Sweetmotion Limited v The Commissioners for HMRC

This is an appeal by Sweetmotion Limited (“Sweetmotion”) in relation to decisions made by HMRC:

These decisions were upheld by a review dated 10 February 2023.

Sweetmotion was professionally represented until about two weeks before the hearing. While represented Sweetmotion lodged a Fairford Response to the effect that, of the Kittel criteria, only knowledge is challenged. Fraudulent tax loss and connection are admitted; as is the fact that the denied transactions were part of an orchestrated scheme to defraud HMRC.

The quantum of input tax denied for each of the periods in dispute is as follows:

At all relevant time the sole director of Sweetmotion was Mr Paul Jenkins. On 13 December 2022, HMRC issued Mr Jenkins with a penalty under s. 69D VATA) (the “PLN”) in the sum of £386,445.30. However, this has not been appealed. It is common ground that this was an accidental omission. It is also common ground that due to the mechanics of VATA 1994 the PLN will stand or fall with the Company Penalty: and any mitigation of the Company Penalty will reduce the quantum of the PLN.

The denial of input tax relates to transactions with four companies, who were between them the sole immediate suppliers of Sweetmotion during all relevant periods, being:

The right of a taxable person to deduct input tax is contained within sections 24-29 of VATA 1994. In particular:

Those provisions reflect and transpose the corresponding European Community laws contained within Articles 167 and 168 of the VAT Directive.

The right to deduct input tax will be lost where a taxable person “knew or should have known” that his transaction was connected with the fraudulent evasion of VAT. This is a test that was originally laid down by the Court of Justice of the European Communities (“CJEU”) in Kittel. There the CJEU stated:

The Kittel Principle was elaborated on by Moses LJ sitting in the Court of Appeal in Mobilx Ltd v HMRC [2010] EWCA Civ 517; [2010] STC 1436 (“Mobilx”) where he stated:

In Mobilx the Court of Appeal went on to sound a note of caution in relation to attempts to improve upon the principle laid down in Kittel:

In relation to the phrase “the only reasonable explanation” it is important to note, as confirmed by Proudman J. sitting in the Upper Tribunal in the case of GSM Export (UK) Ltd and another v HMRC [2014] UKUT 0529 (TCC), that Mobilx does not purport to change the test in Kittel:

The Court of Appeal in Mobilx (at [83]) then affirmed guidance on the treatment of circumstantial evidence in cases of VAT fraud. In doing so the Court of Appeal quoted Christopher Clarke J. in Red 12 Ltd v HMRC [2009] EWHC 2563; [2010] STC 589 (“Red 12”), who had said:

Further, in AC (Wholesale) Ltd v HMRC [2017] UKUT 191 (TCC), the Upper Tribunal considered Mobilx concluding that the “only reasonable explanation” test is simply one way of showing that a person should have known that transactions were connected to fraud. On this, the Upper Tribunal went on to state that:

A taxpayer does not need to know specific details of the fraud being perpetuated. In Fonecomp Ltd v HMRC [2015] EWCA Civ 39; [2015] STC 2254 the Court of Appeal (Arden LJ) said:

It is dishonest for a person deliberately to shut their eyes to facts which they would prefer not to know. If he or she does so, they are taken to have actual knowledge of the facts to which they shut their eyes. See, for example, Beigebell Ltd (No.2) v HMRC [2023] UKFTT 363 (TC) and Cavendish Ships Stores v HMRC [2020] UKFTT 257 (TC). Such knowledge has been described as “Nelsonian” or “blind-eye” knowledge”: see judgment of Lord Scott in Manifest Shipping Company Ltd v Uni-Polaris Shipping Company Ltd and others [2001] UKHL 1; [2003] 1 AC 469:

In Mobilx Moses LJ stated:

In Mahagében kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága; Dávid v Nemzeti Adó- és Vámhivatal Észak-alföldi Regionális Adó Főigazgatósága (Joined cases C-80/11 and C-142/11) [2012] STC 1934 the CJEU said the following with regard to due diligence:

The case law indicates that it is necessary to guard against over-compartmentalisation of relevant factors, and to stand back and consider the totality of the evidence: see Davis & Dann Ltd v HMRC [2016] EWCA Civ 142, [2016] STC 1236 (“Davis & Dann”) and CCA Distribution Ltd v HMRC [2017] EWCA Civ 1899; [2018] STC 206 (“CCA Distribution”).

In considering circumstantial evidence, the Tribunal should take care not to restrict itself to considering each piece of evidence alone and in isolation from the others. This is because circumstantial evidence is not a chain, where a break in one link breaks the chain, but is a cord: one strand of the cord might be insufficient to sustain the weight, but three strands together might be sufficient: see R v Exall (1866) 4 F&F 922, per Pollock CB, cited with approval by the Upper Tribunal CCA Distribution at [91]. Accordingly, the whole can end up stronger than the individual parts: see the decision of Judge Christopher McNall in Wholesale Distribution Ltd v HMRC [2024] UKFTT 00514 (TC) at [49]

Further, it is necessary to consider individual transactions in their context, including drawing inferences from a pattern of transactions, and 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: see Red 12 at [109] to [111]. In effect, as a facet of the guidance given in Red 12, it is necessary to guard against over-compartmentalisation of relevant factors, and to stand back and consider the totality of the evidence: Davis & Dann and CCA Distribution.

Where HMRC rely on the Kittel Principle, it is for HMRC to prove that each element of the test set down by the CJEU is satisfied (see Mobilx at [8]), namely:

As the CJEU underscored at paragraph [47] of Kittel, the right to deduct is “an integral part of the VAT scheme [which] in principle may not be limited”. Accordingly, the Tribunal must, before allowing that right to be interfered with, be satisfied that HMRC have proved each element of the Kittel test in relation to each purchase that they seek to deny input tax on.

It is not enough for HMRC to prove that the appellant’s purchases might have been connected with fraudulent evasion of VAT: see Hira Company Ltd v HMRC [2011] UKFTT 450 (TC) at [111], per Judge Poole. Rather, HMRC have to prove, on the balance of probabilities, that the appellant’s purchases were connected with fraudulent evasion of VAT.

Similarly, it is not enough for HMRC to prove that the appellant knew or should have known that its purchases might be connected with fraudulent evasion of VAT, were probably connected with fraud or were likely connected with fraud. Rather, HMRC have to prove, on the balance of probabilities, that the appellant knew or should have known that its purchases were connected with the fraudulent evasion of VAT.

The standard of proof is the civil standard of the balance of probabilities. As confirmed by Lord Hoffman in Re B [2008] UKHL; 35 [2009] 1 AC 11:

So far as is relevant, s 69C VATA 1994 specifies:

The Company Penalty may be mitigated under section 70 VATA 1994 which provides:

It is common ground that, as the penalty is under section 69C, the only matter that statute prohibits us from considering is the insufficiency of the funds available to any person for paying any VAT due or for paying the amount of the penalty.

We have considered:

We heard live witness evidence from:

We found both HMRC officers to be honest and straightforward witnesses. They conceded facts that were adverse to HMRC’s case, for example that it was irregular both that no veto letters were sent and that HMRC did not alert Sweetmotion to the fact that their suppliers had been deregistered sooner. Officer Joiner also admitted that monthly checks of registration would not normally be necessary, as a taxpayer could rely on HMRC sending a veto letter if a supplier was deregistered.

We note that Officer McNally was not the officer in the case during the investigation. She gave her evidence since the relevant officers had left HMRC. As such, her evidence carries less probative value than if she had been involved in the investigations.

We found Mr Jenkins to be an honest but unreliable witness. The relevant events took place over five years ago, and so it is perhaps natural that some of his recollections were inaccurate. For example he stated that he ceased to have access to the Sweetmotion email since 2021, but the documentary evidence showed him using that as late as December 2022. There were also many questions that Mr Jenkins stated he simply could not remember, for example whether he had contacted KCA or they contacted him; or who at the defaulter companies he spoke to.

We accept the testimony of Mr Goldstein. He gave straightforward answers to the questions he was asked. He was clear about things that were outside his knowledge: for example he was not involved in due diligence. Likewise, he was clear when he was unsure in his answer to a question.

HMRC submit that Sweetmotion either knew, or at the very least should have known, that the transactions in issue were connected with the fraudulent evasion of VAT. The starting point of HMRC’s case is that all four suppliers used by Sweetmotion during the relevant periods were subsequently deregistered as fraudulent defaulters, and that Sweetmotion accepts that the denied transactions formed part of an orchestrated scheme to defraud HMRC. HMRC contend that it is inherently improbable that a trader embarking on legitimate commercial activity would, by coincidence alone, trade exclusively and consecutively with four defaulting suppliers. In HMRC’s submission, this pattern of trading is consistent only with contrived and pre‑arranged dealings, and is inconsistent with ordinary commercial behaviour.

HMRC place weight on the rapidity with which Sweetmotion engaged in high‑value trading with suppliers whom Mr Jenkins had never met and about whom he had undertaken only superficial checks. In respect of Peralto and STB, HMRC note that Sweetmotion traded within hours of receiving unsolicited introductory emails, and in each case entered into transactions of significant value on the same day. HMRC say such immediacy is commercially inexplicable and supports the inference of pre‑planned trading, rather than arms‑length market dealings. HMRC also rely on the fact that Sweetmotion was never involved in the physical movement of the goods, that suppliers delivered directly to Sweetmotion’s customers, and that Sweetmotion did not meaningfully verify transport arrangements, insurance, or the identity and capacity of the supposed suppliers. HMRC submit that Sweetmotion’s role in the chains was commercially artificial and indicative of contrivance.

A major element of HMRC’s case concerns the due diligence undertaken by Mr Jenkins. HMRC accept that undue emphasis should not be placed on due diligence in isolation, but rely on the inadequacy of the steps taken as part of the broader evidential picture – which also includes lack of documentary evidence. HMRC point to features which, in their submission, were obvious and should have prompted a reasonable trader to identify that something was seriously wrong. Examples include the fact that CTADS had filed dormant accounts for nearly a decade, that Peralto and STB were newly incorporated and had not filed any accounts, and that STB’s and CTADS’ VAT certificates contained spelling errors and formatting anomalies. HMRC submit that these matters would have been readily apparent from the most basic inquiry and ought to have been noticed. They argue that Mr Jenkins’ failure to observe such matters cannot be explained by mere inexperience or lack of administrative skill, but instead demonstrates that he either understood the true nature of the transactions or deliberately chose not to probe discrepancies, so as to avoid confirming what he suspected. HMRC therefore invite the Tribunal to infer actual, “blind‑eye” knowledge.

HMRC attach particular importance to the third‑party payments made to ST Bookly in relation to CTADS. Mr Jenkins initially told HMRC that only two or three such payments had been made, but bank evidence showed thirty‑four payments totalling over £676,000. HMRC submit that the scale of the payments, the fact that they were made to an entirely unrelated foreign company, and the fact that they commenced around the time CTADS’s was deregistered, all point towards Sweetmotion’s knowledge of the fraudulent character of the transactions. HMRC argue that Mr Jenkins’ inability to recall the payments, made only weeks earlier, is not credible. They submit that the understatement was not a momentary lapse but an attempt to deflect scrutiny from a feature of the trading which he knew would raise concerns.

HMRC also rely on the dramatic and unexplained increase in Sweetmotion’s turnover from early 2020. They note that Sweetmotion estimated an annual turnover of £100,000 when registering for VAT, and had modest historic returns, yet within months was declaring purchases exceeding £1 million per quarter. HMRC contend that such a sudden and substantial rise, particularly in a sector where Mr Jenkins had little recent trading experience, is itself a hallmark of contrived supply‑chain fraud. They argue that a reasonable trader would have recognised the implausibility of obtaining such volumes, from unknown and newly formed suppliers, at the margins Sweetmotion achieved, without questioning how these suppliers could source goods at such scale and speed.

Turning to the education provided to Mr Jenkins, HMRC acknowledge that much of the formal guidance was provided after many of the denied transactions had taken place. However, HMRC emphasise that by 18 January 2021 Mr Jenkins had been expressly directed to Notice 726 and to HMRC’s guidance on missing trader fraud. In that meeting, HMRC drew his attention to features of fraudulent supply chains, including rapid increases in turnover, new companies with no trading history, low margins, lack of insurance, and unusual payment arrangements. HMRC note that Mr Jenkins did not read the due diligence guidance despite being provided with links and despite acknowledging that he found the information “frightening”. HMRC submit that this failure to engage with guidance – coming at a point when he was actively trading with STB, itself deregistered shortly thereafter – strongly suggests that he was choosing not to enquire lest he confirm what he already suspected. HMRC therefore say this is evidence of actual, blind‑eye knowledge.

In the alternative, HMRC argue that even if the Tribunal is not satisfied that Mr Jenkins had actual knowledge, he unquestionably should have known that the transactions were connected with fraud. They say that the combination of repeated red flags, unexplained trading patterns, anomalies in documentation, implausible commercial arrangements, third‑party payments, and the absence of any credible explanation for how four independent suppliers could each independently be fraudulent, is sufficient to satisfy the objective limb of the Kittel test. In HMRC’s submission, the only reasonable explanation for the circumstances surrounding Sweetmotion’s trading is that the transactions were connected with the fraudulent evasion of VAT and that Mr Jenkins should have appreciated that fact.

Sweetmotion submits that it neither knew nor should have known that its transactions were connected with the fraudulent evasion of VAT. Its case rests on four interconnected themes: the reasonableness of its due diligence, the commercial reality of its trading, the absence of any motive to engage in wrongdoing, and the manner in which HMRC conducted and communicated its investigation.

Sweetmotion emphasises that its back-to-back trading began at the outset of the COVID‑19 pandemic, when the director, Mr Jenkins, was simultaneously undertaking PAYE work. He says the shift into trading FMCG goods arose organically through industry contacts, including a former colleague. Sweetmotion contends that it was well‑placed to operate during lockdown conditions: it had minimal overheads, direct access to wholesale contacts, and a director with three decades of practical experience within the trade. It says the model of back‑to‑back trading with direct delivery from supplier to customer is commonplace in the FMCG sector, where speed of movement and small margins are normal commercial features. It maintains that all goods were physically delivered, paid for, inspected by customers upon receipt, and supported by delivery notes where issues arose.

Sweetmotion argues that it conducted reasonable and proportionate due diligence. The primary purpose of due diligence (until they received education from HMRC on VAT fraud) was seen as minimising financial risk – although that was heavily mitigated by the back-to-back business model. It says that, on Mr Jenkins’ accountant’s advice, the company maintained HMRC‑compliant accounting systems, gave full bank access to its accountant, and declared VAT and corporation tax accurately and on time. As to suppliers, Sweetmotion states that it gathered introduction letters, passports or driving licences, utility bills, VAT registration certificates. It also states that it verified that each supplier was active and VAT‑registered at the point of first trading, and that any suppliers unable or unwilling to supply documentation were not engaged. Sweetmotion submits that these steps met, and in some respects exceeded, what due diligence requires, particularly in the context of COVID‑19 restrictions. It also maintains that many of the red flags identified retrospectively by HMRC were not matters it had been told to look for, nor matters that a reasonable trader would necessarily identify at the time.

Sweetmotion rejects HMRC’s suggestion that any of the trading was pre‑arranged or contrived. It says that rapid turnaround deals are inherent in the FMCG market, where wholesalers buy and sell full truckloads within hours if the goods are available and the price is competitive. It disputes that contact from suppliers was “out of the blue”, stating that introductions generally arose from industry networks, trade exhibitions, or conversations that took place days before any email was sent. Sweetmotion argues it had no reason to doubt the legitimacy of suppliers, all of whom appeared active on public registries at the time of first trading, and some of whom operated from premises with which Mr Jenkins was already familiar.

Sweetmotion places considerable emphasis on the absence of any financial motive to engage in fraud. It describes its business model as low‑margin and high‑volume. It points out that all payments were made by traceable UK bank transfers; and that it derived no abnormal profits. It says that this is wholly inconsistent with the behaviour of a participant in VAT fraud, and that HMRC has not identified a rational explanation why a small family‑run company, operating from the director’s home address, would knowingly expose itself to criminal liability. Sweetmotion also points to Mr Jenkins’ personal background – long‑term community ties, a stable family life, decades in the industry without any allegation of wrongdoing, and a strong emphasis on protecting his family’s reputation – as inconsistent with deliberate participation in fraud.

A significant theme of Sweetmotion’s case concerns HMRC’s conduct. The company says that HMRC repeatedly described discussions as informal, told Mr Jenkins he did not need legal representation, and did not indicate that information provided in meetings would later be relied upon as evidence of wrongdoing. Sweetmotion states that it repeatedly asked HMRC if it had done anything wrong and was told there was no immediate cause for concern. It further submits that HMRC did not inform it at the time when any supplier became deregistered, despite knowing who its suppliers were by early March 2021. Sweetmotion argues that HMRC were under an obligation to alert it to such deregistration promptly. Had HMRC done so, Sweetmotion says it would have immediately ceased trading with the supplier concerned. Instead, the company heard nothing until August 2021, months after the last transaction with a defaulting trader. It therefore says that it should not be criticised for continuing to trade in ignorance of matters known to HMRC but not communicated to it. It also argues that HMRC’s failure to send veto letters, combined with their stated intention to “help” and “advise”, created a false sense of regularity in the supply chains.

Sweetmotion also relies on the prejudice caused by the passage of time. It says the events took place between 2019 and 2021, during the exceptional conditions of the pandemic, and that nearly five years have since elapsed. It submits that HMRC’s delays mean contemporaneous communications, informal notes, and other records can no longer be recovered, including emails lost when the company’s domain name lapsed. It argues that it is unfair to draw adverse inferences from an absence of documentation or from imperfect recollection when HMRC itself discouraged formalisation of the process and did not warn the company of the seriousness of the investigation at the time.

Finally, Sweetmotion disputes HMRC’s characterisation of the third‑party payments. It says that the payments were made only after a supplier reported banking difficulties, and only once Mr Jenkins insisted on receiving a signed letter authorising payment to an alternative account. It argues that HMRC’s reliance on initial misestimation of the number of payments is misplaced; Mr Jenkins says he answered informally and without checking records, believing the conversation to be advisory rather than evidential. Sweetmotion maintains that all bank statements were voluntarily disclosed, that nothing was concealed, and that the payments were consistent with normal commercial pressure in a fast‑moving market, not evidence of knowledge of fraud.

For these reasons, Sweetmotion submits that it did not know, and could not reasonably have known, that its transactions were connected with fraudulent evasion of VAT, and that HMRC has not discharged the burden of proof required under the Kittel principle.

Mr Jenkins has a longstanding connection to the confectionary trade. He grew up in the business as his father was also in the confectionary trade. He has many contacts with large retailers and wholesalers.

Sweetmotion Limited was incorporated on 25 October 2011. The company’s nature of business is listed on Companies House as “wholesale of sugar and chocolate and sugar confectionery”. Mr Jenkins has been the sole director since incorporation.

Sweetmotion has been registered for VAT since 1 March 2013. When applying for registration on form VAT1 it stated its business activities to be the “wholesale of confectionary products”. It was deregistered with effect from 9 December 2021 on the basis that it was no-longer trading.

Immediately prior to February 2020 the business of Sweetmotion changed from consultative sales management to back-to-back sales of whole truck loads – Sweetmotion’s suppliers would deliver directly to Sweetmotion’s customers. This resulted in a rapid increase in turnover. In the periods 12/18 to 12/19 the sales/outputs of Sweetmotion had not exceeded £19,000. In the subsequent periods the inputs/outputs were as follows:

The supplies which have been denied are summarised in the following table:

The supplies in question are predominantly soft drinks. There are some supplies of (i) confectionary, such as Dime bars; (ii) personal hygiene products, such as Gillette and Dove soap (iii) general household products, such as bin bags. The supplies generally relate to full-truckload supplies of a given commodity. Many of the supplies are “grey-market”, being produced outside the UK and not intended to be marketed to consumers in the UK.

Mr Jenkins kept minimal records. Trades would be entered into his diary, which has not been produced in evidence.

Mr Jenkins would generally add a markup of either 10p or 5p per crate on a transaction. He used his knowledge of the business to determine which to add. Where he was unsure what margin to add he would use his best knowledge and then approach other customers if those he first approached were not willing to purchase at that price offering a different, reduced, margin. He described this as a “spit ball” approach.

There are several issues with the invoices prepared by Mr Jenkins. He prepared the invoices himself and clearly did not give much thought to them. Indeed, the gist of his explanation was that he did not have much skill or interest in paperwork and would just do deals on the phone.

For example on 8 December 2020 he invoices a customer £40,804.40 for 3,458 12x2 cases of Dove soap. On 14 December he invoices the same customer the same amount for 3,458 12x4 cases of Dove soap. Commercially this makes no sense. We accept his explanation that the same number of bars of soap will have been provided in each order. {943-944}

Other discrepancies include Euro symbols being used for GBP amounts and occasions where the sales invoice (to Sweetmotion’s customer) predates the purchase invoice by one day.

Invoices were emailed to Mr Jenkins by his suppliers. They were emailed to him at a Sweetmotion email address that he no longer has access to, due to failing to pay for the domain name. Delivery notes were also sent to Mr Jenkins by suppliers, but have not been retained by him.

Transportation of the goods was generally arranged by suppliers. The suppliers retained ownership of the goods until they were delivered to Sweetmotion’s clients.

Clients would generally be expected to pay Sweetmotion on delivery. If payment was not made then, the lorries would be instructed not to deliver. Exceptions were made for larger businesses that were big clients.

There are no written contracts between Mr Jenkins and his suppliers. Mr Jenkins did not insure the goods – nor was he aware if his suppliers did.

On 10 February 2020 at 11:13 Peralto approach Mr Jenkins with the following email:

Enclosed was a certificate of incorporation, a UK driving licence, an introduction letter and VAT certificate.

The letter of introduction stated:

The name on the driving licence was “Rebekah Nayomi Passley”. So “Rebekah” was spelt differently to “Rebecca” in the body of the email.

On the same day as receiving this correspondence Sweetmotion bought 6,240 crates of 330mlx34 GB Coco Cola at a unit price of £7.45 (plus VAT), and so paid a total of £55,785.60 to Peralto.

The invoices from Sweetmotion show 6,216 units being sold to a major soft-drinks wholesaler on the same day at a unit price of £7.50 (plus VAT). The difference in units sold is attributable to breakage. The total received by Sweetmotion was therefore £55,944. Thus while the turnover is high, Sweetmotion made a fairly modest profit (£158, less than 1 per cent of turnover) on the transaction.

Mr Jenkins indicated he did not regard this rapid timeframe as significant, commenting in cross-examination:

The next day two further deals of similar value follow. Thereafter transactions continue with similar frequency.

On 15 April 2020 at 15:03 CTADS approach Mr Jenkins with the following email:

The reference to Gary is to a salesman Mr Jenkins had known for 20 years.

The attached documentation was a certificate of incorporation; the UK driving licence of Miss Mugadza (which indicated her place of birth was Zimbabwe); a certificate of registration for VAT and an introduction letter. The introductory email was sent from a Gmail account, whereas the letter of introduction had an email address linked to a company web domain.

The introduction letter states:

The VAT certificate gives a trade classification as:

It also provides an address in DN6 8DA of:

There is no such road. The road given on the VAT1 form is “43 Owston Road” (without the “n”).

In October 2020 there was a problem with paying into CTADS’s bank account. CTADS requested Sweetmotion to pay ST Bookly instead. The bank account into which the payments were made was located in Cyprus. There are 18 instances of payments in October 2020 and 16 instances of payments in December 2020. The total amount of the payments is £676,956.90.

At the time Mr Jenkin’s only concern was that CTADS may later claim they had not been paid and demand further payment. He sought to mitigate this risk by obtaining a signed letter from the director of CTADS.

In his meeting with HMRC on 12 March 2021 Mr Jenkins stated that there were only 2 or 3 such payments, and he could not remember to whom they were made. This is not so long after the date of the payments, so we find this error surprising. Even so, we do not consider this indicative of Mr Jenkins attempting to deceive HMRC. Rather, viewing the evidence in the round, we find it to be consistent with an extreme lack of interest in documentation and the practicalities of business.

On 28 April 2020 KCA emailed Mr Jenkins a certificate of incorporation; an application to register KCA; the memorandum and articles of association; and a VAT certificate.

The VAT certificate names it “Kensington and Chelsea Associates” while the certificate of incorporation is for “Kensington & Chelsea Estates Limited”

The name was later changed. While there is therefore objectively nothing concerning about this difference, it is a difference that Mr Jenkins did not spot and himself verify that there was no cause for concern.

On 1 December 2020 at 16:53 Mr Jenkins was emailed by STB as follows:

The email attaches a certificate of incorporation; a certificate of registration for VAT; banking details and copy of the passport of the director. It also encloses an introduction letter (similarly worded to the cover email) dated 18 November 2020. The introduction letter has a Mayfair address.

The VAT certificate gives a trade classification as:

The passport copy is a copy of a copy. It is a photograph of a printout of a scan of the original passport. That is apparent from it being on a piece of white paper that is photographed on a work-surface and there are no edges of passport pages showing. Mr Jenkins admitted this to be the case when it was put to him at the hearing, but had not noticed it before then.

When, in cross-examination, Mr Jenkins was challenged about the lack of commerciality of one supplier recommending another, he commented:

However, he was unable to recall the detail of this conversation; and could not remember who the director of STB was.

Also on 1 December, despite the initial contact being made at 16:53 on the same day, Sweetmotion entered into two transactions with STB, for purchases of £40,942.72 and £56,676.15.

In 2020, Sweetmotion came to the attention of HMRC as it had been noted that it was supplying a company called Pallet Price Limited which was being monitored by HMRC. HMRC first contacted Sweetmotion on 8 December 2020, with questions concerning the business. As that email had not been answered, on 22 December HMRC reached out copying-in Sweetmotion’s accountant. The accountant forward it to Mr Jenkins on 29 December. Mr Jenkins replied the following day, noting that the email had been sent to an account he generally did not use. Mr Jenkins replied to Officer Joanne Bannerman on 31 December 2020, giving full answers to her questions. {444}{449}

Following further email enquiries, on 6 January Officer Bannerman requested a telephone meeting with Mr Jenkins to “get more insight”. Mr Jenkins responded on 13 January and a meeting was arranged for 18 January. {463}

HMRC’s internal note of the telephone meeting on 18 January 2021 shows that the business was discussed in detail, and records the following under the heading of “Due diligence”:

Under the heading “Conclusion/Credibility” the notes states:

Immediately following the meeting Officer Bannerman emailed Mr Jenkins as follows:

In cross-examination Mr Jenkins was asked whether he had read section 6 of Notice 726. He initially stated that: “I do not believe I looked at it in any depth, no.” However, once he had been taken to the section and questioned about the similarities between the “red flags” highlighted within that section and his own deals, he was again asked whether he had looked at the link when HMRC had sent it. He then replied: “no”.

When Mr Jenkins was asked why he had not looked at the information properly he replied that this was because:

On 26 February 2021 Officer Percival wrote to Sweetmotion to request a meeting. The letter stated: {505}

The letter noted that arrangements would be made for HMRC to be provided with certain records on a monthly basis. The letter also stated:

On 10 March Mr Jenkins emailed Officer Percival with the names and contact details of the four suppliers that he used. The email also states:

The remote meeting took place on 12 March 2021. The meeting discussed issues including due diligence, third-party payments and lack of written contracts. The recorded exchanges include:

At no stage of this conversation is it suggested to Mr Jenkins that the due diligence and other checks he is taking are inadequate. While he is, for example, asked about credit checks and written contracts there is no suggestion that they might be a good idea when he says that he does not do them.

Mr Jenkins presents as highly cooperative. He says he has read Notice 726 and has clearly given it some thought as he says it is “quite frightening”.

HMRC’s stated purpose is to “give people the knowledge of what to look out for and if they are currently caught up in a fraudulent chain then we can advise how to get out of it”.

Although in this conversation Mr Jenkins stated he had visited Peralto in cross-examination he admitted that he had not visited the principal place of business or met with the director. We find it more likely than not that he never visited the principal place of business or met with the director.

On 15 March 2021 HMRC wrote to Sweetmotion requesting information. A link was again provided to Public Notice 726 and Mr Jenkins was asked to confirm he understood the contents of the notice. On the same day Mr Jenkins responded with bank statements and the VAT return. On 7 April Mr Jenkins provided various invoices from Sweetmotion.

The earliest suggestion that Sweetmotion may have been involved in a fraudulent supply chain was on 12-13 May 2021. On 12 May 2021 Officer Percival wrote to Mr Jenkins:

Then on 13 May 2021Officer Percival wrote to Mr Jenkins:

On 20 May 2021 Officer Percival had a telephone meeting with Mr Jenkins. At that meeting, amongst other things, it was explained that CTAD and Peralto had made supplies after they were deregistered.

At no stage has HMRC ever sent a veto letter to Sweetmotion with regard to any off the four defaulting suppliers.

Sweetmotion ceased trading in April 2021, due to concerns with the letters being received from HMRC.

We disagree with HMRC who say that by not reading the information provided on 18 January 2020 this indicates Sweetmotion knew the transactions were connected with fraud. We consider the more plausible explanation is that Mr Jenkins mistakenly thought the due diligence he was doing was adequate.

HMRC rightly say that being supplied consecutively by four defaulting traders, who account for 100% of all supplies between them, is a strong indicator of contrivance. However, it does not follow that Sweetmotion was aware. Fraudsters can be manipulative and excel in gaining peoples’ confidence and trust. Mr Jenkins may as plausibly have falen victim to fraudsters who are capable of such orchestration. We do not consider it to be an indicator of knowledge in this case.

We agree it is commercially foolish to trade, essentially sequentially, with only four suppliers – so often having only one supplier at any time. In cross examination Mr Jenkins explained:

He also explained at the time he had a “PAYE job” and was looking to do things simply so that it could be combined with his employment, rather than introducing complications. We accept his explanation. While this suggests naivety by Mr Jenkins it is not an indication of fraud.

Likewise we do not consider the absence of written contracts between Sweetmotion and its suppliers or the lack of insurance indicators of Mr Jenkin’s knowledge of fraud. The importance of written contracts was reduced by the payments being made on delivery. Similarly, the lack of Mr Jenkin’s interest in insurance by his suppliers is explained by the back-to-back nature of the transactions, where Sweetmotion never took possession of the goods and only paid for them once they were delivered to its customers.

We consider that the email from STB saying it was recommended by CTADS was not an indicator of knowledge. This seems more to be an indicator of something going on that Mr Jenkins should have picked up on.

Similarly, we do not consider that Mr Jenkin’s comment that there were only 2-3 third party payments shows him trying to “deflect” HMRC: rather the comment shows a lack of attention and care to detail.

We accept that the rapid trading with Peralto and STB on the same day that Sweetmotion was approached could be an indicator of knowledge, potentially showing pre-planned trading. However such rapid trading is not in itself sufficient to show knowledge, it may just show foolhardiness.

We also take account of the unchallenged witness statement of Mr Gaffney that refers to Mr Jenkins as someone of high integrity and someone who would not knowingly proceed with anything if he thought it was incorrect, improper, or non-compliant.

Viewing all the evidence in the round, we find that Mr Jenkins did not know the transactions were connected with VAT fraud.

There are several factors that should have pointed Sweetmotion to realise that something untoward was going on. These include:

Further, if Mr Jenkins had properly applied his mind to due diligence information within his possession, he would have seen red flags, specifically:

These matters, viewed together, should have raised red flags that something serious was wrong. We accept they did not raise red flags for Mr Jenkins. The reasons for this are clear to us from an emotional account he gave towards the end of cross-examination on the second day of the hearing. He explained that he thought this would be a long-term business, which he could expand owning his own warehouses and start servicing smaller customers from them. He was excited. He had gone from being high up in a company, with lots of people working for him. He had his family and had become unwell. Business had stopped with the pandemic but he had seemed to find something. He thought of looking at other suppliers, one in Poland and one in Spain, but the suppliers he had made it easy, and he didn’t want to complicate things. He was consumed by hope for the possibilities of what could be. He thought the due diligence he had collected was sufficient. Not all customers accepted the prices he was offering the goods at, so he did not consider the prices too good to be true. We accept Mr Jenkins explanation that he did not know, he was blinded by the hope of being at the start of an exciting business opportunity that would change his life, but we consider from these factors he should have been aware that something was seriously wrong.

That is not sufficient for us to dismiss the appeal. HMRC accept that the known or should have known test relates specifically to VAT fraud.

This is an unusual case, because it is only well into the fraud that HMRC starts educating Mr Jenkins about missing trader fraud. On his own account Mr Jenkins was concerned about being defrauded financially – for example his explanation of wanting a written assurance from the directors to make third-party payments. However, initially he was not aware of VAT fraud.

We consider that in relation to any trades on or after 19 January 2021 Mr Jenkins should have been aware. By then he had the meeting on 18 January 2021, at which some of the hallmarks of missing trader fraud were explained. The note records that when HMRC explained one such hallmark was companies whose turnover increases greatly very quickly, Mr Jenkins interjected that’s what his business had done. HMRC also sent him the factsheet on How to spot missing trader VAT fraud and the Public Notice 726, referring him to section 6. While Public Notice 726 relates to “specified goods” (broadly certain electronic equipment, including phones and computers) and the goods Sweetmotion sold were not specified goods, we do not consider this significant, as he was referred to the section that concerns “how to make sure the integrity of your supply chain”, which is equally relevant to him. He was also referred to the factsheet on How to spot missing trader VAT fraud which is of general application.

We acknowledge that HMRC sent Sweetmotion no veto letters. We further acknowledge that despite Mr Jenkins telling HMRC who Sweetmotion’s suppliers were on 10 March 2021 HMRC did not raise any issues with the supply chain until 12-13 May 2021. This was despite regular contact (including meetings) in this period. Indeed, this contradicts the stated position of HMRC at the meetings as being there to help. For example, at the meeting on 12 March Officer Percival comments:

Similarly on 13 May 2021 he indicated that the purpose of his conversations was to:

Yet, despite knowing who Sweetmotion’s suppliers were, HMRC did not raise issues.

We find such conduct by HMRC troubling and inexplicable. The relevant officers have since left HMRC and so we did not have the benefit of an explanation from them. We can well understand that Mr Jenkins would be angry and upset that HMRC said nothing for so long. However that does not extricate Sweetmotion. The relevant question is still whether Sweetmotion should have known that the transactions were connected with VAT fraud. For the reasons given, we find they should have from 19 January 2021.

We accept HMRC’s inaction after Sweetmotion told HMRC the identity of its suppliers will have given Sweetmotion some comfort. Even so the pointers that something was wrong were so strong that, after they received education from HMRC in January 2021, Sweetmotion should have known the transactions were connected with fraud.

Also, we specifically place no weight on the fact that Sweetmotion did not redo due diligence. A taxpayer can expect HMRC to send veto letters. Indeed, even the officers who gave evidence conceded that the idea of doing monthly checks on VAT registration was unrealistic.

It follows that input tax is denied, but only in relation to transactions on or after 19 January 2021.

It is common ground that if the denial is upheld then the Company Penalty follows.

Given the very clear cooperation given by Sweetmotion and Mr Jenkins with HMRC we consider it proper to mitigate the penalty. Such cooperation is very clear to us looking at the chain of emails where meetings are arranged. Mr Jenkins was very keen to meet with HMRC. His behaviour in those meetings is forthcoming and cooperative.

In the circumstances we consider a 25% reduction of the penalty appropriate. HMRC will also need to recalculate the penalty so it only relates to transactions on or after 19 January 2021.

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.