VAT Regulations 1995 , SI 1995/2518:
“Where the Commissioners are satisfied that- (a) a supply of goods by a taxable person involves their removal from the United Kingdom, (b) the supply is to a person in another member State, (c) the goods have been removed to another member State, and (d) the goods are not goods in relation to whose supply the taxable person has opted, pursuant to section 50A of the Act, for VAT to be charged by reference to the profit margin on the supply, The supply, subject to such conditions as they may impose, shall be zero-rated.”
The supply, subject to such conditions as they may impose, shall be zero-rated.”

Restrictions on zero-rating: case law

[15]The principle that a right existing for VAT purposes may be restricted in the context of fraudulent evasion of VAT is most commonly understood by reference to the right to deduct input tax. The key principles are derived from Axel Kittel v Belgium; Belgium v Recolta Recycling (C-439/04 and C/440-04) [2006] ECR 1-6161 and the decision in Mobilx Ltd (in administration) [2010] EWCA Civ 517. The Court of Appeal concluded in Mobilx (at [49]) that there was no relevant distinction in this regard between domestic and Community law. The right to deduct must be refused: “… 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’.” (Kittel at [59]).[16]The principle also applies to restrict the right to zero-rate supplies. In Mecsek-Gabona a Hungarian exporter was denied relief from VAT on an export of goods to an Italian customer who was alleged to be fraudulent. The CJEU stated:
"53 … [it was] for the national court to carry out an overall assessment of all the facts and circumstances of the case in order to establish whether Mecsek-Gabona had acted in good faith and taken every step which could reasonably be asked of it to satisfy itself that the transaction which it had carried out had not resulted in its participation in tax fraud … 55 … [a tax authority is permitted to refuse] to grant a vendor the right to the VAT exemption for an intra-Community supply, provided that it has been established, in the light of objective evidence, that the vendor has failed to fulfil its obligations as regards evidence, or that it knew or should have known that the transaction which it carried out was part of a tax fraud committed by the purchaser, and that it had not taken every reasonable step within its power to prevent its own participation in that fraud."
[17]HMRC were therefore entitled to deny zero rating in respect of the transactions which are the subject of this appeal if, on the balance of probabilities, if they can establish that [PAP] .. knew or should have known that the transactions were connected with tax fraud and that it had not taken every reasonable step within its powers to prevent its own participation in that fraud." (Mecsek at [55])

Evidence

[18]We were provided with witness statements by AP and Officer Cook, both of whom also gave oral evidence at the hearing. We also had a hearing bundle and two supplementary bundles of evidence.[19]We considered all of the evidence before us and have taken it into account in this decision, together with the submissions of the parties. This decision focusses on the evidence and submissions material to the decision; where we have not set out elements of evidence and submissions, that does not mean that these were not taken into consideration.[20]Officer Cook was a reliable witness giving straightforward answers to the best of his ability.[21]We found AP to be a less reliable witness. We note that AP has some speech difficulties, and that English is not his first language. We have taken these factors into account in considering his responses to cross-examination. When asked about matters which contradicted aspects of his evidence, he generally said that the HMRC officer had misunderstood him or otherwise made a mistake. AP also contended that evidence was available to support many statements, but that he had either lost it or mislaid it.[22]AP considered that it was impossible to remember matters which had taken place a number of years ago, but nevertheless either contended that HMRC had made mistakes in the contemporaneous documents or gave absolute answers in respect of matters around that time. For example, when asked if he had read Notice 726, his response was that it was impossible to remember whether he had read it. However, he then answered that he had “of course” considered the risk factors set out in that Notice and adopted them in his due diligence approach.[23]On balance, although we accept that mistakes may be made, we consider that AP’s approach to answering questions in the hearing meant that his evidence was not particularly reliable. We have generally preferred documentary evidence where it was available.

Communications between HMRC and PAP

[24]It was not disputed that there had been extensive visits by HMRC to PAP from 2013 onwards regarding the risks of being involved in cross-border transactions of this nature. PAP had twice been placed on monthly monitoring due to concerns about the way in which it carried on business. Almost all of PAP’s declared supplies were zero rated as sales to VAT registered entities in other EU member states. As such, most of its VAT returns were repayment claims arising from input tax incurred on purchases.[25]A monitoring call was held in September 2020 to discuss trading activities and how transactions were undertaken. During the conversation, AP confirmed that PAP was paid in cash, either euros or sterling, by a Bulgarian customer (Gerrard; this referred to two entities, Gerrard AD and Gerrard Bulgaria) because the customer’s bank account had been blocked. AP would collect the cash from the customer and bring it back to the UK. He did not declare the cash (which would be anything from £10,000 to £50,000 at a time) to Customs.[26]A VAT number used on a VAT invoice for Gerrard was found to be invalid; AP advised that the invoice had been mistakenly issued using that VAT number, and that this had been corrected.[27]At a subsequent call in December 2020 the cash payments by Gerrard were discussed; AP was advised that he needed to be registered as a High Value Dealer given the level of cash being brought into the UK. He stated that only Gerrard paid him in cash and that PAP’s invoices had stated from September 2020 that payment could not be made in cash. AP confirmed that he did not run financial checks on companies. When advised that he needed to do so, AP stated that he considered it more reliable to actually meet with the customer.[28]On 15 February 2021, HMRC sent a tax loss letter regarding Gerrard, as fifteen supplies made by PAP to Gerrard had been traced to a tax loss. He was advised that one of the companies had been deregistered on 12 May 2020 and any supplies to them after that date should be standard rated (although the schedule of transactions did not show any supplies to that company after that date). PAP were asked to provide copies of the due diligence checks undertaken on the two Gerrard companies.[29]In March 2021 HMRC made enquiries of the Bulgarian tax authorities regarding supplies by PAP to Spinelo and Balioni. The Bulgarian authorities replied on 10 May 2021 stating that they had been unable to contact the company and no response had been received to written requests for documents. They confirmed that Spinelo had declared acquisitions from PAP but had declared no other purchases and no sales. The Bulgarian authorities subsequently confirmed that they had cancelled Spinelo’s VAT registration with effect from 28 May 2021.[30]On 16 July 2021, the Bulgarian authorities confirmed that they had been unable to contact Balioni and that it had not responded to written requests for documentation. Balioni’s VAT registration had been cancelled within effect from 10 February 2021 as a missing trader. Balioni had declared acquisitions from PAP but had declared no other purchases and no sales.[31]On 26 May 2021, HMRC notified PAP that there were inaccuracies for the monthly VAT periods September to December 2020 in the evidence produced to support zero-rated supplies. HMRC initially denied the zero-rating claim for transactions on the basis that insufficient export evidence had been supplied. Following a review request, this decision was withdrawn and an amended assessment issued to deny the zero rating in later periods, to reflect the three month period in which export evidence should be submitted.[32]Following an ADR meeting and evidence of triangulation supplies, and other evidence, being provided, HMRC accepted on the balance of probabilities that the goods had been exported.[33]HMRC subsequently disallowed zero rating in respect of non-triangulated supplies to Balioni and Spinelo in the periods September to December 2020. It is this decision which is under appeal.[34]AP’s submissions included a number of criticisms of HMRC’s behaviour with regard to the conduct of the investigation. We noted in the hearing that our jurisdiction with regard to tax matters does not extend to HMRC behaviour in this context.

Due diligence

[35]The meeting notes from the HMRC visit in June 2013 state that AP explained that he carried out full due diligence checks, including credit checks and VIES checks on VAT numbers. His suppliers and customers were longstanding businesses and he would not trade without reasonable checks. He was concerned about the possibility of counterfeit goods and, for example, had decided not to use a potential supplier offering low prices because he had heard bad reports of the company.[36]In the hearing AP stated that he did not think he had said that he would do credit checks on customers, as his suppliers had not run credit checks on him. He thought that this was something new and not business-related 13 years ago.[37]At a visit in November 2017, AP confirmed that he met potential customers at trade shows. When asked if he carried on any due diligence on customers, he explained that he would ask around other business contacts, check how long they had been in business, and visit premises to ensure they were legitimate. When asked in the hearing if he had visited Balioni and Spinelo’s premises, he said that he was not sure if he had, but that he had met them in the wholesale area in Sofia.[38]When asked if he carried out third party checks such as credit checks, AP stated that he verified everything relating to price, reputation and nature of the business. He checked VAT registration numbers on the VEIS website and would go ahead with a transaction if the registration number showed as valid on VEIS. He had not retained any contemporaneous evidence of these checks: the VEIS confirmation provided to HMRC was dated November 2022, although the VEIS acquisitions details provided had been obtained around the time of the transactions.[39]AP’s evidence was that it was not important that there was no evidence of a VIES check of registration because he also had the certificate of information for each company and had the Bulgarian IDs. He stated that the certificate of incorporation was evidence that they had been VAT registered. HMRC pointed out that the incorporation certificates were dated July 2021 and so they were not evidence that he had the information when he decided to do business with the companies. AP replied that it was also not evidence that anything incorrect had happened.[40]AP’s evidence in the hearing was that perhaps he had lost the VIES confirmation or accidentally deleted it. It was not something that worried him because he considered that the customers were doing everything correctly.[41]In the hearing, AP confirmed that he obtained copies of ID information for the individuals involved with Balioni and Spinelo and that he had had conversations with them and had been to see the premises from which they operated (although, as noted above, he also stated that he was not sure if he had visited their respective premises), and had asked around about them. He considered that due diligence was more of a dynamic thing and not just a list; he made sure that he did this to make sure that he was acting in accordance with VAT Notice 703 (which we note is a Notice dealing with export evidence, and not due diligence).[42]AP considered that it was up to him to feel comfortable that he understood his customers, and that the sort of checks that HMRC considered appropriate were UK checks that were not done in other countries. He did not believe that a UK company would have the means of doing a credit check in another country and, further, that it could not be a requirement to do a credit check on a new business because the result would be zero and so no-one could make supplies to that business. He repeated stated that HMRC were viewing everything from a UK mentality than meant that specific rules had to be followed, but that he was dealing with other countries and that other evidence should be accepted.[43]AP stated in the hearing that the culture in Bulgaria was to pay in cash, so that there would not be sufficient data from which credit scores could be calculated, and there was no company which he could have used to run credit checks. It was not the same as in the UK, and he considered that he was being asked for something that did not exist in Bulgaria. He considered that as he had customer ID information and their evidence that they had declared the purchases for VAT purposes, that should be a sufficient basket of evidence. He conceded that the VEIS evidence that the purchases had been declared, and the fact that the customers had paid him, was more important.[44]AP considered that, as Balioni and Spinelo had been able to register as companies, obtain VAT registration, and had opened bank accounts, this showed that the Bulgarian authorities were satisfied with them. He had asked for ID, incorporation certificates and confirmation that acquisitions had been declared for VAT purposes. He considered that it was for the Bulgarian authorities to stop Balioni and Spinelo if there was VAT fraud and that HMRC were expecting him to do the job of the Bulgarian authorities.[45]There was no evidence of any orders from either company. AP’s evidence was that he sent them sales orders and they would either sign them in his presence or email confirmation. They did not issue any orders. No email confirmations were provided to the Tribunal.

Payments

[46]During a call with HMRC in September 2020, AP confirmed that PAP was paid in cash, either euros or sterling, by one Bulgarian customer (Gerrard) because the customer’s bank account had been blocked. He would collect the cash from the customer and bring it back to the UK. He did not declare the cash (which would be anything from £10,000 to £50,000 at a time) to Customs. He stated that PAP was not paid in cash by any other customers.[47]In the hearing, AP said that he did not think he had understood what was being asked in that call. He wasn’t now able to specifically say whether he, or the HMRC officer, had misunderstood the conversation.[48]When asked why, then, he had said in a subsequent call in December 2020 that Gerrard were the only customers paying in cash, AP stated that he had said it was also some other customers, then said that the questions should be put to the officer who had taken part in the call as the conversation was five years earlier and he could not confirm what had been said in the conversation: perhaps he had said something else, but the officer had recorded only one part of his answer. We did not find this speculation to be particularly helpful and on balance we prefer the documentary evidence.[49]AP’s evidence regarding payments from Balioni and Spinelo was that cash payments were how business was generally done in Bulgaria, although he had no explanation as to why they were willing to incur the fees of paying him in sterling other than to say that he had billed them in sterling. Both businesses had bank accounts and could have made payment by transfer. AP considered that, as he was travelling to Bulgaria to receive orders, it was not unreasonable to accept cash payments and bring those back to the UK.[50]The cash was generally paid into PAP’s bank account by relatively small deposits each day over the counter at a Post Office. AP stated that this was for security reasons, that it was less risky to make deposits at a nearby Post Office than depositing the entire amount at his bank branch.[51]Both Balioni and Spinelo also made payments by bank transfer. Banking information obtained by HMRC from the Bulgarian authorities showed each company’s bank account had very little activity other than that required to make the payments to PAP. Both accounts were funded by cash deposits made by Mr Dinov, who also collected goods on behalf of the companies once they had been transported to Bulgaria by PAP.

Customer agreements

[52]PAP signed agreements with both Balioni and Spinelo; AP prepared each of the documents using a format he had used with other companies. These were one page documents which recorded details of PAP and the customer, each stating that PAP agreed to sell goods to the customer, and to have an open account. The agreements were each dated 15 May 2020 ; for Spinelo, the date next to the signature on behalf of PAP was handwritten. Each agreement included the VAT registration number of the customer company.[53]The Bulgarian tax authority confirmed to HMRC that neither Balioni nor Spinelo could have known what their VAT number was on 15 May 2020; the companies were each VAT registered on 4 June 2020 and their VAT number was allocated and communicated to them on that date.[54]In the hearing, AP stated that the date on each of these documents was not correct, but they had not been back-dated although they had been signed some time after 15 May 2020. He said that it was a simple error, nothing more, although it was not easy now to remember how the error had occurred. He accepted that there was no reference to the error in his witness statement, but believed that he had mentioned it to HMRC in correspondence. This explanation was not credible, as HMRC were unaware that there was any such mistake at the time that AP stated he had mentioned it. AP stated that mistakes are made when doing business and considered that the dating of the agreements was simply an error.

Issues to be determined

[55]HMRC accepted that PAP supplied physical goods which were exported to Bulgaria and that it held all relevant export documentation. The denial of zero-rating was made solely on the basis that PAP knew or should have known that it was participating in a supply chain involving fraudulent defaulters. PAP accepted that the transaction chains were accurate but did not accept that there had been a fraudulent tax loss in any of the transactions to which this appeal relates (although they had in earlier correspondence accepted that there was such a tax loss).[56]There was no dispute as to quantum or the validity of the decision or penalties: the latter are challenged only on the basis that HMRC’s denial of zero-rating (the Mecsek case) was incorrect.[57]The substantive issues for this Tribunal to determine were therefore:(1) whether there was a tax loss connected with fraud in respect of each of the 14 transactions;(2) whether PAP knew that the transactions were connected with VAT fraud;(3) if not, whether PAP should have known that the transactions were connected with VAT fraud;(4) whether PAP had taken every reasonable step in its power to prevent its own participation in that fraud.[58]As noted, there was no dispute that the penalty issue in respect of PAP follows on from the Mecsek issue. If HMRC fail to prove the Mecsek case, the penalty appeal and AP’s appeal against the personal liability notice must also be allowed. If, however, HMRC are able to prove their Mecsek case, we must still consider whether the penalty amount is appropriate and further consider whether the personal liability notice is appropriate.

Summary of the parties’ arguments

[59]HMRC asserted that Balioni and Spinelo were fraudulent missing traders and that PAP had actual or constructive knowledge of the fraud because:(1) the customers exhibited multiple objective red flags;(2) payment patterns, documentation and trading conditions were highly abnormal;(3) PAP’s due diligence was superficial and failed to identify obvious risks;(4) similar concerns had been raised in PAP’s earlier trade with another Bulgarian entity (Gerard AD), which was also linked to fraud.[60]HMRC contended that PAP did not take every reasonable step to prevent participation in the fraud.[61]PAP and AP disputed all allegations of fraudulent connection and argued:(1) The Bulgarian authorities did not identify or assert fraud at the time; both customers declared acquisitions.(2) Business failure and non cooperation during the pandemic did not equate to fraud.(3) PAP acted in good faith, took reasonable steps, and had no means of knowing of any wrongdoing.(4) HMRC’s case was a product of hindsight and delay rather than contemporaneous risk indicators.

Were the supplies to Balioni and Spinelo connected with fraudulent evasion of VAT

[62]HMRC contended that all 14 of the transactions in question were part of fraudulent VAT evasion by the two companies. The Bulgarian authorities had established that they were missing traders, as neither could be located at their registered addresses and their representatives also could not be located. The VAT returns of both companies included only purchases from PAP; no other purchases and no sales were reported on any VAT return filed by the companies.[63]HMRC contended that this pattern, claiming input tax but failing to declare any output tax, was a typical missing trader pattern and necessarily indicated a fraudulent VAT loss.[64]PAP argued that no tax loss had been established, let alone a fraudulent tax loss. The fact that the companies had ceased trading or otherwise were not contactable did not demonstrate fraud. The Bulgarian tax authorities’ report did not state that fraud had occurred, only that the companies were non-compliant and that the representatives could not be contacted. PAP contended the companies could equally have failed as a result of the global pandemic which was continuing to have an effect at that time.[65]PAP contended that it was accepted that the goods had left the UK, and the purchases had been declared in the companies’ VAT returns: they contended that in a case of fraud, those purchase would not have been declared.

Discussion

[66]We note that the burden lies on HMRC to show that the relevant transactions were connected with fraudulent evasion of VAT; it was not disputed that PAP was involved in the relevant transactions.[67]Considering the evidence before us, we conclude that there was a tax loss: AP’s evidence was that Balioni and Spinelo both sold the goods that were supplied by PAP to local small retailers. It was not disputed that any such sales would have been subject to VAT. Both companies failed to declare any sales on their VAT returns to the Bulgarian tax authorities.[68]PAP’s contention that the Bulgarian authorities did not specifically state that there had been VAT fraud is not conclusive of the matter. PAP’s contention that the circumstances could be explained by the pandemic are not sustainable: even if the companies were in financial difficulties and unable to pay VAT amounts due, if they had intended to comply with their legal obligations they would have declared their sales on their tax returns.[69]We consider that the only reasonable explanation, consistent with all the circumstances, noting the companies’ failure to declare any sales and AP’s evidence that they were making sales and that they only declared purchases from a supplier who insisted on being provided with evidence of such declaration, is that the companies were involved in fraudulent evasion of VAT.[70]Accordingly, we find that there was a tax loss in the supply chain to which these transactions were connected and that the tax loss was as a result of fraudulent evasion of VAT by Balioni and Spinelo.[71]During the hearing PA argued that the phrase “supply chain” referred only to its suppliers and did not refer to its customers; we consider that this phrase properly refers to the entire supply chain, including both PAP’s suppliers and its customers.

Did PAP know that the transactions were connected with such fraud

[72]HMRC contended that PAP had actual knowledge of the fraud, based on the features of the transactions and PAP’s previous dealings with HMRC. In the alternative, they contended that for the same reasons, PAP should have known that the transactions were connected with fraud.[73]PAP had been repeatedly warned about VAT fraud in its business sector in HMRC visits, education letters and discussions between 2013 and 2016. PAP had been put on monthly monitoring by HMRC, following warnings of MTIC fraud in the supply chain. They had been warned about a previous Bulgarian customer whose transactions had also been found to be connected to fraud.[74]There were significant similarities between Balioni and Spinelo:(1) both were registered on the same date in the commercial register (on 1 June 2020)(2) both were registered for VAT on the same date (4 June 2020)(3) both used the same individual (Dinov) to collect goods(4) neither declared any sales to the Bulgarian tax authorities(5) both purchased large quantities of goods from PAP[75]HMRC contended that it was improbable that two customers, who were said to be unrelated, would share this many similarities unless fraud was involved.[76]HMRC further argued that the due diligence which AP stated he had carried out on behalf of PAP was wholly inadequate: there was no evidence that any basic checks, such as verifying VAT registration, had been undertaken before trading began, and reliance was placed on generic documents produced late, including after trading had begun.[77]PAP contended that it had traded for over a decade, with regular oversight from HMRC, and had never previously been considered to have participated in fraud. They denied any knowledge of fraud.[78]PAP contended that they undertook reasonable due diligence, verifying VAT registration at the relevant time, obtaining ID documentation, meeting with the company representatives and requiring the companies to provide VIES information to confirm that the purchases had been declared to the Bulgarian authorities. PAP only required their Bulgarian customers to provide these, including Gerrard, as their customers in other countries were larger more established businesses which he considered were lower risk.[79]PAP contended that the due diligence checks had to be considered in the context of the environment in which they were undertaken: it was not possible, for example, to carry out meaningful credit checks in Bulgaria because much of business operated on a cash basis. No due diligence activity identified by HMRC would have revealed or prevented the alleged participation in fraudulent transactions. The due diligence undertaken exceeded the requirements of HMRC’s Notice 726.[80]HMRC argued that the way in which PAP carried on business with these customers was not consistent with that of a genuine trader:(1) it accepted over £430,000 in cash from the two companies in Bulgaria, paid in sterling, although AP was aware that this could create difficulties with banking as he had previously had a bank account frozen due to large cash deposits;(2) it was paid over £90,000 by Bailoni less than a month after first meeting with the company representative, and before any invoices had been raised;(3) money continued to be received for months after trade had stopped and invoices ceased to be raised;(4) the payments received bore no resemblance or correlation to invoices raised;(5) significant quantities of goods were shipped to Spinelo in particular before payment, running a significant commercial risk with no good explanation.[81]PAP contended that there was nothing unusual with this trading pattern, and that they had done business on the same, or similar terms with many other customers. They had long accepted payment in cash, which was common in Bulgaria, and all cash was declared and banked. The freezing of their bank account had been an error on the part of the bank.[82]PAP contended that HMRC’s arguments were based on hindsight at best; nothing at the time of the transactions indicated that there may have been any fraud.

Discussion

[83]Given that PAP has a legal personality only, we are required to consider (and it was not contended that any other approach should be taken) the actual and means of knowledge of AP, the sole person involved with PAP. We note that the burden lies on HMRC to show that PAP (effectively, AP) knew or should have known that it was participating in transactions connected with VAT fraud.[84]The evidence shows that HMRC had a number of meetings with PAP over the years. In the hearing, AP accepted that he had received the VAT notices and other information on behalf of PAP, although this was an assumption on his part as it had been a long time ago. He agreed that there had been a long discussion with HMRC regarding MTIC risks, but considered that this had been a wide discussion with very generic information. AP stated that he had considered the risk factors and had adopted the checks set out in section 6.2 of VAT notice 726. He stated that he followed Notices 762 and 703.[85]AP accepted in the hearing that by 2014 he was aware that there could be fraud in PAP’s supply chains. However, he considered that HMRC had been aware of the nature of PAP’s business throughout all the visits and that they did not appear to have any concerns about PAP’s transactions as there were no official warnings issued.[86]As noted above, AP’s evidence was inconsistent and, on balance, we prefer the documentary evidence which indicates that his answers to HMRC were not accurate, particularly with regard to receipt of cash payments and electronic payments. We consider that he was giving the answers he assumed HMRC wanted to hear.[87]AP’s evidence was that he required customers to pay in advance to obtain the goods, so that he had control of the goods and so had security: if the customer did not pay, he did not release the goods. He stated that this was also because his suppliers generally required money on account, to give them security before they supply PAP. He had made sure that in most cases, most of the funds were obtained on account so that risk was reduced.[88]This was wholly inconsistent with the way in which PAP did business with Balioni and Spinelo. The analysis of the invoices and payments, which was produced by HMRC from PAP’s documents and was not disputed by PAP, showed that PAP provided (and released) goods to both companies prior to any substantial payment of the relevant invoices, including incurring the costs of transport and AP’s regular costs of travel to Bulgaria as well as other overheads. Spinelo at one stage owed over £100,000 to PAP.[89]AP also had no credible explanation as to how two one-person companies could fund purchases of over £1,000,000 in aggregate in the space of a few months: he simply stated that they understood the business.[90]AP also continued to maintain, in the face of clear evidence to the contrary, that Balioni and Spinelo had been “doing everything correctly”. Given that his evidence was that he had seen their premises and knew of their sales of goods, this was not a credible position to maintain given the Bulgarian authorities’ clear statements that neither company declared any sales at all. Indeed, the only things they declared were the transactions which needed to be declared to produce the piece of paper (the VIES record of purchases from PAP) that AP stated he required they provide.[91]We consider that the only reasonable explanation for the inconsistencies in evidence, the refusal to accept clear evidence of VAT fraud by the customers, and the uncommercial relationship between PAP and these two companies, permitting them to accumulate a significant level of debt whilst continuing to supply them, is that PAP knew that there was VAT fraud in its supply chain. Provided PAP was being paid by its customers, it was not particularly concerned about this as AP’s view was, as set out in his evidence, that it was for the authorities to stop VAT fraud.[92]We therefore find that HMRC have met the burden of proof on them to show that PAP knew that their supplies were connected with VAT fraud.

In the alternative, should PAP have known that the supplies were connected with fraud

[93]As set out above, we have concluded that PAP knew that its supplies were connected with VAT fraud. In case we are wrong on that, and given the parties’ submissions, we have considered the alternative question whether, even if PAP did not know, it should have known that the supplies were connected with fraud.[94]The approach to be taken by this Tribunal in relation to the “should have known” issue can be distilled from a number of cases referred to by the parties:(1) individual transactions should be considered in context: this can include drawing inferences from a pattern of transactions, and we should 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”: Red 12 Trading Ltd [2010] STC 589, at [109] to [111].(2) we are required to guard against over-compartmentalisation of relevant factors, and to stand back and consider all of the circumstances: Davis and Dann Ltd & Anor [2016] EWCA Civ 142.(3) the trader need not know the details of the fraud or of the connection between its transactions and the fraudulent evasion of VAT: Fonecomp Limited [2015] EWCA Civ 39.[95]The question of whether PAP “should have known” involves the application of an objective test namely whether, even if PAP did not actually know that its transactions were connected with fraud, a reasonable businessperson with ordinary competence in PAP’s position would have known.[96]AP argued (in summary) that he had no means of knowing that the companies were involved with VAT fraud and that it was for the authorities to stop such fraud.

Discussion

[97]We consider that AP’s evidence regarding due diligence was to be considered in the context that he believed that HMRC should have told him that something was wrong with a previous Bulgarian customer (Garrard), with whom PAP had undertaken transactions of over £1,000,000 almost all paid in cash, over a period of just over two years. AP argued that HMRC had not raised an assessment in respect of those transactions, which AP’s evidence was had been carried out in the same way as those with Balioni and Spinelo. The first he had known that HMRC considered that there was a problem with Garrard came in 2021, after PAP had ceased trading with Balioni and Spinelo.[98]This approach was also clear in AP’s statement that he considered that it was for the Bulgarian authorities to stop Balioni and Spinelo if they were committing VAT fraud, and that HMRC were effectively expecting him to do the job of the Bulgarian authorities.[99]Similarly, with regard to questions about why he had not registered as a high value dealer when advised that he needed to do so given the level of cash he was importing into the UK, he took the view that as he had not had an official warning he had assumed it was not compulsory, as HMRC had visited and he considered that they were fully aware of the business.[100]AP stated that he did all of the due diligence that was open to him to do: he obtained copies of ID information, he checked VAT and corporate registration, he got to know his customers and he obtained VIES evidence that purchases were declared. His evidence was that the sorts of checks that HMRC considered were appropriate were not done in other countries. He stated that it was not possible to undertake credit checks in Bulgaria, as that was not how business was done in that country. He also contended that it was not an absolute requirement to obtain credit checks as part of due diligence, and that these would be meaningless for new companies. AP stated in the hearing that the fact that Spinelo continued to pay him after they were deregistered showed that he was correct and the companies were doing everything correctly.[101]Accordingly, we consider that AP’s approach to due diligence is best described by his comments that the UK and Bulgarian authorities should have done something, that it was not for PAP to stop VAT fraud. Although he obtained documents, we find that he did not consider them in any detail or at all. Notably, with regard to the VIES documents, those produced by Garrard were fraudulent: a short check of the details of the VAT registration details would have shown this. AP’s explanation was that perhaps there had been a different address in 2018 when he started to receive them. We consider that it is more likely that he simply did not check the VAT registration for Garrard.[102]AP’s repeated evidence was that PAP could not undertake credit checks because there was no such thing in Bulgaria. There was no evidence to show that PAP had attempted to obtain any financial information in respect of Balioni and Spinelo. Given that PAP provided credit to both customers, we consider that a reasonable trader would have undertaken such checks for their own protection as well as to ensure that the customers were credible traders. On balance, we consider it more likely that PAP considered that obtaining documents from the customer was sufficient and that AP did not in fact consider the documents provided and so did not carry out any effective checks of the businesses.[103]We consider that a reasonable businessperson with ordinary competence, faced with two potential customers whom they had met together, who used the same individual (Dinov) to collect goods and make payments, who wanted to make payment of substantial sums in cash, who had registered for VAT on the same day and had registered as a company on the same day, yet were apparently in competition with each other, would have considered in all of the circumstances that it was more likely than not that those companies were working together and would have sought answers as to why they were separately registered.[104]We consider that if PAP had carried out effective checks, it would have questioned how the companies were able to fund the substantial transactions taking place shortly after being formed. It would have questioned why Balioni was willing to provide £90,000 in cash without security to PAP within two or three weeks of meeting AP for the first time. It would have questioned why the payments were being made in cash, in sterling, rather than being made by bank transfer which would have involved considerably less risk. This is particularly given that AP’s evidence was that he deposited the cash in small transactions at the Post Office as this method was less risky than depositing the cash in a single transaction at his bank. We consider that a reasonable businessperson with ordinary competence would have made such checks and would have realised that the arrangements were not commercially credible.[105]We have noted the submissions made regarding the customer agreements and the date on those being inconsistent with the companies’ VAT registration. The agreements were clearly dated sometime later than 15 May 2020. We do not consider that this was necessarily indicative of fraud. Whilst it may be that the agreements were produced much later, to try to mislead HMRC, there is no clear evidence as to when (other than after VAT registration of the companies) the documents were produced. They were in the same format as other agreements with customers in the bundle, which were also produced by PAP. We consider that it is equally plausible that these agreements were further documents which AP obtained by rote without paying any attention as to the detail of the documents.[106]We conclude that the above factors taken together would have meant that a reasonable business person with ordinary competence would have considered that it was more likely than not that the customers’ business was connected with fraud. We therefore find that PAP should have known that its supplies to Balioni and Spinelo were connected with fraud.

Has PAP shown that it took every reasonable step within its power to prevent participation

[107]For the reasons set out above, we do not consider that PAP has shown that it took every reasonable step within its power to prevent participation. As noted, we find that although AP obtained some documentation he did no more than collect it; he did not go on to consider the contents of those documents. PAP undertook no financial checks on Balioni and Spinelo. The only contemporaneous documents produced were copies of ID: VAT and corporate information was generally dated after the transactions took place.[108]AP’s evidence was, in summary, that as long as PAP was being paid he considered that everything was being done correctly. He considered that it was for the authorities to prevent VAT fraud.[109]On balance, we consider that PAP did not take any substantive steps to prevent participation, let alone every reasonable step within its power.

Conclusion as to the decision to deny zero-rating

[110]For the reasons set out above, we conclude that HMRC were entitled to deny zero rating in respect of the transactions which are the subject of this appeal.

Was HMRC entitled to impose a s69C penalty on PAP

[111]Section 69C VATA permits a penalty to be issued to a company where the company entered into a transaction which was connected with the fraudulent evasion of VAT by another person and the company knew or should have known that the transaction was connected with the fraudulent evasion of VAT.[112]Given our conclusions above, it follows that we consider that HMRC were entitled to impose a s69C penalty on PAP. No mitigation of the penalty was considered appropriate. PAP made no submissions as to the quantum of the penalty.[113]Given that we have concluded that PAP knew that its customers were engaged in fraudulent evasion of VAT we do not consider that there is any reason to mitigate the penalty. We conclude that the penalty was validly issued.

Was HMRC entitled to issue a s69D personal liability notice to AP

[114]HMRC contended that the actions of PAP which gave rise to the s69C penalty liability were solely attributable to AP, who was the sole director and shareholder of PAP. AP did not content that this was incorrect, or that anyone else was involved in PAP’s actions in respect of these transactions.[115]AP did not make any particular submissions with regard to the penalty liability notice, as he simply contended that the zero-rating should not be denied and that the company was not liable to any penalty as a result.[116]Given our conclusions above, and noting that AP did not dispute that anyone else was involved in the transactions, we consider that the penalty liability notice was validly issued.

Right to apply for permission to appeal

[117]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:21 May 2026