Judgment summary
This case concerns A & A Contractors Midlands Limited ("A&A"), a concreting sub-contractor, and its sole director Kanwarvir Singh ("KS"). HMRC denied A&A's entitlement to deduct input tax for periods 08/19 to 05/22 on the basis that A&A knew or should have known its transactions with eight suppliers were connected to fraudulent evasion of VAT (the Kittel principle). HMRC also deregistered A&A for VAT, assessed it to VAT, imposed a penalty under s 69C VATA, and made KS personally liable for that penalty under s 69D VATA.
The Tribunal found that all of A&A's suppliers had indeed engaged in fraudulent evasion of VAT and that A&A's transactions with them were connected to tax losses (paras 87-101). However, the Tribunal found that HMRC had not established, on a balance of probability, that A&A knew or should have known of this connection from the outset of its trading relationships (para 105).
The Tribunal held that A&A only became obliged to make reasonable enquiries into the trustworthiness of its suppliers once it received a tax loss letter regarding C Ltd on 22 June 2020, allowing two days for receipt, meaning the obligation arose from 24 June 2020 (paras 107, 109). Because A&A failed to make such enquiries thereafter, and continued trading with existing and new suppliers without adequate due diligence, the Tribunal found A&A should have known from that date onward that its transactions were connected to VAT fraud (paras 108-116).
The appeal was allowed in part: input tax denial, the VAT assessment, and the s 69C penalty were reduced to reflect that only transactions after 24 June 2020 were tainted (paras 1, 3, 4, 117, 119-120). The appeal against deregistration was dismissed, the Tribunal finding deregistration proportionate under the Ablessio principle (paras 2, 118). KS's personal liability for the penalty was reduced correspondingly but remained at 100% of the reduced penalty (paras 5, 121-122).
Background
A&A was incorporated on 7 January 2019 and registered for VAT from 19 March 2019, with KS as its sole director throughout (paras 4-5). A&A carried out concreting work on construction sites, using both its own employees and construction labour supplied by eight sub-contractors referred to as B Ltd, C Ltd, BW Ltd, G Ltd, K Ltd, X Ltd, J Ltd and D Ltd (paras 8-9).
All eight suppliers defaulted on their VAT obligations. HMRC sent A&A a series of "VETO letters" and "tax loss letters" between February 2020 and July 2022, notifying it of deregistrations and tax losses connected to various suppliers (paras 13, 17-18, 20-23, 28-29, 35, 40, 42-43).
HMRC opened a compliance check into A&A in September 2021 (para 31) and subsequently issued five decisions: to deregister A&A from VAT with effect from 18 July 2022 (para 41); to deny A&A's entitlement to deduct input tax for periods 08/19 to 05/22 (para 45); to assess A&A to VAT accordingly (para 46); to impose a penalty on A&A under s 69C VATA (para 47); and to make KS personally liable for that penalty under s 69D VATA (para 50). A&A and KS appealed against these decisions, which were consolidated for hearing (paras 48, 51, 53-54).
Core dispute
The core dispute was whether A&A knew or should have known, at the time it entered into transactions with each of its eight suppliers, that those transactions were connected to the fraudulent evasion of VAT, applying the Kittel principle (paras 1-2, 67-74).
HMRC submitted that all the circumstances of A&A's trade showed that it knew from the outset, or should have known, that its transactions were connected to fraud, and that KS was personally responsible as sole director (para 63). The Appellant submitted that KS had no knowledge of any fraud, that A&A carried out due diligence, and that HMRC's claims were misconceived (para 64).
A further issue was whether deregistration of A&A's VAT registration was proportionate and appropriate under the Ablessio principle (paras 75-81, 118), and whether the consequential VAT assessment, s 69C penalty, and s 69D personal liability decision against KS should stand (paras 82-85, 119-122).
Court findings
The Tribunal found that each supplier's default was caused by dishonest, deliberate failure to submit VAT returns or pay VAT due, amounting to fraudulent evasion of VAT, and that A&A's transactions with each supplier were connected to that fraud (paras 88-101).
The Tribunal found that HMRC had not established, on the balance of probabilities, that A&A knew or should have known of any connection to fraud when it began transacting with B Ltd, C Ltd or BW Ltd (para 105). The VETO letter concerning E Ltd, received on 18 February 2020, obliged A&A to make reasonable enquiries about which supply chain E Ltd featured in, but did not establish that A&A should have known of fraud in its own transactions at that point (para 106).
The Tribunal found that the VETO letter and tax loss letter concerning C Ltd, received in June 2020, gave A&A indications of fraud sufficient to oblige it to make reasonable enquiries into the trustworthiness of all similar suppliers, including B Ltd, BW Ltd, G Ltd and K Ltd (para 107). A&A failed to make such enquiries and continued transacting with these suppliers, so the Tribunal concluded that from 24 June 2020, A&A should have known its transactions with these suppliers were connected to fraud (paras 108-109).
The Tribunal found A&A's later due diligence on X Ltd, J Ltd and D Ltd insufficient, given the escalating warnings A&A had received, and concluded A&A should have known from the outset of trading with each of these three suppliers that the transactions were connected to fraud (paras 110-116).
On deregistration, the Tribunal found that HMRC had discharged the burden of showing deregistration was proportionate and appropriate under the Ablessio principle, given A&A's continued failure to make enquiries despite mounting warnings (para 118).
Outcome
The appeal against the input tax denial decision was allowed in part: the right to deduct input tax is denied only for transactions entered into after 24 June 2020 (para 1).
The appeal against the deregistration decision was dismissed (para 2).
The appeal against the VAT assessment was allowed in part, with the assessment reduced to correspond with the reduced input tax denial (para 3).
The appeal against the s 69C penalty decision was allowed in part, with the potential lost VAT reduced accordingly; the penalty calculation was otherwise unchanged (para 4).
The appeal against the s 69D company officer penalty decision was allowed in part, reducing KS's personal liability to correspond with the reduced penalty on A&A; KS's liability remained at 100% of that reduced amount (paras 5, 121-122).
The parties were given liberty to apply to the Tribunal within 90 days if unable to agree on amendments required to give effect to the decision (para 6).
Major issues / areas of contention
- Whether A&A knew or should have known, from the outset of trading with each of its eight suppliers, that its transactions were connected to fraudulent evasion of VAT under the Kittel principle.
- Whether HMRC's VETO letters and tax loss letters triggered an obligation on A&A to make reasonable enquiries into the trustworthiness of its suppliers, and if so, from what point in time.
- Whether A&A's due diligence on X Ltd, J Ltd and D Ltd was adequate given the level of scrutiny required by that stage.
- Whether it was proportionate and appropriate to cancel A&A's VAT registration under the Ablessio principle.
- Whether the VAT assessment and s 69C penalty should be reduced to reflect any partial success on the input tax denial issue.
- Whether KS should be held personally liable, and to what extent, for the penalty imposed on A&A under s 69D VATA.