Kuldip Bachra v The Commissioners for HMRC

Articles 167 and 168 of Council Directive 2006/112/EC of 28 November 2006 on the common system of VAT (the “2006 Directive”) provide as follows:

“Article 167

A right of deduction shall arise at the time the deductible tax becomes chargeable…

Article 168

In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT, which he is liable to pay:

(a)

the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person…”

Article 273 of the 2006 Directive provides that “Member States may impose other obligations which they deem necessary to ensure the correct collection of VAT and to prevent evasion, subject to the requirement of equal treatment as between domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers”.

The above provisions are reflected in UK domestic legislation by ss24 to 26 Value Added Tax Act 1994, which provide as follows:

“24 Input tax and output tax

(1)

Subject to the following provisions of this section, “input tax”, in relation to a taxable person, means the following tax, that is to say-

(a)

VAT on the supply to him of any goods or services;…

being (in each case) goods or services used or to be used for the purpose of any business carried on or to be carried on by him…

(2)

Subject to the following provisions of this section, “output tax”, in relation to a taxable person, means VAT on supplies which he makes…

(6)

Regulations may provide -

(a)

for VAT on the supply of goods or services to a taxable person… to be treated as his input tax only if and to the extent that the charge to VAT is evidenced and quantified by reference to such documents or other information as may be specified in the regulations or the Commissioners may direct either generally or in particular cases or classes of cases;…

25 Payment by reference to accounting periods and credit for input tax against output tax

(1)

A taxable person shall -

(a)

in respect of supplies made by him…

account for and pay VAT by reference to such periods (in this Act referred to as “prescribed accounting periods”) at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances.

(2)

Subject to the provisions of this section, he is entitled at the end of each prescribed accounting period to credit for so much of his input tax as is allowable under section 26, and then to deduct that amount from any output tax that is due from him.

26 Input tax allowable under section 25

(1)

The amount of input tax for which a taxable person is entitled to credit at the end of any period shall be so much of the input tax for the period (that is input tax on supplies…) as is allowable by or under regulations as being attributable to supplies within subsection (2) below.

(2)

The supplies within this subsection are the following supplies made or to be made by the taxable person in the course or furtherance of his business – …

(b)

supplies outside the United Kingdom which would be taxable supplies if made in the United Kingdom;…”

Schedule 24 FA 2007 sets out the circumstances in which HMRC may issue a penalty:

“1 (1) A penalty is payable by a person (P) where -

(a)

P gives HMRC a document of a kind listed in the Table below, and

(b)

Conditions 1 and 2 are satisfied.

(2)

Condition 1 is that the document contains an inaccuracy which amounts to, or leads to -

(a)

an understatement of a liability to tax,

(b)

a false or inflated statement of a loss ..., or

(c)

a false or inflated claim to repayment of tax.

(3)

Condition 2 is that the inaccuracy was careless (within the meaning of paragraph 3) or deliberate on P’s part.

…”

VAT returns are a document listed in the Table to which paragraph 1 refers.

Paragraph 19 provides for HMRC to issue a penalty to an officer of a company by which certain penalties are payable:

“19 (1) Where a penalty under paragraph 1 is payable by a company for a deliberate inaccuracy which was attributable to an officer of the company, the officer is liable to pay such portion of the penalty (which may be 100%) as HMRC may specify by written notice to the officer.

(2)

Sub-paragraph (1) does not allow HMRC to recover more than 100% of a penalty.

(3)

In the application of sub-paragraph (1) to a body corporate other than a limited liability partnership “officer” means -

(a)

a director (including a shadow director within the meaning of section 251 of the Companies Act 2006 (c. 46)),

...

(5)

Where HMRC have specified a portion of a penalty in a notice given to an officer under sub-paragraph (1) -

(a)

paragraph 11 applies to the specified portion as to a penalty,

(b)

the officer must pay the specified portion before the end of the period of 30 days beginning with the day on which the notice is given,

(c)

paragraph 13(2), (3) and (5) apply as if the notice were an assessment of a penalty,

(d)

a further notice may be given in respect of a portion of any additional amount assessed in a supplementary assessment in respect of the penalty under paragraph 13(6),

(e)

paragraphs 15(1) and (2), 16 and 17(1) to (3) and (6) apply as if HMRC had decided that a penalty of the amount of the specified portion is payable by the officer, and

(f)

paragraph 21 applies as if the officer were liable to a penalty.

…”

The European Court of Justice (the “CJEU”), in its judgment in the joined cases of Axel Kittel v Belgium and Belgium v Recolta Recycling SPRL (C-439/04 and C-440/04) [2008] STC 1537, confirmed that taxable persons who “knew or should have known” that the supplies in which input tax was incurred were connected with the fraudulent evasion of VAT would not be entitled to claim a credit in respect of that VAT input tax in the manner described above:

“44.

The Court drew the conclusion, at paragraph 51 of Optigen, that transactions which are not themselves vitiated by VAT fraud constitute supplies of goods effected by a taxable person acting as such and an economic activity within the meaning of Article 2(1), Article 4 and Article 5(1) of the Sixth Directive where they fulfil the objective criteria on which the definitions of those terms are based, regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge.

45.

The Court observed that the right to deduct input VAT of a taxable person who carries out such transactions likewise cannot be affected by the fact that, in the chain of supply of which those transactions form part, another prior or subsequent transaction is vitiated by VAT fraud, without that taxable person knowing or having any means of knowing (Optigen, paragraph 52).

46.

The same conclusion applies where such transactions, without that taxable person knowing or having any means of knowing, are carried out in connection with fraud committed by the seller.

…

51  … traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of losing the right to deduct the input VAT. 

52.

It follows that, where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void, by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller, causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.

…

55.

Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively … It is a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent ends…

56.

In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods. 

57.

That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice. 

58.

In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them. 

59.

Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of ‘supply of goods effected by a taxable person acting as such’ and ‘economic activity’. 

60.

It follows from the foregoing that the answer to the questions must be that where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void - by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller - causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud.

61.

By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.”

In Mahagében kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Foigazgatósága and Peter David v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Foigazgatósága (C-80/11 and C-142/11) [2012] STC 1934 the CJEU gave additional guidance:

“53 According to the Court's case-law, traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input VAT (see Kittel and Recolta Recycling, paragraph 51).

54 On the other hand, it is not contrary to European Union law to require a trader to take every step which could reasonably be required of him to satisfy himself that the transaction which he is effecting does not result in his participation in tax evasion (see, to that effect, Case C-409/04 Teleos and Others [2007] ECR I-7797, paragraphs 65 and 68; Netto Supermarkt, paragraph 24; and Case C-499/10 Vlaamse Oliemaatschappij [2011] ECR I-0000, paragraph 25).

55 Moreover, in accordance with the first paragraph of Article 273 of Directive 2006/112, Member States may impose obligations, other than those provided for by that directive, if they consider such obligations necessary to ensure the correct levying and collection of VAT and to prevent evasion.

56 However, even though that provision gives the Member States a margin of discretion (see Case C-588/10 Kraft Foods Polska [2012] ECR I-0000, paragraph 23), that option may not be relied upon, according to the second paragraph of that article, in order to impose additional invoicing obligations over and above those laid down in Chapter 3, headed 'Invoicing', of Title XI, headed 'Obligations of taxable persons and certain non-taxable persons', of that directive and, in particular, Article 226 thereof.

57 Furthermore, the measures which the Member States may adopt under Article 273 of Directive 2006/112, in order to ensure the correct levying and collection of the tax and to prevent evasion, must not go further than is necessary to attain such objectives. Therefore, they cannot be used in such a way that they would have the effect of systematically undermining the right to deduct VAT and, consequently, the neutrality of VAT, which is a fundamental principle of the common system of VAT (see, to that effect, inter alia, Gabalfrisa and Others, paragraph 52; Halifax and Others, paragraph 92; Case C-385/09 Nidera Handelscompagnie [2010] ECR I-0000, paragraph 49; and Dankowski, paragraph 37).

58 As regards the national measures at issue in the case in the main proceedings, it must be noted that the Law on VAT does not prescribe specific obligations, but merely provides, in Paragraph 44(5), that the taxation rights of the taxable person indicated as the purchaser in the invoice may not be called into question, provided that that person has acted with due diligence in respect of the chargeable event, bearing in mind the circumstances under which the goods were supplied or the services performed.

59 In those circumstances, it follows from the case-law referred to in paragraphs 53 and 54 of the present judgment that determination of the measures which may, in a particular case, reasonably be required of a taxable person wishing to exercise the right to deduct VAT in order to satisfy himself that his transactions are not connected with fraud committed by a trader at an earlier stage of a transaction depends essentially on the circumstances of that particular case.

60 It is true that, when there are indications pointing to an infringement or fraud, a reasonable trader could, depending on the circumstances of the case, be obliged to make enquiries about another trader from whom he intends to purchase goods or services in order to ascertain the latter's trustworthiness.

61 However, the tax authority cannot, as a general rule, require the taxable person wishing to exercise the right to deduct VAT, first, to ensure that the issuer of the invoice relating to the goods and services in respect of which the exercise of that right to deduct is sought has the capacity of a taxable person, that he was in possession of the goods at issue and was in a position to supply them and that he has satisfied his obligations as regards declaration and payment of VAT, in order to be satisfied that there are no irregularities or fraud at the level of the traders operating at an earlier stage of the transaction or, second, to be in possession of documents in that regard.

62 It is, in principle, for the tax authorities to carry out the necessary inspections of taxable persons in order to detect VAT irregularities and fraud as well as to impose penalties on the taxable person who has committed those irregularities or fraud.

63 According to the case-law of the Court, Member States are required to check taxable persons' returns, accounts and other relevant documents (see Case C-132/06 Commission v Italy [2008] ECR I-5457, paragraph 37, and Case C-188/09 Profaktor Kulesza, Frankowski, Józwiak, Orlowski [2010] ECR I-7639, paragraph 21).

64 To that end, Directive 2006/112 imposes, in particular in Article 242, an obligation on every taxable person to keep accounts in sufficient detail for VAT to be applied and its application checked by the tax authorities. In order to facilitate the performance of that task, Articles 245 and 249 of that directive provide for the right of the competent authorities to access the invoices which the taxable person is obliged to store under Article 244 of that directive.

65 It follows that, by imposing on taxable persons, in view of the risk that the right to deduct may be refused, the measures listed in paragraph 61 of the present judgment, the tax authority would, contrary to those provisions, be transferring its own investigative tasks to taxable persons.”

The Kittel principle has been clarified by Moses LJ in Mobilx Ltd (in administration) v HMRC [2010] EWCA Civ 517 at [30]:

“…the Court made clear that the reason why fraud vitiates a transaction is not because it makes the transaction unlawful but rather because where a person commits fraud he will not be able to establish that the objective criteria which determine the scope of VAT and the right to deduct have been met.” 

Considering further the extent of knowledge, Moses LJ stated:

“55.

If HMRC was right and it was sufficient to show that the trader should have known that he was running a risk that his purchase was connected with fraud, the principle of legal certainty would, in my view, be infringed. A trader who knows or could have known no more than that there was a risk of fraud will find it difficult to gauge the extent of the risk; nor will he be able to foresee whether the circumstances are such that it will be asserted against him that the risk of fraud was so great that he should not have entered into the transaction. In short, he will not be in a position to know before he enters into the transaction that, if he does so, he will not be entitled to deduct input VAT. The principle of legal certainty will be infringed.

56.

It must be remembered that the approach of the court in Kittel was to enlarge the category of participants. A trader who should have known that he was running the risk that by his purchase he might be taking part in a transaction connected with fraudulent evasion of VAT, cannot be regarded as a participant in that fraud. The highest it could be put is that he was running the risk that he might be a participant. That is not the approach of the Court in Kittel, nor is it the language it used. In those circumstances, I am of the view that it must be established that the trader knew or should have known that by his purchase he was taking part in such a transaction, as the Chancellor concluded in his judgment in BSG: -

“The relevant knowledge is that BSG ought to have known by its purchases it was participating in transactions which were connected with a fraudulent evasion of VAT; that such transactions might be so connected is not enough.” (§ 52)

57.

HMRC object that the principle should not be restricted to those cases where a trader has deliberately refrained from asking questions lest his suspicions should be confirmed. This has been described as a category of case which is so close to actual knowledge that the person is treated as having received the information which he deliberately sought to avoid (see Lord Scott in Manifest Shipping Co Limited v Uni-Polaris Insurance Co Limited and Others [2001] UKHL 1 and White v White [2001] 1 WLR 481 paragraphs 16 and 17, 486 E-G). HMRC seeks to rely upon the views of Lewison J in Livewire and Olympia [2009] EWHC 15 (Ch) (§ 85) and Burton J in R (Just Fabulous) v HMRC [2008] STC 2123 (§ 45) that:

“The principle of legal certainty must be trumped by the ‘objective recognised and encouraged by the Sixth Directive’.”

58.

As I have endeavoured to emphasise, the essence of the approach of the court in Kittel was to provide a means of depriving those who participate in a transaction connected with fraudulent evasion of VAT by extending the category of participants and, thus, of those whose transactions do not meet the objective criteria which determine the scope of the right to deduct. The court preserved the principle of legal certainty; it did not trump it.

59.

The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who “should have known”. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel. 

60.

The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”

On questions of proof, Moses LJ stated:

“81.

HMRC raised in writing the question as to where the burden of proof lies. It is plain that if HMRC wishes to assert that a trader's state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion. No sensible argument was advanced to the contrary.

82.

But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. As I indicated in relation to the BSG appeal, Tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a Tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was.”

At [83] Moses LJ stated that he could do no better than repeat the words of Christopher Clarke J in Red12 v HMRC [2009] EWHC 2563 (Ch):

“109.

Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and “similar fact” evidence. That is not to alter its character by reference to earlier or later transactions but to discern it. 

110.

To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile telephones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands. 

111.

Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.”

In Fonecomp Limited v HMRC [2015] EWCA Civ 39 it was submitted that the words “should have known” (per Moses LJ in Mobilx ) meant “has any means of knowing” (at [51]) and that the Appellant could not have found out about the fraud even if it made inquiries because the fraud did not relate to the chain of transactions with which it was concerned. Arden LJ in the Court of Appeal (with whom McFarlane and Burnett LJJ agreed) said, at [51]:

“However, in my judgment, the holding of Moses LJ does not mean that the trader has to have the means of knowing how the fraud that actually took place occurred. He has simply to know, or have the means of knowing, that fraud has occurred, or will occur, at some point in some transaction to which his transaction is connected. The participant does not need to know how the fraud was carried out in order to have this knowledge. This is apparent from [56] and [61] of Kittel cited above. Paragraph 61 of Kittel formulates the requirement of knowledge as knowledge on the part of the trader that “by his purchase he was participating in a transaction connected with fraudulent evasion of VAT”. It follows that the trader does not need to know the specific details of the fraud.”

In Davis and Dann Ltd v HMRC [2016] STC 126, the Court of Appeal approached the “should have known” test on the basis of Moses LJ’s statement in Mobilx that it required that “the only reasonable explanation” for the transactions must have been connection to fraud. It was common ground in that case that what HMRC needed to show was that the only reasonable explanation for the transactions was that they were connected to a VAT fraud (at [4], citing Mobilx at [59]).

In AC (Wholesale) Limited v HMRC [2017] UKUT 191 (TCC) the Upper Tribunal concluded that the “only reasonable explanation” formulation was simply one way of showing that a person should have known that the transaction was connected to fraud:

“29…Moses LJ was clear that the test in Kittel was a simple one that should not be over refined. It is, to us, inconceivable that Moses LJ’s example of an application of part of that test, the ‘no other reasonable explanation’, would lead to the test becoming more complicated and more difficult to apply in practice. That, in our view, would be the consequence of applying the interpretation urged upon us by Mr Brown. In effect, HMRC would be required to devote time and resources to considering what possible reasonable explanations, other than a connection with fraud, might be put forward by an appellant and then adduce evidence and argument to counter them even where the appellant has not sought to rely on such explanations. That would be an unreasonable and unjustified evidential burden on HMRC. Accordingly, we do not consider that HMRC are required to eliminate all possible reasonable explanations other than fraud before the FTT is entitled to conclude that the appellant should have known that the transactions were connected to fraud. 

30.

Of course, we accept (as, we understand, does HMRC) that where the appellant asserts that there is an explanation (or several explanations) for the circumstances of a transaction other than a connection with fraud then it may be necessary for HMRC to show that the only reasonable explanation was fraud. As is clear from Davis & Dann, the FTT’s task in such a case is to have regard to all the circumstances, both individually and cumulatively, and then decide whether HMRC have proved that the appellant should have known of the connection with fraud. In assessing the overall picture, the FTT may consider whether the only reasonable conclusion was that the purchases were connected with fraud. Whether the circumstances of the transactions can reasonably be regarded as having an explanation other than a connection with fraud or the existence of such a connection is the only reasonable explanation is a question of fact and evaluation that must be decided on the evidence in the particular case. It does not make the elimination of all possible explanations the test which remains, simply, did the person claiming the right to deduct input tax know that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT or should he have known of such a connection.”

The case law also indicates that it is necessary to guard against over-compartmentalisation of relevant factors, and to stand back and consider the totality of the evidence (Davis and Dann, and CCA Distribution v HMRC [2017] EWCA Civ 1899).

HMRC bears the burden of proof in respect of all of the issues in this appeal, namely:

As stated above, the burden of proof is on HMRC in respect of all these issues, the relevant standard of proof being the balance of probabilities. In HMRC v Citibank NA, E Buyer UK Limited [2017] EWCA 1416 (Civ) the Court of Appeal held that satisfying the burden of proof in respect of the allegation that a taxpayer knew or should have known that its transactions were connected with the fraudulent evasion of VAT does not require HMRC to prove that the taxpayer (or those acting on its behalf) was dishonest or fraudulent. HMRC has not pleaded dishonesty or fraud in respect of either OWD or Mrs Bachra. However, where HMRC seeks to allege that a person has fraudulently defaulted on a VAT liability (which is a necessary part of the Kittel principle), that does amount to an allegation of fraud or dishonesty made against a non-party.

The penalty issued to OWD and the PLN issued to Mrs Bachra were based on HMRC’s denial of credit for input tax on 375 Deals. HMRC have subsequently withdrawn their case in respect of 43 of these Deals for various reasons – for some it was because they had pleaded the wrong defaulter in the Statement of Case and accepted it was too late to amend fairly; others because they could not prove the deals traced to fraudulent tax losses; one because the supply was not of alcoholic goods and some because HMRC accepted they could not prove that the alleged defaulting trader had not declared the deals (due to absence of business records). HMRC did not accept that any of the withdrawn deals, save for that involving non-alcoholic goods, were untainted by a connection with fraud, but they were not pursued for the purposes of this appeal. (The deal packs, and the Deal numbers referred to in this Decision, retained their original numbering.)

Mrs Bachra’s appeal against the PLN must be allowed to the extent that the penalty issued to OWD related to the denial of credit for input tax on those 43 Deals. We consider the status of the PLN and HMRC’s change of position in relation to the amount at issue further in the context of the Discussion on the calculation of the PLN below (at [269] to [276]).

Of the remaining 332 Deals, Mrs Bachra accepted that HMRC have established a connection with the fraudulent evasion of VAT in many of these deals, but did challenge some denials on the basis that HMRC have not proved the transaction chains. (Mrs Bachra had initially also challenged whether HMRC had established that there was a fraudulent default in respect of some of the alleged defaulters, and this challenge was maintained in Mr Bedenham’s skeleton argument, but after the conclusion of the oral evidence at the hearing Mr Bedenham confirmed that it was now accepted by Mrs Bachra that all of the businesses said to be the defaulting trader in specified deals were fraudulent defaulters.) We consider this challenge to the transaction chains in the Discussion on whether there were inaccuracies in OWD’s returns (at [150] to [168]).

The hearing bundles were extensive, and we heard evidence from two witnesses, Mrs Bachra and Officer Joanne Jones of HMRC, both of whom were cross-examined on their evidence.

The documentary evidence included:

OWD is in liquidation and the records of OWD are in the possession of the liquidator, not Mrs Bachra. Neither party had requested a copy of the records from the liquidator.

Mrs Bachra had provided two witness statements. In responding to the matters relied upon by HMRC in their Statement of Case, Mrs Bachra emphasised that she did not have OWD’s records, she was now responsible for looking after her husband (who had been taken seriously ill in 2017), the visits by HMRC were several years ago and she had not been experienced in running a business and dealing with suppliers. As to Mrs Bachra’s evidence:

We did not find Mrs Bachra’s evidence to be helpful; and there were areas where her evidence was contradicted by contemporaneous documentary evidence, as noted above. We have generally sought to corroborate Mrs Bachra’s evidence by reference to documentary evidence or visit reports when making our findings of fact and reaching conclusions as we were not satisfied that her evidence was reliable. That is not, however, a conclusion that Mrs Bachra’s evidence was untruthful (and we note that HMRC had not pleaded dishonesty).

Officer Jones had been employed by HMRC since February 1987 and in her current role (which she has been in since July 2012) she examines the compliance of businesses operating in the alcohol trade and investigates alcohol supply chains. Officer Jones had provided four witness statements in relation to OWD. The VAT assessment issued to OWD had been issued by Officer Kim Deakin (who had visited OWD during the VAT periods in issue), who has since left the team. Officer Jones had issued the penalty to OWD in November 2017 and the PLN to Mrs Bachra in December 2017 but had not visited OWD whilst the company was trading.

We found Officer Jones to be an honest and credible witness. Officer Jones was not, however, able to add anything to the information contained in HMRC’s visit reports as she had not been present at any of those visits.

Officer Jones had also provided witness statements in respect of some of the other traders in the transaction chains, namely ALT Supplies Ltd (“ALT”), Neat Trading Ltd (“Neat”) and Yewhall Ltd (“Yewhall”) (each of which were accepted to be fraudulent defaulters) and Bestbuys Supplies Ltd (“Bestbuys”) (a buffer trader). Officer Jones’ evidence as to matters of fact in those witness statements was not challenged.

There were witness statements from a multitude of HMRC officers setting out HMRC’s position in relation to each of the fraudulent defaulters and buffer traders. Mr Bedenham did not require those witnesses to attend the hearing to be cross-examined on their evidence and their evidence of fact in those statements was not challenged.

We have taken account of all of the evidence and submissions when making our findings of fact and reaching our decision, but have not found it necessary to refer to all of the evidence and submissions in this Decision.

We set out here our findings of fact, which mainly relate to the background to the establishment of OWD, the visits by HMRC officers to OWD (each of which was attended by Mrs Bachra) and the due diligence conducted by OWD in respect of its suppliers. We make additional findings of fact in the Discussion.

Mrs Bachra had owned and rented out a number of off-licences. In around 2003, having rented out or sold these retail businesses, she was employed at Eastenders Cash & Carry (“Eastenders”) as a cashier. Eastenders was owned by Kulwant Hare (Mrs Bachra’s brother) and Alexander Wilson. She was promoted to the role of warehouse manager of the warehouse in Birmingham, and held that role for nine years. This role did not involve her dealing with suppliers.

In around 2013 Eastenders shut down this Birmingham business. OWD bought the stock held by Eastenders in its warehouse in Rabone Lane and then operated from those premises itself.

OWD had been incorporated on 17 May 2013. The application form to register for VAT was received by HMRC on 20 May 2013 and stated that its business activities were the sale of confectionery, soft drinks, tobacco, sweets, crisp, milk and bread, butter, etc. This application was submitted by Hoang Van Dinh, OWD’s first director. The effective date of VAT registration was 27 May 2013. Mrs Bachra was appointed as director of OWD on 3 June 2013 and was the sole director throughout VAT periods 03/14 to 12/16 and until OWD went into liquidation in 2017.

In October 2013 OWD informed HMRC that its principal place of business had changed to Rabone Lane, Smethwick, Birmingham - OWD operated from these premises throughout the VAT periods in issue.

OWD operated a cash and carry business, supplying retailers (including clubs, pubs and restaurants) and traders with various products including alcohol. Sales of alcohol accounted for 65 to 70% of its turnover, and this was the mainstay of its business. OWD also sold, eg, soft drinks, confectionary, toiletries, cleaning products and electronic cigarettes.

OWD purchased alcoholic goods from a number of different suppliers. Mrs Bachra, and thus OWD, was approached by these suppliers attending the warehouse in Rabone Lane and offering to supply various goods.

Mrs Bachra explained that OWD did want to buy from sources closer to the manufacturer, but its size meant that it was usually not possible to buy direct in this manner. Jeff Street, who was appointed as manager during the VAT periods in issue, did focus on this and OWD did join a buyers’ group to try to improve its purchasing power.

There are 332 purchases by OWD in respect of which HMRC has denied credit for input tax. The fact that these supplies took place, the dates, supplier and value were agreed between the parties. The final deal to which this appeal relates, Deal 375, took place on 9 December 2016.

We describe here the visits by HMRC to OWD and some of the correspondence between them.

We had the visit reports from HMRC and, as set out above, concluded that they were broadly accurate as a record of the discussions which had taken place. Mr Bedenham did challenge the fairness of the observations which were made by HMRC in those reports (usually presented under the heading “Conclusions/credibility”) and we address those to the extent required in the Discussion.

On 23 October 2013 Officers Brian Nolan and Stephen Dunckley made an unannounced visit to OWD’s premises and they met with Mrs Bachra. The visit report records:

The Conclusion/Credibility section of the report records that either Mrs Bachra never got over her nervousness from the unannounced visit, or she in fact knows little about the business. Getting answers was like “drawing teeth” and this section concludes “I am concerned that in fact Mrs Bachra is in fact “a front” and in reality others control what goes on but I have no evidence to substantiate this.”

Officers Nolan and Dunckley then visited Deepak Kabra of CBS Associates on 13 November 2013.

The visit report includes:

Officers Simon Japes and Dave McMaster visited OWD, and met with Mrs Bachra and Mr Kabra.

The visit report records:

The report includes a note that the trader is potentially high risk and twice-yearly visits would be worthwhile.

HMRC then sent the following letters:

On 15 July 2015 HMRC issued a Schedule 36 notice to OWD for business records for the VAT periods 06/13 to 06/15, as well as specified records for transactions that had taken place since 1 July 2015, to be provided by 5 August 2015. This notice had not been complied with in full by 14 September 2015, as records for transactions since 1 July 2015 had not been provided.

This was a long meeting (over 4 hours), and those attending included Officers Julie Cawley and Kim Deakin from HMRC, as well as Mike Tilt of HMRC, a data handling specialist, Mrs Bachra, Mr Kabra and Nigel Ferrington of Vincent Curley & Co.

The visit report includes a list of suppliers to OWD; they include One Way Wholesale, Marchis, Beccha Brands, Ace Drinks and Millennium Wholesale.

The first part of the visit report is Officer Tilt’s interim report. Officer Tilt had attended to interrogate the computerised record systems namely STL (for the tills) and VT (for the accounts). That report describes the processes used for customers, stock control and payments from the till, and includes the following:

The report on the remainder of the visit includes:

The Conclusion/Credibility section records that the data handling interim report has significant concerns, and the interview highlighted concerns as to the legitimacy of supply chains, origin of funds for set-up of the business, controls over who is buying stock, quality of due diligence, control of cash and who is the guiding mind behind the running of the company.

After the meeting, Officer Cawley wrote to OWD arranging for Officer Deakin to visit OWD on 24 August 2015 (as had been agreed with Mr Kabra) to collect the requested paper records, and arranging a return visit to complete their questions regarding trading activities on 14 September 2015.

That meeting in September did not take place as Vincent Curley & Co were not available on that date.

Officers Cawley, Deakin and Tilt visited OWD on 6 October 2015. They met with Mrs Bachra, Mr Kabra and Vincent Curley.

The visit report lists suppliers to OWD including Millennium Wholesale, Budweiser Budvar UK Ltd, Dassani Off Licence and Corinthian Brands Ltd. The visit report includes:

The meeting was somewhat fractious, in particular between Officer Cawley and Mr Curley. There were various exchanges about the timing of information being provided, and what exactly was being requested.

There was then a discussion about specific suppliers. We list all discussed below, but have not summarised the discussion for each:

In the context of discussing Allan Desmond, Officer Cawley noted that OWD seemed to have a high turnover of suppliers and asked whether customers expect the same stock when they regularly come to the cash and carry. Mrs Bachra said that they, OWD, had to take what stock was coming.

HMRC also asked for records – purchase ledgers for the suppliers discussed, a price list from the cash and carry and records for July to September 2015 in respect of Ace Wines, Millennium Wholesale, Hare Wines, Budweiser, One Way Wholesale, SS Traders and others. They also asked about new suppliers in the last three weeks; Mrs Bachra didn’t want to commit herself, and Mr Curley said they would be in the business records. There was a discussion over timing of provision of the records.

The Conclusion/Credibility section records:

Officers Cawley and Deakin returned to OWD, meeting with Mrs Bachra, Mr Curley and Mr Kabra (and others).

The visit report includes:

In Conclusion/Credibility it was recorded by HMRC that there remain unanswered questions over the ownership of the premises and missing sales transactions. The due diligence is not of an acceptable level, and overall the officers’ level of concern remains high.

From the report it appears that there had been disagreements between Officer Deakin and Mr Curley in the context of the discussion about whether there were missing invoices. This continued in the context of a discussion about an invoice for rent. Officer Deakin was frustrated by Mr Curley answering on behalf of the trader without reference to her; Mrs Bachra and Mr Curley stepped out of the room for a few minutes at one point. Officer Deakin said Mr Curley was obstructive in the context of her requests for records.

On 10 February 2016 HMRC wrote to OWD saying that they would issue best judgment assessments for tax due on missing sales transactions and sales credit notes, issue an assessment to deny input tax on rent from invoices (where those issuing the invoices were not VAT registered), and issue an assessment to correct anomalies on input tax credits claimed in 12/14 and 03/15. The following assessments were issued:

HMRC issued Schedule 36 notices on 15 March 2016 and 12 April 2016 for specified purchase invoices from SDDL, Gempost, Just Beers and STL (no further details specified), sales invoices to Exeter Wine Company and due diligence records in respect of Just Beer, Gempost, Chameleon and Best Drinks Cash and Carry (“Best Drinks”); and for purchase and sales ledgers, and the five highest value purchase invoices, for each of February and March 2016.

On 18 April 2016 Officer Cawley wrote to OWD saying she had now had the opportunity to review the due diligence provided in respect of the four new suppliers, Best Drinks, Chameleon, Just Beer and Gempost, setting out specific comments and concerns, concluding in her opinion that the due diligence reports did not meet the requirements set out in Excise Notice 2002.

On 23 May 2016 HMRC issued a VAT assessment for £10,255 in respect of the property invoices for 03/16.

Another Schedule 36 notice was issued on 20 June 2016.

Officer Cawley began trying to arrange the next visit to OWD with Mr Curley on 12 May 2016. Meetings were twice arranged but later cancelled by Mr Curley. The next visit did not take place until 27 July 2016.

Officers Cawley, Deakin and Paul Marriott visited OWD and met with Mrs Bachra, Mr Curley, Mr Kabra and another on 27 July 2016.

The visit report includes:

In Conclusion/Credibility the officers said “It is a concern that OWD’s level of due diligence did not highlight problems with Chameleon. KB’s explanations are not convincing…KB still buys from people who are described as passing trade and makes an initial order on the slimmest of due diligence…”.

HMRC issued further Schedule 36 notices on 30 August 2016.

The final visit by HMRC to OWD during the periods under appeal was on 4 November 2016. Officers Cawley and Marriott attended as well as Mrs Bachra, Mr Kabra and Mr Barring of Vincent Curley & Co.

The visit report includes:

The Conclusion/Credibility section records that at this time she was still concerned over the rate of turnover of suppliers that shortly after supplying OWD then become deregistered.

HMRC issued Schedule 36 notices to OWD on 6 December 2016, 12 January 2017, 2 February 2017, 2 March 2017 and 9 March 2017.

OWD was sent various notifications of deregistration and tax loss letters.

HMRC issued seven letters to OWD notifying it of counterparties that had been deregistered for VAT (“Notices of Deregistration”):

During the periods 03/14 to 12/16, HMRC issued seven letters to OWD notifying it that transactions through six of its suppliers had traced to tax losses (the “Tax Loss Letters”). Those letters are in standard form, reminding OWD of HMRC’s ongoing investigations into MTIC fraud, stating that as a result of their enquiries in respect of the specified VAT period, HMRC now know that a specified number of transactions commenced with a defaulting trader, resulting in a loss to the public revenue. Those letters identify the purchase invoices which have been traced in transaction chains commencing with a VAT loss:

During this time there was also a “Balance of Probabilities Tax Loss Warning” letter dated 6 October 2015. That letter warns OWD that a significant number of their purchases “appear to be connected to fraud” with the supply chains commencing with a defaulting trader in the UK, and identifying the suppliers in question as Wentworth and SS Traders. That letter says HMRC were continuing their investigations and once the full amount of unpaid VAT has been established HMRC will issue a tax loss letter to OWD scheduling the relevant transactions.

OWD did not trade with any supplier after receiving a Tax Loss Letter or a Notice of Deregistration in respect of that supplier.

Further Tax Loss Letters were issued after the VAT periods under appeal:

Mrs Bachra’s evidence as to the due diligence conducted by OWD was that before trading with any suppliers, due diligence was always conducted by OWD’s accountant (Mr Kabra at CBS Associates) and by DDE (a business run by Mark Curley, Vincent Curley’s son). Suppliers would also sometimes leave due diligence information with OWD when they visited OWD in Rathbone Lane, and Mrs Bachra did visit the premises of some suppliers, including Wentworth and SS Traders.

We make detailed findings below in relation to the documentary evidence of this due diligence, based on the papers which were provided by OWD (and its advisers) to HMRC, and then draw some conclusions as to the level of due diligence conducted. We deal with the suppliers alphabetically rather than the order in which they appeared in the Deals.

When assessing the due diligence conducted by OWD, we do not place any weight on the fact that OWD subsequently went into liquidation. HMRC were requesting copies of due diligence packs throughout the VAT periods in issue (not only during the visits, but then requiring them by issuing Schedule 36 notices). We have concluded that the information which was provided contemporaneously to HMRC, and which is now in the bundle, is that which OWD had obtained at the time.

We consider the content of the various DDE reports in relation to the different suppliers below. We note at the outset that the reports take a fairly standard form:

The due diligence provided to HMRC was:

The only due diligence information provided to HMRC were DDE reports of which there were two different versions, both of which are dated 17 October 2014.

One version of this DDE report was sent to OWD with a cover letter dated 20 January 2015, which states that the business has passed the full vetting procedures and notes that the report details the financial information and references available. The report includes:

The second version of the report was provided to HMRC in 2019. It is also dated 17 October 2014, with a cover letter of that date; but that includes different photos (although the same visit report) and a landlord’s reference from 1 December 2014.

The DDE report was sent to OWD on 11 March 2015, and states that the business passed their vetting procedures. The report includes:

The DDE report was sent to OWD on 3 March 2016. That report stated that the business had passed DDE’s vetting procedures and includes:

The due diligence provided to HMRC comprised:

The DDE report was sent to OWD on 10 February 2016. That report says that the business passed the vetting procedures and includes:

The due diligence provided to HMRC comprised:

The DDE report was sent to OWD on 15 February 2016 and states that the business passed the vetting procedures, and information relating to FITTED due diligence checks has been provided in the report. The report then includes:

The due diligence information provided to HMRC comprised:

There was the following due diligence information:

The due diligence provided to HMRC comprised:

The due diligence provided to HMRC was:

OWD provided the following due diligence to HMRC:

We also had:

There were three reports from DDE which were sent to OWD on different dates:

The due diligence provided to HMRC was:

The due diligence provided to HMRC was:

The due diligence provided to HMRC comprised:

There was a further copy of this report from DDE which was sent to OWD on 28 May 2015; it is substantially same but states that they could not obtain references and noting this is not necessarily negative.

The first DDE report which was sent by DDE to OWD was that for Gujarr on 27 August 2014. There was no DDE report for ALT, Destined or N&R Supplies Ltd (“N&R”) (a supplier for which no due diligence was provided to HMRC) and we find that DDE had not been instructed by OWD to conduct due diligence for initial suppliers such as ALT and Destined.

For some suppliers (eg Allan Desmond, Gempost and Just Beer), the only documentary evidence of due diligence was the DDE report.

Mr Kabra and Mrs Bachra informed HMRC during the various visits that CBS Associates would always conduct due diligence on suppliers. The difficulty with accepting this explanation is that there was no documentary evidence of this for some of the suppliers (as above), and no good reason for the failure to have produced such evidence.

This can be illustrated by the due diligence produced for Chameleon Trading (where the only evidence produced was the DDE report). The first supply was on 31 March 2016, by which time there had been several visits from HMRC. In the visit of 2 February 2016, Mrs Bachra named Chameleon Trading as a new supplier from whom they had bought in December, and said that due diligence had been done by DDE. She said that the supplier came to OWD’s premises and left due diligence. There was no documentary evidence of what had been left, and no documentary evidence of any due diligence having been undertaken by Mr Kabra. The proximity of HMRC’s visit to the dates of trading with Chameleon Trading means that if due diligence had been to hand at that time, we would expect OWD to have provided it. The fact that nothing was given to HMRC leads us to infer that there was nothing other than the DDE report.

The position is similar in respect of Just Beer - HMRC sent a Schedule 36 notice to OWD on 15 March 2016 requiring production of specified invoices and documents, including due diligence records in respect of Just Beer (which had originally been requested on 19 February 2016). OWD had only started trading with Just Beer in January 2016, and they only provided the DDE report (from February 2016). This is strong evidence that there was no other due diligence which had been done.

In any event, based on all of the evidence before us, including the level of due diligence done for ALT and Destined, and Mr Kabra’s explanations to HMRC officers during the visits, and recognising that some of the due diligence held by OWD for suppliers was that which had been handed to them by those suppliers, we conclude that where conducted this involved obtaining the certificate of incorporation of the company, verifying the identity of the director (by obtaining a copy passport and/or driving licence) and some check of the VAT number (generally by conducting a VIES check online).

We have concluded, on the balance of probabilities, that, with one exception, the only due diligence conducted by or on behalf of OWD is that which was produced by way of documentary evidence. The exception relates to N&R, where the first supply was on 17 November 2016, ie after the last visit by HMRC to OWD whilst trading, and accept that this would explain why no due diligence for this supplier was provided to HMRC.

We address in the Discussion the extent to which this information was then read and assessed by OWD.

HMRC issued a notice of VAT assessment to OWD on 24 January 2017 for £38,415 denying input tax which had been claimed for 12/15 and 06/16 on purchases from Chameleon. The director of Chameleon had no knowledge of OWD and HMRC said it appeared OWD had purchased from a hijacked trader. OWD requested a review (by letter from Rainer Hughes on 6 February 2017). The review conclusion letter from HMRC dated 14 March 2017 upheld that assessment.

HMRC notified OWD on 5 June 2017 of its decision to refuse entitlement to the right to deduct input tax on the basis of the application of Kittel. The VAT assessment for the periods 03/14 to 12/16 totalled £2,064,126. OWD requested a review; the letter is dated 31 March 2017 but that date cannot be correct. In any event, HMRC replied on 22 June 2017 stating that the request had been passed to the review team.

Officer Cawley and Paul Marriott made an unannounced visit to OWD at Rabone Lane on 27 June 2017. The building was being demolished. The builders confirmed that they had been on site since April 2017 and they were building a new cash and carry for Dhamecha.

On 29 June 2017 HMRC wrote to OWD Ltd at the address of CBS Associates informing them that OWD’s VAT registration was cancelled with effect from 1 April 2017.

HMRC had also issued notifications of excise duty assessments to OWD in November 2016, January 2017 and February 2017, as well as related penalty assessments.

A liquidator was appointed for OWD on 15 August 2017.

As set out in Background Facts above, the penalty was issued to OWD c/o Kingsland Business Recovery of £1,177,422.96 on 2 November 2017 and the PLN for the same amount was issued to Mrs Bachra in December 2017.

As set out above, HMRC must establish, on the balance of probabilities, that OWD was not entitled to the input tax claimed, ie that the Kittel test is satisfied in relation to the relevant supplies. This requires the following to be determined:

Mr Bedenham accepted that the various defaults relied upon by HMRC in each of the specified deals were fraudulent. However, he challenged whether HMRC had met their burden of establishing a connection with the fraudulent evasion of VAT in some of the deals.

The tax losses, and the fact that they resulted from the fraudulent evasion of VAT, were agreed. The fraudulent defaulters were:

Deals 178-180, 193-199, 221-258 and 272-282 are not listed above against any fraudulent defaulter. They were all supplies by SDDL to OWD. HMRC did not allege that SDDL was a fraudulent defaulter, and Mrs Bachra did not accept that these supplies were connected with the fraudulent evasion of VAT.

Dealing with deals where Mrs Bachra challenged whether the supplies to OWD were connected with the fraudulent evasion of VAT, Mr Watkinson acknowledged that HMRC had not produced documentary evidence (eg invoices) but were inviting the Tribunal to draw an inference based on all of the evidence available.

There were 17 purchases by OWD from Gujarr (which was not alleged to be a fraudulent defaulter) in August to October 2014 (Deals 72-86 and 92-93). 16 of those have been accepted as tracing back to Logical (a fraudulent defaulter). There is no documentary evidence that the goods in Deal 74, purchased on 21 August 2014 for a gross amount of £36,680.57, also traced back to Logical.

The evidence adduced by HMRC in respect of Gujarr (not specific to Deal 74) establishes that:

We are satisfied on the basis of this evidence that HMRC have established that, on the balance of probabilities, Deal 74 was connected to a fraudulent tax loss.

Deals 97-110 were all purchases by OWD from Allan Desmond in October to December 2014. Officer Jones has produced documents tracing 8 of the 14 transaction chains (Deals 97-103 and 110) back to Fahm (a fraudulent defaulter). HMRC did not have complete supporting documents for Deals 104-109 (the invoices to OWD for which were dated 18 to 28 November 2014) showing that Allan Desmond had purchased these goods from Fahm.

However, on the basis of:

OWD bought from Wentworth in Deals 206-211 in July to September 2015. Mrs Bachra accepted that the goods in Deals 206-207 had been supplied by KT Enterprises, a fraudulent defaulter, to Wentworth. There was no documentation connecting Deals 208-211 back to KT Enterprises. HMRC invited us to draw an inference.

We note that Deals 206 and 207 took place in July and August 2015, whereas the challenged supplies all took place from 3 to 8 September 2015.

There had been earlier supplies in 2015 by Wentworth to OWD, which also traced back to fraudulent defaulters – in some Wentworth had bought from Beer Bhai, others from Aphrodite. This was not a case where the direct supplier to OWD only had one supplier.

The evidence from HMRC’s visits establishes that:

There were also invoices from TJ Drinks to Wentworth for several supplies in October to December 2015.

HMRC submitted that the only two potential suppliers to Wentworth for these four deals are KT Enterprises and TJ Drinks, both of which were accepted to be fraudulent defaulters.

On balance, and taking account of all of the evidence, we accept that the connection to a fraudulent default has been established by HMRC.

Gempost was a supplier to OWD between January and August 2016. Gempost was not a fraudulent defaulter, but was accepted as having purchased from Newmoby (a fraudulent defaulter) in Deals 329-338 and 348-349 in May, June and July 2016. Deals 350 to 353 were supplies from Gempost to OWD between 1 to 10 August 2016. There was no documentation linking these supplies back to Newmoby, and HMRC relied on the pattern of trade.

Gempost were found to be missing during a visit by HMRC on 24 August 2016, and HMRC had not been able to obtain invoices in relation to these four deals. HMRC did adduce evidence that Gempost had made a further 176 purchases from Newmoby between 15 May and 30 July 2016.

Based on the pattern of trade and the fact that Gempost had made more purchases from Newmoby, we drew the inference that Deals 350-353 also traced from Gempost back to Newmoby, and were connected with the fraudulent evasion of VAT.

These are all purchases by OWD from SDDL. SDDL is said by HMRC to be a buffer trader - they do not allege it was itself a fraudulent defaulter. HMRC submit that the deals were connected with the fraudulent evasion of VAT, on the basis that all of SDDL’s purchases which they have been able to trace have been traced to fraudulent tax losses, and so, on the balance of probabilities, where SDDL supplied OWD those purchases also traced to fraudulent tax losses.

The evidence as to SDDL establishes:

On the basis of the evidence, we accept that OWD’s purchases from SDDL also traced to fraudulent tax losses.

We have set out above the principles which have developed in relation to whether a taxable person knew or should have known that its transactions were connected with the fraudulent evasion of VAT. Both parties proceeded on the basis that it is the knowledge and actions of Mrs Bachra that are relevant when considering what OWD knew or should have known; we agree that this is the correct approach as she was the sole director of OWD and her evidence was that she was the person making the decisions.

For HMRC, Mr Watkinson submitted:

Mr Bedenham submitted that Mrs Bachra had had the opportunity to run a cash and carry business in Birmingham in 2013, had taken that up and, not having had the experience of such a role, had taken the sensible steps of seeking external help from accountants and subsequently a tax adviser and using a professional due diligence company. Some of the transactions undertaken were subsequently found to have been connected with fraud; but her suppliers were vetted by professionals and nothing about these purchases stood out compared to the remainder of the business. The goods bought were then sold in the cash and carry.

Furthermore, Mr Bedenham emphasised that HMRC’s own case relied upon the same factors for knowledge and should have known, ie HMRC accepted that these factors are consistent with its position that OWD should have known of the connection to fraud and even if we find that the matters relied upon are made out this does not require a conclusion that OWD knew of the connection.

The outcome of this appeal need not necessarily be binary – just as we could find that HMRC had met their burden in respect of some but not all of the connections to fraudulent evasion, we could also conclude that, based on the facts as we have found them, OWD knew or should have known as from a particular date.

We have assessed the various factors on which the parties relied in the light of all of the evidence before us and set out our conclusions below.

HMRC have established a connection to the fraudulent evasion of VAT for 332 supplies to OWD over a three year period. HMRC have produced a deal overview which records, for each VAT period, the percentage of input tax traced to the fraudulent evasion of VAT. This shows the following:

The overall percentage (based on the total net purchases) was that 48% of input tax claimed traced to fraud. On the basis of our findings of fact and conclusions as to the connections, we accept this as accurate.

Whilst the sale of alcohol was the majority of OWD’s business, this was nevertheless only 65 to 70%. Of the non-alcohol sales, there was no evidence as to the proportion of zero-rated or standard-rated products.

This is a significant number of transactions, and a substantial proportion of the input tax claimed. The connections have been found to be established through a number of suppliers, several of whom were themselves the fraudulent defaulters (eg ALT, Destined and TJ Drinks), but others were buffers (eg Gujarr and Wentworth), such that the fraudulent default had occurred further down the chain.

Mr Watkinson submitted that the general pattern was that when one defaulter was deregistered a new one was brought in to replace it, and questioned why so many companies that were connected to fraud were attracted to OWD.

Mrs Bachra’s evidence was that she was unlucky, and gave evidence that OWD had traded with some suppliers for longer periods of time. She referred in this context to SDDL and Millennium. SDDL were a supplier from April 2015 to January 2016. However, there was minimal evidence as to the transactions with Millennium – all we have is the fact that they were named as a current supplier in some of the visit reports.

We acknowledge the underlying facts in relation to both the scale of the tax losses, and this pattern (which we do find existed) of the replacement of defaulting traders. These factors, viewed in isolation, are not probative; it is possible that OWD was targeted by those connected with fraud as it became known that insufficient questions were being asked by OWD. We do take them into account when reaching our conclusions.

Mr Watkinson drew attention to the warnings given to OWD about the general risk of VAT fraud in the alcohol industry, the notifications in relation to OWD’s own suppliers and the lack of any meaningful reaction thereto. In this regard, he submitted:

HMRC had provided Mrs Bachra with the notice on “How to Spot Missing Trader Fraud” at the initial unannounced visit on 23 October 2013 and took her through the notice. They also issued Notice 726 at that meeting. This was before any of the transactions in this appeal.

We remind ourselves of the content of these notices.

The notice “How to Spot Missing Trader Fraud” is short and clear, and sets out the warning:

“Be suspicious if your business or those you are dealing with show any of the following characteristics.

• Newly established or recently incorporated companies with no financial or trading history.

• Contacts have a poor knowledge of the market and products.

• Unsolicited approaches from organisations offering an easy profit on high-value/volume deals for no apparent risk.

…

• Entities trading from residential or short-term lease accommodation and serviced offices.

This list is not exhaustive – use your common sense and be suspicious.”

It goes on to set out that if a trader does not conduct “intelligent risk assessment” including KYC or ignoring adverse indicators a trader risks involvement in fraud.

Notice 726 sets out at section 6 on “Dealing with other businesses – How to ensure the integrity of your supply chain” examples of indicators that could alert a trader to the risk that VAT would go unpaid, and include:

“1)

Legitimacy of customers or suppliers. For example:

• what is your customer’s/supplier’s history in the trade?

…

• does your supplier offer deals that carry no commercial risk for you – eg, no requirement to pay for goods until payment received from customer?

…

• are they high value deals offered with no formal contractual arrangements?

• are they high value deals offered by a newly established supplier with minimal trading history, low credit rating etc?

• can a brand new business obtain specified goods cheaper than a long established one?

• has HMRC specifically notified you that previous deals involving your supplier had been traced to a VAT loss and/or had involved carousel movements of goods?”

That same section then says on checks:

“6.2

Checks carried out by existing businesses

The following are examples of specific checks carried out by businesses that took part in the consultation exercise in 2003 when these rules were introduced. These may also help you to decide what checks you should carry out, but this list is not exhaustive and you should decide what checks you need to carry out before dealing with a supplier or customer:

• obtain copies of Certificates of Incorporation and VAT registration certificates

• verify VAT registration details with HMRC

• obtain signed letters of introduction on headed paper

• obtain some form of written and signed trade references

• obtain credit checks or other background checks from an independent third party

• insist on personal contact with a senior officer of the prospective supplier, making an initial visit to their premises whenever possible

• obtain the prospective supplier’s bank details, to check whether:

(a)

payments would be made to a third party; and

(b)

that in the case of an import, the supplier and their bank shared the same country of residence.

• check details provided against other sources, e.g. website, letterheads, BT landline records

Paperwork in addition to invoices may be received in relation to the supplies you purchase and sell. This documentation should be kept to support your view of a transaction’s legitimacy. The following are examples of additional paperwork that some businesses retain:

• purchase orders

• pro-forma invoices

• delivery notes

• CMRs (Convention Merchandises Routiers) or airway bills

• allocation notification

• inspection reports

Again this is not an exhaustive list, but does show some of the more common subsidiary documentation.”

Mrs Bachra confirmed that she read these notices. Whilst Notice 726 is stated to apply to supplies of specified goods, the list of which does not include alcohol, Mrs Bachra confirmed she understood that it was relevant because it was handed to her by HMRC. She accepted that she knew of the risk of alcohol fraud in cash and carries before the periods in issue.

This awareness of the risks can only have been reinforced by subsequent communications from HMRC:

The risks of alcohol fraud were also discussed in detail during the visits from HMRC on 15 August 2015 and 6 October 2015. Furthermore, by 6 October 2015, OWD had received three Notices of Deregistration (the first of which was from 18 June 2014) and three Tax Loss Letters. During that meeting Officer Cawley explained that Tax Loss Letters were an amber light to the trader, which meant that Mrs Bachra may want to make further checks on transactions. In the ensuing discussion with Mr Curley, Officer Deakin pointed out that if she constantly saw tax loss letters in a trader’s file then an inference could be drawn that there was a problem with the due diligence checks.

There were then further Notices of Deregistration and Tax Loss Letters sent to OWD during the relevant periods.

We have no doubt that OWD was aware of the risk of VAT fraud in the alcohol industry throughout the VAT periods in issue, including warning signs to look out for, and was later being told by HMRC that OWD’s own transactions were connected to fraud.

Mr Watkinson submitted that the purchase of the business from Eastenders was apparently based on Mrs Bachra’s optimism that she could succeed where Eastenders had failed, the business of OWD was not run in a commercial manner (eg with no electronic stock control, management accounts or cash ledger) and that the deals were characterised by a lack of complete commercial documentation.

Mrs Bachra was appointed as a director of OWD on 3 June 2013. OWD then acquired the business from Eastenders, the specific date of which is not known but in any event took place by October 2013 (as OWD then registered its own principal place of business at Rabone Lane, which had been the premises previously used by Eastenders).

That business transfer was documented simply by an invoice for the stock; and we find that there was no independent stock take (despite Mrs Bachra’s statements to the contrary to HMRC during some of the visits), no clear explanation as to the financing of the purchase, and Mrs Bachra was initially not forthcoming in disclosing the connection (through her brother) with Eastenders.

Conflicting and vague information was given to HMRC by OWD and CBS Associates about the purchase price for the stock and as to the source of funding:

We find this lack of clarity troubling; this is information which Mrs Bachra should have known. She controlled OWD, and had provided at least some of the money herself. Mrs Bachra explained in evidence, responding to a challenge that it was not commercially normal not to have an independent stock take, that she was dealing with her brother. That is a fair response – but it is an explanation she gives now, not one that she gave to the officers when they were asking about documentation.

There were three other cash and carries within one mile of OWD, including one next door. We infer that it was a competitive market, but Mrs Bachra said this helped bring people in. When asked how she thought that she could succeed with OWD when Eastenders had closed down, Mrs Bachra’s evidence was that she thought she could make a go of it, she wanted to get good suppliers, and open accounts with those nearer the manufacturers. The premises were in a good location, and there were lots of potential customers in the area.

Mr Watkinson submitted that OWD was not run in a commercial manner; whereas Mrs Bachra said she was running the business, trying to get help, and engaged Mr Street to seek to get better access to suppliers closer to the manufacturers.

We find that:

There were two themes in relation to the transactions with suppliers which are of potential concern:

In terms of the transaction documents, Mr Watkinson drew attention to:

Mrs Bachra’s evidence was that there would always be a purchase order, a delivery note (sometimes this might have been marked on the invoice) and remittance records as well as an invoice. This way she would know what had been delivered; and it would be obvious whether or not payment had been made. Mrs Bachra said that all supplies (ie including those from suppliers which have not been challenged such as Millennium) were deal with in the same way.

It is quite clear that there was incomplete documentation for many of the deals, eg:

We do not accept that there would always have been complete documentation for each deal - the documentation provided contradicts this, and this cannot be explained by reference to OWD’s subsequent liquidation as this is information that was being requested by HMRC whilst the company was trading. We also find that OWD paid minimal, if any, attention to the details of these documents – no thought was given to the retention of title clause in situations where goods were sold to OWD on credit, and some of the documents kept as evidence of remittance simply showed that a payment transfer had been requested by OWD, not that it had subsequently been made.

However, we note that:

There was no documentary evidence of any negotiation of price, or discussions with suppliers in relation to availability of requested stock.

Mr Watkinson submitted that OWD had repeatedly failed to provide full information to HMRC when requested, this occurred throughout the VAT periods in issue, and the fact that the visit reports reveal that there was antagonism or conflict between Mr Curley and the HMRC officers does not exculpate Mrs Bachra. This submission was particularly relevant to HMRC’s submissions on actual knowledge.

HMRC’s first substantive visit to OWD during the periods in issue was on 27 March 2014. Some information was requested and we have no evidence that this was not provided promptly.

HMRC did issue several Schedule 36 notices to OWD in order to obtain books and records. The first was issued on 15 July 2015; however, on the facts that notice does not support a conclusion that OWD had failed to provide information when requested to HMRC:

The meeting did not take place until 5 August 2015. The records which had been requested (by the letter in June 2015) had not all been provided at that meeting. HMRC were still chasing for the deal log on 14 September 2015.

However, the visit reports from 6 October 2015 and 2 February 2016 record several instances where HMRC were requesting information (whether ledgers or due diligence records) in respect of new suppliers or recent transactions and Mr Curley challenged HMRC’s entitlement to request such records, or refused to commit to timely production of the records (on one occasion saying they would be provided when they got around to it). He was OWD’s agent, and although the reports do support a conclusion that Mrs Bachra had sought to smooth some matters over, the reality is that there were still significant delays in producing documents requested by HMRC. Schedule 36 notices were issued on 15 March 2016 and 12 April 2016 for purchase and sales invoices, due diligence packs and ledgers, and further notices were issued on 20 June 2016, 30 August 2016 and 6 December 2016.

One striking aspect of the visit reports is the interim report from Officer Tilt, the data handling specialist, on 5 August 2015, where during his first visit to OWD he concluded that OWD had deliberately tried to disguise the location of the server used for the tills. The location of this server became an issue in subsequent visits as well (including in October 2015 and February 2016). The striking aspect is the apparent speed with which Officer Tilt reached such a strident conclusion during that one meeting. On the basis of the facts before us, we are not satisfied that OWD had tried to disguise the location of the server - Mrs Bachra gave permission for Officer Tilt to contact STL to ask about the server, and we conclude that Mrs Bachra did not know where it was or how the system operated at that time.

The visit reports also indicate that HMRC were concerned about the failure to provide information relating to “missing transactions”:

Mrs Bachra denied that there were off-record stock sales. Her explanation was that the tills were being used to get a value for an item, or do a stock check; and that these void/cancelled transactions don’t generate an invoice. This comes up as a line in the records. There was nothing, she said, to show – nothing more could be printed off. This was explained by Mrs Bachra in the visit on 4 November 2016 (and confirmed in evidence).

We find that there were significant delays in providing the information which had been requested to HMRC, in circumstances where the information should have been readily to hand; this included delays in providing the due diligence which had been conducted on particular suppliers, and transaction records for stated periods. We were not satisfied that OWD concealed the location of the server for the tills.

Mr Watkinson submitted that OWD was repeatedly advised of the need to carry out due diligence and that OWD’s due diligence was inadequate. In his submission, OWD’s due diligence was nothing more than window dressing, an exercise in collecting paper to show to HMRC, eg some due diligence was only obtained after OWD had started to trade with the relevant company and therefore can have had no impact on the decision to trade with it. There were obvious indicia that OWD’s suppliers were not commercially credible, and posed a serious risk of fraud, that OWD could, and should, have ascertained. Mr Watkinson submitted that no serious thought can have been given to the legitimacy of OWD’s suppliers.

We have set out in detail in the Findings of Fact (at [106] to [137]) the due diligence which was conducted by OWD in relation to its suppliers.

Mrs Bachra’s evidence was “risk was always considered” when dealing with new suppliers, she relied heavily on her accountant and Mr Curley (which we take to mean the reports commissioned from DDE) but acknowledged that “passing” the due diligence (referring to the DDE reports) went a long way towards helping her make up her mind.

We have carefully considered the contents of all of the due diligence information which was actually obtained by OWD in respect of its suppliers. There were a multitude of warning signs that should have merited further enquiries, or a decision not to trade, and these are apparent on even a quick review.

By way of examples:

Mrs Bachra said that she had noticed the change of name of Simon Lloyd (although she had not queried it); this was one of the only examples of her evidence being that she had even noticed something at the time the information was provided (as when she was taken to what HMRC said were warning signs in the documentation in relation to other suppliers her position was generally that she had done the due diligence, and she could see now, ie in preparing for or at the hearing, that there were warning signs).

There were several occasions where OWD had started trading with a new supplier before any substantive due diligence had been conducted:

We have already described the format of the DDE reports. They give the appearance of being substantive documents. They state that the relevant business has passed the vetting procedures on the cover page. We have referred to some of the specific contents of the reports in our Findings of Fact. We add the following:

Mrs Bachra was warned by HMRC not only of the importance of conducting due diligence on suppliers, but on the need to consider its contents. The notices which she was given drew attention to the warning signs. At the visit of 2 February 2016, having discussed due diligence in relation to various new suppliers (including Just Beer and Gempost), Officer Deakin was clear throughout that her view was that the due diligence didn’t go far enough, and reiterated that there was not sufficient due diligence currently. Officer Cawley’s subsequent letter in April 2016 set out various specific concerns in relation to particular suppliers.

Instead, the documentary evidence, which Mrs Bachra had at the time of entering into many of the supplies (albeit not always before the first few supplies with a new supplier), shows that the suppliers with whom OWD was dealing bore some of the characteristics about which HMRC were warning, or which should have raised concern:

Additional factors relied upon by HMRC in this context included:

The hearing bundles include witness statements (and supporting exhibits) from HMRC officers in relation to each of the fraudulent defaulters and some of the buffer traders which set out the evidence in support of these and other contentions, eg:

We would expect that the facts in relation to N&R could have been discovered by OWD (or by DDE on its behalf) with further investigation. However, there were some matters, eg the seizures, which could not reasonably have been expected to have been discovered by OWD. We place no weight on such matters when assessing OWD’s knowledge or what it should have known.

We have carefully considered the evidence in relation to the due diligence conducted by OWD:

The above addresses the evidence which is available in respect of the suppliers which are involved in the transactions with which this appeal is concerned. There are matters on which we did not have evidence:

HMRC challenged Mrs Bachra’s credibility, both as a witness and as to whether she had been the person in control of OWD, drawing attention to what they submitted was the possible role of Mrs Bachra’s family members. Mr Watkinson’s submissions included that the vagueness and contradictions of Mrs Bachra’s evidence supported an inference that she knew of the connection with fraud. HMRC’s Statement of Case had expressly referred to the previous involvement of Mrs Bachra’s family in excise duty fraud, and this was also relied upon in Mr Watkinson’s written submissions.

We have addressed Mrs Bachra’s evidence at [41] to [42] above, concluding that her evidence was not helpful, but not reaching a conclusion that it was untruthful.

As regards Mrs Bachra’s family:

The accuracy of this information was not challenged by Mr Bedenham; he did challenge its relevance, submitting that HMRC had pursued Mrs Bachra because of these family relationships.

Mrs Bacha’s position has been throughout that she was running the business of OWD - she made all the decisions about which goods are purchased and at what price. She has said that her husband and her children sometimes helped at the cash and carry.

It is apparent from HMRC’s visit reports that HMRC had concerns about OWD because of Mrs Bachra’s family relationships, and were questioning whether Mrs Bachra had control of OWD or whether it was being run by others (particularly her husband). This can be seen from:

On the basis of the evidence, we find as follows:

There are 332 Deals in issue before us. In some the fraudulent defaulter was a direct supplier to OWD (eg ALT, Destined, TJ Drinks), in others indirect (eg Gujarr, SS Traders, Wentworth). We are mindful throughout that HMRC need to establish that, on the balance of probabilities, OWD knew or should have known that its transactions were connected to fraudulent tax losses, in accordance with the guidance set out in the authorities; and that this needs to be satisfied in respect of each denial of input tax credit.

Taking account of all of the evidence before us, we have no doubt that OWD should have known that all of the transactions which are the subject of this appeal were connected with the fraudulent evasion of VAT.

We rely in particular on:

This conclusion is sufficient to establish that there was an inaccuracy in OWD’s VAT returns. Mr Bedenham’s submission was that such a conclusion is not sufficient in the context of an appeal against a PLN, as he submitted that this did not constitute deliberate conduct as required by paragraph 19. We have considered those submissions below in relation to the requirements of paragraph 19 and at this stage address whether HMRC have established, on the balance of probabilities, that OWD knew that its transactions were connected with the fraudulent evasion of VAT.

We note at the outset that HMRC relied on the same factors for establishing both alternative limbs of the Kittel principle, ie their own case recognised that the factors they were relying upon to establish knowledge of OWD, even if established, could be explained by a conclusion that OWD should have known of the connection.

Some of the facts as we have found them do provide some support for the conclusion that OWD, through Mrs Bachra, knew of the connection to the fraudulent evasion of VAT:

Notwithstanding the range of the matters identified above, we nevertheless considered that the question of whether OWD knew of the connection to the fraudulent evasion of VAT to be finely balanced. We considered all of the evidence to which we were taken, and sought to consider the transactions undertaken by OWD in the light of all the evidence available to us and concluded that there were two particular difficulties when seeking to assess whether HMRC have met their burden of proof:

Mr Watkinson acknowledged that the evidence on which HMRC relied was circumstantial; there were no smoking guns. That is not surprising, but of itself it does not necessarily mean that HMRC will be unable to meet their burden.

Viewing all of the evidence before us, and considering the absence of evidence in relation to non-challenged suppliers, we were ultimately not satisfied that HMRC have established, on the balance of probabilities, that OWD knew of the connection to the fraudulent evasion of VAT.

Paragraph 19 provides for HMRC to issue a penalty to an officer of a company by which certain penalties are payable. Paragraph 19(1) provides:

“19(1) Where a penalty under paragraph 1 is payable by a company for a deliberate inaccuracy which was attributable to an officer of the company, the officer is liable to pay such portion of the penalty (which may be 100%) as HMRC may specify by written notice to the officer.”

HMRC issued an inaccuracy penalty on 2 November 2017 to OWD. The penalty amount was £1,177,422.96 for the VAT periods 03/14 to 12/16, and this was imposed on the basis that the behaviour was deliberate. The PLN was issued to Mrs Bachra on 15 December 2017 for the whole of that amount.

HMRC bear the burden of proving that the inaccuracies in OWD’s returns were deliberate, that the deliberate inaccuracies were attributable to Mrs Bachra and that the penalty is correctly calculated. We take these issues in turn.

Mr Watkinson submitted that if we were satisfied that OWD’s returns were inaccurate, the inaccuracies should be found to be deliberate irrespective of which limb of the Kittel test we find is satisfied.

Mr Bedenham accepted that if we found that OWD knew that the transactions were connected with the fraudulent evasion of VAT then this would constitute a deliberate inaccuracy for this purpose. Mr Bedenham submitted that a finding that OWD should have known for the purposes of the Kittel test is not a finding of actual knowledge or actual intention and cannot constitute deliberate conduct.

In the light of our conclusion above, that OWD did not know but should have known of this connection, we need to reach a conclusion on Mr Watkinson’s submissions that a finding that OWD should have known of the connection is sufficient to constitute a deliberate inaccuracy for the purposes of paragraph 19.

Mr Watkinson’s submissions included:

We do not agree with Mr Watkinson’s submission that an inaccuracy which is based on a finding that OWD should have known of a connection to the fraudulent evasion of VAT constitutes a deliberate inaccuracy. We gratefully adopt the explanation of a deliberate inaccuracy set out in Auxilium. As the Tribunal in Auxilium went on to explain, the question of whether there is a deliberate inaccuracy is a subjective test; it is not whether a reasonable taxpayer might have made the same error or even whether this taxpayer failed to take all reasonable steps to ensure that the return was accurate. It is a question of the knowledge and intention of the particular taxpayer at the time.

Neither Clynes nor Cannon were concerned with the question whether the “should have known” limb of the Kittel test equates to deliberate for the purposes of the legislation on penalties. We do not find them helpful in reaching a conclusion on this point. In Tooth, the Supreme Court questioned whether recklessness could constitute deliberate conduct but then said that the issue need not be determined in that appeal. This does not therefore provide us with further guidance on this matter.

Instead, we have focused carefully on the entirety of the judgement of Moses LJ in Mobilx to remind ourselves of what is captured by the “should have known” limb of the Kittel test. Moses LJ set out who is to be treated as participating in the fraud (with the consequence that they would lose their entitlement to input tax), and setting the boundaries around what it is that should have been known to be treated as such a participant. The language used in that context does include reference to choice and intention, eg in [61] the reference to a person who has the means of knowledge available and chooses not to deploy it, or chooses to ignore obvious inferences from the fact and circumstances; and at [64] “If it is established that a trader should have known that by his purchase there was no reasonable explanation for the circumstances in which the transaction was undertaken other than that it was connected with fraud then such a trader was directly and knowingly involved in fraudulent evasion of VAT”.

However, this language is concerned with the entitlement to input tax, ie whether there was an inaccuracy at all, and describing the persons (who have met the know or should have known threshold) as being directly and knowingly involved in the fraudulent evasion of VAT for that purpose. We do not accept that this reasoning requires us to conclude that the inaccuracy was deliberate.

Mr Watkinson submitted that the description by Moses LJ of what is caught by “should have known” goes beyond carelessness. We agree that the description is such that someone who is found to meet this threshold will almost inevitably be found to have been careless; but the ease with which that conclusion can be reached does not mean that they should be treated as having knowingly provided HMRC with a document that contains an error with the intention that HMRC should rely upon it as an accurate document. Our conclusion was that OWD should have known that this was the case; but that is not actual knowledge.

We have concluded that the inaccuracy in OWD’s returns was not deliberate.

That conclusion means that Mrs Bachra’s appeal is allowed (as paragraph 19 only allows a penalty to be attributed to an officer of the company where the penalty was payable by the company for a deliberate inaccuracy). As we heard full argument on the remaining issues we address them below.

Paragraph 19 allows HMRC to issue a PLN where a penalty is payable by a company “for a deliberate inaccuracy which was attributable to an officer of the company”.

HMRC’s position was that Mrs Bachra was the sole director of OWD, her evidence was that she was running the company, meeting suppliers, placing orders, and that no-one else was dictating what she should do, and that therefore any deliberate inaccuracy of OWD was and could only be attributable to her.

Mrs Bachra’s position was that only if she had actual knowledge that OWD’s VAT returns contained an inaccuracy could it be properly said that any deliberate inaccuracy by OWD was attributable to her.

If we had concluded that OWD had actual knowledge of the connection with the fraudulent evasion of VAT, that would have constituted a deliberate inaccuracy and we would accept Mr Watkinson’s submissions that such inaccuracy must be attributed to Mrs Bachra, as she was responsible for the actions of OWD.

If we had concluded that “should have known” was sufficient to constitute a deliberate inaccuracy on the part of OWD, such that paragraph 19 was capable of being satisfied, we would also have decided that the inaccuracy was then attributable to Mrs Bachra for the same reason - there was no-one else, and the failings of OWD, as well as the actions of OWD, could only be attributed to Mrs Bachra.

We would, therefore, have concluded that HMRC had satisfied their burden on this issue.

HMRC must establish that the PLN was correctly calculated. We address in this context the calculation of the PLN, the withdrawal by HMRC of some of the deals, and what were said to be the subsequent re-calculations of the PLN.

We note at the outset that HMRC issued the PLN to Mrs Bachra in December 2017 and there was no evidence or submission that an amended PLN has since been issued to her.

The PLN issued by HMRC to Mrs Bachra and which is the subject-matter of this appeal was issued for the amount of £1,177,422.96, this being the amount of the penalty which had been issued to OWD. The PLR figure which formed the basis of that penalty was made up of the £38,415 and the £2,064,130 assessments which had been issued to OWD. The changes to the amount of the PLN which HMRC have sought to have upheld in this appeal are:

Mr Bedenham submitted that Mrs Bachra’s appeal must be allowed in respect of the difference between the amount of the PLN as initially issued in December 2017 and the amount now claimed as due by HMRC as HMRC have withdrawn their case in respect of that amount. We agree.

The changes made by HMRC to what they say is the amount of the PLN are all based on changes to the amount of the PLR - the reduction for disclosure is unchanged (and neither party submitted that any different reduction for quality of disclosure should be substituted). In the absence of submissions on this matter, we accept and would apply the reduction which has already been applied by HMRC, 40%.

With one exception, the amounts (of PLR and correspondingly the PLN) set out in the table provided by HMRC on 3 May 2022 for each VAT period are equal to or less than the amount assessed by way or penalty to OWD and thus in the PLN. The exception is for the period 06/15, where the penalty table accompanying the penalty explanation letter set out PLR of £230,985 and a penalty (to be issued to OWD) of £129,351.60. HMRC now seek a penalty of £131,704 for this period, based on PLR of £235,187, and seek to impose this by way of amendment or re-calculation of the PLN.

We did not receive submissions from the parties as to whether HMRC should be able, in the context of seeking a decision to uphold the PLN in a lower amount than that which had been issued to Mrs Bachra, to increase the amount of the penalty and resulting PLN for one of the VAT periods (albeit with decreases elsewhere more than offsetting this increase). On the basis that we have already decided to allow Mrs Bachra’s appeal and this question does not need to be determined by us, we considered it was not in accordance with the overriding objective to seek submissions from the parties on this specific question (being mindful that this would result in increased costs for the parties). Our preliminary view, reached without the benefit of any submissions, is that it is not open to HMRC to seek to impose an increased amount by way of penalty (or PLN) for any particular VAT period in circumstances where they have not re-issued the penalty (or PLN) accordingly, as this is not only necessary for the issuance of the penalty of that (higher) amount but also is required as a matter of fairness to enable the taxpayer to know the case they need to answer.

We would therefore decide, if we had not allowed the appeal on other grounds, that the PLN should be calculated at the amounts set out in the table at [16], with the exception that the PLN for 06/15 should be reduced to £129,35160.

Mrs Bachra’s appeal is allowed.

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