Judgment summary
This decision concerns twelve linked appeals (relating to twenty HMRC decisions) brought by three companies in the Harlequin group (Brickwork, Contracting and Scaffolding) and their two directors, Mr Parkhouse and Mr Sutcliffe, against HMRC decisions denying input tax deductions on Kittel grounds, consequential VAT assessments, section 69C penalties, and section 69D officer liability notices (18)-(36).
The alleged fraud concerned a labour supplier, FFCS (and associated individuals/companies), which stopped filing VAT returns after April 2018, was deregistered in October 2019, and entered liquidation in December 2020, leaving substantial unpaid VAT (14, 239-244).
The Tribunal first dealt with two preliminary applications: HMRC's late application to amend its Statement of Case (refused save for a minor correction) and the Appellants' consequential application to debar HMRC (refused, though described as 'a very close-run thing') (119-147). The Tribunal then heard evidence, made findings on the relationship between the parties and the FFCS arrangements, and considered the substantive issues under the Kittel principle and sections 69C and 69D VATA (299-383). It concluded that HMRC had not proved, on the balance of probabilities, that the VAT loss was occasioned by fraud, and allowed the appeals on that basis (299-320, 384). The Tribunal went on, in case of a successful challenge to that finding, to address the remaining issues on a hypothetical basis, finding that Harlequin should have known of any connection with fraud (had it existed), that penalties would have been mitigated from 30% to 20%, and that officer liability would have been apportioned 80% to Mr Parkhouse and 20% to Mr Sutcliffe (321-385).
Background
Mr Parkhouse and Mr Sutcliffe operated several companies in the construction industry, including the three corporate Appellants: Harlequin Brickwork Limited, Harlequin Brickwork Contracting Limited and Harlequin Scaffolding Solutions Limited, referred to collectively as 'Harlequin' (4-6). Harlequin supplied bricklaying and scaffolding labour to clients including major household names (201-204).
In late 2018 or early 2019, Mr Warner (an employee of Scaffolding) introduced Harlequin to FFCS, a labour supply company, represented by an individual referred to as 'Giuseppe' (213-217). Harlequin entered into subcontracting arrangements with FFCS for the supply of labour, with payments later routed through a related company, iFourCS (222-223).
FFCS ceased filing VAT returns after April 2018, was deregistered for VAT on 15 October 2019 (partly because it shared an address with two unrelated companies under HMRC investigation), and entered creditors' voluntary liquidation on 7 December 2020, ultimately being unable to pay VAT assessed against it (239-244). Between 2019 and 2021, a company called Brightshine Management Services Ltd made payments totalling substantial sums to Mr Parkhouse and Mr Sutcliffe personally, said to be commissions for introducing work to FFCS, paid via foreign bank accounts and a credit card (225-238).
HMRC subsequently denied Harlequin's input tax claims on FFCS-related transactions under Kittel principles, raised consequential VAT assessments, imposed section 69C penalties, and issued section 69D officer liability notices against Mr Parkhouse and Mr Sutcliffe (14-36). Gross payment status decisions under the CIS were also made but the Appellants withdrew their appeals against those decisions during the hearing (39-40).
Core dispute
The central issue was whether HMRC had proved, on the balance of probabilities, that the admitted VAT loss (caused by FFCS's failure to account for output tax) was occasioned by fraud, that Harlequin's transactions were connected with that fraudulent loss, and that Harlequin knew or should have known of the connection, so as to justify denial of input tax under the Kittel principle (42, 299).
Related disputes concerned whether HMRC should be permitted to amend their Statement of Case shortly before the hearing to add further factual allegations supporting the fraud case (68-127), and whether HMRC's pleaded case on fraud in paragraph 101 of the Statement of Case was so inadequately particularised that HMRC should be debarred from further participation (128-147).
Further issues concerned whether, if the substantive VAT denial were upheld, the section 69C penalties should be mitigated under section 70 (352-363), and whether, and to what extent, the resulting penalties should be attributed personally to Mr Parkhouse and Mr Sutcliffe under section 69D (364-383).
Court findings
The Tribunal refused HMRC's application to amend its Statement of Case, save for a minor correction to paragraph 18, holding the application was 'very late' and that the proposed new paragraph 17a and cross-references in paragraph 101 amounted to an impermissible extension of HMRC's fraud case at that late stage (119-127).
The Tribunal refused the Appellants' consequential application to debar HMRC, concluding that paragraph 101 of the Statement of Case, though 'threadbare', gave HMRC a realistic prospect of success because it pleaded both the bare facts of non-payment of VAT and an express characterisation of that conduct as fraudulent (139-147).
On the substantive question, the Tribunal found that HMRC had not discharged the burden of proving, on the balance of probabilities, that the VAT loss was occasioned by fraud, given the limited pleaded facts (FFCS's non-filing, deregistration, assessment and inability to pay) and the absence of evidence displacing innocent explanations such as being overwhelmed by paperwork or director illness (299-320).
On a hypothetical basis (had fraud been established), the Tribunal found that Harlequin's transactions would have been connected with the fraudulent loss (321-322), that neither Mr Parkhouse nor Mr Sutcliffe actually knew of any connection with fraud, including in relation to the Brightshine payments which were found to be genuine incentive payments (323-340), but that Harlequin should have known of the connection because a basic VAT registration number check would have revealed a mismatch with FFCS's name, which, combined with known risks of VAT fraud in the construction industry, meant no explanation consistent with a legitimate VAT position could reasonably have been accepted (341-351).
On penalties, the Tribunal found that, had the VAT denial been upheld, the section 69C penalty would have been mitigated under section 70 from 30% to 20%, reflecting Harlequin's adequate co-operation with HMRC balanced against the seriousness of the case and the fact that HMRC instigated the investigation (352-363). On officer liability under section 69D, the Tribunal found both directors bore some responsibility but would have varied the attribution from the assessed 2/3 (Mr Parkhouse) and 1/3 (Mr Sutcliffe) to 80% and 20% respectively (364-383). The Tribunal also addressed procedural incidents during the hearing, including a breach of a witness warning by an HMRC officer (found not to have caused material unfairness), inadmissible late evidence from Officer Rouse (disregarded), and protection of Mr Sutcliffe's legal advice privilege during cross-examination (149-170).
Outcome
The Tribunal allowed the remaining appeals because HMRC had not proved that the VAT loss was occasioned by fraud (384). Had the Tribunal decided otherwise on that point, it would have dismissed the companies' VAT appeals, partially allowed the companies' penalty appeals by reducing the penalty to 20% of the VAT, partially allowed Mr Sutcliffe's appeal by reducing his section 69D liability to 4% of the VAT in issue, and partially allowed Mr Parkhouse's appeal by reducing his section 69D liability to 16% of the VAT in issue (385).
Major issues / areas of contention
- Whether HMRC should be permitted to amend their Statement of Case shortly before the hearing to add further factual allegations supporting the fraud case.
- Whether HMRC's pleaded case on fraud in paragraph 101 of the Statement of Case was adequately particularised, and whether HMRC should be debarred from further participation.
- Whether there was a VAT loss occasioned by fraud, as required under the Kittel principle.
- Whether Harlequin's transactions were connected with the fraudulent loss of VAT.
- Whether Harlequin knew or should have known of the connection with fraud, distinguishing actual from constructive knowledge.
- Whether section 69C penalties should be reduced under section 70 VATA, and by how much.
- Whether, and to what extent, the section 69C penalties should be attributed to Mr Parkhouse and Mr Sutcliffe personally under section 69D VATA.
- Procedural issues arising during the hearing, including a breach of a witness warning, inadmissible late evidence, and protection of legal advice privilege.