[2026] UKUT 00324 (TCC) Eurolaser IT Limited v The Commissioners for HM Revenue and Customs [2026] UKUT 00324 (TCC)

UPPER TRIBUNAL
TAX AND CHANCERY CHAMBER
[2026] UKUT 00324 (TCC)Case No UT/2025/000048
Between
EUROLASER IT LIMITEDAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondent
Before
JUDGE SWAMI RAGHAVANJUDGE VIMAL TILAKAPALADate 21 August 2026Category: Tax

Introduction

[1]This is an appeal against a decision of the First-tier Tribunal (Tax Chamber) (“FTT”), published as Eurolaser IT Limited v HMRC [2025] UKFTT 405 (TC) (“the FTT Decision”).[2]The FTT upheld HMRC's decisions denying the Appellant entitlement to deduct input tax of £1,628,525.16 and denying zero-rating in respect of intra-Community supplies of £503,409.29 arising from transactions undertaken during VAT periods 02/18 to 04/18 and 09/18 to 12/18. It also upheld penalties totalling £312,406.16. The assessments were raised pursuant to the principles established by the Court of Justice of the European Union ("CJEU") in Axel Kittel v Belgian State and Belgian State v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) ("Kittel") and Mecsek Gabona Kft v Nemzeti Adó- és Vámhivatal (Case C-273/11) ("Mecsek"). Those authorities establish, broadly speaking, that a taxpayer may be denied entitlement to deduct input tax, or to zero-rate intra-Community supplies, where it knew or should have known that the transactions in question were connected with the fraudulent evasion of VAT.[3]The Appellant is a trader in information technology products. Following a review of the assessments, HMRC accepted that the Appellant's sole director, Mr Stephen Pallister, neither knew nor should have known that the transactions in question were connected with the fraudulent evasion of VAT. HMRC maintained, however, that Mr Moshin Darr, a self-employed consultant engaged by the Appellant, knew, or should have known, of that connection and that his knowledge or means of knowledge were attributable to the Appellant. The FTT accepted that case, finding both that Mr Darr knew, alternatively should have known, that the transactions were connected with fraudulent VAT evasion and that his knowledge and means of knowledge were attributable to the Appellant. It accordingly dismissed the appeal against the assessments and penalties.[4]With permission of the Upper Tribunal, the Appellant appeals on three grounds. These challenge the FTT's findings as to Mr Darr's actual and constructive knowledge and the FTT’s reliance, in reaching those conclusions, on Mr Darr's previous involvement with a company found to have participated in fraudulent VAT transactions (Euro Stock Shop Limited ("ESSL")).

law

[5]law The assessments under appeal were issued pursuant to section 73 of the Value Added Tax Act 1994 ("VATA"). The associated penalties were issued pursuant to section 69C VATA.[6]The transactions took place prior to the United Kingdom's withdrawal from the European Union and were therefore governed by the common system of value added tax established by Council Directive 2006/112/EC ("the Principal VAT Directive").[7]Under section 24 VATA, a taxable person is entitled, subject to the statutory scheme, to credit for VAT incurred on supplies received for the purposes of its taxable business. The entitlement to deduct input tax is then given effect through section 25 VATA. In domestic law, those provisions implemented the right of deduction contained in Articles 167 and following of the Principal VAT Directive. Those rights form a fundamental feature of the common VAT system. However, as discussed below, they may be denied in circumstances where a taxpayer knew or should have known that it was participating in transactions connected with VAT fraud.[8]The disputed output tax assessments concerned supplies made by the Appellant to customers in other Member States. At the material time, Article 138 of the Principal VAT Directive required Member States to exempt certain intra-Community supplies of goods. In the United Kingdom, that exemption was implemented through section 30 VATA and the Value Added Tax Regulations 1995. In broad terms, supplies of goods removed from the United Kingdom to another Member State could qualify for zero-rating provided the statutory conditions were met.[9]The legal principles governing the present appeal are not in dispute and it is therefore unnecessary to set them out in detail. In Axel Kittel v Belgian State and Belgian State v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) ("Kittel"), the Court of Justice of the European Union ("CJEU") held that a taxable person may be denied the right to deduct input tax where it is established, in the light of objective factors, that the taxpayer knew or should have known that, by its purchase, it was participating in a transaction connected with the fraudulent evasion of VAT. Similarly, in Mecsek Gabona Kft v Nemzeti Adó- és Vámhivatal (Case C-273/11) ("Mecsek"), the CJEU held that exemption in respect of an intra-Community supply may be refused where objective evidence demonstrates that the supplier knew or should have known that the transaction formed part of a VAT fraud committed by its purchaser. The FTT also considered the authorities concerning whether a taxpayer had taken every reasonable step available to avoid participation in such fraud. No challenge is made before us to the FTT's articulation of those principles.[10]By the time of the hearing before the FTT, the parties had reached substantial agreement regarding the underlying frauds. The Appellant accepted that the transactions which formed the subject matter of the disputed assessments were connected with fraudulent VAT losses elsewhere in the relevant supply chains. HMRC had also accepted on review that the Appellant's sole director, Mr Stephen Pallister, neither knew nor should have known of that connection. The principal issue before the FTT was therefore whether Mr Moshin Darr, the self-employed consultant engaged by the Appellant, knew or should have known of the connection between the transactions and the fraudulent evasion of VAT and, if so, whether his knowledge or means of knowledge were attributable to the Appellant.

Background and FTT Decision

[11]Background and FTT Decision The FTT identified four issues for determination:(i) whether Mr Moshin Darr knew or should have known of the connection between the Appellant's transactions and the admitted fraudulent evasion of VAT elsewhere in the relevant supply chains ("the Darr Knowledge Issue");(ii) whether any such knowledge or means of knowledge was attributable to the Appellant ("the Attribution Issue");(iii) whether the test in Mecsek included a requirement that the Appellant had failed to take every reasonable step to avoid participation in the fraud ("the Mecsek Test Issue"); and(iv) if so, whether such reasonable steps had been taken ("the Reasonable Steps Issue") (FTT [9]). The FTT resolved each issue in HMRC's favour (FTT [10]-[11]).[12]In addressing the Darr Knowledge Issue, the FTT began by noting that, following HMRC's review conclusion, the case no longer turned upon the knowledge of the Appellant's sole director, Mr Stephen Pallister. HMRC had accepted that Mr Pallister neither knew nor should have known of the connection between the transactions and the fraud. The question for the FTT was therefore whether the evidence established that Mr Darr knew or should have known of that connection (FTT [6], [59]).[13]The FTT summarised what it described as the relevant and accepted evidence derived from Mr Pallister's witness statement (FTT [23]-[28]). It recorded, amongst other matters, that Mr Pallister had operated in the IT products market for many years, exercised close control over the Appellant's business, required due diligence to be undertaken on counterparties, retained emails and recordings of landline calls, and controlled payments, deliveries and invoicing arrangements (FTT [23]-[28]). It also recorded Mr Pallister's evidence that payment terms under which customers paid before suppliers were paid were consistent with the Appellant's legitimate trading arrangements (FTT [28]).[14]Prior to summarising that evidence, the FTT recorded that HMRC had agreed that Mr Pallister would not be required for cross-examination after discussion of the relevance of his evidence in circumstances where HMRC's case was directed to Mr Darr's knowledge rather than his own. The FTT stated that it did not regard that course as amounting to wholesale acceptance of Mr Pallister's evidence, but rather as acceptance of those aspects considered material to the assessment of Mr Darr's knowledge or means of knowledge (FTT [20]).[15]The FTT then summarised the evidence of HMRC Officer Lebedevas and the documentary evidence on which HMRC relied (FTT [29]-[43]). The matters identified by the FTT included, amongst other things, analyses of mark-ups and transaction patterns, evidence that many transactions were undertaken on a back-to-back basis, the repeated trading of identical quantities of goods between a limited group of counterparties, the use of euro-denominated purchases from UK suppliers, payment arrangements under which the Appellant received payment from customers before paying suppliers, significant increases in turnover associated with transactions introduced by Mr Darr, and evidence regarding Mr Darr's previous involvement with ESSL, including the findings made in earlier tribunal proceedings concerning that company and Mr Darr's subsequent disqualification as a director (FTT [29], [30]-[35]).[16]The FTT also addressed what the parties referred to as the "suitcase of evidence", namely records which Mr Pallister said had previously been supplied to HMRC but which were no longer available. The FTT declined to draw adverse inferences against either party and stated that it had determined the appeal on all the evidence before it (FTT [44]-[54]). It noted in particular that the Appellant had not sought to adduce any of the material said to comprise the suitcase of evidence notwithstanding an opportunity to do so (FTT [52]-[54]).[17]Before making its findings, the FTT expressly noted HMRC's acceptance that the Appellant did not know and had no means of knowing of the connection to fraud through matters known to Mr Pallister. It therefore approached the evidence for the purpose of determining what inferences could properly be drawn regarding Mr Darr's knowledge and means of knowledge rather than what might have been known to the Appellant through a combination of the knowledge of Mr Darr and Mr Pallister (FTT [59]).[18]The central findings of fact made by the FTT appear at [60] of the decision. Those findings included that Mr Darr had previously been found culpably involved in MTIC transactions whilst acting through ESSL (FTT [60(1)]); that he was responsible for introducing and arranging the transactions giving rise to the disputed assessments (FTT [60(2)], [60(8)]); that he would have been aware of the information obtained as part of the Appellant's due diligence processes (FTT [60(5)]); that he worked closely with the Appellant's other traders and Mr Pallister (FTT [60(6)]); and that he did not disclose his previous involvement in ESSL or his disqualification as a director when he became engaged by the Appellant (FTT [60(7)]).[19]The FTT also made detailed findings regarding the transactions introduced by Mr Darr. It found that over the relevant period he arranged 87 purchase transactions involving repetitive trading patterns, identical or near-identical quantities, and recurring mark-ups across multiple transactions in the same products (FTT [60(9)]). It found that 41 of those purchases were back-to-back transactions (FTT [60(9)(h)]), that goods were often purchased in precisely the quantities required by customers (FTT [60(10)]), and that Mr Darr would have been aware of those matters (FTT [60(10)]). The FTT further found that he was well aware that many of the transactions were back-to-back and involved what it described as "uncommercial hallmarks" (FTT [60(11)]) and that all transactions giving rise to the assessments were introduced by him and by no other consultant or employee (FTT [60(12)]-[60(15)]).[20]Having made those findings, the FTT proceeded to draw a number of inferences. It inferred that Mr Darr had sufficient visibility of invoices and payments to have "a complete picture" of the transactions, including knowledge that Sirius, a supplier within the relevant deal chains, invoiced in euros notwithstanding contractual terms expressed in sterling (FTT [61(1)]). It further inferred that he would have known that the business generated through his trading differed markedly from the company's usual trading patterns and that he was outperforming other traders within the business (FTT [61(2)]). The FTT also concluded that the mark-up arrangements and the splitting of transactions did not reflect normal commercial practice and that Mr Darr, as the individual arranging the transactions, would have appreciated that fact (FTT [61(3)]-[61(4)]). Finally, it inferred that the transactions ceased because Mr Darr became aware that HMRC had identified the relevant deal chains and the Appellant's involvement in them (FTT [61(5)]-[61(7)]).[21]Particular significance was attached by the FTT to comparisons between the transactions under appeal and the transactions considered in the earlier ESSL litigation. The FTT found that although there was not a complete match between the two sets of transactions, there were "strong similarities", including a confined group of counterparties, trading in similar quantities over short periods, the absence of material reductions for larger volumes, payment arrangements involving receipt of customer funds before suppliers were paid, retention of title clauses, commission-based participation, and significant increases in turnover associated with the relevant transactions (FTT [61(8)]). It concluded that the differences between the ESSL transactions and the transactions under appeal were insufficient to support a conclusion that Mr Darr had been innocently or inadvertently used by fraudsters (FTT [61(9)]).[22]Drawing those matters together, the FTT concluded that it had "little hesitation" in finding that Mr Darr knew of the connection between the transactions and fraudulent VAT evasion (FTT [62]). It reasoned that Mr Darr represented the principal common link across all of the transactions giving rise to the assessments and that the findings made in the ESSL litigation demonstrated that he was fully familiar with the operation of supply-chain fraud. Against that background, the FTT considered it "all but inconceivable" that he would not have recognised the features which it regarded as indicators of fraud in the transactions under appeal (FTT [62]). Alternatively, the FTT concluded that if actual knowledge were not established, Mr Darr should have known of that connection because his previous involvement in MTIC fraud should have made him "hypervigilant" to the risk of becoming involved in comparable arrangements (FTT [63]).[23]The FTT recognised that its conclusion might appear to depend significantly upon Mr Darr's previous involvement in supply-chain fraud and, in particular, upon the fact that this was the factor which "tips the balance" when contrasted with HMRC's acceptance that Mr Pallister lacked the requisite knowledge or means of knowledge (FTT [64]). It nevertheless concluded that Mr Darr's previous involvement in MTIC fraud was a relevant matter to which it was entitled to attach weight. Drawing an analogy with the use of bad character evidence in criminal proceedings, the FTT reasoned that Mr Darr's prior experience of MTIC fraud rendered it more likely that he knew, or should have known, of the connection to fraud in the transactions under appeal (FTT [65]). It therefore concluded that such previous involvement was a relevant consideration in assessing both actual knowledge and means of knowledge (FTT [64]-[65]).[24]Having found that Mr Darr knew, alternatively should have known, of the connection to fraud, the FTT concluded that his knowledge and means of knowledge were attributable to the Appellant by application of the principles discussed in HMRC v Greener Solutions [2012] UUT 18 (TCC) and Mobile Sourcing Limited v HMRC [2016] UUT 274 (TCC) (FTT [66]-[82]). It therefore held that the Appellant was liable in respect of the Kittel assessments and associated penalties (FTT [83]).[25]In relation to the Mecsek assessments, the FTT concluded that the relevant test incorporated a requirement that the taxpayer had not taken every reasonable step available to prevent its participation in fraud (FTT [84]-[101]). It found that Mr Darr had not taken such steps and had instead knowingly participated in the fraudulent transactions (FTT [102]). It further concluded that even if regard were had to Mr Pallister's conduct, he had failed to undertake certain reasonable steps, including enquiries which might have revealed Mr Darr's previous involvement in MTIC fraud (FTT [103]). The Mecsek assessments and associated penalties were therefore also upheld (FTT [104]).[26]The FTT accordingly dismissed the appeal in its entirety and upheld all assessments and penalties (FTT [105]).

Grounds of appeal

[27]Grounds of appeal With permission of the Upper Tribunal (Judge Greenbank) The oral renewal of permission is published as Eurolaser IT Limited v HMRC [2025] UKUT 00358 (TC) , the Appellant appeals on the following three grounds of appeal:(1) Ground 1: The FTT’s finding that Mr Darr knew that the Appellant’s transactions were connected with fraud was: (a) flawed because it relied upon findings of fact and inferences that were inconsistent with Mr Pallister’s unchallenged evidence; and/or (b) unduly coloured by Mr Darr’s previous involvement in transactions connected with fraud; and/or (c) not properly open to the Tribunal such that it was perverse (and therefore constituted an error of law applying Edwards v Bairstow).(2) Ground 2: The FTT’s finding that Mr Darr should have known that the Appellant’s transactions were connected with fraud was: (a) flawed because it relied upon findings that were inconsistent with Mr Pallister’s unchallenged evidence; and/or (b) unduly coloured by Mr Darr’s previous involvement in transactions connected with fraud (12 years earlier); and/or (c) not properly open to the Tribunal such that it was perverse (and therefore constituted an error of law applying Edwards v Bairstow).(3) Ground 3: The decision by the FTT to treat ESSL’s previous involvement in transactions connected with fraud as evidence of Mr Darr’s “propensity” (see paragraph 65 of the Decision) was an error of principle. Even taken at its highest, Mr Darr’s previous involvement with ESSL was insufficient to establish that he had a relevant “propensity”.

Scope of appeal

[28]Before turning to the individual grounds, it is convenient first to summarise the legal principles governing appellate intervention in findings of fact, as they inform the parties' competing characterisations of Grounds 1 and 2.[29]It was common ground that an appeal to the Upper Tribunal lies only on a point of law. The Appellant does not challenge the legal tests applied by the FTT under Kittel or Mecsek. The relevant principles are well established. Under Edwards v Bairstow [1956] AC 14, an error of law may arise where a finding is unsupported by any evidence, is contradicted by the evidence, or is one that no reasonable tribunal, properly directing itself, could have reached. As the Upper Tribunal emphasised in HMRC v Anna Cook [2021] UKUT 15 (TCC), the threshold for establishing such an error is deliberately high. Mere disagreement with the FTT's assessment of the evidence, or with the weight it attributed to particular matters, is insufficient. Equally, as Ingenious Games LLP v HMRC [2019] UKUT 226 (TCC) illustrates, appellate tribunals should be slow to interfere with evaluative findings of fact.[30]Against that background, HMRC submitted that Grounds 1 and 2 are, in substance, conventional Edwards v Bairstow challenges. Ms Brown relied on the terms of Judge Greenbank's permission decision and submitted that the Appellant's criticisms of the FTT's treatment of the evidence ultimately amount to an assertion that certain findings and inferences were not open to the FTT on the evidence. She emphasised that the appeal concerns Mr Darr's knowledge and means of knowledge, not those of Mr Pallister, and argued that the Appellant was in reality challenging the FTT's evaluation of the evidence and the weight it attached to it.[31]Mr Ahmed submitted that Grounds 1 and 2 should not be characterised so narrowly. Although accepting that the grounds are framed in terms of irrationality and findings said not to have been open to the FTT, he argued that the essential complaint is that the FTT relied on findings and inferences which were inconsistent with Mr Pallister's unchallenged evidence and lacked any proper evidential foundation. In particular, he submitted that the FTT treated features such as transaction structures, mark-ups and payment arrangements as indicative of fraud whilst disregarding Mr Pallister's evidence that such features were routinely encountered in legitimate trading. He emphasised that HMRC neither cross-examined Mr Pallister on those matters nor adduced evidence to the contrary.[32]We prefer HMRC's characterisation of Grounds 1 and 2. Properly analysed, the Appellant's case is that certain findings and inferences made by the FTT were not open to it on the evidence. In particular, it is said that the FTT treated matters such as mark-up arrangements, transaction structures, payment arrangements and similarities with the ESSL transactions as indicators of fraud notwithstanding Mr Pallister's unchallenged evidence that such features were equally consistent with legitimate trading and notwithstanding HMRC's decision not to challenge that evidence by cross-examination or contrary evidence. Those matters are relied upon as reasons why the challenged findings are said to lack a proper evidential foundation or to be irrational. The issue raised by Grounds 1 and 2 is therefore whether the findings and inferences challenged by the Appellant were ones which the FTT was entitled to make on the evidence before it. That is a challenge which falls squarely within the principles discussed in Edwards v Bairstow.[33]That conclusion is consistent with the basis upon which permission was granted The parties were agreed that reference in paragraph 20 of Judge Greenbank's oral renewal permission decision to FTT [61(10)] could not be correct because the FTT Decision contains no such paragraph. Both parties proceeded on the basis that the intended references were to FTT [61(8)] and [61(9)], which concerned the FTT's comparison between the transactions under appeal and those considered in the ESSL litigation. . Although the Appellant's original grounds challenged a wider range of findings and inferences, Judge Greenbank treated Grounds 1 and 2 as raising issues falling within the principles in Edwards v Bairstow. In practical terms, the appeal is concerned principally with the FTT's treatment of the characteristics of the transactions, reflected particularly in FTT [61(3)], [61(4)], [61(8)] and [61(9)], and with the extent to which the findings and inferences drawn from those matters are said to be inconsistent with Mr Pallister's evidence.[34]Unlike Grounds 1 and 2, Ground 3 raises a distinct question or principle. The Ground raises the distinct question whether the FTT was entitled, as a matter of law, to treat Mr Darr's previous involvement in Euro Stock Shop Limited ("ESSL") as relevant to the assessment of his knowledge or means of knowledge in relation to the transactions under appeal. HMRC's position was that previous exposure to MTIC fraud may, in principle, be a relevant consideration and that the issue is one of relevance and weight rather than admissibility. The Appellant contended that ESSL concerned different transactions and counterparties and could not properly inform the Kittel analysis in the present case.[35]Accordingly, we proceed on the basis that Grounds 1 and 2 are challenges to findings and inferences of fact to be assessed in accordance with the principles governing appellate intervention under Edwards v Bairstow, whereas Ground 3 raises a separate issue as to whether the FTT took into account a consideration which was legally relevant to its assessment of Mr Darr's knowledge and means of knowledge.

Grounds 1 and 2

[36]Grounds 1 and 2 The Appellant's submissions The Appellant submitted that the FTT's conclusions that Mr Darr knew, alternatively should have known, that the transactions were connected with fraudulent VAT evasion could not properly stand. Although permission was granted by reference to the principles in Edwards v Bairstow, Mr Ahmed argued that the appeal was not merely a challenge to the weight which the FTT attached to the evidence. Rather, the FTT had relied upon findings and inferences which were inconsistent with unchallenged evidence and lacked a proper evidential foundation.[37]Central to the Appellant's case was the evidence of Mr Pallister. Particular reliance was placed upon his evidence that the characteristics of the transactions under appeal were not materially different from transactions unconnected with VAT fraud. In his witness statement Mr Pallister stated:
"In my 33 years in business, I have traded in the same way as I did in the transactions under appeal. The quantities, types of products, values, mark-ups etc. are similar in non-tax loss transactions."
[38]He also stated:
"The manner in which the company traded in clean chains, whether arranged by myself, Mr Darr or another consultant, was no different at all."
[39]The Appellant further submitted that the FTT had treated a number of characteristics of the transactions as hallmarks of fraud notwithstanding Mr Pallister's evidence that such features were routinely encountered in legitimate trading. Particular criticism was directed at FTT [61(3)] and [61(4)], concerning mark-ups and transaction splitting, and at FTT [61(8)] and [61(9)], where the FTT identified similarities between the transactions under appeal and those considered in ESSL. It was argued that the FTT had treated those matters as probative of fraud despite the absence of evidence establishing that they differed from normal commercial arrangements within the relevant market.[40]In oral argument, Mr Ahmed emphasised that the Tribunal should focus upon what had not been challenged. He submitted that if the transactions possessed no characteristics distinguishing them from legitimate transactions, as Mr Pallister had maintained throughout, there was nothing for Mr Darr to recognise as suspicious. In particular, he argued that once Mr Pallister's evidence was accepted, the FTT could not properly characterise the transactions as displaying hallmarks or indicators of fraudulent trading.[41]The Appellant also criticised aspects of the FTT's reasoning which were said to involve speculation. Reference was made, for example, to the inference at FTT [61(5)] that the transactions ceased because Mr Darr appreciated that HMRC had become aware of the fraudulent deal chains. It was submitted that there was no evidential basis for that conclusion.[42]More generally, the Appellant contended that once the findings challenged under Grounds 1 and 2 were removed from consideration, there was insufficient material remaining to support either a finding of actual knowledge or a finding that Mr Darr should have known of the connection between the transactions and the frauds.

HMRC's submissions

[43]HMRC's submissions HMRC submitted that Grounds 1 and 2 amounted, in substance, to challenges to findings and inferences of fact and therefore engaged the stringent principles discussed in Edwards v Bairstow, Georgiou, Ingenious and Anna Cook. The Appellant was required to demonstrate not merely that a different conclusion could have been reached but that the findings made by the FTT were not reasonably open to it on the evidence.[44]Ms Brown emphasised that the appeal concerned Mr Darr's knowledge and means of knowledge, not those of Mr Pallister. The FTT had expressly recognised that, following HMRC's review conclusion, the relevant inquiry was directed at Mr Darr and not at Mr Pallister (FTT [59]). The fact that HMRC had accepted that Mr Pallister neither knew nor should have known of the connection to fraud did not require the same conclusion to be reached in relation to Mr Darr.[45]HMRC denied that the FTT had ignored Mr Pallister's evidence. The FTT had expressly recorded the evidence it regarded as relevant and accepted at FTT [23]-[28], considered the wider evidential record, and reached its conclusions after evaluating all of the evidence before it. The Appellant's complaint amounted in reality to a disagreement with the weight attached to that evidence.[46]HMRC further submitted that the Appellant overstated the significance of the decision not to cross-examine Mr Pallister. As recorded by the FTT, HMRC accepted those aspects of his evidence which were material to the assessment of Mr Darr's knowledge and means of knowledge. It did not follow that every evaluative opinion expressed by Mr Pallister, or every inference he sought to draw from the trading arrangements, had to be accepted.[47]As to the substance of the findings, Ms Brown submitted that the FTT's conclusions were supported by a substantial body of evidence extending well beyond Mr Pallister's witness statement, including the evidence summarised at FTT [29] and the documentary material addressed at FTT [30]-[43]. The Appellant's attempt to rely upon a small number of general statements by Mr Pallister as a complete answer to the detailed findings and inferences made by the FTT was said to be misconceived.[48]Finally, HMRC submitted that the challenged findings formed only part of a broader evidential picture. The FTT's conclusions on knowledge and means of knowledge did not depend upon any single factor but upon the cumulative effect of multiple findings and inferences considered together.

Discussion on Grounds 1 and 2

[49]Discussion on Grounds 1 and 2 We do not accept the Appellant's challenge under Grounds 1 and 2. As explained above, these grounds are properly characterised as challenges to findings and inferences of fact and therefore fall to be assessed in accordance with the principles discussed in Edwards v Bairstow and the authorities which have followed it. The question is not whether a different tribunal might have attached greater weight to Mr Pallister's evidence or reached a different conclusion. Rather, it is whether the findings and inferences challenged by the Appellant were conclusions which were not reasonably open to the FTT on the evidence before it.[50]In our judgment, the Appellant has not demonstrated such an error. We reject the suggestion that the FTT ignored, or impermissibly disregarded, Mr Pallister's evidence. The Appellant's criticism proceeds in large part from a misunderstanding of what the FTT was doing at [20] and [23]-[28]. The FTT did not purport to summarise every aspect of Mr Pallister's witness statement. Rather, it identified those aspects of his evidence which it regarded as relevant and accepted for the purpose of determining the issue before it, namely Mr Darr's knowledge and means of knowledge. The fact that the FTT did not adopt Mr Pallister's broader views as to the commercial significance of particular trading features does not demonstrate either a failure to consider his evidence or procedural unfairness.[51]The Appellant's challenge is founded principally upon an alleged inconsistency between the findings made by the FTT and Mr Pallister's evidence that the transactions appeared commercially normal and were not materially different from legitimate trading undertaken by the Appellant. In our view, that alleged inconsistency is overstated. The question before the FTT was not whether the transactions appeared unobjectionable to Mr Pallister. HMRC had already accepted that Mr Pallister neither knew nor should have known of the connection to fraud. Nor did any acceptance of Mr Pallister's evidence that particular trading features could arise in legitimate transactions require the FTT to accept that those features were incapable of contributing to an inference of knowledge or means of knowledge when considered cumulatively and in the light of Mr Darr's experience. The issue before the FTT was whether the objective features of the transactions, viewed from Mr Darr’s perspective and against the wider evidential picture, supported findings of actual knowledge or means of knowledge.[52]Nor do we accept the Appellant's reliance on the fact that Mr Pallister was not cross-examined. As the Supreme Court explained in Griffiths v TUI (UK) Ltd [2023] UKSC 48, the general rule is that a party should challenge by cross-examination evidence which it subsequently wishes the court not to accept. The rule is, however, rooted in considerations of fairness and is not inflexible. TUI does not assist the Appellant because this is not a case in which the FTT rejected Mr Pallister's factual evidence. On the contrary, the FTT expressly recorded and took into account the aspects of that evidence which it regarded as relevant to the issue before it. The question was whether that evidence prevented the FTT from drawing the findings and inferences which it ultimately made concerning Mr Darr's knowledge and means of knowledge. The FTT was entitled to conclude that it did not. In particular, HMRC's acceptance that Mr Pallister neither knew nor should have known of the connection to fraud did not require the same conclusion to be reached in relation to Mr Darr, whose knowledge and experience formed the focus of the inquiry.[53]Against that background, we turn to the principal findings and inferences at FTT [61] which Mr Ahmed challenged in argument:(1) In FTT [61(1)] the FTT inferred that Mr Darr had sufficient visibility of invoices, payments and transaction documentation to have "a complete picture" of the transactions, including awareness that Sirius invoiced in euros notwithstanding contractual documentation expressed in sterling. There was no inconsistency however because whilst Mr Pallister gave general evidence that similar quantities, values, mark-ups and trading arrangements could arise in legitimate trading, he did not address whether invoicing in euros where the contractual documentation was expressed in sterling was itself a routine or commercially unremarkable feature of legitimate trade.(2) Similar considerations apply to FTT [61(2)]. There the FTT inferred that Mr Darr would have appreciated that the business generated through the transactions he introduced differed markedly from the Appellant's ordinary pattern of trading and that he was substantially outperforming the company's other traders. Mr Pallister's evidence did not materially address the more specific finding being made by the FTT, namely that the transactions introduced by Mr Darr represented an unusually significant component of the Appellant's business and possessed characteristics which distinguished them from the company's ordinary trading activity.(3) In FTT [61(3)] and [61(4)] the Tribunal considered two further features of the transactions. First, it concluded that the mark-up arrangements and margins exhibited characteristics that did not reflect ordinary commercial practice. Secondly, it considered that the splitting of transactions and the repeated trading of similar products in similar quantities formed part of a pattern which Mr Darr, as the person arranging the deals, would have recognised. Mr Pallister's evidence established at most that comparable mark-ups, quantities or trading structures could sometimes be encountered in legitimate transactions. It did not require the FTT to conclude that those features were incapable of carrying evidential weight, particularly when considered collectively and alongside the other findings made at [60] and [61].(4) FTT [61(5)] concerned the Tribunal's inference that the relevant trading ceased because Mr Darr had become aware that HMRC had identified the deal chains and the Appellant's involvement in them. The Appellant submitted not only that this inference was speculative, but also that it was irrelevant because it concerned events occurring after the transactions under appeal. We do not accept that submission. The assessment of actual knowledge or means of knowledge is not confined to the immediate characteristics of the transactions viewed in isolation. A tribunal is entitled to consider the wider factual context, including a trader's conduct before, during and after the relevant transactions, insofar as that conduct is capable of shedding light upon the trader's state of knowledge at the material time. Whether the inference drawn at FTT [61(5)] should ultimately be made was a matter for the FTT. In any event, even if that inference were left out of account, it was not central to the FTT's reasoning and its conclusions would plainly survive without reliance upon it.(5) Particular attention was directed to FTT [61(8)]. However, several of the matters identified there were either not contradicted by Mr Pallister's evidence or were not addressed by it at all. The finding that the transactions involved a confined group of counterparties was not met by evidence that such arrangements were commonplace in legitimate supply chains. The commission arrangements were not materially addressed. Nor did Mr Pallister engage in any detailed way with the significant increase in turnover associated with the transactions introduced by Mr Darr. To the extent that he addressed payment arrangements, he did so at a relatively high level of generality, whereas the FTT was considering specific objective features of the transactions and their similarity to transactions previously found to be connected with fraud.[54]We also reject the Appellant's submission that the FTT was incapable of treating the relevant features as probative unless HMRC adduced separate expert or industry evidence identifying "normal commercial practice". The FTT was required to evaluate the evidence actually before it, including the transaction data, the documentary evidence, the findings made in relation to ESSL and the evidence of Officer Lebedevas. The absence of expert evidence did not prevent the FTT from drawing evaluative conclusions from that material.[55]Nor did Mr Pallister's evidence require the FTT to conclude that the matters identified at FTT [61] could not constitute indicators of fraud when viewed collectively. Evidence that individual features are capable of occurring in legitimate transactions is not the same as evidence that a combination of such features cannot support an inference of knowledge or means of knowledge in a particular case.[56]The same conclusion applies to the Appellant's challenge to FTT [61(8)] and [61(9)] more generally. The FTT was not merely reasoning that the transactions resembled those in ESSL and were therefore fraudulent. Rather, it identified a number of objective similarities between the transactions under appeal and transactions previously found to be connected with fraud and considered those similarities in the light of Mr Darr's previous experience. As discussed above, several of those similarities were either not addressed by Mr Pallister's evidence or were addressed only at a high level of generality. The FTT was entitled to conclude that those similarities formed part of the objective evidential picture against which Mr Darr's knowledge and means of knowledge fell to be assessed.[57]We are also not persuaded that the FTT's findings concerning the mark-up arrangements, the repeated splitting and structure of transactions and the circumstances in which the trading came to an end disclose any error of law. The Appellant's principal complaint was that those matters could not properly be treated as indicators of fraud or of knowledge of fraud because they were consistent with legitimate trading. We reject that submission. The fact that a feature is capable of arising in legitimate trading does not prevent the FTT from treating it as relevant when assessing the cumulative significance of the transactions as a whole.[58]Even if we were to assume in the Appellant's favour that one or more of the challenged findings sat uneasily with aspects of Mr Pallister's evidence, that would fall well short of establishing an Edwards v Bairstow error. The question is whether the findings of actual knowledge or means of knowledge were ones which no reasonable tribunal could have reached. In light of the broader findings made by the FTT, including Mr Darr's central role in the transactions, his familiarity with their detailed operation and the features of the transactions identified at FTT [60] and [61], we do not consider that the Appellant comes close to meeting that demanding standard.[59]Accordingly, we are not persuaded that the Appellant has established that the findings and inferences challenged under Grounds 1 and 2 were ones which were not open to the FTT on the evidence before it. Those grounds therefore fail.

Ground 3

[60]Ground 3 The Appellant's submissions Ground 3 concerns the FTT's treatment of Mr Darr's previous involvement in Euro Stock Shop Limited ("ESSL"), and in particular its observations at FTT [64] and [65].[61]The Appellant submitted that the FTT erred in law by treating Mr Darr's participation in the ESSL transactions as probative of whether he knew, or should have known, that the transactions under appeal were connected with fraudulent VAT evasion. It was argued that the inquiry required by Kittel and Mecsek is necessarily transaction specific and must be directed to the characteristics of the transactions presently under consideration rather than to conduct occurring in unrelated transactions many years earlier.[62]Mr Ahmed emphasised that the ESSL transactions occurred approximately thirteen years before the transactions under appeal, involved different entities, different supply chains and different goods. In his submission, the FTT had effectively reasoned that because Mr Darr had previously been associated with transactions found to be connected with MTIC fraud, he was more likely to have known of fraud in the present case. That was said to be impermissible propensity reasoning.[63]Particular reliance was placed upon FTT [64], where the FTT stated:
"We recognise that in so concluding we at least appear to be accepting that the connecting factor of Mr Darr and his previous involvement in supply chain fraud are what tips the balance..."
[64]The Appellant submitted that this was effectively an acknowledgment by the FTT that its conclusion could not be reached by reference to the characteristics of the transactions under appeal alone and that it therefore required reliance upon Mr Darr's past conduct. If that past conduct was not relevant in principle, the reasoning could not stand.[65]In oral argument, Mr Ahmed sought to link Ground 3 closely to Grounds 1 and 2. He submitted that Mr Pallister's evidence demonstrated that the transactions under appeal possessed no characteristics distinguishing them from legitimate transactions. Accordingly, there were, on his case, no relevant "red flags" from which knowledge or means of knowledge could properly be inferred. Against that background, the FTT's reliance upon ESSL assumed particular importance because it was only by reference to the earlier fraud that the FTT could characterise the present transactions as suspicious. Once the ESSL factor was removed, the remaining findings were said to be incapable of supporting the FTT's conclusions.[66]The Appellant also criticised the analogy drawn by the FTT at [65] with bad character evidence in criminal proceedings. It was argued that there was no proper basis for importing concepts of propensity into the present context and that the FTT had thereby strayed from the transaction-specific inquiry mandated by Kittel and Mecsek.

HMRC's submissions

[67]HMRC's submissions HMRC submitted that Ground 3 proceeded from a false premise, namely that previous involvement in MTIC fraud is incapable in principle of being relevant to the assessment of knowledge or means of knowledge in subsequent transactions.[68]Ms Brown submitted that neither Kittel nor any other authority imposed such a restriction. The inquiry required by Kittel is one based upon objective factors. There is no rule limiting the evidence which may be considered to the immediate characteristics of the transactions under appeal, nor any rule excluding evidence of previous knowledge or experience of VAT fraud.[69]HMRC relied on a number of decisions in which previous experience of MTIC fraud, previous involvement in MTIC fraud and related litigation, or previous knowledge of the operation of such frauds had been treated as relevant considerations when assessing knowledge and means of knowledge. Reference was made in particular to Mobile Export 365 Ltd and Shelford (IT) Ltd v HMRC [2010] UKFTT 367 (TC), Wireless Wizards Ltd v HMRC [2013] UKFTT 680 (TC) and Vortex Enterprises Ltd v HMRC [2023] UKFTT 211 (TC). HMRC accepted that these decisions were not binding authorities on the Upper Tribunal. However, it submitted that they were relevant not because they established legal principle but because they illustrated a consistent approach adopted by tribunals when considering Kittel knowledge cases. In each instance, previous awareness of MTIC fraud, previous involvement in such fraud, or previous exposure to litigation concerning such fraud had been treated as capable of informing the assessment of what a trader knew or should have known when entering later transactions.[70]HMRC further submitted that the FTT had not used the ESSL findings merely to establish propensity. Rather, the FTT had relied upon them because they demonstrated that Mr Darr had previously been found to understand how MTIC fraud operated. The relevance of the ESSL findings therefore lay in the knowledge and experience which they evidenced.[71]As regards FTT [64], HMRC submitted that the Appellant read too much into the language used by the FTT. The FTT had not accepted that the ESSL findings were the sole basis for its conclusions; rather, they formed one part of a broader evidential picture. Even if significant weight had been attached to that factor, that did not render it irrelevant.[72]Finally, HMRC submitted that Ground 3 ultimately amounted to a challenge to the weight attached to the ESSL evidence. Weight was a matter for the FTT. The Appellant had failed to identify any principle of law which prevented the FTT from taking the ESSL findings into account.

Discussion on Ground 3

[73]Discussion on Ground 3 The point of law raised by the ground is whether the FTT erred in law by treating that previous involvement as a relevant consideration at all. It is important to distinguish that question from the way in which the Appellant's submissions were sometimes framed. Much of the argument before us was directed to whether the events in question were too remote in time, involved different counterparties, or arose in different transactions. Those matters go to weight, not relevance. Permission was not granted to challenge the FTT's evaluative assessment of how much significance should be attached to the ESSL findings.[74]We do not accept the Appellant's submission that the inquiry required by Kittel and Mecsek is confined to the immediate characteristics of the transactions under appeal. Whilst the inquiry must ultimately be directed to whether the taxpayer knew, or should have known, of the connection between those transactions and fraudulent VAT evasion, it does not follow that the Tribunal is confined to considering evidence generated exclusively by the transactions themselves. Nothing in the authorities requires a decision-maker to disregard a person's previous experience, knowledge or involvement in the very type of fraud alleged. Previous involvement in MTIC fraud, previous tribunal findings concerning such conduct, and familiarity with the operation of fraudulent supply chains are all capable in principle of constituting objective factors relevant to the assessment of what that person knew or should have known when entering into later transactions exhibiting similar characteristics. The significance of those matters is a question of weight and will depend upon the facts of the particular case, but they are plainly capable of being relevant.[75]As regards the number of earlier FTT decisions to which HMRC referred, they illustrate that previous findings relating to MTIC fraud, previous knowledge of the operation of such frauds and previous involvement in fraudulent supply chains have been regarded as capable of being relevant when assessing whether a trader knew or should have known of fraud in later transactions. They are consistent with the proposition that previous involvement in MTIC fraud is not, as the Appellant contends, irrelevant in principle.[76]Nor do we accept that the relevance of the ESSL findings depended upon a pure propensity inference, namely that because Mr Darr had previously been involved in MTIC fraud he was more likely to have been involved on a later occasion. The significance attached to the earlier litigation is apparent from FTT [62]. The FTT's reasoning was that ESSL demonstrated that Mr Darr had previously been found to understand how supply-chain fraud operated and had been exposed to the characteristics of transactions connected with such fraud. It was therefore open to the FTT to regard that knowledge and experience as relevant when assessing whether he would have recognised similar features in the transactions under appeal. That reasoning applies with particular force to the assessment of means of knowledge, but it is also capable of bearing upon actual knowledge insofar as prior familiarity with the operation of MTIC fraud may support an inference that a person recognised what was occurring when encountering similar features in later transactions. The weight the FTT chose to put on that evidence is not the issue raised by Ground 3. Rather, Ground 3 raises the logically prior question whether such evidence was capable in principle of being treated as relevant. For the reasons given above, we consider that it was.[77]The Appellant's criticism of FTT [64] does not assist. At that paragraph, the FTT acknowledged that Mr Darr's previous involvement in ESSL might be regarded as the factor which "tips the balance" in favour of a finding of knowledge or means of knowledge. The Appellant says that this demonstrates legal error because the FTT should not have relied upon ESSL at all. That does not follow. Ground 3 raises a threshold question, namely whether Mr Darr's previous involvement in MTIC fraud was capable in principle of being taken into account. For the reasons already given, we consider that it was. Once that is established, the extent to which that factor influenced the FTT's ultimate conclusion formed part of the FTT’s evaluative assessment of the evidence and is not the issue raised by Ground 3.[78]We likewise do not consider that the reference to bad character evidence at FTT [65] demonstrates any material legal error. The criminal law analogy was not central to the resolution of this ground. The relevance of the ESSL findings arose not because the findings show a propensity to engage in fraud, but because they were capable of evidencing Mr Darr's familiarity with MTIC fraud and its indicators. Once viewed in that way, the question becomes whether the ESSL findings were capable of being treated as relevant to the assessment of knowledge and means of knowledge, rather than whether they demonstrated a propensity to engage in fraud. For the reasons already given, we are satisfied that they were capable of being treated as relevant.[79]Accordingly, we are satisfied that the FTT did not take into account an irrelevant consideration and Ground 3 is not made out.

Conclusion

[80]Conclusion The appeal is dismissed. JUDGE SWAMI RAGHAVAN JUDGE VIMAL TILAKAPALA Release date: 21 August 2026