Rizwan Butt v The Commissioners for HMRC

This is a consolidated appeal in relation to HMRC’s decision to issue the Appellant, Mr Butt, with penalty notices under section 69D of the Value Added Tax Act 1994 (“VATA 1994”) in respect of a series of transactions which took place in the periods 09/19 to 09/21. The total amount under appeal is £52,450.91 and relate to transactions which HMRC submit can be traced back to tax losses as a result of the fraudulent evasion of VAT, commonly referred to as missing trader intra-community (“MTIC”) fraud.

The decision notices under appeal are as follows:

The section 69D penalties against Mr Butt follow decisions by HMRC to deny Quantum London Limited (“Quantum”), of which Mr Butt was a director, the recovery of input tax for the subject transactions. According to HMRC, Mr Butt knew or should have known that the transactions entered into by Quantum in the periods in question were connected to the fraudulent evasion of VAT.

Schedules of the denied transactions are contained within each of the denial letters and can be summarised as follows:

HMRC accept that even though no formal appeal has been made to the underlying decisions to deny Quantum’s input tax, in order to demonstrate that the decisions under appeal (the director penalties) were correctly issued, they will need to demonstrate that the underlying input tax denials and company penalties under section 69C VATA were correctly made.

A summary of the decisions to deny Quantum’s claim for input tax (the Kittel denials), and the company and director penalties under section 69C and section 69D, are set out below:

The grounds of appeal are stated to be as follows:

A Fairford response was filed on behalf of Mr Butt, in which he accepts the accuracy of the transaction chains (set out below). However, the issues above remained in dispute.

Articles 167 and 168 of the Principal VAT Directive and sections 24 to 26 of VATA 1994 provide for the right to deduct input VAT. If a taxable person has incurred input tax that is properly allowable, they are entitled to set it against their output tax liability and, if the input tax credit due to them exceeds the output tax liability, receive a payment.

However, the Court of Justice of the European Union (“the ECJ”), in the joined cases of Axel Kittel v Belgium and Belgium v Recolta Recycling SPRL (C-439/04 & 440/04) (“Kittel”) has confirmed that taxable persons who “knew or should have known” that the purchases in which input tax was incurred were connected with fraudulent evasion of VAT will not be entitled to deduct that input. At [56] of Kittel, the ECJ stated:

Conversely, the ECJ had stated at [51]:

The rationale for this approach was set out by the ECJ at [57-58], in which the Court explained in such a situation, the taxable person aids the perpetrators of the fraud and becomes their accomplice, and that in addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them. At [59], the ECJ concluded:

At [61], the ECJ proceeded to state that:

In Mobilx Limited (in Liquidation) v HMRC [2010] EWCA Civ 517, the Court of Appeal considered Kittel and stated (at [52], per Moses LJ):

At [59], in relation to the “should have known” aspect of the test, Moses LJ stated:

At [64] of Mobilx, Moses LJ then said:

The following passage at [82] is also pertinent:

As to the phrase “the only reasonable explanation”, the Upper Tribunal in the case of GSM Export (UK) Limited and Another v The Commissioners for HMRC [2014] UKUT 0529 (TCC) has confirmed that Mobilx does not purport to change the test in Kittel [19]:

Further, in AC (Wholesale) Ltd v HMRC [2017] UKUT 191 (TCC), the Upper Tribunal considered that the ‘only reasonable explanation’ test is simply one way of showing that a person should have known that transactions were connected to fraud.

The Court of Appeal in Mobilx also affirmed guidance on the treatment of circumstantial evidence in cases of VAT fraud, repeating the words of Christopher Clarke J in Red12 v HMRC [2009] EWHC 2563:

Further, as was said in R v Exall (1866) 4 F&F 922, perPollock CB:

A tax payer does not need to know specific details of the fraud being perpetuated. In Fonecomp Ltd v HMRC [2015] STC 2254, the Court of Appeal said this at [51]:

Furthermore, it is dishonest for a person deliberately to shut their eyes to facts which they would prefer not to know. If he or she does so, they are taken to have actual knowledge of the facts to which they shut their eyes. Such knowledge has been described as "Nelsonian" or "blind- eye" knowledge". Lord Scott in Manifest Shipping Company Limited v. Uni-Polaris Shipping Company Limited and Others [2001] UKHL 1 said the following at [112]:

The burden of proving knowledge or means of knowledge rests on HMRC. The standard of proof is the civil standard of the balance of probabilities.

HMRC must prove that Mr Butt either (a) actually knew that he was participating in a transaction connected with fraudulent evasion of VAT; or (b) that he had the means at his disposal of knowing that he was participating in such a transaction: see Mobilx, at [52].

It not sufficient for HMRC to show that the taxpayer knew or should have known that it was running the risk that by its purchase it might be taking part in a transaction connected with fraudulent evasion of VAT: see Mobilx at [56]. Nor is it sufficient for HMRC to show that a taxpayer knew or should have known that such transactions might be connected with fraudulent evasion, or even that it was more likely than not (in other words, probable) that its transaction was so connected: see Mobilx at [56] and [60];

The Tribunal must focus only on what the taxpayer actually knew at the time of the relevant transaction and/or the means of knowledge it had at its disposal at that time. Whilst that can include obvious inferences from the facts and circumstances in which it has been trading (see Mobilx at [61]), it cannot, by definition, include information not known to it if it had no means at its disposal of knowing during the relevant period or matters known only with the benefit of hindsight: see Aria Technology Ltd v HMRC [2016] UKFTT 98 (TC) at [13].

Nor is it sufficient for HMRC to show that a reasonable explanation for the relevant transaction was that it was connected with fraudulent evasion of VAT, it must be the only reasonable explanation (see Mobilx at [75]).

The test is an objective one, so a naïve taxpayer will not have satisfied the objective criteria entitling it to a deduction, if it failed to deploy means of knowledge available to it (see Mobilx at [52]).

Section 69C of the VAT Act 1994 states as follows:

Section 69D of the VAT Act 1994 states as follows:

Mr Spencer, director of Ian Spencer & Associates Ltd, appeared on behalf of Mr Butt. Ms Joanna Vicary of counsel appeared on behalf of HMRC. We are grateful to them for their helpful assistance during the hearing. They made fulsome submissions and have left no stone unturned. They have said everything that could possibly have been said on behalf of their clients.

The Tribunal received a great volume of documents for this appeal, with the substantive bundle consisting of 13,678 pages and an authorities bundle consisting of 432 pages. We received skeleton arguments from both parties. In addition, a response was filed by HMRC to the Respondent’s skeleton argument on matters of law. As HMRC’s response had been filed without the Tribunal’s permission, we indicated at the outset of the hearing that we would grant Mr Butt permission to respond to that document in writing. Mr Spencer, on behalf of Mr Butt, informed us that he did not wish to respond in writing. Notwithstanding this, to ensure that both parties had a full opportunity to advance their case, we indicated that Mr Spencer could respond to that document in his closing submissions if he wished.

Despite the great volume of documentation, the parties estimated that only half a day reading would be required. That period was later extended to one day. We indicated at the outset of the hearing that the Tribunal had read all the documents in the pre-reading list provided by HMRC, the skeleton arguments, and all the witness statements (see below). However, we would not be reading the entire substantive bundle, and to the extent that the parties consider materials in the bundle to be relevant to this appeal and the decision we have to take, that they should take us to them specifically and explain their relevance.  This approach is consistent with the guidance given by the Upper Tribunal in Adelekun v HMRC [2020] UKUT 244 (TCC).

Mr Butt provided a witness statement. He was the director of Quantum between 9 March 2019 (incorporation) and 13 December 2021 (his disqualification as director). He gave oral evidence under oath and was cross-examined.

HMRC provided witness statements from the following witnesses, all being employees or officers of HMRC:

Officer Carmelina Mankad is the appointed officer for Quantum. She was allocated to the case on 10 August 2021 having taken over from another office (Officer Gary Saul) who had moved on to another business area. Officer Mankad’s written evidence sets out in detail HMRC’s dealings with Trade Lynx, Quantum and Mr Butt, the decisions to issue Kittel denials and to raise penalties, and Quantum’s transactions with other traders in the chain. The other Officers dealt with specific traders in the supply chain.

The Tribunal heard oral evidence under oath from all of HMRC’s witnesses. Each were cross-examined during the hearing.

The Tribunal has considered all the relevant evidence placed before it. Given the volume of evidence, it is impossible to refer to it all, even in a lengthy decision such as this. That does not mean that the Tribunal has not given it due consideration.

The Tribunal has found all facts on the balance of probabilities.

As stated above, Mr Butt was a director of Quantum between 8 March 2019 and 13December 2021. Mr Butt has also been the director of three additional companies:

By way of a Court order dated 23 November 2021, Mr Butt was disqualified from acting as a director for 10 years from 14 December 2021 as a result of his conduct whilst acting as a director for Trade Lynx. The case details attached to the order from the Insolvency Service summarises the conduct in issue as follows:

Trade Lynx was incorporated on 9 August 2011 (company registration no. 07733900). The nature of its business, as listed in its Companies House records, was “non-specialised wholesale trade.” Its principal place of business (“PPOB”) was a residential address in Essex.

Trade Lynx was registered for VAT on 1 June 2012. It stated its business activities, within its VAT 1 Form, as “Importer of empty hamburger and empty plastic lunch boxes.”

The sole director on incorporation was Mr Butt (he resigned on 13 December 2021, shortly before his disqualification took effect).

On 8 March 2022, a first Gazette Notice for compulsory strike off was issued. This action was suspended on 1 April 2022.

On 9 September 2019, the company was deregistered for VAT at the request of its liquidator.

On 22 June 2020, a letter was issued denying Trade Lynx entitlement to the right to deduct input tax claimed in its VAT accounting periods 06/18 to 03/19 amounting to £204,977.56 in reliance on the Kittel principle. The decision has not been appealed and the resulting debt has not been paid.

On 24 July 2020, Trade Lynx was issued with a penalty under section 69C VATA in the sum of £61,019 (a revised denial letter and section 69C penalty notice was issued on 14 September 2020). This decision has not been challenged and the penalty has not been paid.

On 20 January 2021, Mr Butt was notified that he was to be made personally liable under section 69D VATA to the penalty issued to Trade Lynx (a corrected version of the liability notice was issued to Mr Butt on 31 March 2021). An appeal was made out of time. A hearing took place on 28 February 2023. Permission to pursue the appeal was refused on 13 March 2023.

Lion Foods was incorporated on 17 March 2017 (under company registration no. 10677684. Mr Butt was a director between 17 March 2017 and 2 April 2018.

The nature of this business, as listed in its Companies House records, was “wholesale of meat and meat products, wholesale of dairy products, eggs and edible oils and fats wholesale of fruit and vegetable juices, mineral water and soft drinks.” Its business activities as stated within its VAT 1 Form was “soft drinks (wholesale).”

On 1 May 2017, Mr Butt made an application for VAT registration. He later completed a form and submitted it to HMRC stating that the company supplied food items and packaging products to fried chicken shops and restaurants. Lion Foods was given a VAT registration number on 27 July 2017 with an effective date of registration of 1 May 2017.

Lion Foods was compulsorily deregistered for VAT on 30 August 2019.

Quantum was incorporated on 8 March 2019 (under company registration no. 11870317). The nature of its business, as listed in its Companies House records, was “non-specialised wholesale trade.”

Quantum was registered for VAT on 22 May 2019. It stated its business activities in its VAT 1 Form as “import and export of soft drinks, mineral water, packaging and food items .” Its PPOB was the same residential address in Essex as had been listed for Trade Lynx. This PPOB is also the registered address on Companies House.

At incorporation, there were two directors, Rizwan Butt (the Appellant) and Azhar Butt. Azhar Butt resigned on 11 March 2019. Thereafter, Nadyia Butt was appointed on 16 November 2019. Her appointment was terminated on 14 September 2021.

Mr Butt was a director of Quantum until his disqualification on 13 December 2021. There are no directors of Quantum currently listed at Companies House. It is common ground that Mr Butt was the sole person acting in the company and took all decisions regarding the suppliers used and the customers supplied.

On 8 March 2022, a first Gazette Notice for compulsory strike off was issued. This action was suspended on 1 April 2022.

On 12 September 2012, HMRC undertook its first visit to Trade Lynx. Mr Butt confirmed during this visit that the company had started trading in July 2012. He stated that he did not arrange transportation of goods purchased, as it was all arranged by the supplier who would be given the name of the customer. Mr Butt was informed of the risks of the industry and MTIC fraud. He was handed various fact sheets.

On 13 September 2012, Trade Lynx was issued with its first MTIC awareness letter which indicated that this type of fraud was rife within the wholesale of commodities. The letter provided information on how to validate the VAT status of trading partners and made reference to Notice 726 – Joint and Several liability (“Notice 726”).

On 30 May 2013, another visit was undertaken with Trade Lynx as it had sold goods to another trader that was part of a supply chain under investigation. Mr Butt explained how he started the business and provided details of his main suppliers. He explained that his suppliers delivered directly to his customers. He was informed that he should keep better records and was again handed Notice 726.

On 7 June 2013, a further MTIC awareness letter was sent to Trade Lynx which indicated that alternative banking platforms were often used by those involved in MTIC fraud. Further details on MTIC fraud and what checks might be useful were provided within the letter.

On 12 November 2013, Trade Lynx was issued with a tax loss letter notifying it that its purchases from Grove Green Limited in the 12/12 VAT period had been traced to transaction chains commencing with a VAT loss exceeding £2,633.

On 3 December 2013, Trade Lynx was issued with a tax loss letter notifying it that its purchases from Tradeway Supplies Limited in the 06/13 VAT period had been traced to transaction chains commencing with a VAT loss exceeding £23,198.

On 10 December 2013, another visit was undertaken with Trade Lynx. Records were discussed, the need for due diligence was raised, and Mr Butt was informed that he should undertake a detailed review of the checks and documents obtained. He was referred to the recent tax loss letters and again to Notice 726.

On 2 July 2013, 17 July 2013, 24 July 2013 and 26 July 2013, Trade Lynx was issued with veto letters notifying it that its suppliers Universal Food & Packaging, Whitmount Limited, Grove Green Limited and Hook Sinker Limited had all been deregistered for VAT.

On 10 March 2014, Trade Lynx was issued with a veto letter notifying it that another of its suppliers, Tradeway Supplies Limited, had been deregistered for VAT.

On 14 March 2014, Trade Lynx was issued with a tax loss letter notifying it that its purchases from Hook Sinker Limited in the 03/13 and 06/13 VAT periods had been traced to transaction chains commencing with a VAT loss exceeding £30,800.

On 19 March 2014, Trade Lynx was issued with a veto letter notifying it that its supplier Melon Limited had been deregistered for VAT.

On 16 May 2014, Trade Lynx was issued with a veto letter notifying it that its supplier Guru Krupa Limited had been deregistered for VAT.

On 23 October 2014, Trade Lynx was issued with a tax loss letter notifying it that its purchases from Degroot Trading Limited in the 06/13 VAT period had been traced to transaction chains commencing with a VAT loss exceeding £75,055.

On 5 December 2014, a visit was undertaken to Trade Lynx to discuss customers and suppliers, as well as the recent tax loss letter.

On 27 March 2015, a visit was undertaken to Trade Lynx as part of the monitoring of the company with the aim of obtaining documents for transactions undertaken in January and February 2015.

On 13 May 2015, a visit was undertaken to Trade Lynx. Once again, customers and suppliers were discussed and Mr Butt was reminded that due diligence checks needed to be undertaken.

On 31 July 2015, Trade Lynx was issued with a veto letter notifying it that its supplier Natural Drinks (UK) Limited had been deregistered for VAT.

On 18 August 2015, another visit was undertaken to Trade Lynx. It was confirmed that the business had increased its turnover in the most recent VAT period, the company had a new German supplier and three new customers. Records were requested so that the 06/15 return could be reviewed.

On 19 November 2015, a visit was undertaken to Trade Lynx. Again, the business was discussed and Mr Butt was advised to carry out checks on his suppliers and customers regularly.

On 8 March 2019, Quantum was incorporated and Mr Butt was named as a director (the chronology of HMRC’s involvement with Quantum is set out below).

On 20 August 2019 HMRC, wrote to Trade Lynx to seek to arrange a visit to verify several sales. This meeting did not take place as HMRC received a response from the liquidator, indicating that they had received instructions from Mr Butt to place Trade Lynx into liquidation.

On 9 September 2019, Trade Lynx was deregistered for VAT at the request of its liquidator.

On 8 October 2019, a visit was undertaken to speak to the liquidators and to request various documentation. This documentation was received from the liquidators on 19 November 2019.

On 22 June 2020, a Kittel denial letter was issued to Trade Lynx denying its entitlement to the right to deduct input tax claimed in its VAT accounting periods 06/18 to 03/19 totalling £204,977.56.

On 24 July 2020, a section 69C penalty was issued to the company in the sum of £61,019 (a revised denial letter and section 69C penalty letter was issued on 14 September 2020).

On 20 January 2021, Mr Butt was notified that he was to be made personally liable under section 69D VATA to the penalty issued to Trade Lynx (a corrected version of the liability notice was issued on 31 March 2021). An appeal was issued out of time, but permission to pursue the appeal was refused.

Pursuant to a court order dated 23 November 2021, Mr Butt was disqualified from acting as a director for 10 years from 14 December 2021 for conduct whilst acting as a director for Trade Lynx.

As stated above, Quantum was incorporated on 8 March 2019 (a few months prior to Trade Lynx being placed into liquidation). Mr Butt has been the director of Quantum at all material times, and it is not disputed that he was the sole person acting within the company and making all decisions regarding suppliers and the customers.

On 25 July 2019, a visit was undertaken to Quantum as its VRN had been verified by another company. It was confirmed that Quantum bought and sold soft drinks, and that Mr Butt sourced his suppliers and customers through his previous business (Trade Lynx). It was confirmed that delivery prices were always included in the price and that his suppliers delivered directly to his customers. Mr Butt was again given information about MTIC fraud and tax loss chains, and advised about the measures he could take to protect his business from VAT fraud.

On 30 July 2019, an MTIC awareness letter was issued to Quantum. This described MTIC fraud, indicated what a company might look out for, and referenced the need for due diligence.

In August 2019, HMRC were informed by the liquidator of Trade Lynx that they had received instructions from Mr Butt to place the company into liquidation. On 9 September 2019 Trade Lynx was deregistered for VAT (see the chronology above concerning Trade Lynx).

On 20 December 2019, following a VAT verification request made by Quantum for one of its suppliers, Maestro Trades Limited, HMRC wrote to Quantum to confirm that it was currently unable to verify Maestro. It later transpired that Quantum proceeded to trade with Maestro, notwithstanding the fact that HMRC had informed Quantum that it was unable to verify Maestro’s VAT registration details.

On 4 February 2020, an unannounced visit was undertaken to Quantum. It had been noted that Mr Butt had been involved with Trade Lynx and that company had been involved in transactions resulting in tax losses. No one was at the PPOB and a letter was left. Mr Butt later contacted HMRC and a visit was arranged for 5 March 2020.

In the meantime, on 24 February 2020, a veto letter was issued to Quantum indicating that its supplier Maestro Trades Limited had been deregistered.

On 5 March 2020, the agreed visit took place at the PPOB which was Mr Butt’s home address. It was stated that Quantum purchased from a French company (SEDB Sarl) and sold to an Italian company (Rotana SRLS). There had, however, also been UK trade carried out. Mr Butt was asked how he became aware of Alam Trading Limited, one of its suppliers, and he indicated that the company had reached out to Quantum.

Mr Butt explained how a typical transaction worked and confirmed that his suppliers would deliver directly to his customers. He stated that there were no contracts or agreements, and that the onus was on the supplier to insure the goods for loss/ damage. He stated that his customer would pay him before he would pay the supplier. It was noted that the company had no website or social media presence, and Mr Butt indicated that everything was done by word of mouth. Due diligence was again discussed and Mr Butt was issued with Notice 726, and in particular, taken to section 6.

On 23 March 2020, a veto letter was issued to Quantum indicating that its supplier K.A. Top Traders had been deregistered for VAT.

On 6 May 2020, a letter was sent to Quantum noting that it had been identified as a business that may be at risk of involvement in supply chains connected to fraud and was to be included on HMRC’s monitoring project. That would involve it being visited regularly and it providing records on a monthly basis. Quantum was again referred to Notice 726 and the “How to Spot Missing Trader VAT Fraud” leaflet.

On 1 July 2020, Quantum was issued with a tax loss letter notifying it that 13 of its purchases from K.A. Top Traders Limited in VAT periods 06/19 and 09/19 had been traced to transaction chains commencing with a VAT loss exceeding £37,984.

On 19 January 2021, Quantum was issued with a tax loss letter notifying it that three of its purchases from Alam Trading Limited in VAT periods 12/19 had been traced to transaction chains commencing with a VAT loss which exceeded £7,751.

On 21 April 2021, Quantum was issued with a tax loss letter notifying it that four of its purchases from Alam Trading Limited in VAT periods 03/20 had been traced to transaction chains commencing with a VAT loss which exceeded £10,415.

On 27 April 2021, a telephone call was undertaken with Mr Butt and the tax loss letters relating to Alam Trading Limited discussed. He stated that he had spoken to Alam Trading Limited and had stopped trading with them. Mr Butt said that he would provide the names of his new suppliers and that he had carried out due diligence on these suppliers who were in any event well established in the industry.

On 15 June 2021, Quantum was issued with a tax loss letter notifying it that 29 of its purchases from KA Top Traders Limited in September, October and November 2019 had been traced to transaction chains commencing with a VAT loss which exceeded £85,678.

On 2 September 2021, a telephone conference was undertaken with Quantum as Officer Mankad had taken over the monitoring of the company. Questions were asked about how the business operated and due diligence was discussed. Mr Butt acknowledged at the meeting that Quantum did not add any value to the goods or transactions. He indicated that following tax loss letters he was no longer dealing with Alam Trading Limited or K.A. Top Traders Limited. He indicated that he had a robust due diligence process in place, meeting directors and customers in person and that his business was based on connections and links. He confirmed that he had previously been told about Notice 726 and had been given recommendations as to due diligence checks. Full details of all the interventions that could be undertaken (deregistration, input tax denial, penalties) were given to Mr Butt and the relevant legislation that related to these interventions was provided by email directly after the meeting.

On 22 September 2021, HMRC issued a Kittel denial letter denying Quantum entitlement to the right to deduct input tax claimed in its VAT accounting period 09/19 totalling £67,640.76.

On 13 October 2021, a penalty under section 69C VATA was issued to Quantum in the sum of £15,219.22. At the same time, Mr Butt was issued with a letter notifying him that HMRC were considering making him personally liable for the penalty and giving him the opportunity to make representations.

No representations were received in the relevant timeframe and, as such, on 25 November 2021 Mr Butt was notified that he was to be made personally liable for the penalty issued to Quantum under section 69D VATA.

On 9 December 2021, a video meeting was undertaken with Mr Butt and he was asked about his supplier Maestro Trade Limited. He could not remember how he found the company nor who his contact was. As for his other supplier, Alam Trading Limited, he indicated that Quantum had been approached by that company and that he had met a company representative several times. Queries were also raised regarding Mr Butt’s EU suppliers and why almost all orders from EU suppliers were delivered to Germany. Mr Butt stated that his brother was a German citizen but lived in the UK. Mr Butt indicated that he did not understand why he had been denied input tax. In response, officers referred him to the discussions he had had during his meeting with Officer Mankad on 2 September 2021 and her email of the same date. Mr Butt’s disqualification was also discussed.

On 13 December 2021, Quantum was issued with a tax loss letter notifying it that five of its purchases from Maestro Trades Limited in VAT periods 12/19 and 03/20 had been traced to transaction chains commencing with a VAT loss which exceeded £13,372.

On 24 December 2021, Quantum was issued with a 7-day deregistration warning letter as attempts to contact the company had been unsuccessful and it was not clear whether it continued to trade given that the sole remaining director, Mr Butt, had resigned on 13 December 2021.

On 7 January 2022, a Kittel denial letter was issued denying Quantum entitlement to the right to deduct input tax claimed in its VAT accounting periods 12/19 and 03/20 totalling £83,701. A notice of assessment was issued dated 10 January 2022.

On 10 January 2022, Quantum was deregistered for VAT.

On 21 January 2022, Quantum was issued with a penalty under section 69C VATA in the sum of £18,832.99. At the same time Mr Butt was issued with a letter notifying him that HMRC were considering making him personally liable for the penalty and giving him the opportunity to make representations.

By way of a letter dated 31 January 2022 Mr Butt made representations as to why he should not be made liable to a penalty, stating that HMRC had failed to evidence their case. On 8 February 2022, HMRC responded rebutting those points.

On 9 March 2022, Mr Butt was notified that he was to be made personally liable for the penalty issued to Quantum under section 69D VATA.

On 8 April 2022, Quantum was issued with a tax loss letter notifying it that 10 of its purchases from Alam Trading Limited between April 2020 and December 2020 had been traced to transaction chains commencing with a VAT loss which exceeded £25,928.

On 21 June 2022, Quantum was issued with a tax loss letter notifying it that four of its purchases from Mega Foods Limited in October, November and December 2020 had been traced to transaction chains commencing with a VAT loss which exceeded £8,237.

On 8 July 2022, a Kittel denial letter was issued denying Quantum entitlement to the right to deduct input tax claimed in its VAT accounting periods 06/20 to 12/20 totalling £34,165.

On 8 August 2022, Quantum was issued with a penalty under section 69C VATA in the sum of £10,249.50. At the same time Mr Butt was issued with a letter notifying him that HMRC were considering making him personally liable for the penalty and giving him the opportunity to make representations.

No representations were made and as such on 8 September 2022 Mr Butt was notified that he was to be made personally liable for the penalty issued to Quantum under section 69D VATA.

On 13 March 2023, a Kittel denial letter was issued denying Quantum entitlement to the right to deduct input tax claimed in its VAT accounting periods 03/21 to 09/21 totalling £27,165.60.

On 13 March 2023, Quantum was also issued with a penalty under section 69C VATA in the sum of £8,149.20. On 14 March 2023 time Mr Butt was issued with a letter notifying him that HMRC were considering making him personally liable for the penalty and giving him the opportunity to make representations in this regard.

On 17 March 2023, Mr Butt made representations as to why he believed that he should not be made liable for the penalty, stating that he was not aware of any tax losses in the relevant periods. These representations were not considered sufficient by HMRC.

On 31 March 2023 Mr Butt was notified that he was to be made personally liable for the penalty issued to Quantum under section 69D VATA.

The decisions under appeal concern transactions which relate to Quantum’s purchases from several suppliers. It is accepted that the transaction chains set out by HMRC are accurate and that there were tax losses in those chains (see Mr Butt’s Fairford response). However, Mr Butt submits that this is insufficient for the Kittel principle to be invoked, and that HMRC had not established that the losses were a result of “deliberate actions” or “deliberate evasion” on the part of defaulting trader.

The transaction chains are as follows:

The following is a summary of HMRC’s position as to the status or role played by the traders involved:

It is HMRC’s case that Quantum and Mr Butt (as a director of Quantum) knew, or should have known, that the transactions that were entered into with Alam, K.A. Top Traders, Maestro, Mega Foods and Metropac were connected to the fraudulent evasion of VAT.

Mr Butt disputes this. In the skeleton argument filed on his behalf, his case is put as follows:

HMRC submit the following as indications by which the Tribunal can determine that Mr Butt knew, or should have known, that the transactions entered into by Quantum in the periods under appeal, involving the traders identified by HMRC as having been involved in tax losses, were connected with the fraudulent evasion of tax.

It is common ground that Mr Butt, when he was the director of Trade Lynx and then of Quantum, had been the subject of numerous visits from HMRC Officers between 2012 and 2020 during which he received education and warnings that the wholesale of fast-moving consumer goods posed a risk of supply chain fraud.

He was referred to appropriate educational materials, including in particular, Notice 726, and the “How to Spot Missing Trader Fraud” leaflet. These materials were provided to Mr Butt on several occasions over the course of approximately 8 years.

These visits from HMRC are summarised below:

Trade Lynx, Quantum, and Mr Butt as the director of both companies, had also been repeatedly informed that they had traded in tax loss chains. Veto letters had also been issued on many occasions in respect of traders the companies had entered into transactions with. The tax loss letters issued were as follows:

HMRC submit that notwithstanding these notifications, Trade Lynx, Quantum and thereby Mr Butt continued to trade in the same manner without making any material adjustment to their procedures or checks in order to protect against VAT fraud.

It is not in dispute that Quantum delivered directly to its customers, with the supplier making the arrangements for the delivery. In certain cases, Quantum’s details were not even on the shipping documents. Mr Butt was also aware, and indicated to HMRC officers during a visit on 2 September 2021, that his company did not add any value to the transaction chains.

HMRC submit that this is highly suggestive of contrivance in the transaction chains as there appears to be little commercial value to Quantum being in the transaction chains as the customer could simply purchase from Quantum’s supplier directly in these circumstances (and the supplier could also cut out Quantum and sell to the customer).

HMRC further submit that there is no evidence that Quantum or Mr Butt played any active part or showed any interest in negotiating the prices that were either paid or charged for the goods bought and sold. They point to Mr Butt’s emails with Alam Trading showing no negotiation on the price list, the order placed with Mega Foods without pricing details, and a general absence of evidence of negotiating or questioning when suppliers raised their price.

There were also no contracts, nor any provision made for inspection of goods, or consideration of how to deal with any commercial issues that may arise as one would expect. Mr Butt also appeared not to know when Quantum took ownership of the goods and did not take any steps to enquire about insurance with his suppliers who were also tasked with delivering the goods. HMRC state that this failure is all the more striking given the extent of the education provided to him, which specifically highlighted that an absence of insurance could be an indicator of VAT fraud.

HMRC contend that this, and the fact that all parties appeared to be unconcerned with the condition of the goods or the terms on which they were sold, which would leave the business with no form of redress if issues arise, suggest that the transactions were contrived and were not genuine arm’s length commercial transactions.

In addition, HMRC state that Quantum always appeared to be able to immediately source the exact amount and type of goods that his customer wanted from his supplier. The ease of obtaining the exact goods that were required appears to suggest contrivance rather than genuine commercial deals. With a single exception, all transactions had been bought and sold in the exact same quantities throughout the chain.

It is said by HMRC that during the visit on 2 September 2021, Mr Butt appeared to state that he was ‘pre-ordering’ goods. It is not clear what is meant by that.

It is also HMRC’s case that the commercial checks carried out by Quantum and Mr Butt on Quantum’s trading partners were superficial and inadequate. HMRC point to the following deficiencies:

HMRC point to the extensive education which Mr Butt has received as to VAT fraud, from 2012 when he was initially director of Trade Lynx, and later, as the director of Quantum. Given the extensive education he had received, and the numerous veto and tax loss letters throughout the years, it was incumbent upon Mr Butt to take every precaution which could reasonably be required to ensure that Quantum’s transactions were not connected with fraud. It is against this background that the commercial checks carried out by Quantum and Mr Butt fall to be evaluated.

HMRC submit that it must have been clear to Mr Butt that the checks undertaken were insufficient to satisfy him that Quantum’s counterparties were legitimate and trustworthy. HMRC invite the Tribunal to infer that the natural and logical inference to be drawn from Quantum’s lack of meaningful due diligence was therefore because Mr Butt knew that Quantum’s suppliers would not stand up to scrutiny and that the transactions were connected with fraud.

HMRC’s alternative case is that Quantum and Mr Butt should have known that the transactions were connected with fraudulent evasion of VAT, particularly in light of the extensive education and intervention that Mr Butt and Quantum had received from HMRC. Despite repeated visits, the provision of educational material, and advice from HMRC Officers over several years as to what type of checks should be undertaken, as well as veto and tax loss letters, the due diligence undertaken by Quantum/ Mr Butt did not improve and were not sufficient to protect it from exposure to fraudulent supply chains.

HMRC also contend that on review of the due diligence materials provided by Quantum, these were fairly basic, consisting of generic type material which simply establishes that a legal entity exists at a point in time (e.g. VAT and Companies House certificates), but do not seek to identify and test any actual risks. For example, Quantum and Mr Butt did not obtain any references, or carry out background checks or credit checks on any of the entities they were trading with. When potential issues are identified from basic due diligence, no steps were taken to further investigate or probe those issues.

Notice 726 has been provided to Mr Butt on several occasions since HMRC undertook their first visit in 2012. Notice 726 is headed “Joint and several liability for unpaid VAT” and explains that a trader may be held jointly and severally liable for the unpaid VAT of another VAT-registered business when it sells or buys specified goods.

Of particular relevance is section 6, which is headed: “Dealing with other businesses, how to make sure the integrity of your supply chain.”

The “How to spot missing trader VAT fraud” leaflet has also been provided to Mr Butt on several occasions since 2012. The document explains the concept of missing trader fraud, which involves a ‘defaulting’ trader who deliberately fails to pay its VAT liability for taxable supplies made in the UK. The leaflet explains that those supplies may pass through a number of intermediary traders before they are either sold to an end user in the UK or outside the UK. The leaflet explains that in some cases, the organisers of the fraud will use non-tax loss chains alongside tax loss chains in order to disguise the VAT losses as part of an overall scheme to defraud HMRC.

In respect of how VAT fraud could affect a business, the leaflet explains that:

In respect of how a business could avoid becoming embroiled in missing trader fraud, the leaflet states:

Under the heading “What kind of checks can I undertake to help ensure the integrity of my supply chain?”, the leaflet provides examples of indicators that could alert a business to the risk of a connection with missing trader fraud:

The leaflet goes on to provide a non-exhaustive list of specific checks which could be carried out by existing businesses to protect them from being involved in fraudulent VAT chains:

Paperwork in addition to invoices may also be received in relation to supplies and the leaflet advises that those should be kept to support a business’s view of a transaction’s legitimacy, including:

Further, under the heading, “What will HMRC look out for when considering the extent of my checks?” the leaflet states:

Mr Butt denies that he (as director of Quantum) knew or should have known that there would be tax losses in the supply chains in which they were involved. He submits that:

Mr Butt further submits that if HMRC have not taken action against Quantum’s suppliers or customers, then it would be wrong for HMRC to now take the same action against Quantum and Mr Butt, as they would, he submits, in effect be cancelling their loss and profiting over and above the loss identified by that same amount.

In addition, Mr Butt does not accept that HMRC have accurately calculated any losses suffered and upon which the penalties raised against him are based.

As stated above, Mr Butt provided a witness statement and gave oral evidence. Attached to his witness statement were documents consisting of the checks which Mr Butt had undertaken on five of the suppliers involved in the chains under appeal, namely KA Top Traders, Maestro Foods, Metropac, Alam Trading and Mega Foods. Mr Butt states that these were the only documents he still had access to. We will address these documents below.

All of HMRC’s witnesses were cross-examined by Mr Spencer, in some cases, at some length. The evidence of the HMRC witnesses in respect of each supplier in the chain have been summarised above. We have set out additional aspects of their evidence below.

Mr Butt also gave oral evidence and was cross-examined at length by Ms Vicary. We summarise Mr Butt’s evidence in chief as follows:

Mr Butt was cross-examined at length by Ms Vicary. The key parts of his oral evidence, in relation to his time as director of Trade Lynx and Quantum, and HMRC’s involvement with the companies, are as follows:

At certain points in his oral evidence, Mr Butt referred to documents which he said were held by HMC and which he could not access. When we asked Mr Butt whether he had asked HMRC for the release of the documents said to be held by HMRC after he’d engaged Mr Spencer as his representative (that engagement having commenced in 2021), Mr Butt stated that he had not.

As the hearing progressed, Mr Butt also referred to documents which he stated had been passed on to Mr Spencer, or which Mr Butt had found overnight, none of which had been adduced as evidence into these proceedings despite the Tribunal’s clear directions (made by consent) that by no later than 1 February 2024, HMRC shall serve all evidence on which they relied, and on 1 May 2024, Mr Butt shall then serve all evidence on which he relied.

When asked why he had not provided these additional documents at the same time as his witness statement in 2024, or indeed provided them in the approximately 20 months between the date for the filing of his evidence and this hearing, Mr Butt, who has been represented by Mr Spencer for the purpose of these appeals since at least 2021, stated that he thought he had lost the documents and that it was only after he’d commenced his oral evidence, and reflected overnight, that he’d realised he had access to the documents.

Mr Spencer did not apply to admit the additional documents. The Tribunal raised the issue with Mr Spencer after Mr Butt had given his oral evidence and before closing submissions, asking him how he wished us to deal with the additional documents which Mr Butt had referred to in his oral evidence (but which were not attached to his witness statement and which we had not seen). We asked Mr Spencer to take instructions from Mr Butt.

Mr Spencer eventually stated that he wished to apply to admit nine additional documents. Mr Spencer’s submissions in summary were as follows:

The application was opposed by Ms Vicary, who submitted as follows:

The Tribunal reflected carefully on the parties’ submissions. We gave an ex-tempore judgment refusing the application by Mr Butt to adduce additional documents. Ultimately, we were not persuaded that the emails would be determinative one way or another as to the issues that we have to determine. The application has also been brought extremely late in the day (on the final day of this appeal), in circumstances when the parties had agreed directions for the filing of evidence in November 2023. If Mr Butt had wanted to rely on the additional documents, he could and should have provided them by the date set out in the directions, or if not, well in advance of this hearing (the emails have always been in his possession and he could/ should have produced them months ago). It is also important to note that Mr Butt lodged his appeal in March 2022 and has engaged Mr Spencer as his agent and representative since 2021. Admitting the evidence would also greatly prejudice the timetable for this appeal. HMRC would need to be given the chance to consider the additional documents and recall witnesses, resulting in an adjournment, further delay and costs. It would be contrary to the overriding objective of enabling the Tribunal to deal with cases fairly and justly to admit this very late evidence of limited probative value.

The transaction chains as set out by HMRC are not in dispute. These are detailed in the annexes to the decisions under appeal (and summarised above).

Having carefully reflected on the written and oral evidence of the HMRC’s officers and the parties’ submissions, we find that the following traders were fraudulent defaulters in the transaction chains involving Quantum which are the subject of this appeal: KA Top Traders, Guston Services, Carmella, Maestro Trades, Winona Global, Brands Nexus, Mirandina, AK International, Thirsty Foods, MJD Wholesale, and On Point.

We also find that Alam Trading, Mega Foods and Metropac were buffer companies in fraudulent transaction chains involving Quantum which are the subject of this appeal.

HMRC contend that Mr Butt knew, or should have known, that the transactions involved were connected with the fraudulent evasion of VAT by other traders. He was cross-examined at length about HMRC’s extensive involvement with him and Quantum (and before that, with Trade Lynx). He was also cross-examined about his due diligence checks in respect of several suppliers which HMRC had identified as fraudulent traders.

As held in Manifest Shipping Company Limited v. Uni-Polaris Shipping Company Limited and Others (quoted above), it is dishonest for a person deliberately to shut their eyes to facts which they would prefer not to know. If he or she does so, they are taken to have actual knowledge of the facts to which they shut their eyes. Such knowledge has been described as "Nelsonian” or “blind-eye” knowledge", which approximates to knowledge.

This requires an amalgam of suspicion that certain facts may exist and a decision by that person to refrain from taking any steps to confirm their existence, "not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind - I suspect there is something wrong, and if I ask questions and make farther inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover”.

We find that Mr Butt had “blind-eye” knowledge that the transactions under appeal were connected with the fraudulent evasion of VAT. We have reached this finding on the basis of the cumulative circumstances surrounding Quantum’s transactions, what Mr Butt (as director) did or omitted to do, what he could have done, together with the history of HMRC’s high level of involvement with Mr Butt and Quantum, and before then, with Trade Lynx, since 2012.

In reaching our finding that Mr Butt had “blind-eye” knowledge, we have taken into account the following, in particular:

The cumulative effect of these factors is compelling. For all these reasons, we find that Mr Butt (as the director of Quantum) had “blind-eye” knowledge that Quantum’s transactions were connected with fraudulent evasion of VAT.

Even if we are incorrect in our findings that Mr Butt had blind-eye knowledge, the various factors that we have discussed clearly demonstrate that Mr Butt had the means of knowledge to alert him to the connection of these transactions to VAT fraud, and he would have been aware that there was no other reasonable explanation for the transactions. We therefore find, as an alternative, that Mr Butt should have been aware of the connection of these transactions to the fraudulent evasion of VAT.

We agree with Ms Vicary that the fact that HMRC may not have taken action against Quantum’s suppliers or customers does not assist Mr Butt. It is not necessary for HMRC to pursue other parties in the supply chain. Pursuant to the Kittel principle, the only relevant question is whether the taxpayer in issue has lost his right to deduct. In this case, that question is answered in the affirmative.

The issue of “non-discrimination has also been addressed by the Upper Tribunal in HMRC v S&I Electronics Plc [2012] UKUT 87 (TCC). HMRC in that case had denied the input tax to the brokers but not to the buffers within the relevant chains. The Upper Tribunal considered the argument that the decisions were tainted by a discriminatory policy for which there was no objective justification. The Upper Tribunal [at 33 – 37] rejected that argument and concluded that ‘the principle of non-discrimination is not engaged.’

The argument that HMRC would be ‘profiting over and above the loss’ in the event that HMRC takes action against Quantum’s suppliers or its customers is also not sustainable.

We refer to what has already been said about regarding the Kittel principle. HMRC are not ‘capped’ to the amount of input tax they are able to deny. There is also no principle which states that HMRC must deny at a single point in the chain. Per the Court of Appeal in Mobilx:

This argument was also addressed in CallTel Telecom Ltd (No 2) [2009] EWHC 1081 (Ch) and rejected:

Section 69D VATA provides that a company officer should be considered liable for the company penalty when:

We find that the penalties issued to Quantum under section 69C VATA, and the penalties issued to Mr Butt as the director of Quantum, were correctly issued pursuant to the relevant provisions of VATA.

It is not disputed that Mr Butt was the sole person acting in Quantum and took all decisions regarding the suppliers used and the customers supplied. Given that the actions of Quantum in undertaking the transactions which are the subject of this appeal can be attributed to Mr Butt as the sole director of Quantum, he should be held liable for the penalties issued to Quantum under section 69D VATA.

We have considered the calculations set out in Officer Mankad’s evidence as to the penalties payable. We reject Mr Butt’s submissions that those calculations are incorrect. His arguments as to non-discrimination and HMRC “profiting over and above the loss” in the event that action is taken against Quantum’s suppliers or its customers are not sustainable.

For the reasons set out above, the appeal is dismissed.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.