W. Reilly Limited v The Commissioners for HMRC
Neutral Citation: [2026] UKFTT 00641 (TC)
Case Number: TC 09863
FIRST-TIER TRIBUNAL
TAX CHAMBER
Taylor House
Appeal reference: TC/2023/09191
VALUE ADDED TAX –whether HMRC issued assessments for VAT purposes within the applicable time limit – yes – whether the appellant should have known that its transactions on which input tax was incurred were connected with the fraudulent evasion of VAT by its suppliers and whether a related penalty was due – no – appeal allowed
Heard on: 21, 22 and 23 January 2026
Judgment date: 28 April 2026
Before
TRIBUNAL MEMBER MOHAMMED FAROOQ
Between
W. REILLY LIMITED
Appellant
and
THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS
Respondents
Representation:
For the Appellant:
Ms Dilpreet Dhanoa, of counselFor the Respondents:
Mr Ben Symmons, of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs (“HMRC”)DECISION
Part A - Overview
The appellant has appealed against (1) a decision and assessments dated 27 April 2023 by which HMRC sought to deny the appellant input tax of £286,809 which it had claimed credit for in relation to purchases of supplies of labour from Simplify Contracting Services Ltd (“Simplify”) and SMP Support Services Ltd (“SMP”) in respect of its periods of account for value added tax (“VAT”) purposes of 02/19, 05/19, 08/19, 11/19 and 02/20. HMRC later cancelled the assessment for the period 02/19 thereby reducing the denied input tax to £274,198 (“the disputed tax” and “the VAT decision”), and (2) a decision and assessment dated 15 June 2023 by which HMRC sought to impose a penalty on the appellant under s 69 of the Value Added Tax Act 1994 (“VATA”) in the sum of £86,042.70, which on 28 July 2023 HMRC reduced on review to £82,259.40 (“the penalty decision”).
The appellant was incorporated on 12 September 1994 on the basis that its business was the “construction of civil engineering projects not elsewhere classified”. It was registered for VAT purposes at all relevant times. The appellant currently has one director, Ms Lidiya Zhekova Todorova, who was appointed on 1 October 2015. Mr William Reilly was appointed as a director on 12 September 1994 and resigned as a director on 11 March 2021. The appellant delivers infrastructure and groundwork projects for a range of commercial and public-sector clients. It maintains a permanent core workforce supplemented by temporary site labour engaged through third-party labour providers to meet project-specific demands.
Issues
In outline, in accounting for VAT, ss 25 and 26 VATA confer on a taxable person the right, subject to statutory conditions, to deduct from “output tax”, any “input tax” which is properly attributable to taxable supplies used for the purposes of its business. HMRC contend that under the principles set out in the case law, in particular, by the Court of Justice of the European Union (“CJEU”) in Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (C-439/04 and C-440/04) (“Kittel”), the appellant is not entitled to deduct the disputed tax for VAT purposes. In that case, the CJEU said this:
… a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of goods.
That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.
In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them.
Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchases, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity’.”
…
By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.” (Emphasis added.)
A convenient formulation of the requirements set out in Kittel, as adopted by the tribunal in Ronald HullJunior Ltd v Revenue & Customs [2020] UKFTT 76 (TC) (“Ronald Hull”) is that for the principles in Kittel to apply HMRC are required to establish:
There is a tax loss which results from the fraudulent evasion of VAT.
HMRC assert that, as set out in Part B, there is a tax loss of £201,805.41 associated with the appellant’s trade with Simplify for the VAT periods 05/19 to 02/20 and a tax loss of £72,393.93 associated with the appellant’s trade with SMP.
There is a connection between the fraudulent evasion and the transactions on which the relevant input tax is incurred.
HMRC contend that there is such a connection between the fraudulent evasion by Simplify and SMP and the transactions in relation to which the disputed tax is denied
The trader knew or should have known that its transactions were connected with that fraudulent evasion (“condition 3”).
For the reasons set out in Part C, HMRC assert that this condition is also met
The appellant does not contest that conditions in (1) and (2) above are not met. It stated that it accepted HMRC’s characterisation because it lacks HMRC’s investigatory powers and third-party access. The dispute is whether condition 3 is met. It was common ground that the burden of proof rests on HMRC to prove, on the balance of probabilities, the facts necessary to justify the denial of the appellant’s right to recover/obtain credit for the disputed tax. During the course of the hearing it became clear that HMRC do not argue that the appellant knew that its transactions with SMP and Simplify were connected with fraudulent evasion; rather their case is that the appellant should have known that fact, on the basis that the objective circumstances were such that a reasonable trader in its position would have concluded that the transactions were connected with fraud.
Both parties referred to the description of the principles set out in Kittel in the Court of Appeal’s decision in Mobilx Limited (in administration) v HMRC [2010] EWCA Civ 517 (“Mobilx”). At [52] of the decision in that case, Moses LJ described the Kittel test as follows:
“If a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT, he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.”
At [59] and [64], Moses LJ said this in relation to condition 3:
The test in Kittel is simple and should not be over-refined, it embraces not only those who know of the connection but those who “should have known”. Thus, it includes those who should have known from the circumstances, which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraudulent evasion of VAT, then he should have known of that fact…”
If it is established that a trader should have known that by his purchase there was no reasonable explanation for the circumstances in which the transaction was undertaken other than that it was connected with fraud then such a trader was directly and knowingly involved in fraudulent evasion of VAT.” (Emphasis added.)
Moses LJ then said this, at [82], as regards the role of due diligence:
“But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. … Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected with the fraudulent evasion of VAT…” (Emphasis added.)
HMRC also referred to Moses LJ’s comments, at [83], where he affirmed guidance on the treatment of circumstantial evidence, as set out by Clarke J in Red 12 v HMRC [2009] EWHC 2563 (“Red 12”):
“109 Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and “similar fact” evidence. That is not to alter its character by reference to earlier or later transactions but to discern it.
110 To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile telephones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands.
111 Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do,and what it could have done, together with the surrounding circumstances in respect of all of them.” (Emphasis added.)
Finally, HMRC referred to Moses LJ’s comment, at [84], that it was significant that in that case: “... a trader has chosen to ignore the obvious explanation as to why he was presented with the opportunity to reap a large and predictable reward over a short space of time.”
We note that in Mobilx, Moses LJ made it clear that the Kittel test has a relatively high threshold, in particular, in the following comment at [60]:
“The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”
HMRC referred to the decision of Lewison J in HMRC v Livewire and Olympia [2009] EWHC 15 (Ch) at [123] which made clear that the Kittel test applies to the taxable person:
“…Second, the Kittel test applies to the taxable person. The taxable person was Olympia (the company). The question, therefore, for the Tribunal was not what a director of Olympia knew or ought to have known, but what the company itself knew or ought to have known. The knowledge of a director of the company may, to be sure, be attributed to a company, but there may be other knowledge (for example that of a senior employee) which, on the facts ought also to be attributed to the company...”
HMRC referred to Fonecomp Ltd v HMRC [2015] EWCA Civ 39, where Arden LJ confirmed, at [44], that: “there is nothing in Kittel which would lead to the conclusion that HMRC has to show that the transaction provides tangible assistance in carrying out the fraud” and, at [48], that:
“Lack of knowledge of the specific mechanics of a VAT fraud affords no basis for any argument that the decision of either tribunal was wrong in law: what is required is simply participation with knowledge in a transaction ‘connected with fraudulent evasion of VAT’…”
HMRC also drew attention to the comments of Arden LJ in that case, at [49], where she cited with approval the following dictum of Briggs J in Megtian v Revenue and Customs Commissioners [2010] STC 840:
“[37] In my judgment, there are likely to be many cases in which a participant in a sophisticated fraud is shown to have actual or blind-eye knowledge that the transaction in which he is participating is connected with that fraud, without knowing, for example, whether his chain is a clean or dirty chain, whether contra-trading is necessarily involved at all, or whether the fraud has at its heart merely a dishonest intention to abscond without paying tax, or that intention plus one or more multifarious means of achieving a cover-up while the absconding takes place.”
HMRC noted that in that case, Arden LJ went on to comment on the decision in Mobilx, at [51], as follows:
“However, in my judgment, the holding of Moses LJ does not mean that the trader has to have the means of knowing how the fraud that actually took place occurred. He has simply to know, or have the means of knowing, that fraud has occurred, or will occur, at some point in some transaction to which his transaction is connected. The participant does not need to know how the fraud was carried out in order to have this knowledge. This is apparent from [56] and [61] of Kittel cited above. Paragraph 61 of Kittel formulates the requirement of knowledge as knowledge on the part of the trader that ‘by his purchase he was participating in a transaction connected with fraudulent evasion of VAT’. It follows that the trader does not need to know the specific details of the fraud.”
HMRC also relied on AC (Wholesale) Ltd v HMRC [2017] UKUT 191 (TCC), where the Upper Tribunal considered Mobilix and stated that “…the ‘only reasonable explanation’ test is simply one way of showing that a person should have known that transactions were connected to fraud” and said this:
It is, to us, inconceivable that Moses LJ's example of an application of part of that test, the 'no other reasonable explanation', would lead to the test becoming more complicated and more difficult to apply in practice. That, in our view, would be the consequence of applying the interpretation urged upon us by Mr. Brown. In effect, HMRC would be required to devote time and resources to considering what possible reasonable explanations, other than a connection with fraud, might be put forward by an appellant and then adduce evidence and argument to counter them even where the appellant has not sought to rely on such explanations. That would be an unreasonable and unjustified evidential burden on HMRC. Accordingly, we do not consider that HMRC are required to eliminate all possible reasonable explanations other than fraud before the FTT is entitled to conclude that the appellant should have known that the transactions were connected to fraud.
Of course, we accept (as, we understand, does HMRC) that where the appellant asserts that there is an explanation (or several explanations) for the circumstances of a transaction other than a connection with fraud then it may be necessary for HMRC to show that the only reasonable explanation was fraud. As is clear from Davis & Dann, the FTT's task in such a case is to have regard to all the circumstances, both individually and cumulatively, and then decide whether HMRC have proved that the appellant should have known of the connection with fraud. In assessing the overall picture, the FTT may consider whether the only reasonable conclusion was that the purchases were connected with fraud. Whether the circumstances of the transactions can reasonably be regarded as having an explanation other than a connection with fraud, or whether the existence of such a connection is the only reasonable explanation, is a question of fact and evaluation that must be decided on the evidence in the particular case. It does not make the elimination of all possible explanations the test which remains, simply, did the person claiming the right to deduct input tax know that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT or should he have known of such a connection.” (Emphasis added.)
Time limit issue
The prior issue is whether HMRC issued their assessments for the disputed tax within the relevant statutory time limits for them to do so. The appellant contends that (1) HMRC did not do so and, therefore, the assessments were not validly issued and must be discharged/cancelled, and (2) where the assessment/denial decision falls away on time limits, any derivative penalty decision (including under s 69C VATA) cannot stand, because the statutory preconditions for the penalty are not met and/or the penalty is predicated upon an unlawful underlying denial/assessment.
In outline:
The power to make the assessments to VAT is contained in s 73 VATA. In broad terms (a) s 73(1) permits HMRC to assess where a return is incorrect and VAT has been under-declared (including where input tax has been overstated); and (b) s 73(2) permits HMRC to assess an amount that has been paid/credited as a repayment or VAT credit which ought not to have been paid/credited (or would not have been paid/credited had the true facts been known).
Section 73(6) imposes a specific time requirement for making an assessment under ss 73(1) to (3):
An assessment under subsection (1), (2) or (3) above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided for in section 77 and shall not be made after the later of the following -
2 years after the end of the prescribed accounting period; or
one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge,
but (subject to that section) where further such evidence comes to the Commissioners’ knowledge after the making of an assessment under subsection (1), (2) or (3) above, another assessment may be made under that subsection, in addition to any earlier assessment.” (Emphasis added.)
Section 77 provides an additional “long-stop” cap. HMRC may not assess more than four years after the end of the prescribed accounting period. Where fraud/dishonest conduct is alleged, the legislation allows an extended long-stop (up to 20 years), but that does not remove the need to comply with the one-year rule in s 73(6)(b).
The time limits in s 73(6) apply to the making of the assessment (an internal act), not the later notification. This distinction can matter where evidence shows internal steps took place on different dates. Tribunal authority recognises that Parliament treated the making of an assessment as an internal matter for HMRC, and the statutory time limit attaches to that internal act.
In this case HMRC’s assessments were made more than two years after the end of the relevant periods. Hence, they were made in time only if the requirements of s 73(6)(b) VATA are satisfied.
It was common ground that the tribunal is to apply s 73(6)(b) VATA in light of the principles set out by Dyson J in Pegasus Birds Ltd [1999] STC 95 (“Pegasus Birds”) which have been applied in many cases:
The Commissioners’ opinion referred to in section 73(6)(b) is an opinion as to whether they have evidence of facts sufficient to justify making the assessment. Evidence is the means by which the facts are proved.
The evidence in question must be sufficient to justify the making of the assessment in question: C & E Commissioners v Post Office [1995] STC 749, 754G.
The knowledge referred to in section 73(6)(b) is actual, and not constructive knowledge: C & E Commissioners v Post Office at p755D. In this context, I understand constructive knowledge to mean knowledge of evidence which the Commissioners do not in fact have, but which they could and would have if they had taken the necessary steps to acquire it.
The correct approach for a Tribunal to adopt is (i) to decide what were the facts which, in the opinion of the officer making the assessment on behalf of the Commissioners, justified the making of the assessment, and (ii) to determine when the last piece of evidence of these facts of sufficient weight to justify making the assessment was communicated to the Commissioners. The period of one year runs from the date in (ii): Heyfordian Travel Ltd v C & E Commissioners [1979] VATTR 139, 151; and Classicmoor Ltd v C & E Commissioners[1995] V & DR 1, 10.1.27.
An officer’s decision that the evidence of which he has knowledge is insufficient to justify making an assessment, and accordingly, his failure to make an earlier assessment, can only be challenged on Wednesbury principles, or principles analogous to Wednesbury … (see Classicmoor … at 10-11,and more generally John Dee Ltd v C & E Commissioners [1995] STC 941, 952 per Neill LJ).
The burden is on the taxpayer to show that the assessment was made outside the time limit specified in s 73(6)(b) of the 1994 Act.”
Dyson J’s approach was approved by Aldous LJ in Pegasus Birds in the Court of Appeal, [2000] STC 91, at [11] and [15]:
“The relevant evidence of facts is that which was considered, in the opinion of the Commissioners, to justify the making of the assessment. The one-year time limit runs from the date when the facts constituting the evidence came to the knowledge of the Commissioners.
…
An opinion as to what evidence justifies an assessment requires judgment and in that sense is subjective; but the existence of the opinion is a fact. From that it is possible to ascertain what was the evidence of facts which was thought to justify the making of the assessment. Once that evidence has been ascertained, then the date when the last piece of the puzzle fell into place can be ascertained. In most cases, the date will have been known to the taxpayer, as he will be the person who supplied the information.”
In Cumbrae Properties (1963) Ltd, Sir Douglas Frank QC held that the one-year period runs from the date when the: “evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge”, and that:
“…The tribunal cannot substitute its own view of what facts justify the making of an assessment but can only decide when the last of those facts was communicated or came to the knowledge of the officer.”
The appellant referred to the application of the above principles by the Upper Tribunal in Nottingham Forest Football Club Limited v The Commissioners for His Majesty’s Revenue and Customs [2024] UKUT 00145 (TCC).
It was common ground that if the appellant succeeds on either or both of its arguments, the penalty which HMRC seek to impose in the penalty decision falls away.
Part B - Evidence and facts
We have found the facts on the basis of the documents in the bundles and the evidence of Ms Todorova, who gave evidence for the appellant, and Mr Harris and Ms Emory, who gave evidence for HMRC. They all attended the hearing and were cross-examined. We found them all to be honest and credible
HMRC asserted that there is a tax loss of £201,805.41 associated with the appellant’s trade with Simplify for the VAT periods 05/19 to 02/20 as follows:
Simplify was incorporated on 8 May 1998 on the basis that its business was: “Other business support service activities not elsewhere classified”. Ms Nicola Jane Scambler was a director of Simplify from 14 November 2016 until her resignation on 22 December 2020. Ms Sarah Needham was then appointed a director from 22 December 2020. Ms Scambler was also a director of SMP, as set out below. HMRC submitted that throughout the relevant periods Simplify was in fact controlled by Mr Paul Bell as a shadow and/or de facto director.
Simplify was for some time registered under the Construction Industry Scheme (“CIS”) on the basis that it was entitled to receive payments under that scheme gross without deduction of sums in respect of tax. We refer to such an entitlement as an entitlement to “gross payment status”.
HMRC assessed Simplify to additional output tax as follows: (1) on 29 November 2018, for additional output tax of £9,741,884 in respect of the periods 02/17 to 02/18 on the basis that the income which Simplify declared for CIS purposes was significantly higher than its declared “outputs” for VAT purposes, (2) on 15 June 2020, for additional “output tax” of £26,034,264 following HMRC obtaining bank statements for Simplify (pursuant to their statutory powers of investigation) which showed further underdeclared sales.
On 30 May 2019, HMRC removed Simplify’s gross payment status.
Simplify was deregistered for VAT purposes with effect from 17 August 2019.
Simplify appealed to the tribunal against both assessments (the appeals were assigned the references TC/2019/02487 and TC/2020/04056). However, liquidators appointed on Simplify entering compulsory liquidation on 5 October 2022 withdrew both of these appeals (as was confirmed by the tribunal in May 2023).
Simplify has not paid the sums assessed by HMRC in the assessments described above. HMRC consider that this constitutes a fraudulent default by Simplify.
Mr Harris noted in his witness statement that (a) Simplify failed to provide records to HMRC covering the relevant periods to which the disputed tax relates and that assessment was based on the CIS information held which included sales to the appellant between March 2019 and January 2020, (b) the CIS record for between 6 April 2019 to 5 October 2019 confirms that the appellant paid Simplify £839,483, (c) the appellant claimed £201,805.41 of “input tax” relating to purchases from Simplify as shown in its VAT reports covering transactions from 7 March 2019 to 24 September 2019, and (d) Simplify failed to provide detailed VAT reports, and evidence which HMRC obtained from the bank statements show payments received from the appellant which match the appellant’s purchase invoices between 7 March 2019 and 11 June 2019. Bank statements were not provided beyond 20 June 2019.
HMRC asserted that there is a tax loss of £72,393.93 associated with the appellant’s trade with SMP as follows:
SMP was incorporated on 18 January 2010 under company number 07128599. During the relevant periods, SMP had two directors (1) Mr Saul Thomas Philpot, who was appointed on 11 March 2016 and resigned on 10 July 2020, and (2) Ms Scambler, who was appointed on 11 March 2016 and resigned on 22 December 2020. Following these resignations, Ms Joanne Watson was appointed a director. HMRC’s view is that throughout the relevant periods, SMP was in fact controlled by Mr Paul Bell as a shadow and/or de facto director.
Following Simplify’s deregistration from VAT, its workforce was transferred to SMP. It appears that SMP continued Simplify’s business with no interruption. The appellant started doing business with SMP on 26 September 2019, two days after its last transaction with Simplify.
The appellant was issued with invoices that used Simplify’s logo but gave details for SMP. SMP utilised both a declared and an undeclared sales daybook. Sales to the appellant were recorded in the undeclared sales daybook until January 2020. HMRC requested the undeclared sales daybook but it was not provided to them.
On 26 October 2020, HMRC (a) raised an assessment for additional “output tax” due from SMP of £13,642,997 (plus penalties of £8,224,320.35 and £871,486.10) in respect of undeclared sales in the periods from 10/19 to 07/20, and (b) issued Mr Bell with a personal liability notice in the sum of £8,224,320.35. SMP and Mr Bell appealed to the tribunal against these decisions (the appeals were assigned the references TC/2020/04643 and TC/2020/04200 respectively).
On 10 August 2021, SMP was deregistered from VAT under “the Ablessio principle” on the grounds that SMP was using its VAT registration solely or principally for fraudulent purposes. Following an independent review dated 16 November 2021, the deregistration decision was upheld. SMP appealed to the tribunal against this decision (the appeal was assigned the reference TC/2021/19518).
On 9 December 2021 HMRC (a) raised a further assessment in which they stated that SMP was subject to further VAT of £3,748,931 in respect of the periods from 08/20 to 06/21, and (b) issued (i) a penalty to SMP of £33,691.51 for careless behaviour in respect of the period 08/20, and (ii) a penalty to SMP of £798,207.46 for deliberate behaviour in respect of the periods 09/20 to 06/2, and (c) issued Mr Bell with a personal liability notice in the sum of £798,207.46.
Mr Bell appealed to the tribunal against this penalty (and the appeal was assigned the reference TC/2022/00368). That appeal was later consolidated with the appeal dealt with under reference TC/2020/04200. This consolidated appeal is stayed.
SMP appealed to the tribunal against these decisions on 7 January 2022 (the appeal was assigned the reference TC/2022/00367). All the appeals to the tribunal made by SMP were struck out by the tribunal following non-compliance with an “unless order” issued by the tribunal in January 2023.
SMP has not paid the sums assessed by HMRC under the assessments set out above. In HMRC’s view this constitutes a fraudulent default by SMP.
SMP entered compulsory liquidation on 5 October 2022.
As regards the relationship between Simplify and SMP:
The two entities had the same business address in Derby as was shown on the insurance certificate of both Simplify and SMP, which were also in the same style and form. As set out below, the appellant obtained these insurance certificates as part of the due diligence that it conducted on Simplify and SMP.
Ms Todorova provided to HMRC company details that SMP had apparently provided to her. These details are largely those of Simplify, using Simplify’s name and company email addresses.
The data sharing agreements for both Simplify and SMP were in the same format, had the same business address and were both signed by Ms G Towers for Simplify/SMP. Ms Todorova signed for the appellant in relation to the SMP services agreement.
The terms and conditions for SMP that were signed by Ms G Towers for SMP and Ms Todorova for the appellant had the Simplify logo displayed on the first page. Ms Todorova accepted that she must have read this document.
One of SMP’s first invoices to the appellant clearly displayed the Simplify logo at the top of each page. HMRC submitted that it is unusual for a company to include the logo of another company on its invoice. We have commented on this in our conclusions.
As set out below, Ms Todorova told HMRC that SMP was a major supplier of labour to the appellant. It can be inferred that Simplify was also a major supplier of labour to the appellant.
The appellant had also historically traded with the following persons/entities which HMRC consider are also fraudulent defaulters:
Arion Services Ltd (“Arion”) which was incorporated on 20 April 2004 under company number 05107199:
HMRC raised assessments for £3,813,531 for the periods 02/14 and 05/14 and £633,132 for periods 08/14 and 11/14 on the basis that a comparison of Arion’s income declared for CIS purposes and that declared for “output tax” purposes revealed that Arion had failed to declare substantial “output tax” for which it was liable.
The appellant paid £585,711 to Arion between 6 April 2016 and 5 December 2016.
Arion was voluntarily deregistered from VAT with effect from 2 December 2016
Global Outsourcing Ltd (“Global”). Global was incorporated on 18 February 2013 under company number 08408206:
Global failed to submit VAT returns for the periods 05/17 to 11/17. HMRC officers were due to make an announced visit to Global’s principal place of business and registered office on 24 October 2017. This visit was cancelled by the director of Global, from whom no further contact was received.
On 27 July 2018, HMRC assessed Global for “output tax” of (i) £716,865 for the period 05/17 and (ii) £1,091,606 for the period 08/17. In the absence of VAT returns, the assessments were based on sums calculated from receipts shown for CIS purposes. The assessments were sent to Global’s principal place of business and the director’s home address. The assessments sent to the director’s home address were returned as undelivered.
The appellant paid Global £134,470 between 6 May 2017 and 5 October 2017, during the periods for which Global failed to submit any VAT returns.
Global was deregistered from VAT on 14 September 2018 after letters sent to Global were returned to HMRC as undelivered.
On 21 September 2018 HMRC issued a letter to the appellant notifying it that Global had been deregistered for VAT and a separate letter notifying it of tax losses associated with Global which HMRC considered arise fraudulently (“the Global loss letter” and together “the Global letters”)
Global entered insolvency on 1 October 2018 and was dissolved on 14 March 2023.
The appellant was issued with the following letters and information by HMRC:
On 11 April 2005, a letter notifying the appellant that its supplier, RP Construction, had been deregistered from VAT.
On 28 April 2009, a copy of a notice titled “use of labour providers – guidance to assist your due diligence”.
On 20 May 2010, a copy of a notice titled “use of labour providers – guidance to assist your due diligence”.
On 20 May 2010, a letter notifying the appellant that its supplier, Caspian Contractors Ltd, had been deregistered from VAT.
On 25 November 2010, a copy of a notice titled “use of labour providers – guidance to assist your due diligence”.
On 25 November 2010, a letter notifying the appellant that its supplier, Flynn Haulage & Plant Ltd, had been deregistered from VAT.
On 8 November 2011, a letter notifying the appellant that its supplier, GSL Site Services Ltd, had been deregistered from VAT.
On 9 November 2017, a notification confirming that Global’s gross payment status had been removed.
On 21 September 2018, a letter notifying the appellant that its supplier, GSL Site Services Ltd, had been deregistered from VAT.
On 21 September 2018, a letter notifying the appellant that there was a tax loss relating to Global that arose fraudulently.
On 30 May 2019, a letter notifying the appellant that Simplify’s gross payment status had been removed.
On 22 June 2020:
A tax loss letter in respect of Simplify covering the period 5 April 2018 to 5 October 2019 stating that tax losses of £1,538,760 had been identified:
“We have examined a number of transaction supply chains, and our enquiries have found evidence to indicate that from month ending 05/04/18 to 05/10/19 £1,538,760 of these transactions associated with your supplier Simplify Contracting Services Ltd., VAT has not been accounted for within the supply chains, therefore potentially giving rise to a fraudulent tax loss.
I have detailed below the payments made to the above company which have been traced in transactions chains commencing with a VAT loss. This information has been obtained from HMRC’s Construction Industry Scheme (“CIS”) system…
[Table showing the relevant sums]
….Please note that we may verify any input tax you have claimed or will claim in relation to transactions involving this company. You should be aware that the European Court of Justice has confirmed that there is no right to deduct VAT where the person making the claim either knew or should have known of a connection with fraudulent evasion of VAT.” (Emphasis added.)
A tax loss letter in respect of Simplify covering the period 5 October 2019 to 5 January 2020, stating that tax losses of £79,560.20 had been identified.
A tax loss letter in respect of SMP stating that a tax loss had been identified:
“I have detailed below the payments made to the above company which have been traced in transactions chains commencing with a VAT loss. This information has been obtained from HMRC’s Construction Industry Scheme (“CIS”) system…
[Table showing the relevant sums]
[There was the same warning as set out in the letter relating to Simplify in the highlighted text regarding the possible denial of input tax.]”
On 23 March 2022, a letter notifying the appellant that its supplier, LBH Rail & Civil Engineering Ltd, had been deregistered from VAT.
There was some dispute over whether Ms Todorova and/or the appellant was aware of the Global letters and of other letters listed at [30] above. The appellant’s principal place of business was originally an address in Kilburn in North London which, as Ms Todorova accepted, was the personal address of Mr Reilly and the address where he/the appellant received correspondence (as was also confirmed by the appellant’s accountants, Chartergates, at a meeting with HMRC on 22 May 2022 (as recorded in notes of the meeting)). From on or around 4 May 2022 the appellant’s registered office was changed to an address in East London which was the personal address of Ms Todorova (and the address was later changed on 19 February 2024). The relevant letters were sent to the North London address. In HMRC’s notes of a meeting with HMRC on 26 February 2021 it is recorded that, when asked if due diligence procedures had changed since the appellant received the Global letters, Ms Todorova said that she was pregnant in 2018 and Mr Reilly was overseeing and she was unsure about the Global loss letter and would query it with Mr Reilly. HMRC also pointed out that in the notes she is recorded as stating that she was responsible for preparing VAT returns for the appellant which she then sent to the accountants. HMRC submitted that, as she was responsible for the VAT affairs of the appellant, Mr Reilly should have made her aware of the Global loss letter. We accept Ms Todorova’s evidence given at the hearing that she was not aware of the Global loss letter at the time and that she made clear to Ms Kar of HMRC at a meeting in February 2021 that she had not received/read it. The further submissions the parties made on this are set out below.
The following events took place in 2020 to 2022:
On or around 26 August 2020, Mr Priestly of HMRC requested information from the appellant covering the previous 12 months of trading including: (a) contracts/terms with labour providers; (b) invoices; (c) purchase and sales daybooks; (d) supplier listings; (e) bank statements; and (f) a detailed VAT report. The appellant provided the requested material on 31 August 2020. The email with which the information was sent states:
“Your message is ready to be sent with the following file or link attachments:
Terms and conditions
Certificate of Incorporation
Certificate of Insurance
Certificate VAT
Company Details
Data Sharing Agreement
SMP Invoice
SMP Invoice”
The appellant submitted that this is a central factual matter: in its view, it demonstrates that by the end of August 2020, HMRC had the essential evidential categories required to justify an assessment.
On or around 30 November 2020, Ms Kar of HMRC took over the appellant’s case and requested similar information to that requested by Mr Priestly including VAT returns and evidence of due diligence checks on suppliers to be provided by 21 December 2020. In this letter HMRC expressed concerns in relation to supply chains connected with fraud and the use of third-party labour providers. The letter referenced the government website link, which contained links to two documents for checks a business could make on their use of labour providers and due diligence. Mr Harris set out in his statement that there have been three updates to the guidance on due diligence since the letter was issued and he provided a due diligence document, entitled “Use of Labour Providers”, which was valid from 2017 that would have been available within the links sent to the appellant at the time. We have set out relevant extracts from this document below.
On 9 December 2020, Ms Kar emailed the appellant advising of fraud risk concerns in the labour supply sector and included the letter sent on 30 November 2020 with a compliance check factsheet. Ms Todorova called HMRC the same day and an email exchange followed this call. This resulted in Ms Kar agreeing that the request was limited to the provision of records from 1 August 2020, to bring the records held by HMRC up to date and, after that, for records to be provided on a monthly basis and for a meeting to be held every two months.
A meeting between Ms Kar and Ms Todorova took place on 26 February 2021. Ms Todorova confirmed that the appellant had stopped trading with SMP following the receipt of a letter that SMP were involved in fraud. As noted above, the note of the meeting produced by HMRC records that Ms Todorova advised that she was unsure about receiving a tax loss letter in respect of Global and would refer to Mr Reilly. Ms Todorova’s position is that this note contains multiple factual inaccuracies and was not agreed.
On 2 March 2021, Ms Kar emailed Ms Todorova and requested, among other things, the last invoice and due diligence for several suppliers including Arion, Simplify, Global, Unity Contracting Services Ltd, Ardent Tide Ltd and Safe Labour Supply UK Ltd. She also requested VAT workings and invoices to support zero rated VAT sales the appellant asserted it had made for periods 05/19, 11/19 and 02/20.
HMRC’s investigation was placed on hold between April 2021 and February 2022 at the appellant’s request.
On 8 March 2022, HMRC held a meeting with Chartergates. HMRC referred to previous transactions and tax loss letters issued, which showed the appellant was supplied by SMP, Global and Simplify. Chartergates advised that the appellant no longer used these suppliers following receipt of the tax loss letters.
On 11 March 2022, Ms Kar requested the following information from Chartergates:
“Please confirm the following with Ms Todorova:
Whether there was another employee doing the company’s day to day activities when she was on maternity leave
List of current employees and their NI numbers
All the addresses of the company and their principal place of business. We are aware of 2 addresses that have been declared to us which are [the North London address] which is their principal place of business and [an address in Enfield]. As per our system, the company’s [North London address] shows a returned mail signal- please confirm if they’re still trading from this address. Attached is an invoice from SMP issued to Mr Reilly at [a different North London address] – we are not aware of this address and are required to know whether the company also operates from these premises.
Which company paid the workers supplied to W.Reilly Ltd by SMP Support Services Ltd.
Transactions with labour providers and detailed VAT reports
The transactions to labour providers on CIS started in April 2016. Therefore I’m requesting forth documents below, as well records for more recent periods. I already hold detailed VAT reports and bank statements for some periods and have noted this below:
Detailed VAT report for VAT quarters 05/16 to 02/20, 08/20 to 05/21 (05/20 report has already been provided to us)
Bank statements from March 2016 to August 2020, March 2021 to May 2021 (September 2020 to Feb 2021 bank statements already provided to us)
I would require the following documents relating to previous transactions with CIS subcontractors:
Last 5 purchase invoices and due diligence done in relation to:
Simplify Contracting Services Ltd
Global Outsourcing Ltd
Unity Contracting Services Ltd
Ardent Tide Ltd
Safe Labour Supply UK Ltd
SMP Support Services Ltd
We discussed any changes in business procedures and you mentioned W.Reilly Ltd now have a more robust due diligence process after receiving the tax loss letters. I will discuss this further during our upcoming meeting.
This meeting was mainly to review transactions with labour providers used previously, due to the high amount of tax loss letters issued. I am aware that you are familiar with the HMRC leaflets ‘Advice on applying supply chain due diligence principles to assure your labour supply chains’ and ‘10 things about due diligence: supply chain assurance’- please forward these leaflet to Ms Todorova to ensure due diligence is done on the company’s supply chains to reduce the risks of tax losses as much as possible if they do plan to use labour providers in the future. Below is the link to access both these leaflets:
[Link]
Due to W.Reilly Ltd. receiving 3 tax loss letters which show the link to the due diligence leaflet, they have the responsibility of following the leaflet to ensure that further tax losses do not take place and contact HMRC on the number/email/postal address provided at the top of the letter. If it is found that there has not been a change in due diligence procedures of their labour providers after receiving each tax loss letter, HMRC will decide whether they knew or should have known there was fraud in their supply chains and will assess up to 4 years, to disallow input tax in relation to these transactions.”
On 22 April 2022, Ms Kar made an amended request for less documents:
“…I have found it reasonable to request the VAT and bank records for the last 4 years. I will review the transactions with labour providers first before moving on to more recent transactions and therefore will be requiring the following for the last 4years:
I’ve reviewed again the documents that are held by HMRC and therefore my amended request would be for:
The answers to the below questions
Detailed VAT reports for 05/18 to 08/20 as this will cover all transactions with labour providers (The 05/20 VAT report has already been submitted to us and therefore not required to be re-submitted)
Bank statements from May 2018 – July 2019 and August 2020 (Those for August 2019 – July 2020 have already been submitted to us and therefore not required to be re-submitted)
Due diligence in relation to:
Simplify Contracting Services Ltd
Global Outsourcing Ltd *
Unity Contracting Services Ltd
Ardent Tide Ltd
Safe Labour Supply UK Ltd
SMP Support Services Ltd”
On 20 May 2022, Chartergates emailed HMRC responding to the email of 22 April 2022 and questions from the meeting on 8 March 2022 and advised that due diligence, banking and VAT report documents were being provided. A further email from Chartergates was sent on the same day to request a “dropbox” as the relevant documents were too large to be sent by email. The email included the following responses to questions posed by HMRC during the meeting on 8 March 2022:
Whether there was another employee doing the company’s day to day activities when Ms Todorova was on maternity leave.
Yes, John McCarthy.
List of current employees and their NI numbers.
Lidiya Todorova [NI number] and W Reilly [NI number]
All the addresses of the company and their principal place of business…
….
Until recently, [the North London address] was the registered office and principal place of business. However, as of 4 May 2022, the registered office has been changed to [an address in Waltham Cross]. Mr Reilly previously retained an office at [the different North London address] - however, W Reilly Ltd no longer rents such an office from this address.
Which company paid the workers supplied to W. Reilly Ltd by SMP Support Services Ltd.
SMP Support Services Ltd.
Trading Levels
Please note that our client believes that its trading levels have been reduced by approximately 50% as a result of the pandemic.”
On 23 May 2022, the requested information was provided by the appellant to HMRC via “dropbox”. Mr Harris said in his witness statement that some of the items provided were duplicates of information provided in the email of 31 August 2020. The “dropbox” information contained the following:
In respect of Simplify: (i) a VAT certificate showing the date of registration, (ii) a data sharing agreement dated 1 May 2019, (iii) insurance certificates dated 9 and 11 July 2018, and (iv) bank details for Simplify.
In respect of SMP (i) a certificate of incorporation dated 11 June 2019, (ii) an insurance certificate dated 6 August 2019, (iii) a VAT certificate showing the date of registration, (iv) company details showing an address not listed on Companies House as a registered address, (v) bank details for SMP, (vi) the company registration number for SMP, (vii) the VAT registration number for SMP, (viii) the Unique Taxpayer Reference number for SMP, (ix) a data sharing agreement dated 14 August 2019 and (x) the terms and conditions dated 14 August 2019.
The appellant also provided its due diligence policy, some of its own VAT invoices and information in relation to other suppliers. Mr Harris set out in his witness statement a table showing invoices supplied for Simplify and SMP. He noted that the appellant operates cash accounting which means the invoices are only accounted for once they pay their suppliers.
On 26 May 2022, HMRC held a meeting with Chartergates. HMRC provided an update of the enquiries and confirmation of actual tax losses for both Simplify and SMP following analysis of the VAT returns. HMRC asked whether any changes to the appellant’s due diligence procedures were made following receipt of further tax loss letters. Chartergates confirmed that swift action was taken and that the appellant would stop trading with the suppliers but said that they were unaware whether the appellant had changed its due diligence process during this time.
On 27 May 2022 Ms Kar requested further information and said this:
“As discussed, I still do not have sufficient evidence to show whether W. Reilly Ltd knew or should have known that their tax loss transactions were connected to VAT fraud.
Therefore the investigation will be to obtain evidence to decide this, especially as the company received 3 tax loss letters. The original tax loss letters, both issued 22 June 2020 show an estimate of the tax loss using payments on W.Reilly’s CIS return, to these companies. This was calculated using best judgement in absence of detailed VAT reports from W Reilly Ltd who weren’t being investigated at the time. However as I now have access to the detailed VAT reports, I’ve calculated a new figure for both the tax losses and have attached the new letters showing the amended amounts below:
Simplify: £228,756
SMP: £72,393
You will see that they have been issued to Ms Todorova at her new business address [address] which you notified me of in your previous email. Please ensure this address is changed by Ms Todorova using her online VAT account before our next meeting, as this will prevent correspondence from any HMRC department being sent to the incorrect address.
If we decide based on our analysis of the documents received that the company knew or should have known their transactions were connected to fraudulent tax losses, an assessment will be raised to disallow the input tax relating to the tax loss letters received in relation to Simplify Contracting Services Ltd and SMP Support Services Ltd…”
She required purchase invoices relating to transactions taken from the detailed VAT report including two invoices for purchases from Simplify of £51,379 on 8 August 2019 and £49,709.75 21 on August 2019 and for a purchase from SMP of £50,000 on 26 September 2019. She said that as the appellant had implemented a new due diligence policy in September 2021, she required copies of the due diligence questionnaire filled out by current main suppliers, as well as the documents to support them. She also raised the following questions for Ms Todorova:
There were large payments credit to your account from Barclays Bank, until February 2020.
Please provide brief details of these transactions.
How have due diligence procedures changed since receiving your first tax loss letter which was in relation to Global Outsourcing Ltd?
After reviewing the invoice from SMP already provided to us (1194475), I could see that not all the workers on the invoice were being paid by SMP themselves. Did they subcontract to another trader which paid these workers?
Were there any checks on the Directors or credit checks done for Simplify and SMP?
What was the role of Mr McCarthy when Ms Todorova was on maternity Leave? Did he carry out the same roles as Ms Todorova.”
On 31 May 2022, Ms Kar issued revised tax loss letters in respect of Simplify and SMP:
In the letter relating to Simplify, she said this:
“As per your detailed VAT report, transactions with the above trader relating to invoices between and have been linked to a tax loss. This tax loss letter in relation to the above trader replaces the one issued 22 June 2020 which was calculated using your CIS return payments, in absence of detailed VAT reports, which is enclosed with this letter.
The transactions relate to invoices from 14 June 2018 to 24 September 2019 and total £1,271,878 with a VAT loss of £228,756.
[There was the same warning regarding the denial of input tax as was included in the earlier tax loss letter (see [30(12)] above).]”
In the letter relating to SMP, she said this:
“As per your detailed VAT report, transactions with the above trader relating to invoices between and have been linked to a tax loss. This tax loss letter in relation to the above trader replaces the one issued 22 June 2020 which was calculated using your CIS return payments, in absence of detailed VAT reports, which is enclosed with this letter.
The transactions relate to invoices from 26 September 2019 to 24 December 2019 and total £433,963 with a VAT loss of £72,393.
[There was the warning regarding the denial of input tax as was included in the earlier tax loss letter (see [30(12)] above).]”
On 10 June 2022, Ms Kar emailed Chartergates with a revised request for information. Again, she asked for both purchase and sales invoices for various companies with which the appellant had contracted. As regards Simplify and SMP, she asked for only the purchase invoice for 8 August 2019 for £51,379 for Simplify.
On 2 August 2022, Chartergates provided by “dropbox” the requested information and responded to HMRC’s questions as follows:
“[As regards action following the Global loss letter and due diligence processes]
On receiving the tax loss letter in relation to Global Outsourcing Ltd in September 2018, our client’s first course of action was to cease continued and ongoing trade with the relevant supplier immediately. The same position was subsequently adopted in June 2020, when further tax loss letters were received in relation to Simplify Contracting Services Ltd and SMP Support Services Ltd.
In addition to the above, we understand that our client reacted to the first tax loss letter by re-acquainting itself with HMRC’s due diligence guidance, as highlighted in the relevant tax loss letter and accordingly, proceeded to undertake appropriate and detailed due diligence on suppliers, which it believed was in line with HMRC’s guidance on due diligence at the relevant time. In undertaking such detailed due diligence, our client was mindful of the need to ensure that it was trading with genuine suppliers. Our client also recognised the importance of detailed due diligence as a means of verifying the integrity of the relevant supply chains.
In April 2021, we were instructed to assist our client with the current and ongoing HMRC enquiry…our client instructed us to review the ongoing due diligence practices and procedures of the business, with a view to improving the same, as necessary. In this regard, we undertook such a review for our client and in light of our client’s requirements, we proceeded to draft a bespoke due diligence policy (inclusive of a risk assessment), together with a supplier due diligence questionnaire. Following further discussions with our client regarding the same, we understand that the aforementioned policy and questionnaire were integrated into and given effect within our client’s business processes and procedures in September 2021.
We note that our client has taken a significant interest and appropriate practical steps in ensuring the integrity of its suppliers, as well as the authenticity of its supply chain. In this regard, we draw your attention to the sample selection of due diligence undertaken by our client in relation to some of its suppliers since September 2021.
We also understand from both our client and from the records previously supplied to HMRC by our client, that during the period between June 2020 (when the tax loss letters were received by our client in relation to Simplify Contracting Services Ltd and SMP Support Services Ltd) and September 2021 (when our client integrated its new due diligence policy and supplier due diligence questionnaire into the business), there was an extremely limited and arguably, insignificant use of labour providers/ suppliers by our client… In fact, we understand that the only labour provider/ supplier engaged by our client during this period was Anchor Recruitment Ltd (due diligence undertaken by our client in relation to this supplier is provided, as indicated below). Indeed, we submit that our client’s minimal use of labour providers/suppliers during this period was in view of the risks associated with labour providers/suppliers (as outlined by HMRC in the aforementioned tax loss letters) and as recognised and understood by our client on its reading and interpretation of the relevant HMRC guidance relating to due diligence and use of labour providers.
We also draw your attention to Clause 5.3 of our client’s due diligence policy, which entails responsibilities in cumbent on our client’s director as regards the ongoing maintenance and updating of the policy and procedures relating to due diligence, in accordance with changes to HMRC’s guidance on due diligence and any associated legislative amendments. We submit that this highlights our client’s continued commitment to undertaking accurate and adequate due diligence.
It must also be borne in mind, that the above changes to our client’s policy and procedures relating to due diligence were made against the backdrop of a complex set of personal and global circumstances….”
[As regards whether SMP sub-contracted to another trader who paid the workers]
Our client was not aware of any sub-contracting arrangements between SMP and other suppliers. Our client had a contractual arrangement with SMP and in this regard, it was of the understanding that SMP was responsible for paying the relevant workers.
[As regards checks on the directors or credit checks done for Simplify and SMP]
Such checks were not undertaken by our client; however, our client understands that as part of the factoring facility with Barclays Bank (mentioned above), relevant checks of this nature were undertaken by Barclays Bank. Ultimately, our client understands that as part of the factoring facility, Barclays Bank undertook detailed checks in relation to our client, its customers and its suppliers and this included checks in relation to directors of the relevant businesses.
[As regards the role of Mr McCarthy when Ms Todorova was on maternity leave]
Our client has advised that Mr McCarthy’s role was “contracts manager” for the business.”
On 8 August 2022 Ms Kar wrote to the appellant as follows:
“Firstly, it has been brought to our attention that prior to receiving the tax loss letter relating to Global Outsourcing Ltd in 2018, W.Reilly Ltd have received several notifications of deregistration of VAT for their previous suppliers which are known as veto letters. These were issued between 2007 and 2011 and had with them enclosed the due diligence guidance (albeit in a different format to the current one as it is updated from time to time). I attach these letters for reference.
Even though the company implemented a more detailed due diligence policy in September 2021, due to the number of times due diligence guidance was provided to them and the procedures only being changed after receiving the third tax loss letter in June 2020, we have decided to raise an assessment based on the principle that the trader knew or should have known they were connected with fraudulent transactions. I will discuss the options available should you disagree with the assessment when it is raised.
The assessment will consist of the tax loss relating to suppliers Simplify Contracting Services Ltd and SMP Support Services Ltd. within the last 4 years….”
Ms Todorova said that the letters HMRC referred to were sent to the North London address and she had not seen them until they were sent to her by Ms Kar.
On 30 January 2023, HMRC requested payment arrangements and points of contact information for SMP and Simplify. This information was not supplied. On 3 March 2023, HMRC clarified the information requested in the email of 30 January, which was responded to on 13 March 2023 by Chartergates disputing the request as the information had already been supplied. No further information was received following HMRC’s request.
HMRC’s guidance for suppliers in the labour market of 2017 which, as set out above, was sent to the appellant included this:
“You should protect your business by undertaking checks to understand:
• where your workers are coming from
• how they’re being paid
• the legitimacy of those arrangements
We can’t tell you exactly what checks you should make because these will vary depending on how your business operates.
What to check
You need to undertake checks within 4 key areas to ensure:
• your supplier of labour is legitimate and has no history of non-compliance
• you understand and approve the labour supply chain
• agency workers are paid their contractual rate and it complies with the National Living Wage (NLW)/National Minimum Wage (NMW)
• you’re doing all you can to eradicate modern slavery and illegal working in your supply chains
These checks are not exhaustive.
If you don’t undertake checks
You need to be aware of the following:
If HMRC finds non-compliance or fraud in your supply chain
It’s likely to cost you more. If it can be shown that you knew or should’ve known that transactions you entered in to were connected with fraudulent evasion of VAT, you’ll lose the right to recover the tax paid on these transactions.
Failure to carry out appropriate checks will be one of the factors that HMRC will take into account in considering whether you knew or should’ve known of the VAT fraud…
….
Guidelines to help you undertake the checks
You need to identify which checks are appropriate to protect your business and the services provided by third party suppliers. You will decide when you’ll carry them out, and how often. The examples given are guidelines to help you avoid getting involved with high-risk businesses and individuals.
Make sure you keep a detailed record of all the checks you undertake.
Make sure your supplier is legitimate and doesn’t have a history of non-compliance
Checks that can help you find out include:
• making sure your labour supply is commercially sustainable so it can meet statutory tax obligations and make a profit
• checking the history of the labour supply business - if a previous business failed because it didn’t pay its tax debts, what changed to stop this happening again
• adding a clause in the contract requiring labour suppliers to show evidence of the VAT and PAYE returns filed and payments they’ve made to HMRC
• checking that appropriate licences are held and in order, for example a Gangmaster Licensing Authority (GLA) licence or a Security Industry Authority (SIA) licence
• verifying the suppliers’ VAT registration details by calling Telephone: 03000 538254 before you use them and making regular checks of all VAT registration numbers afterwards
• telling HMRC about your payroll or staffing outsourcing arrangements
Make sure you understand and are able to approve the supply chain
Actions you can take to help you establish this include:
• adding a clause in the contract requiring your authorisation of further sub-contracting before any of the supplies to be made are sub-contracted to a third party labour provider
• adding a clause in the contract that travel and subsistence arrangements between the workers and the labour supplier comply with HMRC
• adding a clause in the contract preventing the use of offshore intermediaries
• where workers supplied by agencies are being treated as self-employed, decide if the agency rules apply
• ensuring the agency has complied with employment intermediary reporting requirements and get evidence of submitted reports to HMRC where they don’t operate PAYE (this includes where they use an umbrella company).”
In her evidence Ms Todorova emphasised the appellant’s operational reality. We accept her evidence that:
As a company “we take responsibilities seriously and operate a policy that involved a programme of continued improvement and ongoing team training. The appellant’s policy is to maintain and nurture due diligence, health and safety. The appellant holds a number of certificates in this regard which are industry recognised professional standards of certification.”
She joined the appellant in May 2014 as operations manager. At that time Mr Reilly was the owner and director of the business and the offices were based in North London.
The appellant outsources much of the back-office function. She oversaw day to day business operations such as meeting clients, trying to win business and attending audits with the Railway Industry Supplier Qualification scheme (“RISQ”) and the International Organization for Standardisation (“ISO”).
As a small contractor with a limited back-office, the appellant’s risk controls are principally exercised through site-level controls rather than forensic auditing of upstream tax compliance. Until processes were changed in 2021, the appellant followed HMRC’s 2017 guidance and undertook additional checks on its workforce including as a minimum obtaining (a) workers’ personal details (name, date of birth, national insurance number, address and unique tax reference), (b) workers’ ID and passport and checking where they come from and where they are paid and additional checks when verifying invoices and the payment reports provided by the labour providers, (c) workers’ start date, (d) how much workers are paid and who pays them, (e) an induction form which must be completed before the worker starts work; the worker must provide certification of any relevant industry required qualifications such as for construction or rail work. A worker cannot enter a site without valid competency, (f) a medical assessment for health and safety, and (g) a working declaration and an accident reporting declaration. If there was no induction, there was no work for a worker; workers were required to provide identity and competency documentation, with records retained. The appellant also had a construction-industry verification processes (CIS verification numbers and deductions) and typically verified subcontractor status through its payroll/software workflow and HMRC systems.
For Simplify and SMP, the appellant obtained the documents set out above. In addition, the appellant obtained details of the workers (and their pay was checked from the reports the suppliers provided), completed induction forms and competency certificates. Ms Todorova accepted that the appellant had not undertaken the checks set out in the 2017 guidance above as regards checking if Simplify and SMP had a history of non-compliance.
The appellant is subject to an annual audit for the purposes of RISQ and ISO which involves providing details of its management structure and organisation chart, showing it has proper commercial contracts in place with third party suppliers, evidence of compliance with health and safety, quality and environmental standards, and evidence of on-going competence and appropriate training and of its processes in relation to workers as set out above.
It was commercially unviable and would result in “data protection” issues at a minimum for the appellant to obtain some of the information from Simplify and SMP, which it was put to Ms Todorova that the appellant could have asked for, such as internal cashbook records, VAT ledgers, and VAT returns.
That Simplify’s gross payment status under CIS had been removed (as Ms Todorova accepted she was aware) did not necessarily mean that Simplify was involved in serious tax non-compliance; there are a number of reasons why that status may not apply.
In HMRC’s view the appellant knew at all times relevant to this appeal of the potential for VAT fraud in its industry and of the need for due diligence to ensure that it was trading with genuine companies who were not engaged in fraudulent evasion of VAT. The parties’ full submissions are set out in Part C.
Witness evidence of Mr Harris
Mr Harris had worked as an officer for the Fraud Investigation Service (formerly the Missing Trader Intra-Community (MTIC) team) since March 2012. He became the responsible case officer in relation to the appellant and its appeal from October 2023, following the departure of the original decision-making officer. His evidence of earlier events is based on his review of HMRC’s file. The significance of Mr Harris’s evidence is, therefore, primarily as to what HMRC’s file records show was requested/received.
In examination in chief, Mr Harris said that (1) the last piece of evidence on which the assessment was based was that of 2 August 2022. This was a response to Ms Kar’s email of May 2022 in which she raised questions relating to due diligence and banking. The significance is that this showed that the appellant changed course later on, after trading with relevant parties, in that, in 2021 it brought in a due diligence questionnaire. However, no such changes in due diligence were made in the period from 2018 when the appellant was sent the Global tax loss letter to when it was trading with Simplify and SMP, and (2) this was when HMRC first received due diligence information relating to Simplify, and when the appellant first confirmed its correspondence address to HMRC.
In his witness statement and in cross-examination, Mr Harris gave the following main evidence:
He confirmed that (a) he took over case on October 2023, after the decisions were made, he was not involved when the decisions were made and/or in earlier correspondence, he did not decide to issue the assessments and he was not at the key decision making meetings or discussions and had no discussion with the decision maker, and (b) rather his knowledge of these matters comes from reading HMRC’s file. He accepted that it is fair to say that he cannot say from his involvement what the decision maker thought the decisive information was in making the decision; he cannot assist with what was in mind of the relevant officer. He reviewed the documents and records and identified other sources.
He accepted that (a) HMRC asked for the appellant’s core business records in August 2020 (including contracts/terms, invoices, day books, a supplier listing, bank statements and a VAT report), (b) the appellant provided a full suite of what was asked for promptly and without delay; the documents were requested on 26 August 2020 and the appellant provided all documents in full by 31 August 2020, and (c) a number of items which Ms Kar later requested in 2022 and which were provided by the appellant in response were duplicates of the items requested in August 2020 and provided in the email of 31 August 2022. The “dropbox” included items such as VAT returns, bank statements, VAT reports and invoices, and (d) in 2022 there was no additional category of new material requested by HMRC and HMRC were interpreting the material it already had. There is a finality of what was required and what changes it (the appellant) had made by reference to due diligence. When it was put to him that a significant part of what HMRC were doing in 2022 was revisiting and re-reviewing material they already had and having a refresh, he said that some information was provided twice. He said, in effect, that he could give evidence from the documentary records of what Ms Kar thought was the last important fact; he has made an analysis of the information received and what was requested in May 2022 as regards how due diligence had changed in the period – in his view that is the last information which HMRC relied on to make an assessment.
In his statement he said that extended verification involves:
“visiting the trader and obtaining records for the relevant period(s) and conducting credibility checks to verify that the VAT return has been applied correctly and that there is sufficient evidence to support input tax and zero rating. The whole supply chain is traced (from top to bottom), so far as possible, and analysed to confirm whether fraudulent tax losses exist from defaulting or missing UK or EU traders.”
He also said that the due diligence education advice and tax loss letters provided to the appellant between 2007 and 2018 referred to due diligence checks that the appellant could make on their suppliers and supply chain. The letters and links to due diligence checks confirmed the appellant could have undertaken some of the following checks, which were shown in the education leaflets and links:
“Knowing your supplier’s workforce – who provides the workers, who the workers are, what their employment status is, who is responsible for paying them, are they allowed to work in UK, checking whether the workers are paid their contractual rate and that it complies with the National Minimum Wage.”
“Taking a sample check of agency worker’s pay slips and checking who is responsible for paying your workers.”
“Knowing how long your supply chain is – check the supplier exists, check details of any onward subcontracting.”
“Knowing their suppliers – An aim of due diligence and risk assessment is to enable the taxable person to make a judgement on the integrity of their supply chain, the suppliers and the customers within it.”
“Adding a clause into a contract requiring authorisation before further subcontracting to a third party.”
“Ensure the supplier is operating a PAYE scheme and that it is correct.”
He accepted that HMRC’s guidance does not carry the force of law, and that the checks suggested are not exhaustive. That is consistent with Ms Emory’s evidence (as set out below). He confirmed that the guidance states that failure to carry out checks is only one of the factors HMRC will consider when assessing the “knew or should have known” test. He said this provides a sort of list of objective factors and a number of factors would be considered before a decision is made by HMRC.
In his statement Mr Harris said that (a) the appellant had not conducted checks to see whom the workers were paid by as regards both Simplify and SMP and whether either supplier had subcontracted further. The appellant failed to check payslips on a sample of the workers as recommended in the due diligence links and letters previously issued, and (b) the appellant was already on warning following the issue of the Global letters, so to act in the same way, opened the business up to the same risks of tax losses and supply chain fraud, and (c) the appellant almost instantly moved onto using SMP as its labour supplier and again did not carry out any further checks, which would have indicated fraud risks due to the connected companies. At the hearing, he confirmed that he had no personal knowledge of this and was relying on the HMRC guidance which, as noted, does not provide an exhaustive list of due diligence steps a business may take. He accepted that it sets out only a suggested list and a business has to decide what is relevant and appropriate and the guidance does not state that every business must do every check. He said checks have to be relevant and reasonable for the business to take if aware of fraud risk in any particular sector. He accepted that at the time when HMRC were looking at this they did not say to the appellant that it must check its suppliers’ payslips and any sub-contracting arrangements. He said this is in the 2017 guidance though. He accepted that he was not saying that the appellant knew of fraud and ignored it and there is nothing in the bundles showing that.
He accepted that in the appellant’s case: (a) workers physically turned up on site for work; (b) the appellant had worker onboarding/induction arrangements; (c) the appellant had an on-site induction process; (d) the appellant required very granular due diligence on workers and their right to work; and, (e) this was not a case where the appellant did no checks.
He was asked why the fact that the appellant enhanced its due diligence steps in 2021 is relevant. He agreed that the appellant had not said that it actually knew anything was wrong in their dealings with Simplify/SMP. Rather his/HMRC’s stance is that the appellant should have spotted something or asked for something/done further checks. He said, in effect, that HMRC look for the warning signs/the objective factors and assess what a business could do to make checks and whether it neglected to do such checks with the information which it had before it. In his view, the appellant did not do enough in terms of checks. He confirmed that he is not saying they saw proof of fraud and carried on anyway.
It was put to him that the appellant would not automatically be shown information from Simplify and SMP on tax compliance and how workers are paid. He said that this is something they could ask for; he does not know what a business might supply. He accepted that, in his experience it is fair to say that it is not usual for a supplier to provide its internal workings regarding tax compliance to an enterprise such as the appellant. He accepted that the appellant was physically procuring labour for sites and getting them there and getting projects completed.
He accepted that the fact that the appellant operates in a high-risk industry does not mean every supplier is fraudulent or that every customer must assume that (Ms Emory confirmed this as well). He said that this is background/context of which a business should be aware - in this industry risks are high for fraud and it is prudent to have that in mind when considering what checks to make as well as in reviewing checks made to make an objective decision on whether to continue trading with that business. He accepted that, in the context of the provision of labour supply to construction sites, a business must carry out checks regarding the actual sites for workers, and whether they have the legal ability and permission to work in terms of the right papers and documents as well as looking at who pays the workers, ensuring they are being paid at market rate and who is supplying them.
It was put to him that gross payment status for CIS purposes can be removed for a number of reasons, including administrative reasons. He said he does not know about certain areas of CIS. He knows that such status can be removed due to compliance issues and/or for the late filing of returns. He accepted that non-compliance with the requirements of CIS may simply be down to poor administration and does not necessarily mean the business is involved in fraud (Ms Emory also confirmed this). He said the loss of gross payment status is an indicator to check further but does not mean fraud of itself. He accepted that the fact that Simplify/SMP were a major supplier in terms of labour provided does not reveal anything about their conduct as regards fraud. He accepted that when Ms Todorova was informed of the tax losses in relation to Simplify and SMP in June 2020, she ordered the appellant to stop trading with immediate effect with the appellant’s biggest suppliers which meant the appellant was thereby likely to suffer a loss. He accepted that the appellant was so concerned that it tried to engage a solicitor to investigate the situation. It was put to him that is consistent with a business seeking to avoid risk and being responsible. He said he could not talk to this. When pressed he said it is something to take account of as a factor.
In his witness statement Mr Harris said that there were 15 transactions where the VAT claimed far exceeds 20% of the net amount. However, none of the relevant invoices on their face showed VAT grossly over 20%, and the fraud and VAT defaulter status of SMP and Simplify was something HMRC was able to discover by looking at a number of records and sources (as was confirmed by Ms Emory). Mr Harris was unable to explain the calculations underpinning the tables in his witness evidence. Ms Todorova said that HMRC had applied its calculations by using figures from the cashbook information provided by the appellant – as opposed to actual invoices. Mr Harris was not able to explain where in the tables he had provided it is shown that invoices contain VAT of over 20%. He said he had seen discrepancies but he was not able to explain necessarily that column or calculations that underpin it – he could not calculate what the differential is.
In his statement Mr Harris set out that (a) Companies House information showed that Simplify and SMP shared the same director in Ms Nicola Scrambler at the time the transactions were undertaken. This could have been checked by the appellant when entering into an agreement with SMP to ascertain who the company officers were, but no information was provided to show any checks were made or that they acted on any adverse results, where there were risks of tax default by SMP and that they were clearly associated to Simplify, (b) HMRC held details of SMP’s Derby address which was the same as shown on Companies House and the insurance certificate. There is no evidence that the two different addresses were questioned by the appellant, (c) the insurance certificates provided for both Simplify and SMP were with the same insurance broker “Sutton Wilson” which also showed the same insured address in Derby. This was not questioned when the appellant obtained the due diligence from SMP, as it would have shown the connection between Simplify and SMP, and (d) the data sharing agreements for both Simplify and SMP are created in the same document format and show the same business addresses. Each were signed by the same compliance manager, G Towers and were agreed and signed by Ms Todorova. This would have shown the connection between Simplify and SMP and indicates that the appellant had met with the same compliance manager to review and sign these documents. The appellant did nothing to verify that SMP was a credible company that would pay its tax, when it started trading with SMP from 26 September 2019, two days after their last transaction with Simplify on 24 September 2019.
He accepted that companies such as SMP and Simplify can be linked for lots of reasons such as due to shared resources and administrative functions, office addresses, and shared support staff but that linkage does not of itself automatically show that they are fraudulent. He said that if businesses are linked or the same persons are involved, a customer should want to see what it is dealing with and if it is a “phoenix”. He said, in effect, that there needs to be an overall assessment and, if one of the businesses is deregistered for VAT, it is prudent to look at new business and see how quickly that new business comes up. He accepts that businesses can have shared administrative resources – but customers should do checks in such cases to check credibility. He accepted that it is possible for entities to have shared resources without that being a marker of fraud but added that there are more factors here although he accepted that HMRC has the benefit of hindsight.
He accepted that (a) there are a number of things which HMRC later discovered but which the appellant could not see at the relevant time, (b) the appellant would not have automatic access to a supplier’s VAT returns and would not know if a supplier had underdeclared “output” VAT. He said that the appellant could have asked, (c) the appellant would not have known if its supplier ignored HMRC’s requests for information and it can only check what it is shown. For example, if the supplier had been asked and had provided documents which look genuine the appellant would have had limited ways of knowing if it was fraudulent and it is limited by data protection. On the other hand, HMRC can check such matters, (d) if the appellant had asked Simplify and/or SMP about such matters, it would not necessarily have discovered any fraud. The appellant would not have access to a supplier’s VAT returns or information on whether they had under-declared output tax. Ms Emory confirmed in cross-examination that even if copies of these documents had been provided, it is possible that they would have shown figures which were not accurate.
He confirmed that HMRC did have on record the Enfield address as an address for the appellant, although they did not know precisely what it was used for; they had learned that from Ms Todorova in August 2020. However, in March 2022 they had sent post to Mr Reilly’s North London address which was returned.
Ms Emory’s witness evidence was directed primarily to the trading and tax conduct of Simplify and SMP. Ms Emory was not the officer engaged contemporaneously with the appellant during the relevant trading period; her account is derived from HMRC systems and later review, not first-hand dealings with the appellant at the time. Her evidence addresses what HMRC say Simplify/SMP did (under declaration, non-production of records, liquidation/unpaid debts). Her evidence of relevance is as follows:
She has long experience in VAT fraud. She took over once the previous HMRC officer retired to address the fraud of Simplify and SMP. She had no personal involvement in 2019/20 and just knows what she saw in the papers. She was concerned with fraudulent trade by Simplify and SMP and not with what the appellant knew or should have known at the time about any such fraud. She had not had any contact with the appellant.
Her conclusion was that Simplify and SMP were fraudulent defaulters on the basis of factors such as that they had understated output tax, they had failed to provide business records/explanations, assessments were not dealt with or ignored and they went into liquidation with unpaid debt. She accepted that those factors show fraud by the suppliers but do not establish that the appellant knew or should have known of that fraud. She accepted that it is fair to say a supplier can be dishonest without customers knowing about it – she added that is possible but she does not know the circumstances of this case. She knows that they labour supplies and they held themselves out as labour suppliers and there is nothing to suggest labour was not supplied.
She accepted that a customer such as the appellant would not usually have access to the records of a supplier (such as VAT working papers, internal ledger, or the accuracy of its VAT returns) which would show the indicators of fraud she referred to, such as the under-declaration of output tax and failure to supply records. She said the position depends on the relationship between two businesses and the due diligence done and whether the business felt it needed to go further and it is up to each business to determine the correct level of due diligence. She accepted that HMRC, can come to the conclusion that an entity is a fraudulent defaulter because they have access to a number of sources – including information from entities like the appellant – that enable that analysis. She said that HMRC are able to establish output tax and compare to CIS returns and then to VAT records and consider if there is a discrepancy. They don’t need the information that the appellant provided them with.
She suggested it is possible for a business to build up a picture so it could determine if its suppliers were defaulters. She accepted that the level or scale of any fraud cannot be inferred by a customer from receiving supplies and getting invoices.
She said that the appellant was one of sources HMRC had to build up a picture but they could see from the suppliers’ CIS returns and VAT returns that there was a huge discrepancy. They did not need information from the appellant to see that; it was quite plain independently of what the appellant provided. She accepted that HMRC have access to systems and data and can see lot of different information on a lot of different taxpayers. When it was put to her that the matters she spoke of would not be visible to downstream customers at the time of trading with the defaulting suppliers, she said that she did not know if they were aware of it. She noted that Simplify failed to provide records despite many asks. She accepted that it is highly likely that a customer such as the appellant would not know what correspondence passed between HMRC and Simplify at the time. She confirmed that the appellant would not have seen this correspondence. She accepted that it is possible for a supplier to be fraudulent but for a customer to be unaware of that but said that it depends on the circumstances and she does not know what the circumstances were in this case. She accepted that the fact that HMRC concluded the relevant suppliers were dishonest does not mean that the customer necessarily knows that although again she said it depends on the circumstances. She accepted that HMRC established that Simplify and SMP defaulted, acted dishonestly and are dishonest defaulters but that she does not know what the appellant knew or should have known about this default. She accepted that HMRC had access to number of different systems and resources in respect of the suppliers whereby they could request relevant information and cross check it; HMRC have access to a wide array of information and sources, such that they are able to piece together and analyse a taxpayer’s position from information that other taxpayers might not be able to in usual business circumstances.
Part C – Submissions and decision
Time limit issue
HMRC submitted that the assessments for the disputed tax were made within the relevant time limit following the approach to the relevant statutory test set out by Aldous LJ in the Court of Appeal’s decision in Pegasus Birds at [15] and principles 4 and 5 set out by Dyson J in his decision in that case as endorsed by Lord Hodge in DCM (Optical Holdings) Ltd v Revenue and Customs Commissioners [2022] UKSC 26 at [18] and [19]. HMRC made the following main points:
On the basis of the caselaw, the tribunal must (a) determine when an officer of HMRC formed an opinion that he had sufficient evidence of the facts to justify the making of the assessment, (b) ascertain what facts were thought to justify the making of the assessment (on the basis of actual knowledge, not constructive knowledge), (c) determine the date on which the last fact that was important to the officer making the assessment was communicated to HMRC, and (d) determine when an HMRC officer formed a judgment that they had sufficient evidence of the facts to justify the making of an assessment.
HMRC point to the correspondence in 2022:
The letter of 20 May 2022 from Chartergates in which they confirmed several matters in writing, including (i) confirmation of the registered address of the appellant, (ii) confirmation of who paid the workers that SMP provided. This provided a written response to important questions that HMRC had to try and ensure that HMRC sent correspondence to the correct address; and to obtain further information on the appellant’s relationship with SMP.
The letter of 23 May 2022 from Chartergates in which they provided further information, albeit that the appellant had already provided some of the information on 31 August 2020. Most importantly this was the first time that HMRC obtained documents showing the due diligence that the appellant had conducted on Simplify. The documents provided with this letter are crucial to HMRC’s judgment of whether the appellant should have known that supplies made by Simplify were connected with VAT fraud, because they provide insight into the due diligence that the appellant conducted. The receipt of these documents was crucial to HMRC forming that view that the appellant’s due diligence was inadequate and that therefore it should have known that the labour supplies that it was receiving from Simplify, and therefore SMP, for the relevant periods were connected with VAT fraud. This information was also directly relevant to the assessments in relation to supplies that SMP made to the appellant that were connected with VAT fraud as SMP was a “phoenix” company of Simplify and SMP’s tax affairs were therefore inextricably bound up with Simplify (as set out below). Therefore, HMRC needed to understand what due diligence the appellant had conducted on Simplify to further assist HMRC’s understanding of whether the appellant should have known, that supplies made by SMP for the periods 11/19 and 02/20 were connected with VAT fraud. Also, the detailed VAT reports provided were used by HMRC to identify invoices on which VAT was overcharged by Simplify.
The email of 27 May 2022, in which Ms Kar stated that she still did not have sufficient evidence to show whether the appellant knew or should have known that their tax loss transactions were connected to VAT fraud. The logical inference is that Ms Kar had formed the view on 27 May 2022 that she was still not in a position to make an assessment.
Critically, the last evidence is in the letter of 2 August 2022 in relation to the response to the query on whether due diligence practices had changed. Mr Harris is adamant that HMRC only had an adequate understanding of the appellant’s due diligence processes when Chartergates sent this response setting out how procedures changed. That is when HMRC had an adequate picture of the due diligence position and that is the last importance piece of the evidential matrix. There is no other statement in the correspondence in which the appellant/its representatives explain its due diligence procedures that were carried out at the relevant time. Whilst HMRC had received documents which the appellant obtained as part of its due diligence process no explanation was previously provided of that process.
The appellant made the following main submissions
The legal principle for present purposes, as derived from Pegasus Birds, is that: (a) the relevant date is when HMRC obtained/was communicated the “last piece of evidence” relied on (of sufficient weight), not when HMRC later decided it was sufficient; but, (b) because HMRC’s “opinion” involves judgment, a challenge to the officer’s view that earlier evidence was insufficient must meet the Wednesbury threshold.
The last piece of information that was critical to HMRC’s assessments was the due diligence for Simplify and SMP, which came to HMRC’s knowledge on 31 August 2020 when the information was sent to HMRC. The later repeated requests for the same information did not alert HMRC to anything new.
By 31 August 2020, HMRC had all the relevant information they used in arriving at the decision to issue the assessment. The review decision records that the appellant was notified of a tax loss in respect of Simplify and SMP by letters dated 22 June 2020. These letters show that by June 2020 HMRC had already: (a) identified the relevant counterparties (Simplify/SMP); (b) undertaken assessments/CIS status action (with at least respect to Simplify); (c) identified the relevant periods; and (d) formed a sufficiently concrete view to issue formal fraud-chain notifications.
It is also notable that Ms Emory accepted that HMRC did not require information from the appellant in order to reach their own conclusion that Simplify and SMP were defaulters. The alleged supplier default was a matter within HMRC’s own knowledge and systems, not dependent on anything further being elicited from the appellant. By that time, therefore, HMRC had identified fraudulent tax losses relating to the appellant’s direct suppliers (Simplify/SMP), and engaged with the appellant in a way that (on the appellant’s evidence) involved provision of due diligence and invoice materials.
The evidence demonstrates that HMRC’s later 2022 information requests sought materials already provided to HMRC on 31 August 2020, and that HMRC proposed periodic “education” meetings on the basis that it already had a working understanding of the appellant’s due diligence. HMRC’s own record acknowledges duplication of August 2020 material; and the tribunal lacks the evidence of the actual decision-maker (Ms Kar) to explain why earlier evidence was not treated as sufficient, and what exactly changed in 2022. Mr Harris’s evidence is not capable of curing that gap: he joined after the relevant decision was and cannot give direct evidence of Ms Kar’s “opinion” under s 73(6)(b), which is the statutory focus, as he himself accepted in cross-examination. He also accepted that there was no new category of material or information obtained by HMRC in 2022.
HMRC cannot extend the statutory time limit by: (a) requesting the same category of documents again in 2022, in effect, re-packaging or re-reviewing the material already held, or (b) delaying internal decision-making once sufficient evidence exists. The question is whether it was reasonable to maintain that evidence was not “sufficient” until 2022 when the fraud notifications and engagement existed in 2020.
Accordingly, the assessments made on 27 April 2023 were made more than one year after HMRC had evidence of facts sufficient to justify assessment and so are out of time under s 73(6)(b).
In our view, the assessments were made within the applicable 12 month time limit provided for in s 73(6)(b) VATA, as that time limit test has been applied in the caselaw:
The facts on which the relevant HMRC officer relied as justifying the issue of the assessments are, in summary (a) that there were tax losses which result from the fraudulent evasion of VAT by Simplify and SMP, (b) there was a connection between the fraudulent evasion and the transactions between those suppliers and the appellant on which the disputed tax was incurred, and (c) the appellant should have known that its transactions were connected with that fraudulent evasion.
From the evidence in the bundles (in particular, the relevant tax loss letters) and the evidence of Ms Emory, it is reasonable to infer that HMRC had evidence sufficient for them to support the factual basis set out in (1) (a) when the tax loss letters were issued in 2020 or, at the very latest, when they were reissued in May 2022.
From the evidence in the bundles, it is apparent that HMRC based their view that the requirement in 1(c) is satisfied on (a) the issue of the previous letters to the appellant (including but not limited to the Global letters), and (b) what they regard as the limited and inadequate due diligence carried out in relation to Simplify and SMP, in particular, on the basis that the appellant should have been alerted to the need to carry out further checks following receipt of the previous letters, the fact that they were notified that Simplify had lost its gross payment status for CIS purposes and that Simplify and SMP were connected companies. From the evidence in the bundles it is apparent that the last piece of evidence of this fact of sufficient weight to justify making the assessment was communicated to HMRC when, on 22 May 2022, they were provided with the due diligence documents which the appellant had obtained in relation to Simplify. Whilst they had been provided with the due diligence documents obtained for SMP in August 2020 (and some of these materials were requested and provided again), they did not have the documents relating to Simplify until that time. We do not accept that the last piece of relevant evidence was not provided until 2 August 2022 when the appellant’s advisers advised Ms Kar that due diligence processes had changed in 2021. The pertinent fact, on which Ms Kar evidently relied, was the limited due diligence in fact carried out by the appellant.
Kittel issue
HMRC made the following main submissions in support of their view that the appellant should have known that the supplies of labour that it received from Simplify and SMP for the periods under appeal were connected with VAT fraud:
The appellant knew, or should have known, that there was a high risk of suppliers in its industries making supplies to the appellant that were connected with VAT tax fraud. The appellant knew that it had traded with a supplier of services in its industry with whom its transactions could be traced back to VAT fraud. Historically, the appellant (a) received several notifications that entities it did business with had been de-registered for VAT purposes, (b) received HMRC’s letters providing a link to HMRC’s guidance on how to perform due diligence in relation to high-risk businesses such as labour supply providers to ensure that it was not purchasing labour supply services connected with VAT fraud, and (c) was notified by HMRC on 21 September 2018 that Global had been deregistered for VAT and that its recent transactions with Global had been traced back to fraudulent tax losses. Both of the Global letters were addressed to Mr Reilly at an address in North London. This was the principal place of business that the appellant had notified to HMRC and was Mr Reilly’s personal address. He was clearly receiving other correspondence at this address. HMRC sent a letter of 30 May 2019 to that address. Although HMRC has not kept a copy of this letter, it notified the appellant that Simplify had been removed from the CIS gross payment scheme and it is apparent that the appellant started deducting income tax from the payments it was making to Simplify in around June 2019. Therefore, it can be inferred that the appellant must have received and read that later. This is another factor which, together with the factors referred to above, shows that it is reasonable to infer that the appellant received the Global letters. The letters dated 21 September 2018 contained links to HMRC guidance entitled “Use of Labour Providers – Advice on due diligence”. These letters therefore (i) made the appellant aware that there was a risk of suppliers of services in its industry, and particularly labour services suppliers, making supplies to it that were connected with VAT fraud, and (ii) provided a link to helpful guidance on due diligence that the appellant should have been undertaking to ensure supplies of labour services that it acquired were not connected with VAT fraud, and (iii) alerted the appellant to the fact that, among other things (A) it needed to identify due diligence procedures that were appropriate for its business to undertake, in order to ensure, among other things, that it was not receiving labour supplies that were connected with VAT fraud; and (B) if it could be shown that the appellant knew, or should have known, that it was acquiring labour supply services that were connected with VAT fraud, it would lose the right to recover VAT input tax in respect of those transactions. The appellant received a number of other letters with such guidance as set out above.
The appellant should have known that its purchases of labour supply services from Simplify were connected with VAT fraud. It started trading with Simplify in early December 2016 and obtained only rudimentary due diligence on Simplify at that time which would have been sufficient only to confirm Simplify’s existence and identity. The due diligence that the appellant undertook appeared to be a “box-ticking” exercise. It was totally inadequate to satisfy a responsible trader that the transactions it was entering into were legitimate, and in particular, that the supplies of labour being made by Simplify were not connected with VAT fraud. There were the following “red flags” from which it can be inferred that the appellant should have known, that Simplify was making supplies to it connected with VAT fraud:
The appellant should have undertaken far more detailed due diligence on Simplify along the lines of the due diligence it now conducts on counterparties. It should have identified Simplify as being a higher-risk counterparty, and among other things, conducted the following reasonable checks: (i) it should have required Simplify to complete an annual due diligence questionnaire; (ii) it should have obtained evidence of the payments received on the labour supplier’s CIS returns for the last 12 months and compared them to the construction-related labour supply outputs on its VAT returns for the last 12 months in order to determine whether VAT was likely to be underdeclared. The appellant should have been undertaking this check on an annual basis. Based on Ms Emory’s table in her witness statement, if the appellant had conducted this exercise around the start of 2018, it would have discovered that payments shown on Simplify’s CIS returns for the 2017 calendar year significantly exceeded VAT outputs on the appellant’s VAT returns for its VAT periods ended in 2017 and that it was likely that Simplify was undeclaring VAT. It should have been able to determine that there was a significant risk that Simplify was making supplies connected with VAT fraud and would continue to do so, and (iii) it should have obtained proof of payment of VAT for the last 12 months; and undertaken further due diligence, including due diligence of the type mentioned above, when suspicious circumstances arose. In this case, any of the other red flags outlined below should have put the appellant on notice to conduct further due diligence. This applies with even greater force when all of the red flags are considered in combination.
The appellant was notified by HMRC that Simplify’s gross payment status had been removed. As set out above, it appears the appellant received this around 30 May 2019 as in June 2019 it started deducting tax from the payments it made to Simplify. Therefore, HMRC’s letter should have put the appellant on notice that Simplify had tax compliance problems and that it needed to conduct further due diligence on Simplify to ensure that it was not receiving labour supply services from Simplify that were connected with VAT fraud.
There were indications of a lack of commerciality in the arrangements between the appellant and Simplify
For the periods 05/19, 08/19 and 11/19, the tax loss as a percentage of the appellant’s input tax denied for those VAT periods was very high. It varied between 71% and 92%. Simplify was likely to have been the major supplier of contract labour to the appellant during 2019 (as can be inferred from a record of interview with HMRC where Ms Todorova states that SMP was a major supplier of labour). The appellant has offered no evidence in relation to the pricing of the labour supply services that it received from Simplify (and SMP) or of the evidence of the terms and conditions that Simplify was providing its labour supply services to the appellant. This indicates a lack of commerciality in the arrangements between the appellant and Simplify, and potentially a contrivance. At the very least, the appellant should have conducted further due diligence on a major labour supplier.
HMRC initially argued that there were 15 transactions in which Simplify issued an invoice charging VAT well in excess of the 20% standard rate and that should have alerted the appellant to VAT fraud. However, HMRC dropped this point as the witnesses were not able to point to documentary evidence showing this to be the case.
The appellant started trading with SMP only two days after its last transaction with Simplify. Its last payment with Simplify was 24 September 2019 and it started making payments to SMP on 26 September 2019. Simplify entered compulsory liquidation on 5 October 2022. The appellant again obtained only rudimentary due diligence on SMP when it first started trading with SMP which would have been sufficient only to confirm SMP’s existence and identity. Again, the due diligence undertaken appears to have been simply a “box-ticking” exercise. It was totally inadequate to satisfy a responsible trader that the transactions it was entering into were legitimate, in particular, that the supplies of labour being made by SMP were not connected with VAT fraud.
The appellant (a) must have known that SMP was a “phoenix company” of Simplify and knew or should have known that it was effectively carrying on the trade of Simplify, and (b) the tax affairs of Simplify and SMP were inextricably bound together, and all the same points as made above in relation to Simplify also apply to SMP. In this context, the matters which should have alerted the appellant are those set out above. Therefore, the appellant knew, or should have known, that there was a high risk of suppliers in its industries making supplies to the appellant that were connected with VAT tax fraud. In this case, the importance of due diligence is amplified because SMP was a major trading partner and in an industry that the appellant had been put on notice had a higher risk of VAT fraud.
The appellant made the following main submissions:
The right to deduct is a fundamental feature of the VAT system and gives effect to the principle of fiscal neutrality. It is clear from Mobilx that the right to deduct input tax is “integral” to VAT, and any derogation from it must be approached with care and interpreted strictly. The VAT system is designed so that (a) VAT is levied only on the value added at each stage; and (b) the burden of VAT is borne by the final consumer, not by taxable persons making onward taxable supplies. The principle of legal certainty requires that, when a taxable person enters into a transaction which objectively falls within the VAT system, the taxable person should be able to know (by reference to objective criteria) that the transaction is within scope and that its liability is limited to the difference between output tax and input tax, save only for strictly circumscribed exceptions.
The question is whether, on an objective appraisal of the evidence, the appellant should have known it was participating in transactions connected with VAT fraud. In fact the appellant could not have reasonably known about other entities behaving fraudulently, based on its reasonable and comprehensive due diligence checks. The appellant’s due diligence and conduct were consistent with a bona fide trader.
Crucially, the “should have known” test is not met where it is shown merely that fraud was possible or even likely, nor by pointing to carelessness or suggesting that more due diligence could have been done. The tribunal must decide whether the objective indicators truly fixed the appellant with the requisite means of knowledge in the Kittel sense. A general appeal to sector risk, or a hindsight critique of what a careful trader might have done, does not suffice. The evidence must be assessed holistically. Due diligence is relevant as part of the factual matrix, but it is not a free-standing legal requirement and condition 3 is not satisfied on a “tick-box” inquiry. As the Court of Appeal explained in Mobilx, the threshold should not be diluted into mere suspicion: where there are plausible commercial explanations and the transactions are consistent with genuine business activity, HMRC may fail to show that condition 3 is met. Consistently with that approach, Cheema Construction Services Ltd & Anor v Revenue and Customs [2025] UKFTT 92 (TC), Red Rose Payroll Ltd v Revenue and Customs [2025] UKFTT 878 (TC) and GMP Baird Ltd & Ors v Revenue and Customs [2025] UKFTT 1540 emphasise that HMRC guidance is not law, what is “reasonable” is context-dependent, and gaps in due diligence do not automatically establish that condition 3 is met. The burden rests on HMRC to prove, on the balance of probabilities, the facts necessary to justify denial of input tax under the principle in Kittel, including condition 3. The tribunal should be cautious of reasoning that in substance reverses that burden – whether by requiring the appellant to prove a negative, or by treating the absence of particular checks as determinative.
The appellant’s evidence is that the transactions had an ordinary commercial rationale (labour flexibility) and an operational footprint consistent with genuine supply. The appellant’s conduct is inconsistent with the thesis that it was knowingly trading in a fraudulent chain. Once HMRC’s concerns were brought home, the appellant ceased trading with the relevant suppliers. HMRC cannot identify a single document showing the appellant continuing to trade with relevant suppliers regardless or evidencing a willingness to “take the risk” for commercial gain. That reaction is, at the very least, consistent with an honest business seeking to avoid exposure rather than a business trading with its “eyes open”.
The evidence is that:
The appellant was engaged in real labour supply within the ordinary operational model of a construction contractor.
It maintained site-level controls that matter in this sector (induction, right-to-work/competency checks, supervision).
As noted, once it became aware of HMRC’s concerns about Simplify/SMP, it ceased trading with them.
It carried out ongoing verification of subcontractor status through CIS processes.
HMRC’s own narrative accepts that the appellant held documentation for Simplify and SMP (VAT certificate, data sharing agreements, insurance, bank details, incorporation/VAT details, and for SMP terms and conditions). It operated a broader verification process for labour providers and workers (including VAT checks, questionnaires, HMRC verification of worker status, right-to-work checks and competency/safety checks). Mr Harris essentially accepted that these checks were carried out by the appellant.
HMRC’s “red flags”’ do not justify constructive knowledge on these facts:
HMRC characterises the appellant’s due diligence steps as “box-ticking”. However, this is a misrepresentation and diminishes the steps that the appellant did take: (i) the documentary record shows it did not do “nothing”; it obtained core counterparty documents and (on its evidence) carried out worker verification steps, (ii) the tribunal should guard against retrospectively imposing an “HMRC ideal” of supply-chain auditing on a construction business engaging payroll services, absent concrete indicators at the time.
HMRC relies on old letters and, in particular, the Global letters to show the appellant was “on notice” of general risk. However, (i) general awareness of sector risk is not the same as constructive knowledge that these supplies were connected with fraud; the test remains transaction-specific, and (ii) the more compelling inference is that the appellant reacted to concrete HMRC notifications by stopping trading and strengthening processes, rather than turning a blind eye. Moreover, some of this historic correspondence was sent to the former principal place of business and was not necessarily known to Ms Todorova at the relevant time. Her evidence was that certain correspondence went to the North London address and that she was not aware of the Global tax loss letter at the time. She said she made clear to Ms Kar at the meeting in February 2021 that she had not received/read it.
The loss/change of CIS gross payment status is not an unusual or necessarily sinister feature in construction. As Ms Todorova said there are many reasons why a business may lose its CIS payment status.
Corporate succession or shared administrative infrastructure in itself is not proof of VAT fraud, nor does it automatically put the customer on notice that output tax is being suppressed. The appellant held a fresh suite of documents for SMP.
HMRC assert that the appellant received numerous Simplify invoices showing VAT “well in excess” of 20%. However, (i) the bundle material indicates the underlying invoices (and cash-accounting presentation) are material to properly understanding the VAT computation and the dates used in summaries. HMRC itself acknowledges the cash accounting explanation for date differences, (ii) a material strand of Ms Todorova’s evidence was the explanation of invoice presentation and VAT arithmetic, including WRL’s use of cash accounting (claiming VAT by reference to amounts actually paid, drawn from bank statements and the cash book). Her evidence was that accounting treatment and net/gross calculations can make “headline” VAT figures appear anomalous unless one understands the payment basis and deductions, and (iii) this point is at least equivocal and is not a safe foundation for inferring constructive knowledge of VAT fraud.
With respect to commerciality, HMRC criticises lack of pricing evidence and the lack of terms and conditions its trading with Simplify. However, the reality of labour supply in construction is that relationships can be operated with standard terms and operational, project-driven pricing; the absence of a perfect documentary set is not synonymous with contrivance. In any event, there were documented terms and conditions for the appellant’s trading with SMP.
Viewed cumulatively, the evidence indicates that HMRC’s case risks collapsing into: “because due diligence could have been better, the trader should be fixed with knowledge”. That is not the legal test. The tribunal must be satisfied that the objective indicators were such that a reasonable trader should have known of the connection with fraud.
(d) none of the invoices on their face showed VAT grossly over 20%, and the fraud and VAT defaulter status of SMP and Simplify was something HMRC was able to discover by looking at a number of records and sources (as confirmed by Ms Emory). Mr Harris was unable to explain the calculations underpinning the tables in his witness evidence. Ms Todorova was able to cogently explain that HMRC had applied its calculations by using figures from the cashbook information provided by the appellant – as opposed to actual invoices, (d) companies can have shared resources and links for a number of reasons, (e) the appellant would not have access to a supplier’s VAT returns or information on whether they had under-declared output tax (and Ms Emory confirmed that even if copies of these documents had been provided, it is possible that they would have shown figures which were not accurate), and (f) the appellant would also not know about whether a supplier had ignored HMRC correspondence.
The appellant can only check what it is shown and it is possible that if a supplier provides documents that look genuine on their face, the appellant has limited ways of knowing that they are false. Both Mr Harris and Ms Emory accepted this in cross-examination (though Mr Harris asserted again that the appellant could have perhaps asked for more documentation). Mr Harris was specifically asked about the appellant’s due diligence, and he accepted the matters set out above.
Ms Emory’s witness evidence was directed primarily to the trading and tax conduct of Simplify and SMP (i.e. supplier-level default/fraud indicators). On the appellant’s case, that evidence is materially distinct from the question the tribunal must decide under condition 3: what was objectively visible to the appellant at the time. A central limitation is that Ms Emory was not the officer engaged contemporaneously with the appellant during the relevant trading period; her account is derived from HMRC systems and later review. Her evidence, properly read, addresses: what HMRC say Simplify/SMP did (under-declaration, non-production of records, liquidation/unpaid debts), rather than how the appellant should be fixed with constructive knowledge.
From the due diligence which the appellant did have in place, it could not reasonably have inferred that something was wrong with its suppliers. This was a position accepted by both Mr Harris and Ms Emory. Ms Emory specifically agreed that HMRC have access to a wide array of information and sources, such that they are able to piece together and analyse a taxpayer’s position from information that other taxpayer’s might not be able to in usual business circumstances.
Ms Todorova set out in some detail the levels of due diligence which WRL undertake both in her witness statement and in cross-examination. That level of due diligence meets not just the suggested check-list set out in HMRC’s guidance, but it meets and exceeds industry standards for a business like that of the appellant. In addition, in cross-examination Ms Todorova specifically stated that some of the information – which it was put to her that the appellant could have asked for (internal cashbook records, VAT ledgers, and VAT returns) – was simply commercially unviable and would result in data protection issues at a minimum.
The importance of context and treatment of transactions, and what might be deemed usual or unusual for a trader was emphasised in Red12 and cited by the Court of Appeal in Mobilx at [109] to [111] (see above). In Crow Metals Ltd v HMRC [2020] UKFTT 423 (TC) the tribunal held that HMRC was unable to satisfy the burden of proof in their submissions which focused on the due diligence being poor or late. This was not enough to establish that the only reasonable explanation for the transaction to be connected to fraudulent evasion of VAT.
HMRC have failed to explain how the appellant’s due diligence was inadequate and have failed to identify precisely where any gaps in the appellant’s due diligence procedures were, nor do they explain at what point the appellant should have known their transactions with Simplify and SMP were connected with evasion of VAT. The extent of HMRC’s explanation includes a factual list of the events that had taken place. As noted in Kittel and the case law subsequently, it is important that there is a degree of commonality between the transactions in question and the other transactions conducted by the business; that is, in the “ordinary course of business”. Ensuring that there is a common approach to dealing with new suppliers, for example, would allow such transactions to be taken as being in the ordinary course of business if they were scrutinised. As in the case of Ronald Hull, the tribunal should find that HMRC has not produced any support for the contention that the appellant’s due diligence undertaken for SMP and Simplify was any different to that performed on other similar suppliers. The due diligence included obtaining copies of VAT registration and contracts in place which outlined the responsibilities of the labour provider to pay their workers the correct wage. The appellant obtained reports of the workers’ pay from the labour provider and this was matched to the details of the workers’ hours and pay shown on the invoices. In addition, the appellant kept detailed records of the workers provided by Simplify and SMP which included in depth health and safety information, alcohol declarations, etc. The appellant considers that due diligence obtained, was in line with the 2017 guidance available at the time, and the procedures were updated when the guidance was updated in 2021.
The appellant’s position is that the due diligence processes in place were sufficient to identify a potential risk and at no point did the appellant know, nor should have known, that their transactions with Simplify and SMP were connected to the fraudulent evasion of VAT. As in the case of Ronald Hull, any due diligence conducted by the appellant would not have revealed conclusive indicators of fraud. As noted by the tribunal in Ronald Hull (supporting the position in Mobilx), the case law makes the “should have known’ test a high hurdle and: “It is not sufficient it was more likely than not that the transaction was connected to fraud. It requires that fraud is the only reasonable explanation.” Looking at all the evidence together (as required by the case law), it is not reasonable to state that the appellant knew or should have known of any fraud on the part of SMP and/or Simplify. No evidence or reasonably detailed explanation has been produced by HMRC to this end to support its assessment.
We have concluded that, having regard to how the Kittel test has been applied in the cases (as set out in Part A) and in light of all the evidence set out in Part B, HMRC have not demonstrated that, having regard to objective factors, the appellant should have known that, by the purchase of the relevant supplies from Simplify and/or SMP, it was participating in transactions connected with fraudulent evasion of VAT. We note that, as set out at [11], it is plain that whether a taxable person “should have known” this requires a relatively high threshold; it does not suffice that circumstances are such that a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. Rather the test is satisfied where the taxable person should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion. HMRC have not established that is the case here:
It was not disputed that at all relevant times the appellant was carrying out a genuine commercial business as a construction contractor and, in the ordinary course of operating that business, it contracted with and received supplies of labour from Simplify and SMP. The evidence establishes that the appellant carried out checks on Simplify and SMP, when it started to engage with them, of a type required to give assurance that they were businesses operating as they purported to operate as well as carrying out site level controls and checks of the labour supplied to them by these suppliers. In our view, the level of checks and due diligence carried out by the appellant falls within the range of what may be considered reasonable for a relatively small business operating in this sector. These checks did not produce anything which would have caused a business operating in this sector to be aware that the suppliers were involved in evading VAT or to be suspicious that was the case.
HMRC’s “red flags”’ do not justify a conclusion that at the relevant times the appellant “should have known” that by the purchase of the relevant supplies from Simplify and/or SMP, it was participating in transactions connected with fraudulent evasion of VAT on the basis that Simplify and SMP were not duly accounting for the correct amount of VAT in respect of their supplies to the appellant:
The Global letters (and other letters sent to the appellant regarding its suppliers) and the accompanying guidance sent to the appellant by HMRC put to the appellant “on notice” of general risk of VAT fraud in this sector. In our view, for the purposes of applying the Kittel test, it is reasonable to assume that the appellant received and was aware of all letters which were sent to the North London address given that they were plainly received by Mr Reilly, who was a director of the appellant at the time. Whether Ms Todorova personally knew about the letters is not relevant; it is the knowledge of the taxable person, the appellant itself, that is of relevance and the knowledge of Mr Reilly, as a director of the appellant, may be ascribed to the appellant. In any event, as noted, the appellant took on-going reasonable measures to conduct checks of an appropriate kind as regards its suppliers. It did not simply turn a blind eye to the sector risk of which it was plainly aware. Moreover, it is notable that, once HMRC alerted it to their concern that Simplify and SMP were involved in VAT fraud, it ceased doing business with them immediately and subsequently improved its due diligence processes. Overall, the appellant’s actions are commensurate with those of a genuine business seeking to do business with other genuine businesses in the labour supply sector.
The appellant was plainly aware that Simplify had lost its gross payment status for CIS purposes in 2019. However, the loss of gross payment status is not an unusual or necessarily sinister or suspicious feature in construction. As Ms Todorova said there are many reasons why a business may lose that status under the scheme of the CIS legislation. A reasonable trader would not conclude that it was due to the business being involved in fraudulent behaviour.
It is reasonable to infer from the evidence that the appellant was plainly aware that there was a connection between Simplify and SMP. However, (i) the appellant conducted a fresh due diligence check on SMP when it began to trade with it, and (ii) there are many legitimate, commercial reasons why a company may transfer its business to another related entity or why two companies may share the same address, have common branding and/or a shared administrative infrastructure; that does not of itself indicate that one or other or both of the businesses are involved in VAT fraud. At the time that the appellant started trading with SMP and carried out its due diligence checks, there was nothing in the surrounding circumstances to cause the appellant concern.
Neither the fact that Simplify and SMP were major suppliers of labour to the appellant nor that the appellant does not appear to have had formal written terms and conditions as regards its agreement with Simplify is of itself demonstrative of an increased risk of fraud or contrivance.
A mainstay of HMRC’s stance is that, in their view, the appellant could have discovered VAT fraud by Simplify and SMP had the appellant requested, on an annual basis, to see their CIS returns and VAT returns and proof of payment of the relevant sums. However, in our view, (a) for one trader to request such records from another would be unusual and not something that a trader would request in the ordinary course of carrying out due-diligence checks on its suppliers, (b) for the reasons already given, there was nothing in the surrounding facts and circumstances to alert the appellant to the fact that it should make such a request, and (c) it cannot be assumed that, had the appellant made such a request, Simplify and SMP would have provided it with its CIS returns and VAT returns and/or would have provided it with genuine returns/information. A trader such as the appellant simply does not have the same capacity or ability as HMRC does to obtain such information and assess such matters.
Conclusion and right to appeal
For all the reasons set out above, (1) the appellant is entitled to the right to deduct/obtain recovery of the disputed tax, (2) accordingly, the VAT decision has not been correctly made and penalty which HMRC has sought to impose on the appellant in the penalty decision has not been correctly imposed, and (3) the appeal against the VAT decision and the penalty decision is allowed.
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.
Release Date:
28 April 2026