Wholesale Distribution Limited v The Commissioners for HMRC

This is an appeal against HMRC's decisions, each upheld at departmental review, to deny the Appellant's ('WDL') right to deduct input tax.

The decisions are:

The total sum in dispute is therefore £8,167,855.44 (net of statutory interest) and is in respect of the periods 01/16 to 07/17 inclusive.

The appeal, as it now stands, concerns 1081 disputed deals involving the Appellant's wholesale purchase and sale of a variety of 'fast-moving consumer goods' ('FMCG') such as soft drinks, confectionery, batteries, and toiletries.

Unlike in some cases, HMRC does not dispute that the goods actually existed. The denials were on the basis that HMRC was satisfied that all the transactions were connected to a scheme to defraud HMRC of VAT, and that WDL either knew, or should have known, that this was the case: a so-called 'Kittel' denial, applying the reasoning (set out more fully below) in the well-known case of Kittel.

The Grounds of Appeal are:

The 'he' refers to Mr Eamon Crothers. It is 'sic' because Mr Crothers is not the Appellant. WDL is. But the elision of his interests with those of the company is entirely understandable. Mr Crothers is, and at all material times was, the Appellant's sole director and controlling party. To all intents and purposes, he and the Appellant are alter egos: his knowledge is its; and vice versa. His evidence plays a very prominent and important role in this case.

HMRC bears the burden of establishing that the conditions for the recovery of input tax are not met.

The standard of proof is the usual civil standard, namely the balance of probabilities, or whether something is likelier than not.

Whether the burden is discharged to the appropriate standard is addressed by looking at the entirety of the evidence, written, documentary, and oral.

The effect of judicial fact-finding was set out by Lord Hoffmann in Re B [2008] UKHL 35, as follows:

We had written evidence as follows:

We heard oral evidence from the following witnesses, in the following order:

Officer Wilkinson is a long-standing officer of relevant experience. She had been involved with WDL from April 2012, as a monitoring officer, and in March 2014 became responsible for conducting the extended verification process. She undertook a number of visits and being in general contact with WDL. We had an excellent opportunity to assess the cogency of her evidence. She was cross-examined with charm and skill by Mr Magill. Her evidence was careful, and not argumentative or partisan. She made sensible concessions (for example, in relation to the content of deregistration letters). But, in summary, the principal thrust of her oral evidence, emerging repeatedly, was that she had tried to advise Mr Crothers and WDL, but that she did not run the business for him.

We heard Mr Crothers give evidence for several hours, spread over three days, and so we had an excellent opportunity to assess the cogency of his evidence. His witness statement stood as his evidence-in-chief and he was not asked any supplementary questions in chief. As is usual in cases of this kind, he was cross-examined in considerable detail about his business record, his trading relationships, and the denied deals. The cross-examination was searching and robust, but fair. Much of the substance of his evidence, both written and oral, was of an unsatisfactory character, for the detailed reasons which we shall set out below.

Mr Murdock's firm, which is an office of five staff, has been involved with the Appellant since November 2003 (when Mr Murdock witnessed the Companies House forms appointing Mr Crothers and his wife as directors). It prepared the Appellant's VAT returns and Mr Murdock was a point of contact for Officer Wilkinson.

Mr Murdock's oral evidence was somewhat hesitant and lacked detail as to what tasks his firm had actually performed in relation to due diligence. This meant that his evidence on this point was of very limited value because, as he candidly accepted, he had not personally been involved with the due diligence, but had left this to be done by his associates, from whom there was no evidence.

The Appellant did not require the following HMRC witnesses to be called (with the brackets being the company which that officer has reported on):

During the relevant period, Mr Crothers had had an assistant, Aislinn Laverty, but there was no written or oral evidence from her. She was first engaged (as a self-employed person) in mid 2016 - that is to say, during the period of the denied deals. Her role was described by Mr Crothers as 'finding out new clients, sussing out new clients and new suppliers, and just basically keep an eye on what was going on and do a bit of invoicing'. She was helping with paperwork because Mr Crothers was finding the workload, by that point (when WDL was turning over about £30m) too much. She was working for up to 30 hours a week. Ms Laverty was repeatedly referred to by Mr Crothers in his oral evidence as someone who (for example) would have performed VIES checks, and would have kept records, and would have known where those were. We were told that although she was no longer employed by the Appellant, Mr Crothers did 'see her about' and indeed had spoken with her over the weekend of the trial. His explanation as to why there was no evidence from her was that he did not 'think it was necessary' to call her.

The Court may draw adverse inferences from a party’s failure to deploy forms of evidence which it could reasonably have been expected to adduce. Thus, in appropriate cases “a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in the action”, unless a credible reason is given for the witness’s absence: Wisniewski v Central Manchester HA [1998] PIQR P324 at 340. As Lord Leggatt explained in Efobi v Royal Mail Group Ltd [2021] 1 WLR 3863 at §41, this is “a matter of ordinary rationality” and a feature of the process of a Court drawing inferences:

Here, Mr Crothers was in contact with Aislinn - he spoke to her during the course of the hearing when he was trying (belatedly) to find documents which (on his case) supported his argument. His explanation as to why he had not asked her to give evidence (he did not think it was needed) was extremely poor and simply not credible. The best explanation is that her evidence would not have supported the Appellant's case and that is the inference, such as it is, that we draw. However, it does not take things very far because the failure to call her is, in the overall scale of things, a self-inflicted wound by Mr Crothers, because it means that our assessment as to his business practices must repose, in very large measure, on the contemporary documents and on his oral evidence alone.

In his written evidence, Mr Crothers said that he also had assistance from one Kivena Farrell in 2017, but he had not called her either. She was engaged by WDL in 2017, and was working for up to 30 hours a week, performing similar tasks to Aislinn Laverty. But we do not know why she was not called, and so we decline to draw any inference adverse to the Appellant from its failure to have done so.

When it comes to documentary evidence, the position is not satisfactory.

One would have supposed that a trader of integrity, determined to prove that it neither knew nor had reason to suspect a connection to fraud, facing an input tax denial of this magnitude - several million pounds - would have left no stone unturned so as to produce documents and evidence which supported its position. But, for reasons which ultimately remain unexplained and unclear that did not happen here.

This emerged in the following ways.

Firstly - but only during the course of the hearing - some evidence was placed before us that the Appellant had - at least on certain occasions - checked, through the EU VIES system, that VAT numbers were valid. Print-outs had been kept of a series of VIES checks, although it was not clear by whom these had been done. These did not appear in the otherwise exceptionally voluminous bundles; there was no record of them in HMRC's careful and detailed meeting notes; nor in the correspondence; nor - perhaps most surprisingly - in Mr Crothers' witness statement. They emerged only of Day 3 of his oral evidence, following a search of his premises over the intervening weekend; found at the bottom of a drawer, and in response to an invitation from the Tribunal. There was simply no good explanation as to why these had not been put into evidence sooner: they were obviously relevant, contemporaneous documents, from a third party (ie, the EU), and - to an extent - supportive of the Appellant's position. We remain baffled why Mr Crothers would not have considered it appropriate to have conducted a proper search before engaging in this lengthy appeal process.

The VIES checks were produced alongside a modest clutch of documents relating to diligence in relation to two suppliers - SHA Bros Ltd and Prime Merchants Ltd. These came from a firm called Due Diligence Express ('DDX'), which had been instructed not by Mr Murdock's firm but by Mr Crothers. It seems that these were copies of documents which existed in hard copy.

Mr Murdock's evidence, which we believed, that one of his associates had seen some packs and had described them packs as not 'up to standard'. Mr Murdock himself had seen some packs, in white covers, in his office, but could not remember how many - something in the region of ten - and he did not know in relation to which trader. He was not impressed by the packs. He remembered one with a picture of the exterior of some premises on it, and it being remarked 'that could have been anywhere', and he remembered the packs, when looked at, not being 'up to scratch'. We accept this evidence from Mr Murdock. It happens to accord with our own analysis, set out in more detail below, of the two DDX packs which we have seen. We also accept his evidence that the packs which he saw were only up to 6 pages long, and were certainly not as full as the two packs which emerged part-way through the trial. There is no explanation for the discrepancy.

Insofar as we are called upon to resolve the point, we prefer Officer Wilkinson's evidence, being recalled to give oral evidence specifically on the point, to Mr Murdock's, in that she had not been shown any DDX packs in meetings with Mr Murdock or WDL. In rejecting his evidence, we do not think that Mr Murdock was being untruthful: he accepted that his recollection as to meetings which took place more than five years ago was quite hazy. In contrast, Officer Wilkinson was very clear and sure ("I did not see any DDX folders in Mr Murdock's office full stop") that she had not seen the DDX packs placed before us (although she had seen others, for other traders whose deals were not in dispute) and we accept her evidence. It is consistent with our overall appraisal of her evidence, and is consistent with other contemporary documents. If she had been shown DDX packs for the suppliers of interest to her in this period (as she had been in other cases) we are sure that she would have made a note of it, and she did not.

Alongside this is the absence of any good explanation for the failure to produce other contemporary records. Mr Crothers said that a lot of documents had been received by email, to an account to which he still had access, but, despite this being canvassed with him by the Tribunal in the course of his oral evidence, he did not seek (for example) to place emails before us from the likes of Dynamic Sourcing.

Mr Crothers also told us that he had shredded - that is to say, deliberately destroyed - his daybooks, diaries, and other documents in which details of the deals had been recorded at the time. He had not made any attempt to reconstruct these records. He sought to explain the destruction on the basis that no-one would have kept them for six years.

But Mr Crothers' evidence in this regard was entirely unconvincing:

We are entitled to draw inferences from the absence of evidence which is said to have existed, and where Mr Crothers is the person responsible for its non-production. On the basis that Mr Crothers was telling the truth that such documents had existed, then we conclude that he had deliberately destroyed them, so as to keep potentially adverse evidence in them from coming to the attention of HMRC and/or this Tribunal.

One further explanation was put forward for missing documents. This arises from the fact that Mr Crothers was arrested on 5 September 2017 in relation to money laundering (with a restraint order - a form of freezing order - having been made by the High Court of Northern Ireland on 4 September 2017) and the police had uplifted documents. The best evidence (see page 48 of File B) is that PSNI returned materials - coming to 35 lever arch files and a storage box of material in cardboard envelopes - to the Appellant on 18 October 2021; and a further 10 lever arches on 10 December 2021 (File B page 52). The latter contained deal sheets from October 2016 to July 2017.

It was suggested, albeit faintly, that the police might still have some documents, and that explained why Mr Crothers (against whom criminal proceedings were not pursued) did not have them. We reject that explanation - this appeal has been ongoing for a long time; there is no evidence that Mr Crothers' has been trying to retrieve documents from the police over and above those returned to him in October 2021; and in any event it is plainly inconsistent with Mr Crothers' own evidence, recorded above, that he had destroyed such documents as there were.

We should also add, for the avoidance of any doubt, that we do not draw any inference whatsoever - and certainly not one adverse to Mr Crothers - from the fact of his arrest or police involvement. As a matter of record, the police did not even submit a criminal investigation file to the Public Prosecution Service of Northern Ireland (the charging authority); and on 21 August 2021 the High Court discharged, with the consent of the Police Service of Northern Ireland and the Director of Public Prosecutions, the Restraint Order.

The relevant law as to the correct operation of the VAT regime is not in dispute.

Domestic legislation governing the recovery of input tax is contained in sections 24 – 26 of the VAT Act 1994 and the VAT Regulations 1995. In general terms, if a taxable person has incurred input tax that is properly allowable, then he is entitled to set it against his output tax liability and, if the input tax credit due to him exceeds the output tax liability, then he is entitled to a repayment.

When considering the denial of a claim to input tax credit where a transaction is alleged to be connected with fraud, the starting point is the judgment of the CJEU in the combined appeals Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (C439/04 and C-440/04). Where the tax authorities find that the right to deduct has been exercised fraudulently, those authorities are permitted to claim repayment of the deducted sums retroactively. 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 fraud must be regarded as a participant in that fraud (whether or not her profited from it).

In Mobilx Ltd (in administration) v HMRC [2010] EWCA Civ 517 the Court of Appeal considered in detail the “knowledge” element of the principles outlined in Kittel. It emphasised that 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’.

We have also found useful guidance in the following judicial pronouncements, which we have taken into account in reaching our decision in relation to the “should have known” issue:

In an appeal seeking to challenge a decision on a 'Kittel' basis, four issues conventionally arise:

HMRC bears the burden on all those issues. It is for HMRC to satisfy us, to the appropriate standard (namely, the balance of probabilities) as to each issue.

Officer Wilkinson gave evidence for HMRC in relation to this Appellant's supplies to a company called Lynton Exports (Alsager) Ltd, in its appeal before the Tribunal, heard in March and April 2022, released on 20 July 2022, and reported at [2022] UKFTT 224 (TC). The Kittel denials in that case amounted to about £4.4m, in respect of the VAT periods 11/15 to 10/16, and related entirely to supplies to Lynton from WDL: see Para 16[5]. Lynton's trades with WDL ceased shortly after Lynton was given a tax loss letter relating to its purchases from WDL. Lynton accepted that all those trades could be traced to transactions connected with fraudulent evasion of VAT, but did not accept that it knew or should have known of such connection.

The Tribunal there (Judge Peter Kempster and Mr Bayliss) emphasised, quite properly, the need for "sufficient cogent evidence", and for HMRC to go beyond "concerns and suspicions", but needing to advance "probative evidence". The Tribunal remarked that it is possible to infer relevant facts from circumstantial evidence, but that circumstantial evidence (i) must exist; and (ii) must be presented in a credible and persuasive form: see Para [24(3)]. Ultimately, on its consideration of the evidence in that case, and for the reasons set out in Para 42(3) of its decision (including HMRC's acceptance, after hearing evidence, that many of the fraud 'flags' described in HMRC's literature were not in fact present) the Tribunal allowed Lynton's appeal against the Kittel denials.

We do not read anything controversial or novel in what the Tribunal said in Lynton (which does not bind us). It is important to make it clear that the Tribunal's findings in Lynton were findings of fact, binding only in that appeal, and that allowing Lynton's appeal against the Kittel denials does not mean that the Appellant's appeal here must automatically be allowed.

"Circumstantial" evidence is still an admissible species of evidence, of evidential value and weight, and, as evidence, needs to be considered as a whole. In considering this evidence, we should take care not to restrict ourselves to considering each piece of evidence alone and in isolation from the others. This is because circumstantial evidence is not a chain, where a break in one link breaks the chain, but is a cord: one strand of the cord might be insufficient to sustain the weight, but three stranded together might be sufficient: see R v Exall (1866) 4 F&F 922, per Pollock CB, approved by the Upper Tribunal in HMRC v CCA Distribution Ltd [2015] UKUT 513 at Para [91]. The whole can end up stronger than the individual parts.

On the basis of the evidence and submissions which we have heard, we make the following findings of fact.

WDL was is a one-man company, incorporated in 2003. At all relevant times, it had a sole director, which is Mr Crothers. He is also the person with significant control. It has been registered for VAT since 2003. From the very beginning, it traded in fast moving consumer goods such as soft drinks, confectionery, batteries and toiletries. It was always, on the face of it, a successful business. Even in its first year, it turned over just under £600,000. From an early stage - about 2005 - it began to be in a repayment situation in terms of VAT.

WDL is based in Northern Ireland, with its registered address on Church Street in the town of Warrenpoint. It shares that address with a convenience store called 'The Kabin', which also belongs to and is run by Mr Crothers. He sometimes serves behind the counter there, and is assisted by a team of staff.

WDL essentially operated through Mr Crothers on his mobile phone. It did not advertise, nor did it have any regularly updated website. It did its business without written contracts and often - as the acronym FMCG suggests - on a fast-moving basis, with consignments of goods being bought by WDL and sold by WDL on the same day. On at least some occasions, Mr Crothers did not see those goods: he believed that so many pallets of them existed, in such-and-such a place, and, when paid by his buyer, would release the details of where they were to be found, and authority for his buyer to deal with them. None of that is especially unusual in a business which, in effect, a wholesale brokerage.

WDL did not have any storage facilities at Church Street. Instead, it used John Crilly Transport Ltd ('Crilly'), also based in Warrenpoint, or Fisher Logistics ('Fisher'), based in Oldham in the north of England.

We were not provided with and did not hear any evidence from any director or employee of Crilly or Fisher, and so we do not know anything from anyone at Crilly and Fisher as to each firm's arrangements for the storage, handling, or insurance of goods belonging to its clients generally, or to WDL in particular. Accordingly, on these matters, we are left with Mr Crothers' evidence, which in many instances was vague and, in our view, not reliable.

WDL's turnover (net of VAT) in the years preceding the denied deals was:

WDL's turnover (net of VAT) in the years affected by the denied deals was:

From these figures, it will be seen:

It has to be asked as to how this striking increase in turnover in 2016 (maintained, albeit to a lesser extent in 2017) came to be accomplished, given that Mr Crothers' essential business model - him doing deals over the phone - remained unchanged. There is no reliable evidence that Mr Crothers worked any harder, or improved his skills as a businessman, or by some endeavour or activity on his part happened to strike on a source or sources of supply, not hitherto known to him through his years of undoubted experience in the FMCG business, capable of generating such increased turnover. The evidence as to increased turnover is really one as to increased supply, which is actually diversification of supply, with such diversification being achieved largely through dealings with entities whose deals led to VAT fraud.

The increased turnover figure is so striking that it would be entirely reasonable to have expected Mr Crothers to be able to have given a clear, comprehensible, and compelling answer as to how it came about: especially since what is at stake in this appeal - namely, the £8m denials - is so high. But he was wholly unable to do so. Such evidence as he did give was not consistent. Initially he sought to explain the increase by saying that he was dealing in higher-value products. But this does not stand up in the light of what is known as to the composition of the deals - that is to say, the things actually being bought and sold. There is no identifiable change in those which would satisfactorily explain the increase in turnover from about £6m to over £30m. He then changed tack to say that he was simply 'busier', and that he had just had 'more business'. But, again, this is a weak explanation where the business model, and the person doing the business, remain essentially unchanged. The inference is that there is a hidden factor: the most obvious one being that Mr Crothers and WDL had become entangled in a VAT fraud dependent on increase in turnover.

As to the Denied Deals (and the total input tax denied):

These accounted for the following percentage of the total input tax sought by the Appellant:

From this, it will be seen, empirically, that the overwhelming preponderance (ie, almost all of it) of the Appellant's trades in these seven successive quarters are challenged by HMRC on the basis that they are connected to fraud in circumstances where WDL knew or ought to have known of the connection. In relation to two successive quarters, all of the Appellant's trades (ie, every last one) are challenged. It is proper, in the overall weighing-up exercise, to have regard to these figures.

In 518 of the denied deals (or about 48% of them) the Appellant purchased directly from the following (ordered in terms of earliest deal date), who are all alleged to be defaulting traders:

Ordered in terms of number of deals (most to fewest):

HMRC also rely on direct purchases from the following, who are not alleged to be defaulting traders, but who have all been deregistered on the grounds of abuse and connected with the fraudulent evasion of VAT:

HMRC also rely on indirect purchases from the following, who are said to be defaulting or hijacked traders:

HMRC allege that, in relation to the denied deals, the Appellant repeatedly sold to:

The Appellant does not concede that there was a tax loss, and does not advance any positive case itself that there was no tax loss, but puts HMRC to proof. HMRC have to prove this issue on the balance of probabilities.

The Tribunal released Fairford-type directions on 23 May 2019, approved subject to contrary application by the Appellant within 14 days. No such application was made. A purported response was received on 21 July 2022, which prompted an application by HMRC for an unless order, which HMRC then withdrew on 1 August 2022. Eventually, on 19 September 2022, the Appellant confirmed that it did not require the attendance of 15 HMRC officers, and that any inferences to be drawn from the statements of those officers "is entirely a matter for the Tribunal".

The answer is yes, there was a tax loss.

This is set out in the unchallenged written evidence of Officer Wilkinson, in her first witness statement at Paragraphs 72 to 214 inclusive:

We accept this evidence, and find accordingly.

The Appellant does not concede this point, does not advance any positive case itself, but puts HMRC to proof. HMRC have to prove this issue on the balance of probabilities.

The answer is yes, the tax loss resulted from fraudulent evasion.

This is set out in the unchallenged written evidence of Officer Wilkinson, in her first witness statement at Paragraphs 72 to 214 inclusive. We accept that evidence.

The Appellant does not concede this point, does not advance any positive case itself, but puts HMRC to proof. HMRC have to prove this issue on the balance of probabilities.

The answer is yes, the transactions subject to this appeal were connected with that evasion.

This is set out in the unchallenged written evidence of Officer Wilkinson, in her first witness statement at Paragraphs 72 to 214 inclusive. We accept that evidence.

This is the true heart of this appeal.

The answer turns on careful examination of the facts, and especially Mr Crothers' state of knowledge: what he knew; when; and how; and what he should have known.

This is not a blank canvas. Between 18 April 2012 and 1 November 2017, the Appellant had 13 MTIC 'visits', some unannounced, from HMRC Officers. Of those, 9 were carried out, face to face, at the Appellant's address. 4 were on the phone.

In April 2012, WDL was identified by HMRC as a potential new MTIC trader.

The first visit took place on 18 April 2012. It was carried out by Officers Wilkinson and Heatley. They met Mr Crothers and his then-accountant. MTIC fraud was explained and VAT Notice 726 and the leaflet 'How to spot missing trader fraud' handed over. We accept Officer Wilkinson's evidence that the overall purpose of this engagement was education, in terms of informing Mr Crothers - both orally and in writing - of what MTIC fraud was, and advising him and giving him suggestions as to how he could protect himself from becoming involved in it. We accept her evidence that it was never HMRC's role - whether at that meeting or subsequently - to run the Appellant's business for it, nor to tell Mr Crothers (in the sense of ordering or directing him) how to run his business. How the business was run and how the trades were done always remained a matter for Mr Crothers and him alone.

Following that meeting, an MTIC awareness letter was sent to WDL dated 20 April 2012. HMRC's note of the visit on 18 April 2012 was sent on 27 April 2012. No corrections were suggested.

Very shortly after that, namely on 2 May 2012, HMRC initiated a process of extended verification of the Appellant's VAT return for 03/12.

On 25 October 2012, HMRC visited the Appellant's accountants' officers and there interviewed Mr Crothers for about 1 hour. Officer Arnold's contemporaneous note, which we accept as accurate, records that she stressed the importance of due diligence checks for suppliers and customers.

There was another visit in October 2012 regarding a VAT repayment of £137,000 for period 09/12, which was subsequently released.

In June 2013, a VAT assessment for about £20,000 was issued against WDL, on the basis that WDL had failed to provide suitable evidence of dispatch from Cyprus to Ireland. That assessment was paid.

An unannounced visit took place in July 2013, in relation to deals with A S Sales. Mr Crothers was asked if he wanted MTIC fraud explaining to him again, and declined. Officer Arnold's note, which was not challenged, records that she told Mr Crothers that a customer suggesting a supplier or a supplier recommending a customer could be an indication of MTIC fraud ("why would the parties not just trade with each other?").

We are satisfied, and accept HMRC's evidence, that Mr Crothers knew that he needed to satisfy himself that his trades were part of a genuine supply chain, and that MTIC fraud could affect any standard-rated product, including those which he was trading in.

The Appellant was subject to monitoring by HMRC under the 'Continuous Monitoring Project' from August 2013 onwards.

In September 2013 HMRC, alongside a visit on 17 September 2013, undertook an extended verification of WDL for periods 07/13, 08/13 and 10/13. HMRC warned the Appellant that MTIC fraud was continually mutating and "one of the consequences of this is that the nature of fraudulent transaction chains becomes more and more complex". At that meeting, Mr Crothers confirmed that he had received and read Notice 726.

In May 2014, HMRC wrote to WDL that the majority of deals in 07/13 and 08/13 had been traced back to tax loss. The claimed repayments (coming to about £240,000) were initially withheld, but then released to WDL, without prejudice, in June 2014. That was because HMRC was ultimately unable, due to a 'blocking buffer' in the supply chain to fully trace those deals back to tax losses.

The situation, when it first arose, was very serious. HMRC were withholding repayment of almost quarter of a million pounds. If the withholding were persisted in, that would doubtless have had a serious effect on the Appellant's cash flow and its business overall. Moreover, when the Appellant was first told the withholding was because transactions were believed to trace back to a tax loss, Mr Crothers could not have known whether he would ever actually end up getting the withheld money. He knew that, if he did not, it would have been down to issues with his supply chain.

In those circumstances, it is therefore striking that there is no evidence of Mr Crothers or his accountants (all of whom had been advised only about two years previously of MTIC fraud) reaching out to explore with their direct HMRC contact, Officer Wilkinson, whether there was anything different which Mr Crothers could or should have been doing to avoid becoming involved in tax fraud in relation to these particular transactions, or to safeguard the Appellant more generally in the future. We agree with Officer Wilkinson that this episode was a 'good early indicator' for the Appellant to review the adequacy of its own arrangements. However, and unfortunately, it did not seem to have had this effect: instead, and as the overall tenor of his evidence made clear, the eventual release of the repayments to the Appellant seems simply to have given rise to, or fed into, Mr Crothers' belief that his commercial practices were acceptable.

In July 2014, Officer Wilkinson wrote to the Appellant about VAT fraud, and the use of third party banking platforms. Annexe A of that letter reiterated that approaches from newly established or recently incorporated companies with no financial or trading history; new companies managed by individuals with minimal experience and knowledge of trading in the sector; significant increases in the volumes and values of trade, with no apparent commercial driver, were all examples of previous indicators of MTIC fraud, and were still to be taken into consideration when the Appellant was conducting its 'Know your Customer' checks.

Between August 2012 and November 2018, WDL received 22 de-registration/veto letters from Wigan. It is a fair point that none of these letters said that the deregistrations were because of MTIC fraud. On the other hand, the obvious context is the integrity of the VAT system. Mr Crothers was only being sent these letters because he had at some time asked Wigan to validate that VAT number, or the trader had asked Wigan about WDL - that is to say, in both cases, the deregistrations were of entities with which WDL had traded or had intended to trade.

Looked at in the round, we find that Mr Crothers was aware, throughout this entire period, and certainly once he had received the first few of these letters, that his counterparties, taken generally (and not just those whose deals are the subject matter of this appeal) were active in a field which was open to deregistration action by HMRC, where one of the reasons for deregistration - whether stated or not - was connection to fraud. Receipt of the letters and what they would have connoted to a prudent trader, operating in this market, and armed with this knowledge, is therefore part of the overall picture - but, given the absence of express reference to MTIC, and the possibility of deregistration for other (and innocent) reasons (such as dissolution of a company, or death of an individual trader) is of limited weight.

The Appellant was supplied with VAT Notice 726, initially at the meeting with HMRC on 18 April 2012, and was repeatedly referred to it. Insofar as it remained in dispute at the hearing, we accept HMRC's evidence, in preference to that of Mr Crothers, that he was given and had explained to him VAT Notice 726.

Whilst it is true that the March 2008 edition of Notice 726 refers to 'specified goods' and does not refer expressly to the sort of goods which Mr Crothers was trading in, the overall tenor of the notice - as set out in its Section 6 ("Dealing with other businesses - How to ensure the integrity of your supply chain") clearly concerns the need for traders who are VAT registered to act to protect the integrity of their supply chain so as to avoid becoming involved in VAT fraud. The wording is clear (see Section 2.3):

VAT Notice 726 gives fair warning that those who knew or had reasonable grounds to suspect that, in their supply chain, the VAT on the supply of goods would go unpaid, could be held jointly and severally liable for the VAT loss.

We reject any suggestion that a legitimate business dealing in soft drinks or confectionery would, on reading Notice 726, assume that its contents had no relevance to its trade, and we respectfully disagree with the Tribunal in Lynton that the Notice is irrelevant and that no inferences can be drawn about WDL's behaviour from the fact that it was given it. The Notice should not be read as if it were a statute. The Notice is a practical educational tool, alerting VAT-registered traders to the risk of VAT fraud, and giving them useful guidance. Morever, we are satisfied that HMRC's contemporary note of its MTIC visit on 18 April 2012 is accurate, and that Officer Heatley explained to Mr Crothers and his accountant at the time (a Ms McGivern) that, although soft drinks were not one of the commodities mentioned, nonetheless "the questions contained in Notice 726 were very useful for a trader to consider when drawing up meaningful due diligence procedures".

Very shortly after that meeting, on 20 April 2012, HMRC's Specialist Investigations Unit sent the Appellant an 'MTIC Awareness Letter', warning it that MTIC fraud "may involve all types of VAT standard rated goods ...".

Mr Crothers accepted that he was given the leaflet 'How to Spot Missing Trader Fraud', and that this was explained to him. Unlike VAT Notice 726, no criticism can be advanced that the leaflet applies only to certain specified goods because it is not so confined. That leaflet warned traders to use their common sense and to be suspicious of newly established or recently incorporated companies with no financial or trading history; of contacts with a poor knowledge or the market and products; of unsolicited approaches from organisations offering an easy profit on high-value or volume deals for no apparent risk; repeat deals at the same or lower prices and small or consistent profit; and entities trading from residential or short-term lease accommodation or serviced offices.

Several of these warning signs are present in this case, as shall be set out in more detail below.

In the leaflet, HMRC warned VAT registered traders to know their suppliers; to satisfy themselves that a deal looks and feels genuine; and exhorted them to check the integrity of their customers and suppliers, and 'the commercial viability of the transaction'. It warned that businesses can be targeted and drawn into fraud if they do not take appropriate care.

Mr Crothers' entire approach to due diligence can be summarised and captured by the above expression. The expression is not ours. It is entirely his own expression, being the answer which Mr Crothers gave, towards the end of his oral evidence. He said:

This speaks for itself. Ms Vicary described this as a 'self-designed test'. We agree. If the goods arrived, then Mr Crothers was frankly indifferent to who his seller was, their bona fides, or whether his supplier was engaged in tax fraud. The other side of the coin was that, if he was paid for the goods, he was similarly indifferent to who his buyer was, their bona fides, or whether his buyer was engaged in tax fraud.

This attitude - which is entirely ill-conceived on Mr Crothers' part, and which has directly led to this Appellant facing assessments of over £8m - underpinned and explains what actually happened.

It is important to record that the above evidence - which was given with naked candour and without any intention to mislead - was not a one-off or stray comment otherwise inconsistent with the weight of the evidence. It was a pervasive attitude which emerged repeatedly in his oral evidence and it was consistent with many of the things which, on clear (indeed, unchallenged) evidence, he repeatedly did. It was consistent with the weight of the evidence.

By way of illustrations:

In VAT terms, and the right approach to the risk of being involved in VAT fraud, this could almost be described as a short catalogue of exactly what not to do.

Taken individually, none of these are things which a sensible trader, guarding appropriately against the possibility of becoming involving in VAT fraud, would have done. For a trader to have engaged in all of them is extremely striking and raises serious question marks as to that trader's integrity and diligence. Regarded as a species of evidence, even if circumstantial, these plait the strands together into a strong evidential rope winding around the Appellant's dealings.

Alongside and bolstering Mr Crothers' blase attitude was another, which emerged extremely clearly in the course of his oral evidence. This was that, unless he was expressly told by HMRC not to trade with a particular person, then trading was allowed. He was sharply critical that HMRC - which had issued a VAT number to a trader and which had validated it through its Wigan office - could then (to paraphrase) turn around and impugn a transaction with that trader on the basis that it was connected to a tax loss occasioned by fraud.

As far as we could tell, this attitude was genuinely held by Mr Crothers. It was expressed to us so fluently and forcibly that we did not think that it was evidence which was improvised, or invented just for the hearing. But this approach is completely wrong, for a number of reasons.

It was not HMRC's task, or Officer Wilkinson, or any its other officers dealing with Mr Crothers, to do the Appellant's due diligence for it, or to decide for the Appellant who to trade with. The Appellant was Mr Crothers' business; not HMRC's. Mr Crothers was its director and manager; not Officer Wilkinson or any of her colleagues. HMRC can educate, and in this case we are sure was trying to do so. But - put very bluntly - it was always down to Mr Crothers whether he was prepared to be educated. As part of this education, HMRC gave him advice - repeatedly - as to the circumstances in which he was to consider proceeding with caution, in case the transaction happened to be connected to VAT fraud. But Mr Crothers was simply not listening to what he was being told.

The fact that the Appellant had been trading in more or less the same way since 2003, and had never had a claim for repayment refused before, became irrelevant once Mr Crothers knew about, but chose not to apply or follow, the guidance set out in the MTIC leaflet, or MTIC warning letters, or VAT Notice 726 (all of which, when it comes to the steps which a prudent trader should take in mitigating or extinguishing the risk of being involved in VAT fraud, are to like effect). Hence, Mr Crothers ran a clear, identifiable, risk - which had been pointed out to him frequently - that HMRC would decline the Appellant's claims to recover the input VAT.

Notably, it cannot be ignored that this risk was not theoretical. The Appellant had already had a close brush with it in 2014, until Officer Wilkinson, confronted with a blocking buffer and an inability to reconcile certain transactions, decided to release the withheld repayments. That experience should have been a learning experience for the Appellant. It does not seem to have been. It is impermissible speculation whether the circumstances giving rise to this present appeal would ever have come about had the Appellant heeded the warning which that experience should have given him.

But, having had that experience, it is striking that the Appellant did not seem to learn anything of benefit from it, but, in broad terms, carried on trading in the same way - something which has led directly to this appeal.

Insofar as it was contended that Mr Crothers' views as to the propriety of his commercial conduct were shared by his accounant Mr Murdock, this is not a case about Mr Murdock or his views. There is no evidence of Mr Murdock trying to encourage WDL to take a different approach to diligence or to assuring itself of the integrity of its counterparties. We are bound to say, given our impression of Mr Crothers' character, and of the tenacity with which he held his views about diligence, we are extremely doubtful whether Mr Murdock, even if he had tried, could have influenced Mr Crothers to change his practices.

Apart from some criticism of Mr Murdock's firm not always providing monthly deal summaries as promptly as she would have liked, which had resulted, after some emails, in a Schedule 36 notice, Officer Wilkinson accepted that she had good lines of communication with Mr Murdock, and that his firm did not place obstacles in HMRC's way. His firm - as was clear from Mr Murdock's evidence - was a small firm, which did not have a delegated member of staff to deal with HMRC's requests for information about WDL, and which, when asked by HMRC, depended on getting information from Mr Crothers. Mr Murdock accepted, fairly, that there were delays in responding to direct requests from HMRC - sometimes several months - but we do not consider that these were part of any plan on his part, or on the part of his firm, to frustrate HMRC's inquiries into WDL. Sometimes the delays were the result of tax deadlines; and sometimes just the result of pressure of other work in a small firm with modest resources, with 400-500 clients, having to deal with voluminous and complex inquiries for one of them. We also accept Mr Murdock's evidence that a lot of the letters sent by HMRC to Mr Crothers and not copied to Mr Murdock were not shown by Mr Crothers to him.

Eventually, in the additional disclosure, evidence was provided by Mr Crothers that VIES checks had been done for some suppliers. Indeed, repeat checks were done for Whitmount (13 between 13 April 2014 and 25 August 2016); Sha Bros (8 checks between 27 March 2015 and 11 August 2016); and Prime Merchants (2 checks on 29 August 2016 and 4 September 2016). This demonstrates that someone - most probably Aislinn Laverty - was conducting and refreshing checks on the authenticity of the VAT numbers. But it is striking that this exercise was only being conducted for certain suppliers, who were not defaulters. In relation to the seven defaulter suppliers, there is no evidence of any VIES check at all for 4 of them, and a single check (in two instances - Ave Brands and AK Prime) after trading had already begun for the other 3.

Credit must be given for the VIES numbers which were checked in advance of beginning trading. But nonetheless checking a VIES number, in and of itself, was not sufficient to guard against fraud. It simply told the Appellant whether that the VAT number was a valid number or not.

"Validation" of numbers with HMRC's Wigan office ('Wigan') was something which the Appellant was advised by HMRC to do, and which, it is clear, was sometimes done - at least in relation to some counterparties.

But it was not done for all of them. It was not done for Dynamic, Monarch, or AK Prime. Therefore, we do not accept Mr Crothers' written evidence that WDL 'used this facility for each of the traders in the impugned trading period': it did not.

The lack of importance, to the Appellant, of the Wigan process as a means of guarding this business against becoming involved in VAT fraud is clearly demonstrated by the fact that the Appellant, on many occasions, bought from someone before even approaching Wigan for validation; let alone waiting for the answer.

It was striking that Mr Crothers was, time and time again, prepared to venture tens of thousands of pounds on deals with persons without even knowing, beyond their own say-so, whether they were in good standing with HMRC. It was an entirely cavalier, blase, approach to 'diligence'.

Credit must be given for the Wigan checks done in advance of beginning trading. But nonetheless checking a VAT number with Wigan, in and of itself, was not sufficient to guard against fraud, and it never has been.

Wigan letters say:

The Appellant always knew this. It was made clear as early as the MTIC letter sent on 20 April 2012:

A warning in similar terms was given in other letters, such as that of 3 July 2014.

A check with Wigan was part of the overall decision to trade.

Moreover, and as the 2012 letter makes clear, one check might not be sufficient:

Hence, repeat checks were encouraged. In the circumstances of this appeal, some traders were not checked at all, or where checked only once. There is no evidence of any trader being checked before every transaction. We are not holding the Appellant to a standard of checking with Wigan before each and every deal. A sensible approach had to be taken. In fairness to the Appellant, we also add that, where there is evidence of checks with Wigan, the stated 48 hour deadline was seldom (if at all) met by HMRC. But delay from HMRC was not a good reason not to make checks at all, or to make them only after trading had already begun, or not to wait for the result of the validation.

On the basis of Mr Crothers' evidence, Mr Magill makes a valiant attempt to argue that the supply of product under an HMRC issued and authorised VAT number, checked under the available system, and paid for through a licensed bank "carry much more weight as due diligence and indicators of legitimate trade than any other example identified by HMRC". But this argument cannot and does not succeed because (i) it ignores VAT Notice 726 and the reasons for the VAT Notice; (ii) it ignores or trivialises due diligence; (iii) it ignores the Appellant's actual failures to check with Wigan and/or VIES; (iv) it ignores the Appellant's actual fact of trading before checking was done and/or completed (v) it ignores that the over-arching context is VAT fraud, which, in order to work, is perpetrated by people who use VAT numbers; (vi) it ignores the fact that even fraudsters have access to bank accounts. That is to say, deployment of a valid VAT number and access to a bank account are insufficient discriminators of fraudsters from non-fraudsters.

Mr Crothers was initially critical of HMRC, on the basis that there should be 'a sheet' tellinhg him what to do. But, when presented with the terms of the MTIC list - which does exactly that, in plain and easy-to-understand language, and with reference to MTIC fraud generally - he resorted to criticism that the MTIC list (which he had had, before the transactions in dispute in this appeal) was just things being "thrown up" in front of the Appellant - that is to say, to get in the way of the Appellant doing the deals it wanted to do.

That list is topped-and-tailed with exhortations to 'be suspicious'. But Mr Crothers' evidence was that being suspicious would, in effect, stifle his deal-making, by preventing him from dealing with certain people or businesses.

It seems to us that this is very important in this case. Put bluntly, Mr Crothers' one and only concern was to do a deal. As long as a seller had a VAT number and a bank account, then his self-developed and self-applied test of commercial probity was whether the seller could actually come up with the goods. Beyond that, and as emerged with great clarity in this evidence, he was frankly indifferent to the risk of fraud.

Mr Magill accepts that, "with the benefit of hindsight, knowledge of fraud in the chains, and careful scrutiny of the documentation" there were "deficits" in the Appellant's due diligence. This is a sensible - indeed, an inevitable - concession, on the evidence, but, in our view, goes nowhere near far enough in capturing the extent of the Appellant's failures.

What 'due diligence' which was done was fragmentary and perfunctory, often against circumstances and/or documents which should have excited suspicion as to the commercial bona fides of the seller. We agree with HMRC that diligence was not actually being done as a tool so as to allow the Appellant to assess the risk, and as a means whereby he could identify and decline to engage with risky sellers. There is good evidence - including from Mr Crothers in cross-examination - that what checks were done were being done as a paper exercise. That is certainly corroborated by the fact that, regardless of the results of 'due diligence', or even before it had been received, Mr Crothers would just get on with trading.

There are other, individual, features which illustrate the pervasive effect of this attitude on his business practice, and which, in our view, have properly and reasonably led HMRC to the denials of input tax.

We must caution ourselves against 'guilt by association', where tax losses or defaulters are at more than one remove from the Appellant. As Mr Crothers himself says in his evidence, the only information and material generally available to the Appellant was information and documentation exchanged between WDL and its immediate supplier and its immediate customer.

It is also fair to say that the deal packs contain many documents which HMRC do not allege were known to WDL at the time; and we must be very careful not to allow the much bigger picture of tax fraud (captured in the many thousands of pages of documents, to which little or not reference was made, much involving entities at more than one remove from WDL, and which WDL cannot reasonably have known about at the time) to distract from the focus which we must have on WDL's knowledge at the relevant time.

However, this does mean that the dealings with direct suppliers are particularly important and instructive, because these were things in which Mr Crothers and WDL had a direct part. Not only is there an immediate link, but the intensity and quality of inquiry as to the suppliers' commercial integrity rested squarely on WDL, and enable us to make a proper and rounded assessment of what WDL (as opposed to HMRC) knew, or should have known, at the relevant time.

A significant part of the Appellant's case is that he did not have the investigative resources of HMRC and therefore cannot be held responsible for not unearthing things which HMRC, with time and application, was able to. But the argument is ill-conceived. HMRC's own investigative ability is not the yardstick against which the Appellant is being measured. The Appellant is being measured simply in terms of what it knew or ought to have known about its own counterparties and its own transactions - not what HMRC knew or ought to have known.