Rashpal Singh Jabble v The Commissioners for HMRC

The appeal is allowed in respect of three deal chains – numbered 84 to 86 – in which Beer Bhai Cash and Carry Limited sold direct to Drinks Enterprises Limited. The appeal is otherwise dismissed. Pursuant to its power in paragraph 17(2)(b) of Schedule 24 to the Finance Act 2007, the tribunal reduces the amount payable by the appellant by such part of the total as relates to deal chains 84 to 86. We gave a summary decision on 10 October 2022. We now give our full decision at the appellant’s request. I apologise for how long it has taken to produce this full decision. It was requested on 24 October. I was unable to turn to it until after 9 December due to other tax decision writing up. Illness then intervened, after which writing up had to be fitted around non-tax judicial work.

This appeal is against a Personal Liability Notice issued to the appellant by HMRC pursuant to paragraph 19(1) of Schedule 24 to the Finance Act 2007 on 11 January 2018 in the sum of £383,446.63. It was issued following HMRC’s decision to deny input tax of £576,611.51 claimed by Drinks Enterprises Limited (“DEL”) of which the appellant is a director. 123 transactions are covered by the denial decisions. The transactions involve the purchase of alcohol by DEL in VAT periods 10/14, 01/15, 04/15 and 07/15. The Personal Liability Notice was based upon tax losses connected to those transactions, which took place from 1 August 2014 to 31 July 2015. DEL is now in liquidation.

The appellant had given four witness statements by the time this appeal started to be heard in January 2021. After the appeal had started to be heard, it was adjourned on 8 January 2021, on the appellant’s application, to allow for him to inspect documents held by DEL’s liquidator. The inspection was done at the liquidator’s premises. Following that, the appellant supplied further documents to the tribunal and respondents, and gave two further witness statements, making six in all. His witness Ms Manveer Bhatti also gave a witness statement. The appeal was originally relisted to resume on 23 August 2021. But it was postponed by consent and could not be relisted before 12 July 2022 due to a lack of mutually convenient dates. The parties preferred to keep the same panel despite the wait, rather than start afresh with a new panel and a sooner date.

The following background facts were undisputed.

DEL was incorporated at Companies House on 3 June 1997 under company number 3380566. DEL’s directors at incorporation were Kulvinder Singh Jabble and Harbhajan Singh Jabble.

DEL applied for VAT registration on or about 2 February 1998. The VAT1 form, completed by Kulvinder Singh Jabble (one of two directors at that time, the other being Harbhajan Singh Jabble), declared the main business activity to be “wine and beer distribution”, and estimated the value of the taxable supplies in the next 12 months to be £2 million. The application did not indicate any intention to trade with the EU. DEL’s principal place of business, according to the VAT1, was Lion House, A2 Bridge Road, Industrial Estate Bridge Road, Southall, Middlesex UB2 4AB. This address was subsequently changed to Lion House, North Hyde Wharf, Hayes Road, Southall, Middlesex, UB2 5NS. DEL’s registered address was the address of the company accountant, JSP Accounting, 1stFloor, 4-10 College Road, Harrow, HA1 1BE. The company was allocated quarterly returns and was, predominantly, a payment trader.

DEL was a family business and had been in existence since 1997. It was an alcohol wholesaler and a cash and carry. It had over 350 customers and approximately 200 suppliers. It routinely held stock valued in the region of over £1million. It stocked and supplied thousands of different goods lines, and mainly sold a full range of alcoholic and non-alcoholic drinks. In its 20 years of trading, DEL paid millions of pounds in VAT, corporation tax and other taxes. It traded from Lion House in Southall where it had a warehouse. DEL’s customers were retail shops, pubs, clubs and restaurants and these customers came to Lion House. DEL ran a typical cash and carry business but also sold to alcohol wholesalers (Footnote: ¹ ) . DEL’s warehouse staff inspected the stock held in the warehouse on a regular basis. New stock would be ordered when required. DEL sold and held in stock a wide range of goods.

Members of the extended Jabble family have been involved in running the business over the years.

The appellant’s father’s generation comprised—

The appellant’s father and his father’s five siblings came to United Kingdom in the 1960’s. The appellant’s eldest paternal uncle, Harbhajan, started the alcohol business with a shop in Slough, with his father (the appellant’s grandfather). The appellant supposed that, over the years, they decided to open up a wholesale business, at the end of the 70s, early 1980s, so far as the appellant could recall. In the UK recession at the beginning of the 1990s, the wholesale business that the family had created suffered financially, and the family had to start again.

DEL’s original two directors, Harbhajan Singh Jabble and Kulvinder Singh Jabble (one of the appellant’s cousins), resigned on 17 July 1997 and 30 September 2005 respectively.

As to the appellant’s own generation – that is, the offspring of the six siblings including his father – the appellant said that, off the top of his heard, there were nearly 30 children, maybe a bit more than that.

Prior to becoming directors of DEL, the appellant and Ravinder Jabble (another of the appellant’s cousins) worked for DEL in other capacities. The appellant started with DEL at around the age of 22, after university, as a van driver, picker and packer. He became a director of DEL on 8 April 2004. His cousin, Ravinder Jabble, became a director shortly after, on 3 June 2004 (Ravinder Jabble is the son of Harbhajan Jabble, who originally started the business).Ravinder Jabble worked alongside the appellant at DEL. Ravinder resigned as director on 1 October 2015.

Although the appellant and his cousin Ravinder Jabble were both directors of DEL, the parties differed as to the nature of Ravinder Jabble’s involvement in the day-to-day running of DEL. We return to this later. It was however undisputed that the appellant was the one who dealt with HMRC for DEL.

The appellant worked full time for DEL throughout the period for which he was a director of DEL (Footnote: ² ) .

The majority of the suppliers to DEL in the 123 deal chains were Gempost Limited (“Gempost”) and Just Beer Limited (“Just Beer”). At the times of the transactions in question, the appellant’s uncle Jagjit Singh Jabble was director of Gempost, and the appellant’s father Makhan Singh Jabble was director of Just Beer. We return later to the suppliers more generally.

Due diligence was outsourced by DEL to a company called The Due Diligence Exchange Limited (“The Due Diligence Exchange”), which provided reports. DEL’s contact for that at The Due Diligence Exchange was a Mr Mark Curley (Footnote: ³ ) . The Due Diligence Exchange also provided due diligence for Gempost, the appellant’s uncle’s company, and for Just Beer, the appellant’s father’s company. The appellant knew this. DEL engaged the services of tax specialist Vincent Curley and Co Ltd as tax adviser. Mr Vincent Curley’s specialist areas included MTIC and carousel fraud.

The trading environment in the alcohol industry became increasingly difficult as a result of the Alcohol Wholesale Registration Scheme, which went live in April 2017. In addition, DEL received a number of letters from HMRC, culminating in the issue of a Kittel assessment in November 2016. DEL was placed in liquidation on 5 April 2017.

In two instances, Jabble family businesses traded with each other despite there being personnel common to both businesses. In 2009, DEL made purchases of alcohol from Barrel Beers Limited (Footnote: ⁴ ) (“Barrel Beers”) at a time when Ravinder Jabble was a director of both Barrel Beers and DEL (Footnote: ⁵ ) . The appellant told the tribunal – and it appeared undisputed – that “Barrel Beers was provisionally opened for us to be able to sell to the on trade” (Footnote: ⁶ ) . The appellant was aware of Barrel Beers, and of his cousin’s role in it. DEL continued to trade with Barrel Beers after receiving a tax loss letter dated 26 May 2011, advising DEL of tax losses in excess of £82,000 relating to 26 purchases made by DEL from Barrel Beers in VAT period 07/09. The appellant himself adduced the invoices which showed those purchases, at pages 856 to 868 of his exhibits. There were 12 invoices in June 2012 (from 6 to 19 June) and one dated 29 August 2012.

In July 2013, DEL made purchases of alcohol from Red Dust (Australia) Limited, at a time when Red Dust was a deregistered trader (Footnote: ⁷ ) . That was another family company. Kulvinder Singh Jabble, one of the appellant’s cousins, was (and is) the director of that company. He was also a keyholder for DEL on 2 June 2011 (Footnote: ⁸ ) , and a letter from HMRC to DEL dated 12 March 2012 was addressed to Mr K Jabble (Footnote: ⁹ ) .

An overdraft facility was extended to DEL on 19 June 2013 (a month before the Red Dust transactions). The facility was supported by guarantees given by (among others) Kulvinder Singh Jabble (director of Red Dust) and by Barrel Beers (with whom DEL had traded at least in June to August 2012) (Footnote: ¹⁰ ) .

A family business called Keyrange Limited rented business premises at Unit A3 Bridge Road to DEL, and – shortly after DEL’s departure from those premises – to Phoenix Wholesalers Limited (“Phoenix”), a supplier to DEL in 23 of the deal chains in this appeal.

Another Jabble company was BKS Properties Limited, whose directors at the time were Baldip Kaur Jabble, Kiran Jabble and Sheetal Kaur Jabble. It was dissolved on 8 January 2019 (Footnote: ¹¹ ) .

The input tax denied related to 123 transactions, all involving DEL’s purchase of alcohol. In all but five of the 123 deal chains in which the transactions occurred, there was at least one supplier between the first trader in the chain and DEL. The 123 deal chains are set out in chronological order at Annex 1 to this decision. They are set out by category at Annex 2. Some chains comprised four traders, including the defaulting trader at the start and DEL at the end. Some comprised three, and some just two.

At the times of the 123 transactions, the appellant was living with his father.

The suppliers to DEL in the 123 transactions were as follows—

The three purchases by DEL direct from Beer Bhai came after four deals in which DEL had bought from Gempost who had bought from Beer Bhai, and after three deals in which DEL had bought from Just Beer who had bought from Beer Bhai. Beer Bhai was the only supplier, in the 123 deal chains the tribunal is considering, which went from supplying to DEL indirectly via Gempost or Just Beer, to supplying directly to DEL.

It was undisputed that each transaction in each deal chain was – in relation to supply down to and including to DEL – “back to back” in the sense that Ms Robinson used that phrase: (i) goods were bought and sold on the same day, (ii) the same quantity of goods was transacted at each step of the chain. The invoices for the steps down to and including supply to DEL were in evidence, and Ms Robinson had helpfully prepared a “deal log” setting out the dates and numbers of the invoices for each step in each chain. In 122 of the 123 deal chains, the dates of the invoices from DEL’s suppliers to DEL were the same as the dates of the invoices to DEL’s suppliers; and where there were four traders in the chain, even the date of the invoice of the first supplier to the second supplier matched the dates on the invoices from the second supplier to the third supplier, and from the third supplier to DEL. Although it was common ground that the goods in each chain were bought and sold on the same day within each chain, that was not quite shown for one of the chains: for deal chain 104 (07/15-18), the invoice from Phoenix to DEL was dated 21 July 2015 but the invoice from A K Suppliers Limited to Phoenix was dated the following day, 22 July 2015, as was the invoice from Lupt Utama Limited to A K Suppliers Limited (Footnote: ¹² ) (Footnote: ¹³ ) . Since it was undisputed that, within each chain, the same quantity of goods was transacted at each step of that chain, down to and including supply to DEL, we have not needed to set out the invoices which show that, but they were in evidence and we have looked at them all.

Ms Robinson submitted for HMRC that there were nine transactions with Just Beer, and four with Gempost, after HMRC had sent to DEL two tax loss letters in February 2015, saying that DEL’s transactions with Just Beer and with Gempost had traced back to a tax loss. We must be counting differently from HMRC because we counted 13 for Just Beer after the date of the 18 February 2015 Just Beer tax loss letter, and eight for Gempost after the date of the 19 February 2015 tax loss letter—

The defaulting trader in each of the 123 deal chains was as follows—

Ms Robinson gave a helpfully thorough description of the circumstances and activities of DEL’s suppliers. We have extracted from that the following briefer description of each of DEL’s suppliers in the 123 deal chains (Footnote: ¹⁴ ) . After the information about the direct suppliers to DEL, we will include information about other suppliers in the chains.

DEL bought from Aphrodite in two deal chains: chains 65 and 66. Aphrodite was incorporated under company number 09164737 on 6 August 2014. The company directors were Jay Pittman, Christian Picknell (also director of East Sussex Distribution Limited, one of the other traders in the deal chains in this appeal) and Davey John Geater. The sales classification code applied was 46390, non-specialised wholesale of food, beverages and tobacco.

Christian Picknell was appointed a director of Aphrodite on 1 September 2014.

Aphrodite applied for VAT registration on 7 August 2014. The VAT1 form declared the principal place of business as 12 Fullwood Avenue, Newhaven, East Sussex, BN9 9SP, and described the main business activity of the company as the “sale of beauty products”. The estimated turnover in the next 12 months was said to be £240,000. There was no indication on the application that the company intended to buy from or sell to the EU.

In Aphrodite’s period of VAT registration, Aphrodite traded solely in the wholesale of beers and wines.

Following investigations, HMRC on 4 March 2015 deregistered Aphrodite with effect from 5 February 2015. This was on the grounds that Aphrodite had not provided records of trading and that HMRC had reason to believe that an abuse of the VAT system was being perpetrated. (HMRC also deregistered another company of Mr Picknell’s, East Sussex Distribution Limited (“East Sussex”), the defaulting trader in 88 of the chains: 1 to 64, 67 to 76, and 110 to 123.)

DEL did not pay Aphrodite until DEL had been paid, which was after the goods had left DEL’s possession to the purchaser from DEL (Footnote: ¹⁵ ) .

As to when title was to pass in the two deal chains in which DEL purchased from Aphrodite (chains 65 and 66), Aphrodite’s invoice to DEL for both deals said—

DEL bought from Beer Bhai in three deal chains: chains 84 to 86. Beer Bhai was incorporated on 2 December 2013 under company number 8797913. At the date of incorporation, the company was known as SCD Sussex Ltd. The director at that time was Steven Pittman, 12 Fullwood Avenue, Newhaven, East Sussex BN9 9SP. That address was also the registered address of the company. The same address, 12 Fullwood Avenue, Newhaven, had previously been the principal place of business of Aphrodite, the defaulting trader in two of the deal chains in the present case (deal chains 65 and 66).

Beer Bhai applied for VAT registration on 13 December 2013. Mr Pittman submitted the form, and Beer Bhai was granted VAT registration with effect from 2 December 2013. The application for VAT registration declared the main business activity to be “distribution of wholesale goods”. The company was given the trade classification 46390 “Wholesale grocer”. The estimated turnover for the next 12 months was declared to be £500,000. There was no indication that the company would buy from or sell to the EU. Beer Bhai was allocated quarterly returns.

Beer Bhai’s registered office changed three times in just under two months: on 1 December 2014, it changed to 2 Warners Bridge Chase, Rochford, Essex, SS4 1JE; on 20 January 2015, it changed to The Toll House, Sutton Road, Cookham, Maidenhead, SL6 9RD; and on 28 January 2015, it changed to Apex Estate, Lower Eccleshill Road, Darwen, Lancashire, BB3 0RP.

On 17 March 2015, the company name changed from SCD Sussex Ltd to Beer Bhai Cash and Carry Limited. A letter of the same date was sent by Terence McGinley to HMRC notifying HMRC of the name change and of the change of address to Apex Estate.

For completeness, we record that the Beer Bhai invoices to DEL said nothing about title passing. They said only that “All stock is delivered or collected from our warehouse in Darwen & UK duty paid” (Footnote: ¹⁶ ) .

Gempost was incorporated on 6 May 1998. It was registered for VAT with effect from 5 June 2000. The application for VAT registration, submitted by Jaspal Singh Jabble, declared the main business activity to be “wholesalers of alcoholic related products” and estimated the value of taxable supplies in the next 12 months to be £1,000,000. Mr Jaspal Singh Jabble was director of the company from 11 June 1998 to 28 February 2005. On that date, he was replaced as director by Jagjit Singh Jabble (one of the appellant’s uncles), who resigned on 1 March 2016. Jagjit Singh Jabble also had day-to-day control over Just Beer, albeit he was not a director of Just Beer, and it was he who corresponded with HMRC on behalf of both Gempost and Just Beer. Gempost was initially based at Suite 45, The Mill House, Windmill Lane, Southall, UB2 4NL, before moving to Unit 50B (where Just Beer also moved to).

Gempost was a wholesaler of alcohol within the UK, all duty paid. Gempost had no means of storing alcoholic goods. Goods in respect of which it transacted were shipped directly from Gempost’s suppliers to its customers throughout its trading period. DEL’s final trade with Gempost was, of the deals shown to the tribunal, dated 31 March 2015 (04/15-18; see paragraph 45 above).

Gempost is now in liquidation. On 15 May 2017, a winding-up order was made on HMRC’s petition. A liquidator was appointed in May 2017.

As to when title was to pass in the deal chains in which DEL purchased from Gempost—

So, in the 31 deal chains in which DEL bought from Gempost, the invoices from Gempost to DEL and from East Sussex to Gempost all said in effect that title does not pass from the supplier until full payment is received. In four of the deal chains, although that text was on the invoices to DEL from Gempost, there was no text to that effect on the invoices from Beer Bhai to Gempost.

Just Beer was incorporated on 18 June 1998 under company number 03583127, a month after the incorporation of Gempost. An application to register Just Beer for VAT was signed on behalf of the company by Jaspal Singh Jabble on 26 June 1998. The application declared the principal place of business to be Suite 45, Windmill Place, 2/4 Windmill Lane, Hanewell, Middlesex, UB2 4NJ. The main business activity was declared to be “wholesalers/retailers of alcoholic drinks and related products”. The company declared its estimated turnover for the next 12 months to be £1,000,000. Jaspal Singh Jabble was the director of Just Beer from 18 June 1998 to 28 February 2005. Makhan Singh Jabble (the appellant’s father) was appointed as director on 28 February 2005 and resigned in March 2016. Markhan Singh Jabble and Jagjit Singh Jabble are brothers (two of the six siblings who came to the UK in the 1960s). Jagjit Singh Jabble dealt with HMRC on behalf of both Gempost and Just Beer, even though he was not a director of Just Beer. As with Gempost, Just Beer was initially based at Suite 45, The Mill House, Windmill Lane, Southall, UB2 4NL. However, Just Beer later moved to Suite 50B nearby (where Gempost also moved to).

Just Beer was a wholesaler of alcohol within the UK, all duty paid. Like Gempost, Just Beer had no means of storing the goods in which it transacted. So goods in respect of which it transacted were shipped directly from Just Beer’s suppliers to its customers throughout its trading period. DEL’s final trade with Just Beer was, of the deals shown to the tribunal, dated 31 March 2015 (04/15-19; see paragraph 45 above).

Just Beer is now in liquidation. On 27 March 2017, the court made a winding-up order on HMRC’s petition. A liquidator was appointed on 7 July 2017.

As to when title was to pass in the deal chains in which DEL purchased from Just Beer—

So, in the 64 deal chains in which DEL bought from Just Beer, the invoices from Just Beer to DEL and from East Sussex to Just Beer said with three exceptions that title does not pass from the supplier until full payment is received. In three of the 64 deal chains, although that text was on the invoices to DEL from Just Beer, there was no text to that effect on the invoices from Beer Bhai to Just Beer.

From the time of their VAT registration, Gempost and Just Beer each had a number of occasions of contact with HMRC, in a variety of ways. The contact included visits from HMRC. The contact also included so-called “tax loss letters” from HMRC: letters which informed each of Gempost and Just Beer of tax losses in deal chains in which they were involved. We have reproduced at Annex 3 the parts of Ms Robinson’s submission which described the circumstances and dealings of Gempost and Just Beer, and her submission that “Much about the trading activity and trading patterns of both Gempost and JBL strongly suggests that both were part of an organised scheme to defraud the Revenue”.

The appellant’s uncle, Jagjit Singh Jabble, was, at the time of the transactions involving Gempost (Footnote: ¹⁸ ) , director of Gempost. The appellant’s father, Makhan Singh Jabble, was, at the time of the transactions involving Just Beer (Footnote: ¹⁹ ) , director of Just Beer. The appellant accepted in oral evidence that it sounded right that his uncle and father assisted with each other’s companies, as the uncle and father had told HMRC (Footnote: ²⁰ ) . For some time, the premises from which Gempost and Just Beer traded were located upstairs from DEL’s office premises (Footnote: ²¹ ) .

There were no written agreements between Just Beer and DEL, or between Gempost and DEL, as to when legal title to the goods passed, or as to payment or delivery terms, returns or exchange (Footnote: ²² ) .

Phoenix was originally named “Eitmas Clothing Ltd” and was incorporated on 4 March 2010, under company number 07178000. The name of the company was changed to Phoenix Wholesalers Limited on 6 July 2010. From 11 May 2015, the principal place of business was Unit 1, Charlton House, Springfield Road, Hayes, Middlesex UB4 0LG. The director at the date of incorporation was Andrew Davis. He resigned as director the same day. On 29 June 2010, Mohameed Ali Zaheer was appointed director. On 15 April 2015, Mr Sukhdeep Singh Mason was appointed director. He resigned on 25 June 2015. Mr Mason was appointed again on 1 October 2015.

Phoenix applied for VAT registration on 26 March 2010. The form was signed by Felix Bamidele, the director on that date. The business activity was declared to be “import of clothing”. The estimated value of taxable supplies expected in the next 12 months was said to be £100,000. On 14 December 2011, Phoenix applied for a change of trade class from 46420 (wholesale of clothing and footwear) to 463412 (wholesale of alcoholic beverages).

Phoenix was compulsorily deregistered with effect from 12 February 2016, on the basis that it was using its VAT registration solely or principally for fraudulent purposes. On the same date, Phoenix’s input tax claims (totalling £351,352.60) were denied for periods 07/15 and 10/15 on the basis that the transactions on which those claims were based were connected with a fraudulent tax loss and that Phoenix knew or should have known of that fact. A further assessment in the sum of £1,295,133 was issued on 24 November 2016, with a related denial letter, in respect of additional transactions in VAT periods 10/15 and 01/16.

Phoenix was dissolved at Companies House on 24 May 2016, before an assessment raised on 24 November 2016 was issued. That assessment was withdrawn and the subsequent debt balance was written off.

As to when title was to pass in the 23 deal chains in which DEL purchased from Phoenix—

So, in all 23 deal chains in which DEL bought from Phoenix, the invoices apart from those purportedly from the trader at the top, Lupt Utama Limited (whose VRN had been hijacked), all said that property remains in the supplier until payment has been received in full.

A K Suppliers Limited (“A K Suppliers”) was originally incorporated under the name Aircondirect9 Limited on 13 April 2012, under company number SC421889. At the time of incorporation, the director was Zuber Karim, and the registered office was 13 Luke Place, Dundee, DD5 3BN. The standard industrial classification code (“SIC code”) given on the first annual return, submitted on 3 June 2013, was 47421, which relates to the retail of mobile ’phones. A K Suppliers applied on 21 August 2012 for VAT registration. The application gave the principal place of business as 13 Luke Place, Broughty Ferry, Dundee DD53BN. The description of the current and/or intended business was “Selling consumer electronics to retail and wholesale trade & import and export of consumer products”. The application declared the categorisation of the current and/or intended business to be “Wholesale of radio, television goods, electrical household appliances (other than of gramophone records, audio tapes, compact discs and video tapes and the equipment on which these are played) n.e.c. (main activity)” and “Retail sale of furniture, lighting equipment and other household articles (other than musical instruments) n.e.c., in specialised stores” (Footnote: ²⁶ ) . The estimated turnover for the next 12 months was given as £100,000. The estimated value of goods that the company expected to buy from the EU in the next 12 months was given as £60,000. The estimated value of sales that the company expected to make to the EU in the next 12 months was given as £40,000 (Footnote: ²⁷ ) .

There was a change of director on 20 June 2014 and, on 25 September 2014, a change of business name to A K Suppliers Limited. SIC code 46342 was notified on 4 July 2015 via the annual return. That code relates to the wholesale of wine, beer, spirits and other alcoholic beverages (Footnote: ²⁸ ) . On 6 July 2015, the original director, Zuber Karim, told HMRC that he had sold the company and that he no longer had anything to do with it. On 14 September 2015, HMRC officers left a seven-day letter at the company’s new premises in Crawley, stating that, if the business did not contact the officers within seven days, the business would be deregistered. On 22 September 2015, the director emailed HMRC asking them not to cancel the VAT registration. It was too late by then to cancel the deregistration but reinstatement was commenced and it appears must have been effected. HMRC wrote to the company on 22 March 2016 (Footnote: ²⁹ ) advising it that the company was using its VAT registration solely and principally for abusive purposes, and notifying the company that it was deregistered with effect from 22 March 2016. On 17 August 2016, a winding-up order was made in respect of A K Suppliers (Footnote: ³⁰ ) .

On 6 January 2017, a penalty assessment was raised against A K Suppliers in the sum of £288,812.86. The penalty was raised as a result of a “deliberate” inaccuracy under schedule 24 to the Finance Act 2007 (Footnote: ³¹ ) .

On 5 February 2017, a Personal Liability Notice was issued to Mr Aftab Khan (director of A K Suppliers), at Flat 5, 6 Spencer Road, South Croydon, CR2 7EH. The penalty owed was in the sum £288,812.86. No payment has been made against the Personal Liability Notice, and no appeal against it has been received (Footnote: ³² ) .

East Sussex was incorporated on 7 February 2014, under company number 8882370. Its registered office was 9A Kerrara Terrace, Whiteley Road, Eastbourne BN22 8NL, the director’s home address. The sole director and shareholder was Christian Picknell (Footnote: ³³ ) . On 10 February 2014, HMRC received an application for VAT registration. The VAT1 form was submitted by Mr Picknell, the director of East Sussex (Footnote: ³⁴ ) . The application described the business activity as “Distribution service for various goods” (but the company went on to make supplies of alcohol, the majority of which were not declared to HMRC). The VAT application also indicated that the company sought compulsory registration as the turnover would exceed the threshold in the next 30 days alone. The estimated turnover for the next 12 months was specified as £250,000, and the company indicated that it did not expect to be in a repayment position. The principal place of business was declared to be the director’s home address, 9A Kerrara Terrace. Mr Picknell was the only director of East Sussex from its incorporation. On 10 July 2014, HMRC received a VAT variation submission amending the principal place of business to Charter House, Courtlands Road, Eastbourne, BN22 8UY (Footnote: ³⁵ ) . East Sussex was deregistered for VAT with effect from 5 March 2015. Although returns had been submitted for periods 11/14 and 02/15, the liabilities on the returns remained outstanding and no records had been provided by the trader to support the amounts claimed on the returns.

HMRC raised assessments totalling £3,612,061, and imposed penalties on East Sussex in excess of £2.5 million. Those sums have since been written off.

On 8 July 2015, HMRC issued a Personal Liability Notice to Mr Picknell, the director of East Sussex, in the amount of £419,946.00 (relating to the 05/14 and 08/14 periods) (Footnote: ³⁶ ) . The basis for the penalty was that Mr Picknell was the sole director and controlling mind of the business and that he knew, when submitting the 05/14 and 08/14 returns, that those returns were false. The notice was issued on the basis of HMRC’s view that this was a deliberate and concealed act. Mr Picknell was held by HMRC personally liable for 100% of the penalty issued against East Sussex in these periods.

East Sussex was placed into liquidation on HMRC’s petition on 14 September 2015. The liquidators were appointed on 18 November 2015.

Lupt Utama Limited (“Lupt”) was incorporated under company number 07093874, on 3 December 2009. The application to register said the registered office was to be 27 Issigonis House, Cowley Road, Acton Vale, London W3 7UN. The sole shareholder and director was a British national named Lupt Utama whose address was the same as that of the proposed registered office (Footnote: ³⁷ ) . The company details remained unchanged until 2014. On 27 January 2015, Companies House received the Annual Return form AR01 dated 3 December 2014. That form indicated that a Mr Gironella had been appointed as an additional director. The accounts for the year ended 31 December 2014, approved by Mr Utama, showed that by that date the registered office address had changed to 923 Finchley Road, Golders Green, London NW11 7PE. That was the address of Joseph Kahan Associates, the accountants who prepared annual accounts for Lupt (Footnote: ³⁸ ) . The annual return dated 3 December 2015 showed that Mr Utama was again the sole director (Footnote: ³⁹ ) . In 2016, Companies House replaced the Annual Return form AR01 with a simplified document, the Confirmation Statement CS01. The CS01 does not name the company directors. The CS01 for Lupt, dated 3 December 2016, confirmed that Mr Utama was a person with significant control of Lupt (Footnote: ⁴⁰ ) . Forms AP01 (appointment of director) and TM01 (termination of director appointment), filed with Companies House in November and December 2014 and April 2015, indicated changes of director (Footnote: ⁴¹ ) . On 14 April 2015, Companies House received a form AD01 changing the registered office to 1A Varcoe Road, South Bermondsey, London SE16 3DG. A further form AD01 was received by Companies House the following day, 15 April 2015, changing the registered office back to 923 Finchley Road (Footnote: ⁴² ) .

Lupt was registered for VAT with effect from 1 October 2012. Its application for VAT registration, dated 16 December 2012, was in fact received by HMRC on 19 November 2012. The form was signed by Mr Utama. It declared the main trading activity to be costume design and supervision for the television and film industries. The principal place of business was 27 Issigonis House, which was also Mr Utama’s home address. The estimated turnover for the next 12 months was said to be £40,000. No trade with the EU was said to be anticipated (Footnote: ⁴³ ) . Mr Utama applied for Lupt to go on to the Flat Rate VAT scheme in October 2012. The application was granted on 10 December 2012 (Footnote: ⁴⁴ ) .

On 16 November 2015, Mr Utama emailed HMRC saying that Lupt’s VRN had been hijacked by fraudsters. He said that Lupt had supplied services as a costume designer to film companies and had never traded in alcohol. A dummy VRN 020 4823 61 was set up for the hijack trader the taxable person purporting to be (TPPTB) Lupt Utama Limited (Footnote: ⁴⁵ ) . Assessments were raised against the trader purporting to be Lupt Utama Limited. Among the sales invoices raised by the trader purporting to be Lupt Utama Limited were invoices to A K Suppliers, one of the suppliers in the deal chains in the present case. HMRC received various documents from A K Suppliers. Included were deal packs relating to 23 sales purportedly by Lupt to A K Suppliers which, in turn, sold the goods to Phoenix, who then sold the goods to DEL (Footnote: ⁴⁶ ) .

Tax losses totalling £3,686, 544.12 have been attributed to the VRN that was hijacked from Lupt.

There were regular (unannounced) visits by HMRC Customs International Trade and Excise (“CITEX”) officers to DEL’s premises over the years. HMRC officers would check the stock held in the warehouse against purchase invoices. One visit in June 2012 took place over four days. HMRC officers carried out supply chain checks to establish whether or not excise duty had been paid on goods held in the warehouse. Both Just Beer and Gempost had supplied DEL for some years. As the appellant points out, none of these visits by HMRC led to any goods being seized, duty assessments being made or penalties being issued.

HMRC sent various items of correspondence to DEL, in the form of letters and standard notices, as regards fraud.

On 12 February 2007, HMRC wrote to DEL saying (Footnote: ⁴⁷ ) —

Enclosed with HMRC’s 12 February 2007 letter was Notice 726 (Footnote: ⁴⁸ ) headed “Joint and several liability for unpaid VAT (VAT Notice 726)”. Its first line said—

The notice went on to say—

The list of “specified goods” in paragraph 1.4 of the notice comprised computers, telephones and other electronic equipment.

The notice later said (Footnote: ⁴⁹ ) —

The appellant was, in any event, “aware that there was a problem in the industry” (Footnote: ⁵⁰ ) .

DEL received VETO letters, informing it of the deregistration of a trading partner, on the following dates: 19 February 2007 (Mert Liquors Ltd) (Footnote: ⁵¹ ) ; 28 February 2011 (Lid UK Ltd) (Footnote: ⁵² ) ; 17 August 2011 (Dentile Ltd) (Footnote: ⁵³ ) ; and 15 November 2011 (Sharabi Ltd) (Footnote: ⁵⁴ ) .

On 1 September 2010, HMRC officers visited DEL at its premises, and met with the appellant only. Discussions took place with regard to customers, suppliers and due diligence. The appellant said he had engaged The Due Diligence Exchange to carry out due diligence in respect of all his suppliers and his largest customers, and that he carried out his own checks additional to their work. Following the visit, HMRC sent the appellant a letter dated 7 September 2010 summarising the outcome of the visit (Footnote: ⁵⁵ ) .

On 15 September 2011, HMRC officers visited DEL’s premises and met again with the appellant (Footnote: ⁵⁶ ) . The appellant said he was aware of MTIC fraud and had had contact with HMRC Bristol in the past. He said he believed he had read PN726. He said he had received VETO letters in the past, advising of the deregistration of businesses he had dealt with. The appellant provided cash receipts in respect of all monies paid to Gempost for June and July 2011. He stated that the goods were not sold “back to back”, in that a single lot purchased by DEL would then be split and sold on to a number of different customers. On the same day as that visit, one of the officers who had made that visit, Emma Bullivant, issued two documents: Notice PN726 and the “How to spot missing trader fraud” leaflet (Footnote: ⁵⁷ ) . The appellant told the officers on the visit that he conducted due diligence checks on new customers including a trade application form, background checks and credit checks.

On 16 September 2011, HMRC sent an MTIC awareness letter to DEL (Footnote: ⁵⁸ ) , advising that MTIC fraud was prevalent in the wholesale commodity sector, and of the levels of tax loss believed to accrue from such fraud. The letter advised the verification of new trading partners with the Wigan HMRC office. The letter also said—

On 12 March 2012, HMRC issued DEL with a further letter informing DEL of fraud within its sector, and directing the company to HMRC’s website for further information on MTIC fraud. The letter set out the requirement that companies provide HMRC with details of their trading on a monthly basis, and the need to verify the VAT status of new or potential customers and suppliers (Footnote: ⁵⁹ ) .

On 19 March 2012, HMRC officers visited DEL’s premises and spoke with the appellant. The appellant, having established that the officers were part of HMRC’s MTIC team and having established his rights, asked the officers to leave and to return when the appellant and his representative were present (Footnote: ⁶⁰ ) .

On 20 March 2012, Mr Curley, DEL’s representative, informed HMRC that a formal complaint had been made which alleged harassment and abuse of powers. On 28 March 2012, Officer Synnott replied to Mr Curley’s letter. None of the complaints was upheld (Footnote: ⁶¹ ) .

On 18 June 2012, HMRC officers from both the MTIC team and the CITEX team attended DEL’s premises, following a lack of a response to repeated requests to arrange a visit. The officers met the appellant and served on him a letter which explained that CITEX officers were present and would carry out a stock take. The appellant called his representative, Mr Curley, who advised that the ongoing complaints did not stop HMRC conducting an audit. The appellant then stated that he could not see the MTIC officer whilst CITEX continued to harass him. He provided a business card to the officers and asked that they email some dates. The appellant and the officers left the premises (Footnote: ⁶² ) . Dates were subsequently emailed to the appellant, as he had requested, on 26 June 2012. No reply was received (Footnote: ⁶³ ) .

On 24 July 2012, HMRC wrote to DEL, explaining that HMRC had been unable to verify the company’s VAT returns for periods 01/12 and 04/12. The letter said that it was therefore HMRC’s intention to issue an assessment in the sum of £1,533,927.93 in respect of those periods (Footnote: ⁶⁴ ) .

On 10 December 2012, HMRC Officer Cook wrote to DEL under the subject heading “VAT Fraud Alert: Alternative Banking Platforms” advising that those engaged in MTIC fraud sought to use alternative banking platforms to facilitate fraud or launder its proceeds (Footnote: ⁶⁵ ) . The letter went on to say (emphasis in original)—

On 27 June 2013, Officer Cole wrote to DEL and advised that he was now its control officer. The letter reminded DEL of the need to undertake due diligence and the requirement to verify the VAT status of customers and suppliers. The letter also proposed 30 July 2013 for Officer Cole to visit the company premises (Footnote: ⁶⁶ ) . DEL’s representative wrote to HMRC saying that the proposed date was not suitable. On 29 July 2013, Officer Cole wrote to Mr Curley suggesting three dates – 28, 29 or 30 August – for a visit to DEL. Mr Curley replied on 8 August 2013 saying—

By 11 September 2013, neither Mr Curley nor the appellant had made contact with Officer Cole (Footnote: ⁶⁸ ) .

On 11 September 2013, Officer Cole wrote to DEL advising that he had not heard from DEL regarding the rescheduled visit date, and requesting a number of purchase invoices relating to sales that DEL had made on various dates in 2012 and early 2013. The letter also requested “CMR/Freight Documents if the goods were purchased outside the UK”, “Payment Information” and “Due Diligence checks carried out” (Footnote: ⁶⁹ ) . Officer Cole sent a follow-up letter on 25 September 2013 asking for a further piece of information (Footnote: ⁷⁰ ) . Mr Curley replied on 23 September 2013—

On 12 November 2013, Officer Cole again requested the documentation which he had requested in his letter dated 11 September 2013 (Footnote: ⁷² ) .

On 20 November 2013, Mr Curley wrote to HMRC saying—

On 2 December 2013, Officer Cole responded to the request to confirm the purpose of his enquiries. He said the information was required as part of HMRC’s strategy to tackle MTIC fraud. He added that HMRC were undertaking a risk-based programme targeted at those believed to be trading in transaction chains associated with MTIC fraud. The letter also said that Officer Cole still required copies of the documents he had requested in his letters of 11 September and 12 November 2013 (Footnote: ⁷⁴ ) .

On 29 January 2014, Officer Cole issued to DEL a formal “Notice to produce documents and information” having not received the documents listed (Footnote: ⁷⁵ ) . Those were—

On 24 February 2014, Mr Curley wrote to HMRC having previously requested an extension of time 20 February 20145 to provide information. The letter said—

Correspondence continued between HMRC and DEL (via its representative). In a letter from Mr Curley dated 21 April 2014, DEL said there were fundamental flaws in the verification exercise and that HMRC’s “demands” were “quite frankly ludicrous”. The letter went on to say—

On 30 June 2014, in a separate letter from the tax loss letter of that date, Officer Cole made a further request for documents which had not been provided (Footnote: ⁷⁸ ) . He suggested that, if there had been difficulties tracing a purchase invoice in respect of any particular transaction, the company should send copies of the sales and purchase listings.

DEL also received from HMRC a number of so-called “tax loss letters”, advising DEL of tax losses in earlier chains which had been verified by HMRC—

HMRC officers visited DEL’s accountant’s premises on 15 July 2015. The company accountant informed the officers that the business was run from warehouse-type premises, with a large area set aside for stock and then office space on the first floor (Footnote: ⁹⁰ ) . The business employed approximately 40 staff at the time of the visit (Footnote: ⁹¹ ) . According to the accountant, all stock was stored at the principal place of business and none was held elsewhere. Payments for stock were made and received in cash, or by cheque or card. The director dealt with the cash from sales and banked it the following day (Footnote: ⁹² ) .

Records were provided for the period 04/15. Basic checks were conducted by the officers on site, with further checks conducted back at the officers’ office. They reviewed the sales invoices. It appeared that, on a monthly basis, hundreds of sales were made, mainly to retailers. The cash payment sheets indicated that payments made for the transactions subject to verification were often made in cash. The sales listings were provided separately on 23 July 2015 (Footnote: ⁹³ ) .

HMRC officers traced the supply chains from DEL to its suppliers, and from its suppliers’ to their suppliers, and so on. Not all of DEL’s sales could readily be matched with its purchases because a single purchased consignment would in some cases be split up and sold as separate lots (Footnote: ⁹⁴ ) .

On 10 September 2015, Officer Cole wrote to DEL informing DEL that he had traced 74 transactions in VAT periods 10/14, 01/15 and 04/15 to defaulting traders, with a total tax loss in excess of £289,148. The suppliers to DEL in those transactions were Just Beer (56) and Gempost (18) (Footnote: ⁹⁵ ) .

On 23 September 2015, Officer Cole wrote to DEL, informing it that he had traced a further four transactions in VAT periods 07/14 and 10/14 to a defaulting trader, with a tax loss in excess of £31,527.44. The supplier to DEL in those transactions was Horizon Traders Limited (Footnote: ⁹⁶ ) .

DEL’s representative responded, by letters dated 1 and 2 October 2015, to both of those September 2015 letters (Footnote: ⁹⁷ ) . The representative said that DEL had no knowledge or means of knowledge in respect of the tax losses, and that DEL would suspend trading with the identified suppliers.

On 16 October 2015, Officer Cole asked for copies of the due diligence performed on Gempost and Just Beer (Footnote: ⁹⁸ ) .

On 22 October 2015, Officer Cole issued another tax loss letter to DEL, informing it of two transactions in period 04/15 which had been traced to a tax loss in excess of £21,415.47. The supplier to DEL in those transactions was Aphrodite (Footnote: ⁹⁹ ) .

On 17 November 2015, Officer Cole notified the company that there was strong evidence of tax losses in DEL’s supply chains in VAT period 07/15 where goods had been supplied by Phoenix. He said that, while he had been unable as yet to quantify the loss, he estimated it to be £147,910 (Footnote: ¹⁰⁰ ) .

Further tax loss letters were issued to DEL in respect of transactions conducted in VAT periods 04/15: a letter dated 13 January 2016 related to three transactions with Beer Bhai (Footnote: ¹⁰¹ ) ; and a letter dated 5 February 2016 (Footnote: ¹⁰² ) related to four transactions with Gempost and to three with Just Beer. Further tax loss letters were issued to the company in respect of transactions conducted in VAT period 07/15: a letter dated 1 March 2016 related to 23 transactions with Phoenix (Footnote: ¹⁰³ ) ; a letter dated 22 April 2016 related to nine transactions with Gempost (Footnote: ¹⁰⁴ ) ; and a letter dated 23 May 2016 related to five transactions with Just Beer) (Footnote: ¹⁰⁵ ) .

On 23 March 2016, Officer Cole received from Vincent Curley & Co Ltd due diligence packs for suppliers Beer Bhai, Just Beer, Aphrodite, Barrel Beers, Gempost and Horizon Traders Limited (Footnote: ¹⁰⁶ ) .

By letter dated 25 April 2016, Officer Adair informed DEL that she had made a protective assessment under section 73 of the Value Added Tax Act 1994 in the sum of £806,653 (Footnote: ¹⁰⁷ ) .

By letter dated 29 July 2016, DEL replied to the various tax loss letters through its representative, Vincent Curley & Co Ltd. The letter said that DEL had no knowledge or information about the tax losses in its supply chains. The letter added that, so far as DEL was aware, the suppliers were bona fide businesses and that DEL’s due diligence checks confirmed this to be so (Footnote: ¹⁰⁸ ) .

On 25 August 2016, the Lanyard team visited DEL’s principal place of business and was unable to establish that the business was still operating. The team hand-delivered a seven-day deregistration letter (Footnote: ¹⁰⁹ ) . DEL was deregistered with effect from 8 September 2016 (Footnote: ¹¹⁰ ) .

By a letter dated 17 November 2016 (Footnote: ¹¹¹ ) , HMRC notified DEL of HMRC’s decision to deny DEL the right to deduct input tax in the sum of £576,611.52 claimed in accounting periods 10/14, 01/15, 04/15 and 07/15, in relation to the 123 transactions. The grounds for the decision were that those 123 transactions were connected with the fraudulent evasion of VAT and that DEL knew or should have known of that fact (the so-called “Kittel basis”: Axel Kittel v État belge (C-439/04), and État belge v Recolta Recycling SPRL (C-440/04), CJEU 6 July 2006).

On 14 December 2016, DEL requested a review of the decision to deny input tax deduction. On 21 February 2017, Officer Rickaby of HMRC informed DEL that the decision to deny input tax had been upheld on review.

In its notice of appeal dated 9 March 2017, DEL appealed against the 17 November 2016 decision.

DEL entered creditors’ voluntary liquidation on 5 April 2017.

By an email of 25 April 2017, DEL’s liquidator notified the First-tier Tribunal and HMRC of the liquidator’s withdrawal of the 9 March 2017 appeal. The assessed tax the subject of that appeal remained due from DEL under section 73(9) of the Valued Added Tax Act 1994 (“the VAT Act 1994”).

On 3 July 2017, HMRC wrote to DEL’s liquidator notifying it of HMRC’s intention to raise against DEL a penalty of £383,446.63 (Footnote: ¹¹² ) . The letter said, among other things, “The enclosed penalty explanation schedule tells you about the penalties that we intend to charge you and, how we have calculated them”. In fact that schedule was not part of Officer Cole’s original exhibits, but was supplied by consent to the tribunal during the hearing and given exhibit number PC101A.

That penalty explanation schedule said, top right—

Then, under the heading “Behaviour – the behaviour which led to the inaccuracy”, the schedule said—

Having explained why HMRC considered the disclosure to have been prompted, as well as how HMRC arrived at the amount of reduction for the quality of disclosure, and how the penalty was calculated, the penalty explanation schedule concluded (emphasis in original)—

By letter dated 4 September 2017, HMRC issued to DEL a penalty assessment in the sum of £383,446.63, under Schedule 24 to the Finance Act 2007. The penalty assessment was sent to the liquidator’s address (Footnote: ¹¹³ ) .

In that 4 September 2017 letter, HMRC indicated—

On 6 September 2017, HMRC issued a Personal Liability Notice – addressed at the top to the appellant – under paragraph 19(1) of Schedule 24 to the Finance Act 2007 (Footnote: ¹¹⁴ ) . The schedule it enclosed was a copy of the schedule in exhibit PC101A, which had been sent to DEL with the 3 July 2017 notification of penalty against DEL, and which said “knew or should have known” (Footnote: ¹¹⁵ ) . The 6 September 2017 notice explained that the appellant was personally liable for the penalty. Although addressed at the top to the appellant, this first Personal Liability Notice was sent to the liquidator’s address in error, and so, as HMRC accept, was not properly notified to the appellant.

On 10 October 2017, HMRC issued notification of the first Personal Liability Notice to DEL at the liquidator’s address (Footnote: ¹¹⁶ ) .

On 6 November 2017, the appellant made a protective appeal against that first Personal Liability Notice, in case it were to be alleged that the penalty had been notified to him. HMRC however, on 9 January 2018, notified the tribunal and the appellant that HMRC intended to withdraw from the appeal, owing to the deficiencies in service of the first Personal Liability Notice.

HMRC then issued, this time correctly as is common ground, the Personal Liability Notice dated 11 January 2018 addressed to the appellant (Footnote: ¹¹⁷ ) . That is the notice the subject of this appeal. The notice said—

The notice went on to explain “What you need to do now”, “How to pay” and “What to do if you disagree”.

That second Personal Liability Notice, dated 11 January 2018, was accompanied by a letter of the same date to the appellant. The letter said—

The appellant appealed. In amended grounds of appeal dated 18 June 2018, his representative, Mr Vincent Curley, said (page 18)—

Domestic law relating to input tax deduction is contained in the VAT Act 1994 and the Value Added Tax Regulations 1995. Section 4(1) of the VAT Act 1994 provides for VAT to be charged on any taxable supply of goods or services by a taxable person in the course or furtherance of any business carried on by him. Taxable person is defined in section 3. Section 24(1) defines input tax. Sections 25 and 26 provide for recovery of input tax. Section 26 and regulation 101 provide for input tax allowable and for attribution of it to taxable supplies. We need not set out those sections; no point turns on them.

Section 73(1) of the VAT Act 1994 provides—

The penalties in question were imposed under section 97(1)(a) of, and Schedule 24 to, the Finance Act 2007.

The penalty imposed on DEL was imposed under paragraph 1 of Schedule 24 to the Finance Act 2007. That paragraph 1 provided—

The penalty imposed on the appellant was imposed under paragraph 19(1) of Schedule 24 to the Finance Act 2007, which provided—

Paragraph 3 of Schedule 24 to the Finance Act 2007 provides for three degrees of culpability in relation to inaccuracies. Paragraph 4 of Schedule 24 sets out the penalty payable, by reference to whether the inaccuracy is deliberate but not concealed or deliberate and concealed. Paragraphs 9 and 10 of Schedule 24 provide for reductions in the penalty for disclosure. The amount of reduction depends on the quality of the disclosure. Paragraph 11 of Schedule 24 provides that, “If they think it right because of special circumstances, HMRC may reduce a penalty under paragraph 1, 1A or 2” and for that purpose, “reducing a penalty” includes a reference to staying it or agreeing a compromise in relation to proceedings for a penalty (paragraph 11(3)). Paragraph 13 of Schedule 24 deals with the procedure for assessment of penalties.

Paragraphs 15 and 16 of Schedule 24 to the Finance Act 2007 provide for the right and procedure to appeal against a decision that a penalty is payable and as to its quantum. An appeal is to be treated, in general, in the same way as an appeal against an assessment to the tax concerned—

The First-tier Tribunal’s jurisdiction in this appeal is in paragraph 17 of Schedule 24 to the Finance Act 2007, which provides—

There is plenty of case law describing how an MTIC fraud works. An oft-cited description is given in Christopher Clarke J’s judgment in Red 12 Trading Limited v the Commissioners for Her Majesty’s Revenue & Customs [2009] EWHC 2563 (Ch) (emphasis in original)—

Christopher Clarke J’s observations in Red 12 were approved by the Court of Appeal in Mobilx Ltd (in Administration) and others v The Commissioners for Her Majesty’s Revenue & Customs [2010] EWCA Civ 517. Judge Mosedale also helpfully set out the types of VAT fraud, and the key elements of an MTIC fraud, in CCA Distribution Ltd (In administration) v the Commissioners for Her Majesty’s Revenue and Customs [2020] UKFTT 00222 (TC) at paragraphs 7 to 64.

Taxpayers have a right to deduct input tax when certain objective criteria are met. But, in Axel Kittel v État belge (C-439/04), and État belge v Recolta Recycling SPRL (C-440/04), CJEU 6 July 2006. [2006] ECR 1-6161, the CJEU held that—

So, if a trader’s transaction is connected to a fraudulent tax loss, then the trader will lose the right to deduct input tax if it is established, on the basis of objective factors, that the trader knew or should have known that his transaction was connected to a fraudulent tax loss. The trader loses the right because the trader is considered a participant in the fraudulent evasion of VAT. The claim to recover the input tax is considered inaccurate because it falsely represents that the trader is entitled to recover the input tax in those circumstances.

A trader will not however lose the right to deduct input tax merely on account of having a suspicion that the transactions were connected to fraud. Nor will a trader lose the right to deduct where the trader merely knows or should have known that it is more likely than not that the transaction are connected to a fraud (Mobilx Ltd (in Administration) and others v The Commissioners for Her Majesty’s Revenue & Customs [2010] EWCA Civ 517, paragraphs 53 to 57). Only a trader who knew or should have known that its transaction was connected to fraud loses the right to deduct. As the Court of Appeal recognised in Mobilx, the principle of legal certainty requires that a trader should be able to know before entering a transaction whether or not the trader will be entitled to deduct input tax. Knowing that there is a risk that the transaction is connected to fraud does not provide a trader with that level of certainty.

In Fonecomp Limited v the Commissioners for Her Majesty’s Revenue and Customs [2015] EWCA Civ 39, the Court of Appeal considered what knowledge would bring the trader within the Kittel test. The Court of Appeal said—

In The Commissioners for Her Majesty’s Revenue and Customs v Pacific Computers Limited [2016] UKUT 350 (TCC), the Upper Tribunal summarised the way in which a finding that there is an overall scheme to defraud can feed into the question of knowledge—

The Upper Tribunal in Pacific went on to consider the submission that the orchestrator of such a fraud would be unwilling to relinquish any part of it to an unknowing or unwitting participant. Not least because of the risk of discovery. The Upper Tribunal commented on how the First-tier Tribunal had dealt with that argument—

In The Commissioners for Her Majesty’s Revenue and Customs v Brayfal Limited [2011] UKUT 99 (TCC), Lewison J discussed the First-tier Tribunal’s citation in Brayfal of what Christopher Clarke J had said in Red 12 Trading, where he had said—

By the time of the final hearing in the present case, the Supreme Court had given its judgment in Commissioners for Her Majesty’s Revenue and Customs v Tooth [2021] UKSC 17. The Supreme Court considered the meaning of “deliberate” in section 118(7) of the Taxes Management Act 1970, for the purposes of section 29 of that act. Section 29 provided, so far as relevant—

unless one of the two conditions mentioned below is fulfilled.

Section 118(7) of the Taxes Management Act 1970 provided—

In setting out its approach to the construction of sections 29 and 118, the Supreme Court in Tooth observed—

As to what is required by the “deliberate” limb in the first condition under section 29(4), construed in accordance with section 118(7), the Supreme Court in Tooth said—

The Supreme Court went on in Tooth to pose the following question, and provided its answer to that question—

So the question in Tooth for the purposes of section 29 of the Taxes Management Act was not whether a statement was deliberate but whether, when made, the statement was deliberately inaccurate. In fact, we derive that for present purposes from the face of paragraph 1(3) of Schedule 24 in any event; it refers to the inaccuracy being deliberate (our emphasis)—

By the time of the hearing, the appellant had accepted that all 123 transactions were connected with a fraudulent evasion of tax. Mr Farrell also raised the additional point that the appeal must be allowed without more because of the reference to “should have known” which he said formed part of the decision to impose on the appellant the Personal Liability Notice when in fact that part of the Kittel test was not relevant to this penalty.

Mr Farrell’s broad arguments for the appellant were that the tribunal should cancel the Personal Liability Notice for the following reasons—

Between the adjourned and final hearings of this appeal, the appellant inspected business records at the office of DEL’s liquidator. The appellant then adduced 269 further pages of material, including further due diligence reports for each of Phoenix, Just Beer and Gempost. Mr Farrell submitted that this material showed that Ravinder Jabble, the appellant’s cousin and fellow director, was heavily involved in running DEL, ordering stock, dealing specifically with the medium/small suppliers and customers, jointly signing business documentation, having responsibilities equal to those of the appellant, and jointly with the appellant dealing with banking issues. Mr Farrell pointed out that, as the appellant had noted in his sixth witness statement, Ravinder Jabble’s statement in the liquidation proceedings confirmed the division of roles and that Ravinder Jabble was responsible for ordering stock and sales and ensuring that there was sufficient stock in the warehouse.

As to the test used by Officer Cole, Ms Robinson argued for HMRC that the tribunal was not required to allow the appeal without more (a) because Officer Cole had not used the wrong test, but (b) even if he had, the tribunal’s jurisdiction was not limited as suggested for the appellant.

Ms Robinson confirmed that HMRC’s original position – that the tribunal could substitute careless for deliberate – was withdrawn by the time of the final hearing. She accepted that there is no provision permitting the tribunal to substitute a careless inaccuracy penalty for a deliberate inaccuracy penalty issued against a company officer.

Ms Robinson submitted that DEL’s transactions were carried out as part of an orchestrated scheme to defraud HMRC of VAT and that DEL, through the appellant as its controlling mind, knew or should have known of this fact. To prove this, HMRC did not point to any single piece of evidence that provides the conclusion that DEL knew or should have known that its transactions were connected with the fraudulent evasion of VAT. HMRC relied instead on the inferences that can be drawn from the evidence as a whole in relation to the company’s transactions. If the tribunal concludes that the “surrounding circumstances” of the company’s transactions include that they took place as part of an orchestrated fraud then, following Mobilx at paragraphs 82 and 83, the tribunal can, and Ms Robinson submitted it should, take that into account in determining whether DEL knew or should have known that its transactions were connected with the fraudulent evasion of VAT. She submitted that the tribunal is entitled to conclude that the more heavily orchestrated and efficient a fraudulent scheme is, the more likely it is that each party knew its role in that scheme. The facts of such a scheme in the individual case can give rise to the inference that DEL, through the appellant, knew its role in the scheme.

HMRC’s opening submissions had relied on “should have known” in the alternative to “knew”, but Ms Robinson clarified that, if DEL only should have known that the transactions were connected to a fraudulent tax loss, that would not suffice for the tribunal to affirm the Personal Liability Notice against the appellant. Issue 4 however remained framed, by agreement, as whether DEL knew or should have known that the transactions were connected to a fraudulent tax loss. If the tribunal were to find only that DEL should have known, it need not go on to answer the additional questions in the appeal.

Ms Robinson submitted that the same questions as were set out in Pacific Computers apply equally to the present case namely, (i) is the tribunal satisfied there is a high level of orchestration? (ii) if so, how was it managed so well? and (iii) would an orchestrator of a fraud involve an unknowing party, and why would it do so?

Ms Robinson argued for HMRC that the following matters, among others, were indicative of the transactions forming part of an orchestrated scheme to defraud HMRC—

Ms Robinson submitted that, in view of the above factors indicating an orchestrated scheme, the appellant knew that the transactions were connected to a fraudulent tax loss. In relation to transactions with Gempost and Just Beer, an additional factor contributing to an inference that the appellant knew that the transactions were connected to a fraudulent tax loss was, argued Ms Robinson, that those companies were run by the appellant’s uncle and father (respectively).

The following were common ground—

The issues therefore are—

The appellant gave six witness statements, dated 2 July 2019, 20 October 2020, 11 December 2020, 5 January 2021, 23 or 26 July 2021 and 27 January 2022. He also gave oral evidence. Throughout his witness statements and in oral evidence, he denied having knowledge or means of knowledge that the purchases were connected with fraudulent tax losses. We need not set out below each occurrence of the denial.

In his first witness statement (Footnote: ¹²¹ ) , the appellant explained the effect on him of the documents being with HMRC, or with the liquidator or with the liquidator’s solicitors, Teacher Stern—

In his first witness statement, the appellant described the different roles that he and his cousin, Ravinder Jabble, had within DEL—

As to the assessments and penalties, the appellant said in his first witness statement—

As to the traders in the deal chains, the appellant said in his first witness statement—

The appellant in his first witness statement responded generally about the purchases made by DEL—

As to knowledge of tax losses, the appellant said in his first witness statement—

As to a company called Keyrange Limited, the appellant said in his first witness statement—

As to when DEL stopped purchasing from suppliers in the deal chains, the appellant said in his first witness statement—

At paragraph 6.22iii of HMRC’s statement of case, HMRC had said “the Company continued to transact with both Just Beer Ltd and Gempost Ltd, despite having been advised by the Commissioners that there had been tax losses in earlier chains in which those companies had acted as suppliers”. The appellant responded, in his first witness statement—

In his second witness statement, the appellant reiterated that he and Ravinder had different roles within DEL, and that Ravinder was responsible for sales and purchases (paragraph 21). The appellant said that, in terms of purchasing stock, he only had dealings “with our larger suppliers such as Carlsberg, Peroni, Maximum and Confex” (paragraph 21). He said that HMRC “also failed to ask any basic questions about the Director’s [sic] roles in the Company (Ravinder was a Director on Companies House) and about who did what and who was responsible for what in the Company” (paragraph 61). The appellant pointed out that, in 19 years of trading, no seizures of goods were made, despite numerous visits from excise duty officers, nor were there any assessments for excise duty raised, or penalties imposed, or tax loss letters issued to DEL (paragraph 40). He reiterated the “very clear and distinct roles” that he and Ravinder had each had. In particular, Ravinder decided what to purchase, and who to purchase from (paragraph 46). “Ravinder would speak with these suppliers daily and he was their point of contact at the Company” (paragraph 47). He said that “If Ravinder had located a new supplier that he wanted to use, he would discuss this with me as one of my roles was to keep an eye on the finances, including credit control” (paragraph 48). The appellant said it was not correct to suggest that, when HMRC officers visited DEL, they never saw Ravinder. He said that the officers “saw Ravinder every time … but failed to ask who he was” (paragraph 61).

As to when he ceased purchasing from Gempost and Just Beer, the appellant said at paragraph 109 of his second witness statement—

As to “back to back” transactions, which the appellant had addressed in his first witness statement, he made the point in his second witness statement that DEL had numerous suppliers and that “If one supplier could only supply a portion of the goods required on time then the Company always had alternative suppliers to turn to” (paragraph 109(e)(vi)).

In his second witness statement, the appellant also made points about other matters. These included that absence of written contracts was not proof that he was aware of fraud, or that he had means of knowledge of fraud (paragraph 109(f)(ii)); points about criticisms of the due diligence (paragraph 109(g)); and points about the correspondence with HMRC and visits from HMRC. The points he made about the visits included that the visits were “extremely disruptive and, in my opinion, unreasonable”, that they took the appellant away from his work, and that the officers wore nametags and jackets “emblazoned with HMRC, this was very disturbing for customers in the warehouse at the time because they would believe it was a raid” (paragraph 115).

In his third witness statement, the appellant adduced a due diligence report for each of Gempost, Just Beer and Aphrodite, and he adduced two for Phoenix.

In his fourth witness statement, the appellant dealt further with tax loss warning letters. He said—

That fourth witness statement also described the appellant’s solicitor’s attempts to examine documents held by the liquidator.

The appellant’s fifth witness statement exhibited documents which he said showed, among other things, his cousin Ravinder’s involvement on the purchasing side of the business. The appellant also exhibited further due diligence materials for Phoenix dated 14 March 2021, for Just Beer dated 22 October 2012, and for Gempost dated 9 November 2012.

The appellant explained in the fifth witness statement about losing records, computers and documents on liquidation, and about reaccessing them—

The appellant went on in this fifth witness statement to explain what was shown by the various documents that he had exhibited. They included invoices, an advertisement, signatures, handwriting on typed documents, a letter, and an extract from a visitors’ book. The appellant explained that those documents showed that it was Ravinder who made the purchases from the small and medium-sized suppliers and who had signed to say that he was happy with goods delivered, and had compared an invoice against a purchase order. The appellant also exhibited banking documents. These showed, he said, that Ravinder and the appellant had both signed in their capacity as directors. The appellant exhibited Ravinder’s P60 and DEL’s payroll records. The appellant said that both the P60 and the payroll records showed that Ravinder was paid the same as the appellant, “as we were both the company directors with equal responsibility” (paragraph 12, commenting on pages 130 to 233, page 620).

The appellant’s sixth and final witness statement responded to Officer Cole’s witness statement dated 12 October 2021, which had included 108 exhibits. The exhibits included a letter dated 10 September 2015 signed by Ravinder Jabble, 106 due diligence letters to the appellant and one due diligence letter to Ravinder, and exhibit 108 contained witness statements made by members of the appellant’s family in relation to the investigation carried out by the insolvency practitioner. The appellant made the preliminary comment in this sixth witness statement that Officer Cole’s statement “does not specify why he has provided those exhibits, so I am unsure how to respond. He does not give any observation on the exhibits, so I don’t know to what extend [sic] these are relevant” (paragraph 3).

The appellant went on in his sixth statement to disagree with Ravinder’s assertion in a witness statement that Ravinder had left DEL due to the appellant’s character and because the appellant had belittled him (paragraph 5). The appellant also pointed out that Ravinder’s witness statement “confirms our clear division of roles. Ravinder confirms his roles were sales and in particular to ensure that the company had sufficient stock in the warehouse”. The appellant went on to reiterate that their roles were separate and that “Ravinder was responsible for sales and purchases in terms of dealing with customers and suppliers” while the appellant oversaw the accountant’s department, the credit department and all visits and communication with official bodies, liaised with the external accountants and dealt with DEL’s VAT and tax returns, the company finances and the operation of the bank accounts, and dealt with matters such as compliance requirements. The appellant went on to point out a variety of flaws and inaccuracies in Ravinder’s witness statement made for the insolvency proceedings. We do not set them out here; we were not invited by either party to look at Ravinder’s witness statement.

That then deals with the appellant’s written witness evidence. We turn next to his oral evidence. We will deal separately with the evidence from DEL’s former employee, Manveer Bhatti.

The appellant gave uncontested oral evidence as to the make-up of the Jabble family and as to how the business came to be set up. We have set that out under the background facts starting at paragraph 5 above.

As to the appellant’s relationships with his father and uncle, he told the tribunal that he had a typical father and son relationship. Typical in that it was “a typical Indian sort of father and son relationship”, it's “very patriarchal”. It was a given that he respected his father, along with all 16 of his elders; “it went unsaid”, he told us. And yes, the same for his uncle Jagjit, he explained.

The appellant told the tribunal he lived with his father at least as far back as 2010, right up until his father died (so throughout the period covered by the 123 transactions), and that he saw his father every day, and spoke to him every day (Footnote: ¹²² ) . As to the appellant’s contact with his uncle in 2012, 2013 and 2014, the appellant told the tribunal that he spoke to his uncle a couple of times a week (Footnote: ¹²³ ) . The appellant said that Gempost and Just Beer (whose directors were his uncle and father respectively) had offices attached to DEL’s warehouse (Footnote: ¹²⁴ ) , and that it sounded reasonable to say that they shared their office premises (Footnote: ¹²⁵ ) . The appellant did not agree or disagree with the proposition, originating from HMRC (Footnote: ¹²⁶ ) , that his uncle and father shared a desk: the appellant said: “I think they might have had separate offices, I can't remember exactly now” (Footnote: ¹²⁷ ) .

The appellant accepted in oral evidence that neither Gempost nor Just Beer had a warehouse facility. He accepted that that meant that the supplier to Gempost had to deliver goods direct to Gempost’s customer and that the supplier to Just Beer had to deliver direct to Just Beer’s customer. The appellant accepted that this happened with supply to DEL as a customer of Gempost and of Just Beer (Footnote: ¹²⁸ ) . He accepted also that on occasion he would have to go to Gempost’s suppliers, and to Just Beer’s suppliers, to collect the goods (Footnote: ¹²⁹ ) . Yet he said that, despite receiving delivery of goods from Gempost’s and Just Beer’s suppliers, he would “not necessarily” know who was delivering the goods. And he disagreed with the proposition that “in every single transaction, you, their customer, was automatically made aware of the identity of their supplier” (Footnote: ¹³⁰ ) .

In oral evidence, the appellant gave three examples of suppliers with whom DEL had standard written terms (produced by the suppliers): Molson Coors, Miller Brand and Carlsberg (Footnote: ¹³¹ ) . It was undisputed that DEL had no written terms with Gempost or Just Beer. He did however say that there was a term with each of Gempost and Just Beer that payment be made “as soon as possible” (Footnote: ¹³² ) , although he did not say that it was a written term. Asked whether there were written terms or conditions with each of Beer Bhai, Aphrodite and Phoenix, the appellant told the tribunal he could not remember (Footnote: ¹³³ ) .

The appellant was asked about the time it took DEL to pay Aphrodite, the supplier in two of the deal chains (Footnote: ¹³⁴ ) —

The appellant was also asked about payment to Phoenix (Footnote: ¹³⁵ ) —

In cross-examination, the appellant was asked what action he took after receiving the first set of tax loss letters relating to Just Beer and Gempost, dated 30 June and 2 July 2014 (Footnote: ¹³⁶ ) —

Ms Robinson cross-examining then asked the appellant what steps he took following receipt of the 1 October 2014 tax loss letter and the later tax loss letters (Footnote: ¹³⁷ ) —

The appellant was asked about a meeting with HMRC officers which took place on a visit to DEL on 1 September 2010. The record of that visit recorded that the appellant told HMRC, as to checks made by DEL—

The appellant was asked about that in cross-examination (Footnote: ¹³⁸ ) —

As to inserted traders in the deal chains, the appellant accepted in cross-examination that he “suppose[d]” he agreed with or had said “that more wholesalers in a supply chain eats into profit", taken from an HMRC report of a visit made on 1 September 2010 (Footnote: ¹³⁹ ) .

The appellant did not however accept that, on that 1 September 2010 visit, he had said that he “orders as per turnaround of stock” and that “RJ does not buy specifically for a customer’s order”, as Officer Cole had said in paragraph 9 of Officer Cole’s second witness statement (paragraph 235 below). This was the cross-examination of the appellant about that—

The appellant was cross-examined about whether he had seen the tax loss letters dated 26 May 2011 and 19 February 2014 about Barrel Beers and Red Dust respectively—

The appellant was asked about his written statement that he had had no involvement with Keyrange Limited (Footnote: ¹⁴² ) —

In re-examination, the appellant confirmed that, “very soon after” the time when DEL went into liquidation in April 2017, DEL lost possession of all its business records and documents, and all DEL’s computers. He explained that, when he and his solicitors went to inspect the documents at the liquidator’s office, they were not allowed to take any documents away or even use the liquidator’s photocopier, so he and his solicitors were taking photographs of the documents on their mobile ’phones. That was why the quality of the copies “wasn’t optimal” he said (Footnote: ¹⁴³ ) .

The appellant went on to confirm that all the due diligence records that he had been “referred to today” were “absolutely” kept “physically on the premises” of DEL. He told the tribunal that CITEX officers would visit DEL’s work premises “multiple times a year”. Asked “did those customs officers have access, and did they see the due diligence material?” he replied “Absolutely” (Footnote: ¹⁴⁴ ) . The exchange continued—

The re-examination of the appellant continued with questions about Mr Curley of The Due Diligence Exchange (Footnote: ¹⁴⁵ ) —

The appellant was then re-examined about enquiries to be made by DEL (Footnote: ¹⁴⁷ ) —

Asked in re-examination whether he was responsible for procuring stock from Aphrodite (for whom there are two transactions in this case), the appellant said it was Ravinder who procured the stock from Aphrodite. Asked “Is this the kind of supplier that Ravinder would, in fact, be responsible for?”, the appellant replied “Yes” (Footnote: ¹⁴⁸ ) .

In re-examination, the appellant was asked about his recollection regarding the Barrel Beers tax loss letter dated 26 May 2011 (Footnote: ¹⁴⁹ ) —

The appellant was asked in re-examination about the tax loss letter from HMRC dated 19 February 2014 about Red Dust, another Jabble family business. Asked whether he recalled that letter, the appellant replied “Not before this conversation took place yesterday or so”. Asked had he any recollection of those matters at all, he replied “Not -- a vague recollection, I have to be honest, but not -- not in any detail” (Footnote: ¹⁵⁰ ) .

The appellant confirmed that DEL moved from 2A Bridge Road Industrial Estate to its North Hyde Wharf address at the end of May or beginning of June 2011. He confirmed that Keyrange Limited (a Jabble family company) owned unit 2A and that North Hyde Wharf was owned by BKS Properties Limited, another Jabble family company (Footnote: ¹⁵¹ ) .

In relation to the cross-examination of the appellant in which he had been asked why DEL was trading with Barrel Beers because they were said to be competitors, the appellant said in re-examination that he did not see them as direct competitors to what he was doing. DEL was, he said, a cash and carry whereas Barrel Beers were purely wholesalers, and at that point DEL was doing around about 30% wholesaling if the appellant remembered correctly. He confirmed that the vast majority of his business, as Mr Farrell put it, was with restaurants, members of the public and off-licences (Footnote: ¹⁵² ) .

As to whether DEL had made all payments to Phoenix for the 23 deals with Phoenix in this case, the appellant said he had been unable to check the business records to see whether or not Phoenix had been paid. He had “nothing” he said, in terms of paperwork. He confirmed Mr Farrell’s suggestion that he did not have access to the bank account and that the liquidator took everything. Asked whether he knew whether the payments had been made, he replied that he would have endeavoured to pay them as far as he could remember, and that he could not think of any reason why he would not pay them (Footnote: ¹⁵³ ) .

As to DEL ceasing trading with Gempost and Just Beer after tax loss letters, the appellant was taken in re-examination to his witness statement dated 5 January 2012, his fourth statement. He confirmed that what he had said at paragraph 14 of that statement was true: that it was after receiving the two further tax loss letters, dated 18 and 19 February 2015, that he had decided no longer to trade with those companies, and not after the June letter which he had said in his earlier statement (Footnote: ¹⁵⁴ ) .

The appellant was asked to expand on paragraph 15 of that fourth witness statement, which said—

These were his reply and the follow-up questions—

At the request of the panel, Mr Farrell asked the appellant how his first witness statement came to say what he did at paragraph 91 (Footnote: ¹⁵⁵ ) . That was, that he was aware of Keyrange Limited, the company owned by his mother and two aunts, but knew no more about it than he had said in that paragraph and had had no involvement. The appellant replied “Being it is about 100 pages long, I think I have neglected to scrutinise each and every page. That's the most honest answer I can give” (Footnote: ¹⁵⁶ ) .

Mr Jabble further explained what he had meant in cross-examination in dealing with his evidence as to when he stopped trading with Gempost and Just Beer. He explained that he did not act earlier on the principle that he had mentioned in his first witness statement – that as a responsible company director he would ensure that goods did not continue to be sourced from the suppliers mentioned in the tax loss letters – because it was the amended volume of tax loss letters that caused the change. (Footnote: ¹⁵⁷ )

Ms Bhatti gave a witness statement dated 28 October 2020. She explained that she had been employed by DEL from July 2008 until DEL’s liquidation in 2017. She said her role was Office & Accounts Manager. She said her duties involved overlooking all office duties on a daily basis, such as payments to suppliers, purchase orders, human resources and assisting the directors. She said her accounts/cashier responsibilities included handling cash, analysing invoice/expense reports and recording entries, verifying supplier accounts by reconciling monthly statements and related transactions and liaising with The Due Diligence Exchange. As to the roles of the two directors, the appellant and Ravinder Jabble, Ms Bhatti said—

Ms Bhatti confirmed in examination-in-chief that “Rashpal was in charge of accounts and Ravinder was in charge of purchase [sic]. So he would do the sales” (Footnote: ¹⁵⁸ ) .

In cross-examination, Ms Bhatti explained that her role at DEL had changed over her time with DEL. She had started off as a receptionist, which she remained for about three years, she thought, before becoming office and accounts manager (Footnote: ¹⁵⁹ ) . She was full time in both roles. She had her own office at the Unit 2A address and did not share her office with anyone (Footnote: ¹⁶⁰ ) . She said that the appellant “was in the office, like, behind me” (Footnote: ¹⁶¹ ) , that Ravinder had an office in front of her, and that there was a window so she could see when he was in (Footnote: ¹⁶² ) . Because he was dealing with sales, he was right at the front (Footnote: ¹⁶³ ) . He would pass purchase orders onto her to type up, that is to say, put them on SAGE, the electronic accounting system (Footnote: ¹⁶⁴ ) . Once Ms Bhatti had raised the purchase order, she would pass it on to a few people, including Raj or Bupinder (Footnote: ¹⁶⁵ ) . She was not involved after that except to make payments or bank transfers, and she would work alongside the appellant to make sure the payments were made (Footnote: ¹⁶⁶ ) .

Ms Bhatti was asked about cash payments (Footnote: ¹⁶⁷ ) —

Asked about DEL’s next address, North Hyde Wharf, Ms Bhatti explained that again she had her own office, that it was upstairs “Because accounts was upstairs, sales was downstairs” and that “Ravinder was based downstairs, Rashpal was upstairs”. Ms Bhatti said the appellant worked full time for DEL, Monday to Friday. She did not know “exactly what companies or who he’d deal with”, but he came in daily and would come upstairs as well. She agreed that the appellant dealt with the company finances.

Ms Bhatti was asked in cross-examination about other aspects of the business that the appellant dealt with (Footnote: ¹⁶⁸ ) —

Asked by Ms Robinson “Were there any other companies based at either of the two office premises?” (Unit 2A and North Hyde Wharf), Ms Bhatti replied “no” (Footnote: ¹⁶⁹ ) .

Ms Bhatti was asked about Kulvinder Singh Jabble, one of the appellant’s cousins (Footnote: ¹⁷⁰ ) —

Ms Bhatti was briefly re-examined by Mr Farrell (Footnote: ¹⁷¹ ) —

That concluded the evidence for the appellant.

There were five witness statements from HMRC officer, Paul Cole. There were also witness statements from officers David Reynolds (dealing with Gempost and Just Beer), James Borland (dealing with Aphrodite), Ruth Povey (dealing with Beer Bhai), Mathew Bycroft (Lupt), Susan Bradstock (East Sussex) and Pankaj Mandalia (Phoenix).

In relation to the roles of DEL’s directors, that is, the appellant and Ravinder Jabble, Officer Cole’s second witness statement, dated 1 August 2019, said (Footnote: ¹⁷² ) —

In relation to Officer Cole’s decision-making, Mr Farrell cross-examining first took Officer Cole through the penalty notice that Officer Cole had issued against DEL on 3 July 2017 (exhibit PC101 (Footnote: ¹⁷³ ) ) and to the schedule which accompanied that penalty notice, exhibit PC101A. That schedule had said, next to “Description of the inaccuracy”—

As to whether what Officer Cole had done for the DEL penalty was to decide that there had been deliberate conduct by reference to the Kittel test, the cross-examination of Officer Cole continued—

Officer Cole was asked in cross-examination about paragraphs 256 to 259 of his statement—

Some of HMRC’s other witnesses gave oral evidence—

The following analysis is premised on our judgment that the asserted failures to do adequate due diligence are not relevant so far as relied on by HMRC to show that DEL should have known, because – as we explain below – we find that DEL did know, via the appellant.

Mr Farrell submitted for the appellant that, although Officer Cole in evidence attempted to change the position set out in paragraphs 256 to 259 of his witness statement, that position was confirmed by the contemporaneous documents. The NPPS100(S) Form Penalty Explanation – schedule 1 (exhibit PC101A) issued by Officer Cole repeated, said Mr Farrell, the Kittel test under the “Description of Inaccuracy” section and characterised this as deliberate in the “details” box below. Officer Cole’s completion of that form in that way was in sharp contrast, said Mr Farrell, to the NPPS100(S) Form Penalty Explanation–schedule 1 completed to record the decision to issue a Personal Liability Notice to Aftab Khan of another company, A K Suppliers (see paragraph 66 above). That completed form correctly recorded, said Mr Farrell, a decision of deliberate conduct as follows: that “All of your alcohol stock was traced to missing or defaulting suppliers. You sold this stock for a profit of 5p a case regardless of the product sold or the customer you sold it to. The whole character and circumstance of these transactions demonstrate that the supply chain was contrived and that you knew they were connected to fraud ” (Mr Farrell’s emphasis). Mr Farrell invited the tribunal to conclude therefore that Officer Cole had misdirected himself and applied the wrong legal test when making his decision to issue the Personal Liability Notice to the appellant.

Ms Robinson submitted for HMRC that there is no requirement to set out in the notice of intention to charge a penalty, or in the explanation schedule, or in the penalty assessment or in the Personal Liability Notice that a deliberate (but not concealed) inaccuracy occurs when a person gives HMRC a document that the person knows contains an inaccuracy. However, Ms Robinson accepted that there is guidance to that effect in the factsheet to which reference is made within the Personal Liability Notice. Ms Robinson submitted that there is nothing, therefore, in the documents issued either to DEL (c/o the liquidator) or to the appellant to support a contention that Officer Cole applied the wrong test. She submitted that Officer Cole had made clear that, in the context of a Kittel denial, the allegation brought by HMRC is routinely set out in terms of “knew or should have known”, regardless of whether the decision maker takes the view that the trader knew or that the trader should have known. A Kittel case is invariably brought on the “knew or should have known” alternate basis, she said. Ms Robinson submitted that there is simply no evidence that Officer Cole in fact issued the penalty, or the Personal Liability Notice, on an erroneous basis. She pointed out that, in his oral evidence, Officer Cole stated that the Kittel letter (17 November 2016) had been issued to DEL in standard form, pleading the Kittel test as the basis for the denial of DEL’s right to deduct input tax in respect of the transactions set out in that letter. He had said in evidence that the decision to issue a penalty against the company was a separate, and further step. Ms Robinson submitted that Officer Cole’s oral evidence showed that, in imposing a penalty for deliberate behaviour, he had reached a conclusion that the appellant knew that the VAT returns contained inaccuracies.

As Mr Farrell pointed out, the penalty explanation schedule issued to DEL, exhibit PC101A, had said, next to “Description of the inaccuracy”—

The penalty explanation schedule had however gone on to say, next to “Behaviour – the behaviour which led to the inaccuracy”—

We accept Ms Robinson’s general observation that the same factors which support a Kittel denial in respect of input tax claimed by a company may well also support the imposition of a penalty on the company for a deliberate inaccuracy. In a Kittel denial, HMRC need be satisfied only that the trader knew or should have known of the connection to fraudulent tax loss. But the evidence underpinning such a decision might support a finding of actual knowledge on the company’s part, even though the Kittel wording does not require HMRC to specify which. In such a case, the same evidence may well support the imposition of a penalty for a deliberate inaccuracy.

We accept Ms Robinson’s submission that the appellant is not assisted on this issue by the fact that the passage at the top right of the penalty explanation schedule sets out the Kittel test. It was common ground that the completed explanation schedule sent to DEL had also been supplied with the wrongly served Personal Liability Notice dated 6 September 2017. It seemed also to be common ground that – as the second, correctly served, Personal Liability Notice told the appellant – that one too enclosed the same completed penalty explanation schedule (exhibit PC101A, our emphasis)—

Even if the completed penalty explanation schedule were taken to mean that the penalty was imposed on a “knew or should have known” basis, because of the passage at its top that referred to that phrase, that completed explanation schedule was about the penalty charged to “the trader”. The trader was DEL, not the appellant. The explanation schedule was supplied to the appellant with his own Personal Liability Notice because it explained the penalty assessment on the company, which in turn was the backdrop to the Personal Liability Notice to the appellant. That is clear from the passage cited at paragraph 246 above.

We do however accept that what the decision maker Officer Cole said in his witness statement – as opposed to in the penalty explanation schedule – suggested at paragraphs 256 to 259 that he had found only that the appellant knew or should have known that the transactions were connected to a fraudulent tax loss. That was not a finding that the appellant only should have known. But nor was it a clear finding that he knew. Officer Cole did change his position in oral evidence; he said that knowledge was indeed the basis of his decision to issue the Personal Liability Notice to the appellant. If the decision maker had – from all the evidence – made a decision based only on a finding that the appellant should have known (which it was common ground is not the test), it might be said that the decision to issue the Personal Liability Notice had no lawful basis. But it was neither Officer Cole’s oral evidence, nor his written evidence, that he had found only that the appellant should have known. In any event, we accept Ms Robinson’s submission as to the effect on the case even if the decision maker did apply the wrong test. We turn to that under issue 2 below. Given our judgment on issue 2, we need not attempt to reconcile Officer Cole’s written evidence with his oral evidence, nor consider to what extent his recall might have been helped by hearing opening submissions, nor decide which of his oral and written evidence is the true position.

No, the tribunal is not required to cancel the decision and allow the appeal without more if the decision maker did apply the wrong test. We say that for the following reasons.

Mr Farrell argued that, if the decision maker did apply the wrong legal test, it follows that the Personal Liability Notice should be cancelled. He argued that this is because, in these circumstances, the tribunal has no power – under paragraph 17(1) of Schedule 24 to the Finance Act 2007 – to put itself in Officer Cole’s shoes and remake the decision applying the correct legal test.

Ms Robinson argued for HMRC that the tribunal's jurisdiction under paragraph 17(1) of Schedule 24 is not merely supervisory but is “full appellate”. She said there appeared to be no dispute that the tribunal’s jurisdiction under paragraph 17(1) is appellate, and that that means that the tribunal has the power to consider evidence and remake the decision, “ and could reverse findings of fact made by the commissioners ” (as the Court of Appeal said in John Dee Limited v Commissioners of Customs and Excise[1995] EWCA Civ 62,[1995] STC 941, [1995] STC 265).

We are not sure Mr Farrell would agree that the paragraph 17(1) jurisdiction is appellate as opposed to supervisory (supervisory in the sense of considering only what was before the decision maker when the decision was made). But in any event, we accept Ms Robinson’s submission for HMRC that, in exercising the power in paragraph 17(1) of Schedule 24 to the Finance Act 2007 to affirm HMRC’s decision, the tribunal need not adopt each and every aspect of the decision maker’s reasoning. We say that for the following reasons—

Yes. By the time of the final hearing, the appellant had conceded that all 123 transactions were connected to fraudulent tax losses. We accept that concession, in view of the wealth of evidence supplied in relation to the transactions, and to the traders, throughout each of the 123 deal chains.

Yes, we find that DEL knew that at least 120 of the 123 transactions were connected to a fraudulent tax loss.

We do not so find in relation to deal chains 84 to 86. Moreover – given that we are looking at the appellant’s liability, which requires his knowledge – we need not and do not consider whether DEL should have known in respect of those deal chains. We bear in mind that this is not DEL’s appeal, nor Ravinder’s. Neither of them was able to make representations about what knowledge each had. To the extent that we need not make findings, we prefer not to do so.

It became common ground that if DEL only “should have known” that the transactions were connected with a fraudulent tax loss, that would not suffice for the inaccuracies in DEL’s returns to be deliberate (issue 5).

As was common ground, if either the appellant or his fellow director Ravinder Jabble knew, then that means that DEL knew, rather than merely should have known, given those directors’ positions in DEL. In this section we are looking at factors which showed DEL’s knowledge. But there is inevitably some overlap between factors that showed DEL’s knowledge (and which showed a significantly orchestrated scheme) and factors which showed the appellant’s knowledge. So we will under later sections of the decision point back to some of the factors that we include here.

We accept the undisputed facts in the factual background set out at paragraphs 5 to 135 above.

The reasons for which we find – against the factual background at paragraphs 5 to 135 above – that DEL knew that at least 120 of the transactions were connected with a fraudulent tax loss are as follows (Footnote: ¹⁸² ) —

Ms Robinson advanced for HMRC the following as the relevant questions: (1) is the tribunal satisfied there is a high level of orchestration? (2) if so, how was it managed so well? and (3) would an orchestrator of a fraud involve an unknowing party, and if so why?

We find that at least the 120 transactions that were not direct with Beer Bhai were part of an orchestrated scheme. We do not say whether it was “highly orchestrated” because “highly” can mean different things. We do however find that the level of orchestration was significant.

Our reasons for finding that at least those 120 transactions were part of an orchestrated scheme in which the level of orchestration was significant, are as follows—

That was our list of reasons for our findings as to orchestration. We now take each reason in turn.

First, as we found at paragraphs 28 and 258 above, the transactions were back to back (as was not disputed) in the sense used by Ms Robinson, that is to say: (i) goods were bought and sold on the same day (with one exception, not taken by either party), and (ii) the same quantity of goods was transacted at each step of the chain.

The one exception is that, as mentioned at paragraph 28 above, for deal chain 104 (07/15-18), the invoice from Phoenix to DEL was dated one day earlier (21 July 2015) than the invoices higher up the chain from each supplier to the next (Lupt to A K Suppliers: 22 July 2015; A K Suppliers to Phoenix: 22 July 2015 (Footnote: ¹⁸³ ) ). That exception does not in our judgment detract from HMRC’s point that the goods were sold on the same day, being just one day’s difference. If significant at all, it would be so in that it shows that DEL’s supplier Phoenix was invoicing DEL the day before Phoenix was invoiced by A K Suppliers. So, on paper, Phoenix was selling to DEL before Phoenix had even bought the goods from A K Suppliers, and before A K Suppliers had bought the goods from the trader purporting to be Lupt. This is further evidence of orchestration in our judgment.

Our second reason for our orchestration findings is that there was significant consistency in the supply chains. With nine exceptions, when DEL purchased from a particular supplier, that supplier had always sourced that supply from the same supplier, the supplier to DEL’s supplier had equally always sourced that supply from the same supplier and, where there were four participants in the deal chain, the second trader in the chain always sourced that supply from the same ultimate supplier at the top of the chain. For that to happen could not be mere coincidence every time. We infer that there must have been communication between the traders in the chain as to how much to supply, when and to whom. (The exceptions were these: in deal chains 77, 79, 80 and 82, Gempost bought from Beer Bhai instead of from East Sussex; in deal chains 78, 81 and 83, Just Beer bought from Beer Bhai instead of from East Sussex; and deal chains 65 and 66 involved just Aphrodite and DEL. Aphrodite was the fraudulent defaulting trader in those two chains.)

Our third reason for our orchestration findings is that there were no terms and conditions as to time of payment (except as to payment to Just Beer and to Gempost), and no long-stop payment date with Just Beer and with Gempost.

We find, based on the appellant’s own oral evidence, that DEL had no written terms with Gempost or Just Beer. The appellant did however say in oral evidence that there was a term with each of Gempost and Just Beer that payment be made “as soon as possible” (Footnote: ¹⁸⁴ ) , although he did not say that it was a written term. Asked whether there were written terms or conditions with each of Beer Bhai, Aphrodite and Phoenix, the appellant told the tribunal he could not remember (Footnote: ¹⁸⁵ ) . We find that there were – as to time of payment – no formal terms or conditions with each of Beer Bhai, Aphrodite and Phoenix – whether formal in the sense of written, or formal in the sense of mutually understood from a course of dealings or from oral discussions.

As to the effect of those findings: we accept Mr Farrell’s submission for the appellant that the absence of written terms and conditions is not necessarily significant given that the five suppliers to DEL in this case were not as big as, for example, Carlsberg or Molson Coors. We would not necessarily expect to see a formal written contract for the five suppliers to DEL in this case. We would however expect suppliers in a genuinely commercial and non-fraudulent supply chain to have an understanding between supplier and recipient as to when payment is required to be made. First, without a reliable common understanding of when payment must at the latest arrive, there will be difficulties for the supplier both in terms of internal decisions about when that money will be available to spend, and in terms of any representations needing to be made to banks or others as to when payment must at the latest arrive. Moreover, although we accept that payment to Gempost and to Just Beer was understood to be due “as soon as possible”, that does not alter the fact that there was according to the appellant no long-stop date by which payment was due from Gempost and from Just Beer, on which a genuine supplier would need to rely as we have said. Second, as Ms Robinson pointed out, regardless of the provision on invoices as to the supplier retaining title until payment (see below), by the time DEL were to be in default of payment (whatever date that might be given the lack of provision as to date of payment) it would be too late for DEL’s supplier to get the goods back; the goods would have been consumed by the ultimate customer. These are not aspects of a genuine commercial supply chain, at least for the amounts involved in the present case.

As Ms Robinson said, the business model in operation in these transactions was uncommercial, vested all the risk in traders further up the chains, yet created no risk whatsoever for DEL. An obvious reason that the traders further up the chain would not mind this is that they knew that the transactions would be honoured because the transactions were part of an orchestrated scheme. We accept that those traders must have known that, in these circumstances.

Our fourth reason for our orchestration findings is that, with three exceptions, the suppliers’ invoices at each step of each chain said that title did not pass until payment was received. The three exceptions were (i) supplies from Beer Bhai to Gempost and to Just Beer, (ii) two invoices from East Sussex to Just Beer, and (iii) one invoice from Just Beer to DEL. The purchase invoices from DEL did not carry any provision as to title passing either. And yet payment was not required to be received – from DEL at least – prior to the goods arriving with DEL or by any particular date at all. The appellant’s failure to identify any specific written terms and conditions in DEL’s dealings means, and we find, that there was no contractual provision in DEL’s purchases as to whether the supplier to DEL would or would not carry the risk of loss. This mattered – or would matter in a genuinely commercial transaction – because DEL was not required to pay prior to receipt of the goods and yet the supplier’s title remained in the goods until payment. The supplier had no control over the goods and so could no longer keep them safe, yet was still the owner if DEL were to lose them. The values of the transactions were in the tens of thousands, too high for this not to matter.

Ms Robinson’s point about lack of provision for payment applies similarly in relation to the lack of provision as to risk. An obvious reason that the traders further up the chain would not mind this is that they knew that the transactions would be honoured because the transactions were part of an orchestrated scheme. We found at paragraph 270 above that they must have known that.

Our fifth reason for our orchestration findings is that, the more suppliers in the chain, the less profit was to be made. There was no commercial reason for the insertion of additional wholesalers into the chains between the defaulting trader at the top and DEL at the bottom. That was especially so in relation to supplies to DEL by Just Beer and by Gempost, neither of which had its own warehouse and the goods supplied to them notionally were physically supplied direct by their suppliers to DEL.

Our sixth reason for our orchestration findings is that, in relation to the transactions with Just Beer, Gempost (and Phoenix), all three of those companies had a history of being involved in tax loss supply chains. That renders it more likely that they were part of an orchestrated scheme in the present case, compared with if they had not previously been involved in tax loss supply chains.

Our seventh reason for our orchestration findings is that, in relation to purchases from Just Beer and from Gempost, DEL continued to transact with both Just Beer and Gempost, despite having been advised by HMRC (in letters dated 30 June 2014 and 2 July 2014 respectively) that there had been tax losses in earlier chains in which those companies had been suppliers. We return later to this topic, to discuss the appellant’s shifts in evidence about when DEL stopped buying from Gempost and from Just Beer.

Our eighth reason for our orchestration findings is that, on the evidence before us, we are satisfied that Gempost and Just Beer both knew, via the appellant’s uncle and father, that the transactions involving Gempost and Just Beer supplying to DEL were connected with a fraudulent tax loss. We say that because we accept Ms Robinson’s submissions on that – see Annex 3 to this decision. This is relevant to orchestration, to the appellant’s knowledge and to DEL’s knowledge. We deal with it here for its relevance to orchestration. That the middlemen – Gempost (via uncle) and Just Beer (via father) – knew that the transactions were connected to a fraudulent tax loss increases the likelihood that the scheme was significantly orchestrated. We are sorry to have to make such a finding about the appellant’s father’s and uncle’s knowledge, especially as regards the appellant’s father who is sadly no longer with us. We emphasise that our finding is based only on the evidence before us and was unable to take account of any evidence that the appellant’s uncle and father might have given, had they been able to give evidence.

Our ninth reason for our orchestration findings is that DEL either had to collect from the supplier to Gempost or Just Beer, or had goods delivered to DEL by the supplier to Gempost or Just Beer, because neither Gempost nor Just Beer had its own warehouse. We accept that it follows that DEL must have been aware of the identity of the suppliers to Gempost and to Just Beer, at least after the first supply in which DEL would see the identity of the company that DEL went to collect from or received delivery from. We did not accept the appellant’s evidence that, despite collecting or receiving direct from Gempost’s or Just Beer’s supplier, DEL was not aware of the identity of that supplier. DEL must have known to what company it was sending its van drivers, and must have known what company’s drivers were coming to DEL’s warehouse. Even if, which was not suggested and is unlikely, Just Beer and Gempost’s suppliers delivered to DEL in an unmarked van, it is inconceivable that DEL would not know what company the van came from, just by having contact with the driver on handover at DEL’s warehouse. Again, the operation of a legitimate and commercial market would result in DEL bypassing Gempost or Just Beer, and going direct to their suppliers, to maximise DEL’s profit margin. We accept that the fact that Gempost and Just Beer remained in these deal chains despite DEL’s knowledge of who was supplying to them is highly indicative of the contrived nature of the deal chains.

Our tenth reason for our orchestration findings relates to non-payment and delay in payment. Ms Robinson for HMRC questioned the appellant particularly about whether and when DEL had made payment to each of Aphrodite and Phoenix.

As to Phoenix, there was no written evidence of payment by DEL to Phoenix for 17 of the 23 purchases from Phoenix. And the appellant was unable to say whether those 17 purchases had been paid for. He did explain that the liquidator had taken all the records. But we do not accept that the appellant would not know whether DEL had paid invoices of some £700,000. Nor do we accept that the liquidator’s possession of the documents precluded the appellant from finding out that specific information. We do not see why he could not have requested a further visit to the liquidator to look for that information. We do not therefore find, on the evidence before us, that DEL paid Phoenix for those 17 transactions.

As to Aphrodite, we accept that it took from 13 October 2014 to 5 March 2015 for DEL to pay Aphrodite’s invoice. In response to Ms Robinson’s question “Was [Aphrodite] clamouring at your doors to get paid for these transactions?” the appellant said only “I think there might have been one or two reminders. Off the top of my head, I can't remember”. Asked “Did you not have a chain of angry emails from Mr Picknell saying "where is my money"?” the appellant replied only that “I didn't deal directly with Mr Picknell”. We had no evidence that Aphrodite did send one or two reminders; the appellant said only that “there might have been”. Without evidence that there were reminders, we do not find that there were any reminders from Aphrodite. We do not accept that, in a genuine commercial relationship, Aphrodite would not have been chasing payment in some four and a half months.

Moreover, the appellant accepted – and we find – that Aphrodite could not get the goods back in the four and half months that it took DEL to pay the invoice of over £120,000; the goods had already gone from DEL’s cash and carry to the retailer and had we find probably been consumed. That too does not in our judgment reflect a genuine commercial relationship.

Our eleventh reason for our orchestration findings is that Phoenix (and Just Beer and Gempost) had a history of being involved in tax loss supply chains. That renders it more likely that those companies were part of an orchestrated scheme in the present case, compared with if they had not previously been involved in tax loss supply chains.

Our twelfth reason for our findings as to orchestration is that, on 22 October 2015, Officer Cole issued another tax loss letter to DEL, informing DEL of two transactions in period 04/15 which had been traced to a tax loss in the sum of £21,415.47. The supplier on that occasion was Aphrodite. It was common ground that, before this tax loss letter, HMRC had never told DEL that Aphrodite had been involved in fraudulent tax losses. DEL’s purchases from Aphrodite preceded that tax loss letter.

However, Aphrodite had declared in registering for VAT that its intended business activity was the supply of beauty products. But it sold alcohol (to DEL). The very fact that Aphrodite was registered for something other than alcohol sales (and not even remotely connected with supply of food or drink) and yet sold alcohol, is strong evidence that the sales by Aphrodite to DEL were in an orchestrated scheme to defraud (indeed, Aphrodite was the defaulting trader in those two transactions).

The appellant’s evidence as regards vetting suppliers included this, in his first witness statement—

The record of a visit by HMRC officers to DEL on 1 September 2010 had recorded that the appellant told HMRC, as to checks made by DEL—

The appellant was asked about that in cross-examination (Footnote: ¹⁸⁸ ) . He did not resile from the proposition that he and his team checked the VAT certificate of prospective trading partners.

But, despite the appellant’s evidence that DEL would check the VAT certificate, no VAT certificate was obtained by DEL for Aphrodite, prior to DEL’s purchases from Aphrodite. Had the VAT certificate been received by DEL, the certificate would have told DEL (if DEL did not already know) that Aphrodite did not, according to HMRC, trade in wholesale alcohol. That would, as Ms Robinson submitted, have been a negative indicator to be acted upon by an innocent trader. Mr Farrell submitted for the appellant that there was no evidence that the appellant had ever dealt with Aphrodite. That does not in our judgment help the appellant. We accept Ms Robinson’s submission that the appellant’s failure on behalf of DEL to do what was squarely within his accepted role within DEL, to insist on sight of the VAT certificate, was too much of a coincidence to be genuine. As Ms Robinson pointed out, this was the one certificate which did not show the trader to trade in alcohol. It is too convenient that DEL did not see it prior to buying from Aphrodite.

There were other problems with Aphrodite that, as with the VAT registration, were readily discoverable. The address from which Aphrodite operated was residential (Footnote: ¹⁸⁹ ) . Although the appellant had said he would do a drive-by for some prospective trading partners, he did not do so in relation to Aphrodite. Had he done so, he would have seen that the premises were residential, which he accepted would have been significant. Moreover, Aphrodite was not prepared to declare its estimated annual turnover. This gave the appellant no means by which to ascertain whether Aphrodite was a company able to participate in transactions of a high value.

Our thirteenth reason for our orchestration findings is that, again in relation to purchases from Just Beer and from Gempost, DEL transacted directly with Beer Bhai in three deals in period 04/15. In the same period, Beer Bhai also transacted with Gempost and with Just Beer, both of which then made onward sales to DEL. There was no commercial reason, or other innocent reason, for the insertion of Just Beer or Gempost into those transaction chains. Neither Gempost nor Just Beer added value. And their presence in the chains (given that Beer Bhai and DEL must have been known to each other at least after the first transaction in the three-part chains starting with Beer Bhai) was demonstrative of the contrived nature of those three-part chains.

A reminder of what the Upper Tribunal said in Pacific Computers (our emphasis)—

The 120 deal chains involving DEL’s purchases other than direct from Beer Bhai had significant similarities to each other as to the identity of each middleman trader (the so-called “buffer”) and the identify of each defaulting trader—

Returning to the two questions mentioned in Pacific Computers: (i) how did the orchestrators of the fraud manage it so well, and (ii) how likely was it that an orchestrator of such a fraud would involve an unknowing party, and why would it do so? We accept that the only way in which the orchestrators of the frauds in this case could ensure that the frauds worked so well was to tell each party from whom to purchase, to whom to sell and at what price. We accept that the pattern of transactions, and in particular the same-day timings (except for one transaction in one deal chain; paragraph 28 above), simply could not have happened without that level of instruction. It is highly unlikely that the orchestrator of the frauds in this case would have involved an unknowing party, and we find that the orchestrator did not involve an unknowing party (apart from Lupt whose vat registration number was hijacked); there were simply too many fraudulent transactions to take that risk. So DEL must have been told from whom to purchase and at what price. These reasons about the orchestrated scheme would, alone, suffice for us to infer DEL’s knowledge. But our judgment in relation to the orchestrated scheme is not the only factor suggesting an inference that DEL knew, as we set out below. (We come later to why we find that that knowledge was via the appellant.)

That accounts for 118 of the 120 transactions in relation to which we are dismissing the appeal.

The other two transactions in relation to which we are dismissing the appeal had just Aphrodite and DEL in the deal chain. Those two transactions did not have common middlemen because there was no middleman. And, being just two transactions, the transactions were not on the face of it as orchestrated as the other 118. But we nonetheless dismiss the appeal in relation to DEL’s two purchases from Aphrodite for reasons set out below; in particular the convenient failure to obtain the VAT certificate which inconveniently would have shown that Aphrodite’s intended business was said to be the sale of beauty products.

We turn now to the other factors which, taken together, show in our judgment that DEL knew that its purchases were connected to a fraudulent tax loss.

It did not appear to be disputed that DEL and the appellant were aware of fraud within DEL’s industry, the alcohol industry. We find in any event that the appellant was aware of that fraud. That awareness affects the appeal as follows.

Much was made for HMRC about the relevance of Notice 726. We find that on or within a few days after 15 September 2011, the appellant (and so DEL) was aware of the fraud indicators in Notice 726 and that they related to DEL’s industry. So the appellant was not merely aware of MTIC fraud in the alcohol industry; he was also aware of indicators of such fraud. We say that for the following reasons.

Notice 726 started by saying “Find out how you could be made liable for the unpaid VAT of another VAT-registered business when you buy or sell specified goods”. Specified goods were defined, in paragraph 1.4 of the notice, as computers, telephones and other electronic equipment.

Paragraph 1.3 of Notice 726 said—

So, the appellant was not, on the face of Notice 726, required even to read it, according to paragraph 1.3 of the notice. But we accept that he was made aware of its relevance to the alcohol industry by the HMRC officers who visited DEL on 15 September 2011. The visit record for that date (Footnote: ¹⁹⁰ ) does not say in terms that the officers made him aware of it. But the tenor of the visit record as a whole shows that MTIC fraud was the focus of the visit, and one of the officers supplied to the appellant with a letter dated the same day (Footnote: ¹⁹¹ ) , a copy of Notice 726 along with the leaflet on “How to spot missing trader fraud”. So, at the latest on receipt of Notice 726 and the “How to spot missing trader fraud” leaflet, either on or shortly after 15 September 2011, the appellant was aware that the list of indicators of fraud in Notice 726 (and in the leaflet) applied to the alcohol industry too.

Notice 726 included, at its paragraph 2.3, a description of missing trader fraud in these terms—

The notice went on to advise, at paragraph 4.5 (Footnote: ¹⁹³ ) , that it was good commercial practice to carry out checks to establish the credibility and legitimacy of customers, suppliers and supplies, needed to be more extensive in business sectors that are commercially risky or vulnerable to fraud and other criminality, of which the wholesale alcohol sector was one. The notice gave guidance as to the sort of checks that a trader might make to avoid dealing with high-risk businesses or high-risk individuals.

Notice 726 also gave examples of the kind of indicators of fraud to look out for. Those examples included—

As Ms Robinson pointed out for HMRC, there were some of those indicators in the present case. Aphrodite had no history in the trade. All the deals carried no commercial risk for DEL (i) because – as the appellant appeared to accept – DEL did not pay until DEL received payment, and (ii) because title in the goods supplied to DEL remained with some exceptions (where the invoice did not say (Footnote: ¹⁹⁴ ) ) in the supplier, so any loss or damage of goods was not on the face of it DEL’s risk, even while the goods were in DEL’s possession. As to whether the goods were adequately insured, the appellant was unable to point to terms or conditions whether oral or written that dealt with insurance, so DEL was not in a position to know that the goods were adequately insured. HMRC had specifically notified DEL that previous deals with the suppliers had been traced to a VAT loss, with the exception of Aphrodite. As to what recourse there is if the goods are not as described, again, the appellant was unable to point to any terms or conditions, oral or written, that dealt with that.

DEL engaged the services of tax specialist Vincent Curley & Co Ltd as tax adviser. Mr Curley’s letter head described his company as “The Specialists in VAT Excise Duties, Customs Duties, Tribunal Appeals and Tax Investigation”. It was not disputed that Mr Curley’s areas of experience included missing trader fraud. The appellant accepted that it was he within DEL who liaised with Mr Curley. Mr Curley’s experience was evidenced by, for example, his letter to HMRC’s Specialist Investigation Department dated 10 August 2011, on behalf of DEL, setting out “issues which have arisen in our dealings with your department on behalf of taxpayers over many years…” (Footnote: ¹⁹⁵ ) . We accept that it is reasonable to infer, and we do infer, that Mr Curley was a source of information for DEL (via the appellant), in respect of missing trader fraud within DEL’s business sector.

Prior to the deals in question in this case, DEL had received visits from HMRC Specialist Investigations Officers (MTIC officers). We accept that the officers must have been a ready source of information for DEL about the nature and prevalence of fraud in the market. We accept too that the officers must have been a ready source of advice about steps that might be taken by a legitimate business to avoid participation in deal chains tainted by fraud. (The appellant accepted that it was he within the business who liaised with and engaged with HMRC.)

DEL had received VETO letters, informing DEL of the deregistration of a trading partner, on the following dates: 19 February 2007 (Mert Liquors Ltd) (Footnote: ¹⁹⁶ ) , 28 February 2011 (Lid UK Ltd) (Footnote: ¹⁹⁷ ) , 17 August 2011 (Dentile Ltd) (Footnote: ¹⁹⁸ ) , and 15 November 2011 (Sharabi Ltd) (Footnote: ¹⁹⁹ ) . The record of HMRC’s 15 September 2011 visit to DEL said that the appellant said he had received VETO letters in the past which advised of the deregistration of businesses that he had dealt with. Given that the entire tenor of the visit was fraud, we find that the appellant knew from that visit, if not before, that the VETO letters related to fraud in his industry.

On 16 September 2011, HMRC sent DEL an MTIC awareness letter, advising that MTIC fraud was prevalent in the wholesale commodity sector, and estimating the levels of tax loss believed to accrue from such fraud. The letter advised the verification of new trading partners with the Wigan HMRC office (Footnote: ²⁰⁰ ) . The 16 September 2011letter also said—

On 12 March 2012, HMRC issued DEL with a further letter informing DEL of fraud within DEL’s sector, and directing DEL to HMRC’s website for further information about MTIC fraud. The letter set out the requirement that companies provide HMRC with details of their trading on a monthly basis. It also specified the need to verify the VAT status of new or potential customers and suppliers (Footnote: ²⁰¹ ) .

We accept therefore that DEL knew (via the appellant whose role it was to deal with HMRC and with DEL’s tax adviser) of the existence and characteristics of fraud within the wholesale alcohol industry. DEL also knew, via the appellant, what indicators to look out for.

We turn next to the third factor showing DEL’s knowledge that the purchases were connected with a fraudulent tax loss: that the real number of such purchases was higher.

Another factor contributes in our judgment to the inference that DEL knew that at least 120 of its purchases were connected to a tax loss. As Ms Robinson submitted, the true number of deal chains in which DEL had participated which – according to HMRC at least – were connected with a tax loss was significantly higher than in the present case.

We say that in view of the tax loss letters to DEL listed at paragraph 103 above. The letters advised DEL of 35 transactions (12+1+4+7+6+5), other than those in this appeal, in which DEL had purchased from Gempost and which HMRC had traced back to tax losses. Similarly, the tax loss letters listed at paragraph 103 above advised DEL of 32 transactions (12+1+4+7+5+3), other than those in this appeal, in which DEL had purchased from Just Beer and which HMRC had traced back to tax losses. The appellant did not deny seeing those tax loss letters.

There were also two tax loss letters to DEL about two other companies (both Jabble family companies) from whom DEL had made purchases that traced back to tax losses. One was the letter dated 26 May 2011 advising DEL of tax losses in VAT period 07/09 in excess of £82,000 relating to 26 purchases by DEL from Barrel Beers (director Ravinder Jabble, also the appellant’s fellow director in DEL). The other tax loss letter not relating to Gempost or Just Beer was that dated 19 February 2014, advising DEL of tax losses in VAT period 07/13 of £12,607 relating to four purchases by DEL from Red Dust (Australia) Limited (director Kulvinder Jabble). The letter also advised that Red Dust “were deregistered during the period of these transactions and remain deregistered”.

The appellant’s evidence was, as to the Barrel Beers tax loss letter, that he and Ravinder would both have had sight of it, but that he did not remember receiving it and that it was a bit difficult to recall it. In re-examination, Mr Farrell made the point, by a series of questions, that the letter was not telling the appellant not to trade with people. The appellant’s evidence as to the Red Dust tax loss letter was that he had “received many letters from HMRC. This letter in particular -- as I say, I received lots of letters from HMRC”. Asked did he remember receiving that letter though, he replied that he “might -- as I said, I might well have. I can't remember precisely. I …”. In re-examination, he was asked “Do you recall this letter?” to which the appellant replied “Not before this conversation took place yesterday or so”.

Mr Farrell submitted that the appellant had not come to the tribunal to lie to the tribunal. Mr Farrell argued that there were only a very small number of Red Dust transactions and that, in the great scheme of things, it was not highly significant.

We do not accept that the appellant would not, at the time of DEL’s receipt of those Barrel Beers and Red Dust tax loss letters (or shortly after that), have seen that DEL had received a letter, that it was about Barrel Beers and Red Dust respectively, and that it talked about tax losses. It was part of the appellant’s role to deal with HMRC. He had been a director of DEL since 2004. So the 26 May 2011 tax loss letter about Barrel Beers, and the 19 February 2014 tax loss letter about Red Dust, must both have come to his attention. Even a quick skim would have told him that the letters spoke of tax losses in relation to Barrel Beers and Red Dust in DEL’s transactions with those companies. Even if the appellant did not, by the time of the tribunal hearing, recall either of those tax loss letters, that does not alter their significance in relation to DEL’s awareness of tax fraud in deals in which DEL had participated (and in which the companies were family companies). By the time DEL came to make the first purchases in issue in this appeal, DEL had received the Barrel Beers tax loss letter three years previously in 2011, and had received the Red Dust tax loss letter just a month or so earlier than the first purchase in issue in this appeal. The number of transactions in each letter does not affect the general point that DEL knew (via the appellant, as we will come to) of tax fraud in the alcohol industry, and in particular that there were additional deals connected with tax losses.

The tax loss letters about Gempost and Just Beer are relevant not only to DEL’s general awareness (via the appellant) of tax fraud in the alcohol industry, but also of course to whether DEL knew that the deals with Gempost and with Just Beer in this appeal were connected to a fraudulent tax loss. We mentioned in discussing orchestration above that DEL continued to purchase from Gempost and from Just Beer after receiving tax loss letters about previous deals between Gempost and DEL, and between Just Beer and DEL.

Ms Robinson submitted for HMRC that it is disingenuous to suggest that the appellant was unaware of the tax losses in deal chains involving Just Beer and those involving Gempost. Both were run by close family members, she said. Moreover, the appellant lived with his father, director of Just Beer, throughout the period in question in this appeal. Both companies were located (together) – she pointed out – in the same building as DEL, for a significant period of time. So, argued Ms Robinson, the appellant and therefore DEL knew specifically, because of the tax loss letters, that Gempost and Just Beer were each in chains that commenced with a defaulting trader. Despite the tax loss letters to DEL about Gempost and about Just Beer, DEL continued to trade with both those companies.

Mr Farrell submitted that the appellant took immediate action upon receipt of the June and July 2014 tax loss letters and discussed them with both his father (Just Beer) and his uncle (Gempost). Both of them confirmed, he said, that they were not aware of what was alleged but that they would locate new suppliers, and that they had carried out due diligence and that any new suppliers would be checked in accordance with relevant HMRC guidance. It was reasonable, submitted Mr Farrell, for the appellant to accept what he had been told by his father and uncle, both of whom he respected, trusted and looked up to as senior family members, and in Sikh culture family elders are trusted and treated with respect. Mr Farrell argued that it was not unreasonable for the appellant to have behaved in the way that he did upon receipt of the first tax loss letters about Gempost and Just Beer, and that the appellant took immediate action upon receipt of the February 2015 tax loss letters about those companies. In any event, said Mr Farrell, it cannot be concluded from the fact that the letters were sent by HMRC to DEL that this proves the appellant knew that DEL’s transactions were part of a contrived scheme to defraud HMRC of VAT.

We do not accept Mr Farrell’s argument, for three broad reasons. First, the appellant’s evidence as to what he did after receiving the tax loss letters changed several times. Second, we do not accept that DEL was legally obliged to continue purchasing stock. Third, we do not accept that the appellant did in fact talk to his father and uncle and receive comfort. We take each of those three points in turn.

As Ms Robinson pointed out, the appellant’s evidence changed over time with regard to what he did after receiving the tax loss letters about Gempost and Just Beer. In his first witness statement, dated 2 July 2019, the appellant said “the proper response by a company director” advised by HMRC of tax losses in supply chains was to cease making purchases from the suppliers identified in such tax loss letters (Footnote: ²⁰² ) . He said in paragraph 117 of his first statement, addressing paragraphs 132 and 133 of Officer Cole’s first witness statement—

We accept Ms Robinson’s point that the import of that declaration of principle in the appellant’s first statement was that the action of a responsible director, on being advised of tax losses in identified supply chains, is to cease trading with that supplier. Moreover, the appellant said in that first statement that he did in fact take the decision to stop sourcing from Gempost and Just Beer. Although “tak[ing] the decision to stop” is not strictly the same as actually stopping, the appellant’s statement that he had taken the decision to stop suggested that no further supplies were sourced from Gempost or Just Beer once that decision had been made. That turned out not to be true, as we know; it was common ground that DEL continued to buy from Gempost and from Just Beer after receipt of the 30 June and 2 July 2014 tax loss letters.

The appellant’s evidence as to when DEL stopped buying from Gempost and Just Beer changed in his second witness statement, dated 23 October 2020 (Footnote: ²⁰⁴ ) . He said in it that, on receipt of the 30 June 2014 and 2 July 2014 tax loss letters, he discussed the contents with Jagjit Singh Jabble (his uncle, director of Gempost) and Makhan Singh Jabble (his father, director of Just Beer) together and was satisfied and “comforted” with their responses, such that DEL continued to source goods from both Gempost and Just Beer. In that second statement, the appellant said that the next tax loss letter relating to Gempost and Just Beer was dated 22 June 2015, and that it was after receiving that letter that the appellant informed his uncle and father that DEL would cease to purchase from both Gempost and Just Beer.

In fact, there were, as Ms Robinson pointed out, other tax loss letters about Gempost and Just Beer sent to DEL after the 2 July 2014 letter and before the 22 June 2015 letter. Those other tax loss letters were dated 4 September 2014 (about one transaction with Gempost and one with Just Beer), 1 October 2014 (four transactions with Gempost and four with Just Beer), 18 February 2015 (seven transactions with Just Beer), 19 February 2015 (seven transactions with Gempost), and 1 April 2015 (six with Gempost, five with Just Beer). The appellant’s written evidence on this topic underwent a second shift, in his fourth statement, in which he addressed the 18 and 19 February 2015 letters (Footnote: ²⁰⁵ ) . In that fourth statement, dated 5 January 2021, the appellant suggested that he took the decision to cease trading after receipt of the February 2015 letters (which – according to his witness evidence – were the second set of tax loss letters about Gempost and Just Beer), and that any transactions which occurred after that (and we have accepted that there were at least nine: paragraph 45 above) were the result of existing commitments—

As we explain below, we do not accept that DEL was under a legal obligation to continue purchasing stock from Gempost or from Just Beer.

In any event, that was not the final shift in the appellant’s evidence on this topic, as Ms Robinson pointed out. In cross-examination, the four sets of tax loss letters pertaining to Gempost and Just Beer were put to the appellant (Footnote: ²⁰⁷ ) . His account changed once again in light of the October 2014 tax loss letter. He said in cross-examination that, after the June and July 2014 letters and the October 2014letter, he spoke with his uncle and father and made the decision each time to continue trading with their companies, apparently satisfied and comforted by what his father and uncle had told him. The appellant added, for the first time, that he took advice from Vincent Curley, who wanted to challenge some of the assertions made in the tax loss letters.

As Ms Robinson submitted, the appellant was not clarifying some minor error in an early statement. He was talking about a highly significant topic: what he did after receiving tax loss letters about DEL’s purchases from companies; and not just from any companies, but from his father’s and uncle’s companies. While we accept that the liquidator’s possession of the documents might have caused the additional tax loss letters to be available again to the appellant, we do not accept that not having them in front of him when making earlier witness statements was the reason why the appellant had made inaccurate statements of fact as to what DEL did after each set of tax loss letters. He did not need sight of the letters to know in broad terms whether or not he ceased trading with the companies mentioned in them, especially given that they were his uncle’s company and his father’s company. But we do accept that, as it began to appear that more tax loss letters would be put before the tribunal, the appellant tried to explain away what Ms Robinson described as “an emerging picture of the “volume” of tax loss letters sent to DEL about supplies from Gempost and/or Just Beer”. We accept that the fact that the appellant’s account changed to fit the evidence damages his credibility: one of a number of factors contributing to our judgment on credibility.

Returning to one of the reasons the appellant advanced for continuing to purchase, Ms Robinson submitted for HMRC that there can be no suggestion that DEL had ordered stock that it was then obliged to purchase. We accept that there was no legal obligation on DEL to make further purchases from Gempost or from Just Beer after DEL’s receipt of the two February 2015 tax loss letters. Apart from the text at the bottom of Gempost’s and Just Beer’s invoices saying that title remains with the supplier until payment is made, there was – on the appellant’s own evidence – no term or condition between DEL and Gempost, or between DEL and Just Beer, which defined circumstances in which DEL might cancel a stock order. DEL did not pay for goods until after receiving them. We find that there was no obligation to purchase whatsoever. That was not therefore a reason why DEL continued to purchase from Gempost and from Just Beer after receiving tax loss letters about those companies.

Returning to the third of the three points mentioned at paragraph 322 above, we accept Ms Robinson’s point that the appellant was unable to detail with any specificity the conversations with his father and uncle. First, he was unable to specify what his father and uncle had told him they were doing in respect of further due diligence. We accept Ms Robinson’s point that, even if a conversation of the sort described by the appellant did take place, it could only have provided comfort to him if he understood the process by which Gempost and Just Beer each did business, and the changes to that process that were to take place as a result of the information imparted to his uncle and father by the appellant. But there is no detail of that nature reported in the appellant’s evidence about talking to his uncle and father.

Second, the appellant told the tribunal moreover what he would have said, and would have done (our emphasis)—

Despite Ms Robinson asking what question the appellant “did” raise, and what “you raised”, in other words, what he actually did, the appellant still replied only with what he “would have” done. If he were remembering actual conversations, he would be able to say what he did do. We do not accept that he would not remember conversations with his uncle and father on this important topic if he really was not aware of the fraud and really was seeking comfort.

So, while we accept that the appellant may well have talked to his father and uncle about the tax loss letters, we do not accept that any comfort was imparted to him in those conversations.

It is for the reasons at paragraphs 319 to 334 above that we consider that DEL’s continued trade with Gempost and with Just Beer after tax loss letters about those companies is a factor strongly suggestive of DEL’s knowledge that transactions with each of those companies were connected with a fraudulent tax loss.

It was common ground that it was the appellant’s responsibility within DEL to arrange for due diligence to be done in respect of prospective suppliers (Footnote: ²⁰⁸ ) . Ms Robinson submitted that the reports from The Due Diligence Exchange were inadequate, in that the reports did little more than establishing the physical existence of the company and the identity of the company officers. Specifically—

Mr Farrell submitted as follows—

We did not have evidence of what might be considered “normal” due diligence, against which to measure the reports of The Due Diligence Exchange in this case. We do not therefore make a finding as to whether all of the measures at paragraph 336 above would reasonably be expected to feature in a normal, adequate due diligence report. We accept also that traders are not meant to be detectives.

We do accept however that, even if it was normal to say that financial reports would be supplied later, it was DEL’s choice not to await those reports before trading with the prospective supplier in question.

Moreover, DEL chose to trade with each of Aphrodite, Phoenix, Just Beer and Gempost despite the following due diligence points.

DEL chose to trade with Aphrodite despite the following—

The appellant did receive for DEL further due diligence about Gempost, with The Due Diligence Exchange’s cover letter dated 18 September 2014. That letter came after DEL’s receipt of the first and second tax loss letters about Gempost, dated 30 June and 4 September 2014. Whether or not that further due diligence was commissioned as a result of tax loss letters, it had information gaps: it did not identify that Gempost and Just Beer operated from the same office premises as each other, or that the sole director of each company assisted in the operation of the other company (which the appellant accepted “sounds right” (Footnote: ²¹¹ ) ), or that Gempost had no premises in which to store stock. The appellant knew those three points anyway. But that known points were not reported in the further due diligence material suggests that DEL chose to continue to trade with Gempost despite obvious gaps in the due diligence. That in turn suggests that DEL did not in reality depend on the content of the due diligence reports in deciding whether or not to trade with the appellant’s uncle’s company, Gempost.

The only available report for Just Beer was provided to DEL with a cover letter dated 22 October 2012. That report was provided to HMRC with a cover letter dated 20 March 2016. In his fourth witness statement, the appellant said at paragraph 9 “I cannot now recall whether the Company instructed the DDE to carry out an update report on JBL, I can only assume that we were satisfied with the due diligence that the Company had at that time in relation to JBL” (Footnote: ²¹³ ) . In cross-examination, however, the appellant said (paragraph 202 above) that – after the second tax loss letter in respect of each of Gempost and Just Beer – “I believe I had instructed the Due Diligence Exchange to carry out further due diligences”, “I believe I would have asked them to undertake a thorough -- a more thorough -- due diligence exercise”, in respect of “both” companies. The questioning continued—

So, what the appellant said in cross-examination about due diligence on Just Beer had changed from being unable in his fourth witness statement to recall whether DEL had instructed The Due Diligence Exchange to carry out an update report, and assuming that “we were satisfied with the due diligence that the Company had”, to “No, I remember undertaking -- I remember requesting -- and I am firm as I can be that we received the files as well” in relation to Just Beer. We do not accept on the evidence before us that DEL did receive updated due diligence in respect of Just Beer after any of the tax loss letters. The only due diligence material available in relation to Just Beer was with the cover letter dated 22 October 2012. We accept that the liquidator’s actions did not preclude the availability of documents in 2016, when DEL’s documents were being supplied to HMRC. The appellant told the tribunal, and we accept, that all due diligence materials were filed in a particular location in a spare office in the building. We accept that, if an update report existed, it would have been available, would have been provided to HMRC in 2016 and would be in evidence. So what the appellant said in cross-examination – that DEL had received further due diligence files about Just Beer – was inaccurate. Whether or not he commissioned further due diligence on Just Beer after any tax loss letter, DEL continued to trade with Just Beer without receiving any further due diligence on Just Beer. In addition, that the appellant changed his account on this important topic was another factor damaging to his credibility generally.

Mr Farrell submitted that Officer Cole’s witness statement was wrong in saying that no due diligence was provided by DEL in respect of Phoenix, because The Due Diligence Exchange did provide a report to DEL about Phoenix on 7 March 2013 (Footnote: ²¹⁵ ) . We accept that. However, the supplier declaration by Phoenix included one section entirely scored out (Footnote: ²¹⁶ ) . DEL chose to buy from Phoenix without seeking clarification of that.

DEL’s choices mentioned at paragraphs 339 to 342 above suggest – and we find – that DEL did not in fact care about avoiding fraud in relation to trades with each of Aphrodite, Phoenix, Just Beer and Gempost.

DEL, Barrel Beers, Red Dust, Gempost and Just Beer (all of which engaged to some degree in wholesaling alcohol), as well as Keyrange Limited, were all Jabble companies. Each of them had some association with one of more of the others—

That these companies and their directors were all linked in various ways suggests a level of family interaction – and of knowledge between family members – that supports an inference that the appellant must have known that purchasing from Gempost and from Just Beer involved tax fraud.

The business model in operation in these transactions was uncommercial, vested all the risk in traders further up the chains, yet created no risk whatsoever for DEL. That was a specific indicator of fraud mentioned in Notice 726 (and we found at paragraph 298 above that the appellant was aware of the indicators in that notice on or within a few days after 15 September 2011). In that model (Footnote: ²²⁴ ) , DEL’s supplier supplied goods to DEL or to another cash and carry, the cash and carry supplied goods to a retailer, and the retailer sold to the public. The goods were released to DEL (and, subsequently, to a retailer) despite the fact that DEL had not made payment for those goods, and had not been paid for those goods. DEL did not receive payment for the goods until the trickle down from the public, to the retailer and then to DEL. In other words, the original suppliers were not getting their money, yet the goods were long gone. That model was, we accept, too good to be true.

An obvious inference to be drawn is that each supplier in the chain, but specifically DEL, knew that the transactions would be honoured despite their uncommercial aspects. As to how they would know that, an obvious inference is that DEL knew the transactions were contrived. In relation to Gempost and Just Beer, DEL and the appellant might have had a different reason for knowing the transactions would be honoured, that reason being DEL’s and the appellant’s trust of his father and uncle. But the fact remains that buying from Just Beer and Gempost was uncommercial, and after seeing who their suppliers were following the first delivery or collection from their supplier, DEL had no commercial reason to continue purchasing from Gempost or Just Beer.

A meeting visit report for 1 September 2010 recorded that—

Despite that, the appellant did not suggest that he was concerned by the role of middleman played by each of Gempost and Just Beer in the deal chains involving those companies. He knew that neither Gempost nor Just Beer had a warehouse facility. He knew that goods purchased by DEL from Gempost or Just Beer had to be delivered to, or collected from, their supplier directly to DEL. Moreover, absent any warehousing from which to split a purchase before converting it into a supply, Gempost and Just Beer could not, on the face of it, make such a split. It is clear on the evidence that neither Gempost nor Just Beer added value to the transaction chain. We find that DEL must have known that fact. In view of that, and of the appellant’s statement that “more wholesalers in a supply chain eats into profit”, there was no genuine commercial reason for DEL to continue to buy from Gempost or from Just Beer.

We found above that Gempost and Just Beer both knew, via the appellant’s uncle and father, that the transactions involving each of Gempost and Just Beer supplying to DEL were connected with a fraudulent tax loss. The appellant lived with his father throughout the time of all these transactions, and prior to their start, and saw his uncle regularly. We do not accept the appellant’s evidence that he did not know, from his father at least, that DEL’s purchases from both Gempost and Just Beer were connected with a fraudulent tax loss. It is unlikely, and we do not accept, that the appellant could live in such close proximity to his father for all those years – starting at least some four or five years before the transactions in question – and yet not be told by his father, or come to understand from his father, that the transactions were so connected. We accept Mr Farrell’s point, to a degree, about the family hierarchy. It might well have meant that the appellant felt unable to protest to either his father or his uncle at the prospect of DEL being involved. But we do not accept that the hierarchy went so far as to mean that his father, at least, would manage to keep from him for years – while seeing him every morning and evening and at weekends – that DEL’s transactions in question were to be connected with a fraudulent tax loss. So DEL knew, from the appellant’s father and via the appellant, that DEL’s purchases from both Gempost and Just Beer were connected with a fraudulent tax loss.

Some of our reasoning at paragraphs 259 to 353 above does not apply to DEL’s purchases from Aphrodite: that is, the reasoning at paragraphs 267, 273 to 277, 282, 290, 319, 347, 351 and 353 above. Moreover, unlike with Gempost and Just Beer, we were not pointed to any tax loss letters which told DEL that previous purchases by DEL from Aphrodite – prior to the purchases in deal chains 65 and 66 – had been connected with a tax loss. The tax loss letter to DEL about purchases from Aphrodite was dated 22 October 2015. Nonetheless, for the reasons in the other parts of paragraphs 259 to 353 above, we find that DEL knew that its purchases from Aphrodite were connected with a fraudulent tax loss. Particularly striking were (i) the inconsistent VAT registration specifying beauty products and not alcohol, and DEL’s failure to obtain the VAT certificate, and (ii) that it was too good to be true that Aphrodite went four and a half months without payment and did not do something memorable by way of chasing (the appellant’s evidence was “I think there might have been one or two reminders. Off the top of my head, I can't remember” (Footnote: ²²⁶ ) ). As Ms Robinson said, it is not what one would expect in a legitimate transaction.

For the reasons at paragraphs 259 to 353 above, except for those specific to Aphrodite and to Phoenix, we find that DEL knew that its purchases from Gempost, and DEL’s purchases from Just Beer, were connected with a fraudulent tax loss.

Some of our reasoning at paragraphs 259 to 353 above also does not apply to DEL’s purchases from Phoenix: that is, the reasoning at paragraphs 259(d), (f) and (i), 262(vi) to (ix), (xii) and (xiii), 274 to 277, 279, 280, 282 to 288, 290 and 294 above. Moreover, as with Aphrodite, and unlike with Gempost and Just Beer, we were not pointed to any tax loss letters which told DEL that previous purchases by DEL from Phoenix – prior to the purchase in deal chain 87 (the first of the deal chains in this appeal in which DEL purchased from Phoenix) – had been connected with a tax loss. The tax loss letter to DEL about purchases from Phoenix was dated 17 November 2015. Nonetheless, for the reasons in the other parts of paragraphs 259 to 353 above, we find that DEL knew that its purchases from Phoenix were connected with a fraudulent tax loss. Particularly striking was that there was no documentary evidence before the tribunal of DEL having paid Phoenix in 17 of the deals, and the appellant’s oral evidence was not to the effect that DEL did pay Phoenix: he said merely that he would have endeavoured to pay Phoenix as far as he could remember, and that he could not think of any reason why he would not pay Phoenix (Footnote: ²²⁷ ) . That Phoenix waited without chasing was too good to be true, especially given that, according to Phoenix’s director, DEL was Phoenix’s only customer (Footnote: ²²⁸ ) . As Ms Robinson said, it is not what one would expect in a legitimate transaction.

We turn next to the deal chains in respect of which we are allowing the appeal, deal chains 84 to 86, purchases from Beer Bhai. After that, we will address whether the inaccuracies in the returns regarding the other 120 transactions were deliberate, which will include our judgment that the appellant had DEL’s knowledge mentioned above.

In the transactions in deal chains 84 to 86, Beer Bhai sold directly to DEL. They were the twentieth, twenty-first and twenty-second deals in period 04/15, made on 7 April 2015, 7 April 2015 again, and 13 April 2015. Our reasons for not finding that DEL knew that those transactions were connected with a fraudulent tax loss are as follows.

Beer Bhai was the only supplier, of all 123 deal chains, which had supplied via Gempost and Just Beer in addition to supplying direct to DEL. In deal chains 77, 79, 80 and 82, Beer Bhai supplied to Gempost who then supplied to DEL. In deal chains, 78, 81 and 83, Beer Bhai supplied to Just Beer who then supplied to DEL. After having supplied to Gempost and to Just Beer in those deal chains, Beer Bhai supplied direct to DEL in deal chains 84 to 86.

Ms Robinson invited us to infer that the appellant knew not only that the deal chains with Gempost or Just Beer as the middleman were connected with a fraudulent tax loss but also that the appellant (and DEL) knew that the ones in which DEL bought direct from Beer Bhai were so connected.

There was no tax loss letter regarding the deal chains which had Beer Bhai at the start and Just Beer or Gempost in the middle – deal chains 77 to 83 – although those deal chains do appear in the assessment. HMRC discovered later that those chains were connected with a fraudulent tax loss, but did not tell the appellant so until issuing the assessment. So when, in deal chains 84 to 86, DEL bought direct from Beer Bhai, it seemed we must be being asked to infer from matters other than tax loss letters about chains 77 to 83 that the appellant knew that the three transactions direct with Beer Bhai were connected with a fraudulent tax loss.

We asked whether HMRC were saying that DEL and the appellant knew that, when DEL purchased from any inserted traders, especially Gempost and Just Beer, the inserted trader was sourcing the supply (a) form another supplier, and (b) from a supplier from whom DEL also received direct supplies in other deal chains. Ms Robinson accepted that the position was different in relation to Beer Bhai. She submitted that the pattern of the deals is that Gempost and Just Beer cover the majority of the deals. Alongside that, DEL was receiving tax loss letters. It was only after the April 2015 tax loss letter, she said, that DEL stopped trading with Gempost and Just Beer and started purchasing from Beer Bhai. She submitted that the timing of that change was no accident, because by then the appellant would have seen the fourth Gempost tax loss letter, and trading could not then continue after four of them. She submitted that, as observed in Fonecomp, the knowledge to be proved is that the transaction was connected with fraud, not who the participants were or precisely how the fraud would work. Why didn’t the appellant ask himself, said Ms Robinson, “Why didn't Beer Bhai come to me after they knew of my existence?”. She submitted that the fact that Beer Bhai had not come to DEL earlier was evidence of contrivance; Beer Bhai was happy to get less profit from supplying via a middleman (Gempost and Just Beer) rather than supply direct to DEL. She submitted that it was therefore an example of something the appellant would know, in other words, something he would specifically know at the time, as well as being an example of contrivance, from which the tribunal can make a finding of contrived deal chains and of an orchestrated scheme to defraud.

We consider that those arguments could take the case either way – 50:50 – in terms of the appellant’s knowledge that the three transactions direct with Beer Bhai were connected with fraudulent tax losses. We say that for the following reasons.

We have accepted for reasons elsewhere in this decision that the appellant knew that all of DEL’s transactions covered by this appeal with Gempost and Just Beer were connected with fraudulent tax losses. So that means that he knew that DEL’s purchases from Gempost and from Just Beer in deal chains 77 to 83 (in which Gempost and Just Beer sourced from Beer Bhai) were connected with fraudulent tax losses. But we see no reason why his father, uncle or anyone else would have needed to tell him who was the supplier to Gempost and Just Beer in those deal chains. So we do not infer that he was told that by someone other than HMRC. And it is common ground that he was not told that by HMRC either, prior to DEL starting to buy direct from Beer Bhai; there was no tax loss letter telling him that Beer Bhai was the supplier to Gempost and Just Beer in those deal chains.

But even if the appellant knew, because of DEL receiving or collecting goods direct from Beer Bhai (given Gempost’s and Just Beer’s lack of warehouse), that Beer Bhai had been the supplier to Gempost and to Just Beer in those deal chains (which, applying paragraph 51 of the Court of Appeal judgment in Fonecomp, he did not need to know), that does not necessarily mean that he knew that DEL’s purchases direct from Beer Bhai were connected with fraudulent tax losses. Yes, we accept that DEL had finally decided that it could not with impunity continue to purchase from Gempost and from Just Beer after receiving repeated tax loss letters about those companies. That in turn means that DEL needed – if it was to continue making purchases at all – to buy from someone other than Gempost and Just Beer. We need to bear in mind however that DEL did not exist – or at least it was not suggested that DEL existed – merely to perpetrate fraud; it was a business and needed to buy alcohol in any event. Once DEL had decided that it was no longer safe to buy from Gempost or Just Beer, DEL had to look for who else to purchase from. Even if the appellant knew, when DEL started buying direct from Beer Bhai, that Beer Bhai had been the supplier to Gempost and to Just Beer in fraudulent tax loss chains, that does not mean that he knew that changing to buy direct from Beer Bhai must mean continuing with fraud. He might have strongly suspected that those deals too were connected with fraudulent tax losses (and might either have been content or have felt unable to refuse to cooperate). But a strong suspicion is not enough. He might even have been told by his father, uncle or someone else (although not by HMRC) that buying direct from Beer Bhai in those three deals would mean continued involvement in fraud, and being told would be enough (absent, at least, good reason not to believe it). Or he might even have worked it out for himself, and working it out for himself would, too, be enough to mean actual knowledge.

But we saw no reason to infer that he must have been told, or that he must have worked it out for himself. And might have been told, or might have worked it out for himself, do not suffice, given that the burden of proof lies with HMRC.

Had the burden been on the appellant for these three deals, our 50:50 view would mean instead that he had not discharged it, and so we would have found against him on those deals too. But the burden was on HMRC. We find that HMRC have not quite tipped the scales beyond 50% as to those three transactions direct with Beer Bhai. So HMRC have not discharged their burden in respect of those three transactions.

Yes, the inaccuracies in DEL’s VAT returns were deliberate, because of the appellant’s knowledge and actions.

We have considered – as required by the Supreme Court judgment in Commissioners for Her Majesty’s Revenue and Customs v Tooth [2021] UKSC 17, [2021] WLR 2811 – whether the statement in the return that DEL was entitled to deduct the input tax was, when made, deliberately inaccurate. Except in relation to transactions in deal chains 84 to 86, we find that it was, for the simple reason that we find that the appellant actually knew that he was on behalf of DEL claiming input tax on transactions which he knew had been connected to fraudulent tax losses. We so find for the following reasons.

HMRC came to agree that they are required to prove that the appellant must have known that DEL’s transactions were connected to a fraudulent tax loss and that, for a deliberate penalty, “should have known” would not suffice.

Ms Robinson did also submit that, while it appeared that the observations of the Supreme Court in Tooth on recklessness were obiter, nonetheless, it was significant that the Supreme Court did not exclude recklessness as a sufficient basis, and indeed, contemplated that it might well be a sufficient basis for a finding that behaviour was deliberate (Footnote: ²²⁹ ) .

We have not needed to consider whether recklessness would suffice in the present appeal because we found above that DEL had actual knowledge, which we now explain was also the appellant’s actual knowledge.

As to the appellant’s knowledge, Mr Farrell submitted as follows—

As to the appellant’s knowledge, Ms Robinson submitted for HMRC as follows—

We accept Mr Farrell’s submission for the appellant that points (7) and (8) at paragraph 373 above do not help HMRC’s case. We draw no inference of knowledge from the fact that DEL received cash payments. As to the fact that the appellant did not call as witnesses DEL’s counterparties in the transactions in question, we need not make a finding as to whether that helped HMRC’s case, given our other findings. As to prices, we did not understand Ms Robinson to argue for HMRC that the goods were not purchased by DEL at market prices. So we place no reliance one way or another on the assertion that the prices were normal market prices.

Nonetheless, we find that the appellant knew that 120 of the transactions were connected with fraud, for the following reasons.

First, we do accept that there was some division of roles between the appellant and his cousin, fellow director Ravinder Jabble. There was bound to be between two directors. But we do not accept that the appellant was not party to decisions as to which suppliers to use. In cross-examination, his own witness, Ms Bhatti, accepted that the appellant had responsibility for deciding which suppliers to use—

Mr Farrell sought to undo that in re-examination—

That re-examination evidence did not, in our judgment, undo Ms Bhatti’s cross-examination evidence, for the following reasons—

Second, even if the appellant did not have a role in deciding which suppliers to use, we do not accept that, by the time of the transactions in this case, the appellant did not realise, even if he had not been told, that they were connected with a fraudulent tax loss, in view of the following additional points—

It is for the above reasons that we find that the appellant knew that 120 of the transactions were connected with a fraudulent tax loss (whether or not his cousin and fellow director, Ravinder, also knew).

Yes, the inaccuracies in DEL’s VAT returns were attributable to the appellant. We found above that he knew that the transactions were connected with a fraudulent tax loss. His own witness accepted, and we found, that he was responsible for deciding which suppliers to use (although she said that she thought Ravinder sometimes had a say as well; as well not instead). And as Ms Robinson submitted, and which was common ground—

We have already found that the appellant knew that the input tax claimed was in respect of 120 transactions connected with fraudulent tax losses. He knew therefore that he was providing information for DEL’s claims to input tax when DEL was not in fact entitled to that input tax. The inaccuracies in DEL’s VAT returns were therefore attributable to the appellant.

No, the quantum of the penalty is not correct.

We do not disturb HMRC’s decision so far as relating to the reduction to be applied. The potential lost revenue was £576,611.51. The deliberate nature of the inaccuracies in this case mean that the penalty range, before reduction, is between 30 and 70% of the potential lost revenue. We accept that the disclosure was “prompted” because DEL did not tell HMRC about the inaccuracy before HMRC had reason to believe that HMRC had discovered or was about to discover it. We accept that the appropriate reduction was 10%; the trader provided some, but not all information, and did not provide it in a timely fashion. The trader did not tell HMRC about the inaccuracy or assist HMRC in understanding it, but did provide some access to business records so as to permit such a reduction.

We do however find that the quantum of the penalty is not correct for a different reason. That is because we find, as set out above, that HMRC have not discharged their burden of proving that the appellant knew that DEL’s purchases at the bottom of deal chains 84 to 86 were connected to fraudulent tax losses.

The amended grounds of appeal dated 18 June 2018 said—

In other words, the appeal was made under paragraph 15(2) of Schedule 24, in addition to paragraph 15(1) of that schedule. Pursuant to the power in paragraph 17(2)(b) of Schedule 24 to the Finance Act 2007, the tribunal reduces the amount payable by the appellant by such amount of the total as relates to deal chains 84 to 86.

The appellant criticised HMRC for, in his words, “allow[ing] frauds to continue without taking action to intervene and prevent the frauds from continuing”. The appellant questioned some of the HMRC’s witnesses about that.

We accept HMRC’s submission that, whether or not HMRC knowingly allowed a fraud to run, the tribunal has no jurisdiction to undertake any review of HMRC’s conduct in that regard. Moreover, it is not relevant to the determination that the tribunal has to make whether HMRC could or should have done more to prevent fraudulent trading. If HMRC’s conduct had been such that the inaccuracy was not (even partly) attributable to the appellant, that might be different. But we did not understand that to be Mr Farrell’s position.

It is for all of the above reasons that we dismissed the appeal except in relation to such amount of the penalty as related to deal chains 84 to 86.

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 the First-tier Tribunal not later than 56 days after this decision is sent to the party making the application. 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.