“…a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods.”
“57.That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice. 58. In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.”
“... it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity’.”
“A trader who decides to participate in a transaction connected to fraudulent evasion, despite knowledge of that connection, is making an informed choice; he knows where he stands and knows before he enters into the transaction that if found out, he will not be entitled to deduct input tax. The extension of that principle to a taxable person who has the means of knowledge but chooses not to deploy it, similarly, does not infringe that principle. If he has the means of knowledge available and chooses not to deploy it, he knows that, if found out, he will not be entitled to deduct. If he chooses to ignore obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct.”
“If it is established that a trader should have known that by his purchase there was no reasonable explanation for the circumstances in which the transaction was undertaken other than that it was connected with fraud then such a trader was directly and knowingly involved in fraudulent evasion of VAT. The principle in Kittel , properly understood, is, as one would expect, compliant with the rights of traders to freedom from interference with their property enshrined in art I of the First Protocol of the European Convention of Human Rights . The principle in Kittel does no more than to remove from the scope of the right to deduct, a person who, by reason of his degree of knowledge, is properly regarded as one who has aided fraudulent evasion of VAT.”
“I can do no better than repeat the words of Christopher Clarke J in Red12 v HMRC[2009] EWHC 2563 (Ch) ,[2010] STC 589 , ‘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. ‘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.’”
“Such circumstantial evidence, of a type which compels me to reach a more definite conclusion than that which was reached by the tribunal in Mobilx , will often indicate that 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. In Mobilx , Floyd J concluded that it was not open to the tribunal to rely upon such large rewards because the issue had not been properly put to the witnesses. It is to be hoped that no such failure on the part of HMRC will occur in the future. In so saying, I am doing no more than echoing the warning given in HMRC's Public Notice 726 in relation to the introduction of joint and several liability. In that Notice traders were warned that the imposition of joint and several liability was aimed at businesses who "know who is carrying out the frauds, or choose to turn a blind eye" (3.3). They were warned to take heed of any indications that VAT may go unpaid (4.9). A trader who chooses to ignore circumstances which can only reasonably be explained by virtue of the connection between his transactions and fraudulent evasion of VAT, participates in that fraud and, by his own choice, deprives him of the right to deduct input tax.”
“In my judgment … in assessing whether the respondents' knowledge met the no other reasonable explanation standard, the FTT still had to go on to consider all the circumstances. The question is whether or not a reasonable person mindful of those circumstances ought to have concluded that the Transactions were connected with fraud. What matters is the perspective of the person alleged to have such knowledge.”
“Of course, we accept (as, we understand, does HMRC) that where the appellant asserts that there is an explanation (or several explanations) for the circumstances of a transaction other than a connection with fraud then it may be necessary for HMRC to show that the only reasonable explanation was fraud. As is clear from Davis & Dann , the FTT's task in such a case is to have regard to all the circumstances, both individually and cumulatively, and then decide whether HMRC have proved that the appellant should have known of the connection with fraud. In assessing the overall picture, the FTT may consider whether the only reasonable conclusion was that the purchases were connected with fraud. Whether the circumstances of the transactions can reasonably be regarded as having an explanation other than a connection with fraud or the existence of such a connection is the only reasonable explanation is a question of fact and evaluation that must be decided on the evidence in the particular case. It does not make the elimination of all possible explanations the test which remains, simply, did the person claiming the right to deduct input tax know that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT or should he have known of such a connection.”
“In reference to the item 4 i feel there maybe some confusion, which could be due to English being my second language. I wish to confirm that i did not loan Proedyl Ltd any money. He was engaged to carry out some work for me but due to his cash flow issues he asked for a pre-payment of invoice in order to facilitate the supply of labour to site. As such this work was carried out and completed.”
“We've identified increasing problems with fraud and unpaid taxes with businesses in your trade sector. Fraud and general non-compliance with taxation rules and regulations is a major concern for the UK and there is a significant loss to UK tax revenue. We're taking steps to combat these losses by tackling specific schemes to defraud. Our leaflet 'Use of Labour Providers - Advice on due diligence' gives guidance to businesses which use labour providers. For a copy, go to [hyperlink provided] This guidance has equal relevance wherever a user is situated in the supply chain. I strongly recommend that your staff with responsibilities for engaging and administering labour read this leaflet. Relevant staff should do some or all of the proposed due diligence checks as and when deemed necessary. This will help to minimise the risk of you being connected with any possible subsequent failures. Please note that, to exercise your right to recover input tax, you must have actually received the supplies in question and hold a valid tax invoice. An invoice will not be a valid tax invoice if the details on it are those of a company that has gone into liquidation or is missing at the time they make the supply.” (4) Mr Chitas explained that AZE was a supplier that BSCL had previously engaged for a few weeks to do a small amount of work. He discussed the letter with BSCL’s accountant who said there was nothing else to do, but, if this supplier was ever engaged again, no VAT could be paid to them. He did not read the guidance linked to in the letter as he thought he was already doing what was required. (5) The version of the publication “Use of labour providers: advice on due diligence” in issue at the time we are concerned with, and to which the link in this letter would take a reader, was dated19 May 2017 . This document tells its readers that HMRC “continues to find non-compliance, illegal working practices and fraud in labour supply chains across business sectors” and that HMRC is committed to tackling this. Malpractice is not limited to VAT, or even tax more generally, and extends to modern slavery and illegal working by individuals who have no right to work in the UK. Businesses are told that, to protect themselves, they should understand where their workers are coming from, how they are being paid and the legitimacy of those arrangements. One of the risks of not checking is the possible loss of a right to recover input tax. Steps businesses are told to take include making sure their labour supply is commercially sustainable, checking suppliers’ business history, including particular terms in contracts (e.g. one requiring authorisation of further sub-contracting or requiring labour suppliers to show evidence of the VAT and PAYE returns filed and payments they have made to HMRC), and checking that workers are actually paid their contractual rate, that it complies with the national minimum/living wage requirements. The hearing bundle contained a later version (from May 2021) of this guidance, which is much more detailed, far more directional in tone and suggests many more steps a business can take, but this version was not published until after the end of the Relevant Period. (6) On24 August 2020 Officer Wardle of HMRC contacted Mr Chitas regarding BSCL’s 06/20 VAT return. All documents requested were immediately provided (which included invoices for Sandmill and Proedyl as well as other sub-contractors). Sandmill was specifically drawn to Officer Wardle’s attention: one Sandmill invoice included in the 06/20 return belonged in the 09/20 return. Officer Wardle subsequently confirmed that the check was complete and that the input tax claimed in that period would be repaid. He raised no concerns or issues. Mr Chitas explained that he assumed Officer Wardle had looked at the suppliers (and the invoices provided) and was happy with them. Officer Houghton said he was unsure what checks Officer Wardle had made, although it seemed clear he had looked into the suppliers to check they were VAT registered. This is because Officer Wardle had identified that two of the invoices he had asked to review did not show the sub-contractors’ VAT registration numbers, even though they had been used by BSCL to reclaim input tax. Officer Wardle confirmed that the two companies were correctly registered for VAT, and he had accepted the invoices as proof of supply for VAT purposes. Officer Houghton could not say why Officer Wardle did not seem to pick up on the fact that Sandmill and Proedyl were filing no/nil VAT returns (which information would have been available on HMRC’s systems). (7) In a meeting on27 July 2021 HMRC told Mr Chitas that a number of suppliers (including the Defaulters) had been deregistered and on the same day sent him four “veto” letters informing BSCL that HMRC had deregistered the four Defaulters and that they might verify input tax claimed by BSCL in relation to transactions with those businesses. The letter contained a link to the HMRC leaflet “Use of Labour Providers - Advice on due diligence”
“60. It is true that, when there are indications pointing to an infringement or fraud, a reasonable trader could, depending on the circumstances of the case, be obliged to make enquiries about another trader from whom he intends to purchase goods or services in order to ascertain the latter's trustworthiness. 61. However, the tax authority cannot, as a general rule, require the taxable person wishing to exercise the right to deduct VAT, first, to ensure that the issuer of the invoice relating to the goods and services in respect of which the exercise of that right to deduct is sought has the capacity of a taxable person, that he was in possession of the goods at issue and was in a position to supply them and that he has satisfied his obligations as regards declaration and payment of VAT, in order to be satisfied that there are no irregularities or fraud at the level of the traders operating at an earlier stage of the transaction or, second, to be in possession of documents in that regard. 62. It is, in principle, for the tax authorities to carry out the necessary inspections of taxable persons in order to detect VAT irregularities and fraud as well as to impose penalties on the taxable person who has committed those irregularities or fraud. 63. According to the case law of the court, member states are required to check taxable persons' returns, accounts and other relevant documents (see EC Commission v Italy (Case C-132/06 )[2008] ECR I-5457 , para 37, and Dyrektor Izby Skarbowej w Biaymstoku v Profaktor Kulesza, Frankowski, J[³wiak, Orowski (Case C-188/09 )[2010] ECR I-7639 , para 21). 64. To that end, Directive 2006/112 imposes, in particular in art 242, an obligation on every taxable person to keep accounts in sufficient detail for VAT to be applied and its application checked by the tax authorities. In order to facilitate the performance of that task, arts 245 and 249 of that directive provide for the right of the competent authorities to access the invoices which the taxable person is obliged to store under art 244 of that directive. 65. It follows that, by imposing on taxable persons, in view of the risk that the right to deduct may be refused, the measures listed in para 61 of the present judgment, the tax authority would, contrary to those provisions, be transferring its own investigative tasks to taxable persons.”
“This means that the only factor indicative of knowledge or tending to show that the Appellant ought to have known that the transactions were connected with fraud is the lack of proper due diligence highlighted above. However, as this tribunal held in PTGI International Carrier Service Limited v HMRC[2022] UKFTT 20 (TC) at [61] : “The proper question for us to ask ourselves is not “Did the Appellant carry out proper due diligence?”; but “Did the Appellant have the means at its disposal of knowing that by its purchases it is participating in transactions connected with fraudulent evasion of VAT?”
“(1) A person (T) is liable to a penalty where— (a) T has entered into a transaction involving the making of a supply by or to T (“the transaction”), and (b) conditions A to C are satisfied. (2) Condition A is that the transaction was connected with the fraudulent evasion of VAT by another person (whether occurring before or after T entered into the transaction). (3) Condition B is that T knew or should have known that the transaction was connected with the fraudulent evasion of VAT by another person. (4) Condition C is that HMRC have issued a decision (“the denial decision”) in relation to the supply which— (a) prevents T from exercising or relying on a VAT right in relation to the supply, (b) is based on the facts which satisfy conditions A and B in relation to the transaction, and (c) applies a relevant principle of EU case law (whether or not in circumstances that are the same as the circumstances in which any relevant case was decided by the European Court of Justice).” (a) T has entered into a transaction involving the making of a supply by or to T (“the transaction”), and (b) conditions A to C are satisfied. (a) prevents T from exercising or relying on a VAT right in relation to the supply, (b) is based on the facts which satisfy conditions A and B in relation to the transaction, and (c) applies a relevant principle of EU case law (whether or not in circumstances that are the same as the circumstances in which any relevant case was decided by the European Court of Justice).”