Judgment summary
This is an appeal from a decision of the First-tier Tribunal (Tax Chamber), published as Eurolaser IT Limited v HMRC [2025] UKFTT 405 (TC) (1). The FTT had upheld HMRC's decisions denying input tax deduction of £1,628,525.16 and zero-rating of intra-Community supplies of £503,409.29, together with penalties totalling £312,406.16 (2).
The assessments were raised under the Kittel and Mecsek principles, concerning denial of the right to deduct input tax or zero-rate supplies where a taxpayer knew or should have known transactions were connected with fraudulent evasion of VAT (2).
HMRC accepted the Appellant's sole director, Mr Stephen Pallister, neither knew nor should have known of the fraud, but maintained that Mr Moshin Darr, a self-employed consultant, did know or should have known, and that his knowledge was attributable to the Appellant (3). The FTT agreed and dismissed the appeal (3).
The Upper Tribunal (Judge Swami Raghavan and Judge Vimal Tilakapala) heard the appeal on three grounds challenging the FTT's findings on Mr Darr's actual and constructive knowledge and its reliance on his earlier involvement with Euro Stock Shop Limited (ESSL) (4). The appeal was dismissed in its entirety (80).
Background
The Appellant traded in information technology products. The disputed assessments arose from transactions during VAT periods 02/18 to 04/18 and 09/18 to 12/18 (2).
By the FTT hearing, the parties agreed the transactions were connected with fraudulent VAT losses elsewhere in the relevant supply chains, and HMRC had accepted on review that Mr Pallister neither knew nor should have known of that connection (10).
The FTT identified four issues: the Darr Knowledge Issue, the Attribution Issue, the Mecsek Test Issue, and the Reasonable Steps Issue, resolving each in HMRC's favour (11).
The FTT made detailed findings including that Mr Darr had previously been found culpably involved in MTIC transactions through ESSL (60(1)), that he introduced and arranged the transactions giving rise to the assessments (60(2), 60(8)), and that he did not disclose his previous ESSL involvement or director disqualification when engaged by the Appellant (60(7)).
The FTT found 87 purchase transactions arranged by Mr Darr showing repetitive patterns, identical or near-identical quantities and recurring mark-ups, with 41 being back-to-back transactions (60(9)). It drew inferences that Mr Darr had a 'complete picture' of the transactions and would have recognised uncommercial features (61(1)-(4)).
The FTT attached particular significance to 'strong similarities' between the transactions under appeal and those in the earlier ESSL litigation (61(8)-(9)), concluding it had 'little hesitation' in finding Mr Darr knew of the fraud connection, or alternatively should have known because his prior MTIC involvement should have made him 'hypervigilant' (62, 63).
The FTT found Mr Darr's knowledge attributable to the Appellant applying Greener Solutions and Mobile Sourcing principles, and upheld both the Kittel and Mecsek assessments and penalties (66-104).
Core dispute
The Appellant appealed on three grounds. Grounds 1 and 2 challenged the FTT's findings that Mr Darr knew, or should have known, of the connection to fraud, arguing these were inconsistent with Mr Pallister's unchallenged evidence, unduly coloured by Mr Darr's previous ESSL involvement, and not properly open to the Tribunal such that they were perverse under Edwards v Bairstow (27).
Ground 3 challenged the FTT's treatment of Mr Darr's previous ESSL involvement as evidence of 'propensity', arguing this was an error of principle because even taken at its highest it was insufficient to establish relevant propensity, and the Kittel/Mecsek inquiry was said to be transaction-specific (27, 61-64).
HMRC submitted that Grounds 1 and 2 were conventional Edwards v Bairstow challenges to findings of fact, and that Ground 3 proceeded from a false premise that previous MTIC involvement could not in principle be relevant (30, 67-68).
Court findings
The Upper Tribunal characterised Grounds 1 and 2 as challenges to findings and inferences of fact, to be assessed under Edwards v Bairstow principles, namely whether the findings were reasonably open to the FTT on the evidence (32, 49).
The Tribunal rejected the submission that the FTT had ignored Mr Pallister's evidence, finding the FTT had identified and accepted those aspects of his evidence relevant to Mr Darr's knowledge, without being required to adopt his broader commercial views (50-51).
It held that HMRC's decision not to cross-examine Mr Pallister did not prevent the FTT from making the findings and inferences it did, since the FTT had not rejected his factual evidence but had evaluated it alongside a wider evidential picture (52).
Examining the specific findings challenged (FTT [61(1)]-[61(9)]), the Tribunal found no inconsistency amounting to legal error, noting Mr Pallister's evidence did not address several specific features relied on by the FTT, such as euro invoicing against sterling contracts, the scale of Mr Darr's trading relative to the business, and specific similarities with ESSL transactions (53-57).
On Ground 3, the Tribunal held that the Kittel and Mecsek inquiry is not confined to the immediate characteristics of the transactions under appeal, and that previous involvement in MTIC fraud, previous tribunal findings, and familiarity with fraudulent supply chains are capable in principle of being relevant objective factors (74). The relevance of the ESSL findings lay in demonstrating Mr Darr's understanding of how such fraud operated, not in demonstrating propensity, and the weight attached to that factor was a matter for the FTT, not raised by Ground 3 (76-78).
The Tribunal concluded the FTT did not take into account an irrelevant consideration and that no material error of law was established under any ground (79, and generally 49-59, 73-79).
Outcome
The Upper Tribunal dismissed the appeal (80), upholding the FTT's decision that the Kittel and Mecsek assessments, totalling £1,628,525.16 in denied input tax and £503,409.29 in denied zero-rating, together with penalties of £312,406.16, were correctly upheld.
Major issues / areas of contention
- Whether the FTT erred in law in finding that Mr Darr knew that the Appellant's transactions were connected with fraudulent evasion of VAT (Ground 1).
- Whether the FTT erred in law in finding that Mr Darr should have known that the transactions were connected with fraud (Ground 2).
- Whether the FTT's findings on knowledge and means of knowledge were inconsistent with Mr Pallister's unchallenged evidence.
- Whether the FTT's findings and inferences were perverse or not reasonably open to it on the evidence, applying Edwards v Bairstow.
- Whether the FTT erred in law by treating Mr Darr's previous involvement in Euro Stock Shop Limited (ESSL) as relevant to establishing a 'propensity' to know of or participate in fraud (Ground 3).
- Whether knowledge or means of knowledge derived from evidence of prior MTIC fraud involvement is capable in principle of being relevant under Kittel and Mecsek.