4Site Services London Limited v The Commissioners for HMRC

The appellant (4Site) appeals against decisions by HMRC to deny input tax and impose penalties, as follows:

Although 4Site initially disputed that there had been a tax loss in the supply chain, by the date of the hearing they had accepted that a tax loss had occurred. There had also been a dispute as to whether the early assessments had been made out of time; in the hearing it was confirmed that the appellants no longer disputed the validity of those assessments.

It was also accepted in the hearing that there had been fraudulent evasion of tax in the supply chain, and that the transactions were part of the fraudulent evasion, such that it was no longer disputed that the tax loss resulted from fraudulent evasion.

The remaining issues before the Tribunal were therefore:

This decision is based on the documents and oral evidence provided and the submissions of both parties. Where we have not expressly referred to every point made, it has nonetheless been considered in reaching our conclusions.

The judge apologises for the delay in producing this decision, which was due to health issues during this year.

4Site was incorporated on 10 July 2014. It registered for VAT purposes on the same date. The two directors are Mr Prabhakar (DP), who has been a director since incorporation, and Mr Darmoo (CD), who has been a director since 26 May 2016.

4Site supplied construction industry services, particularly on-site lorry hire, “muck away” services (collecting and transporting construction waste to licensed disposal sites), and the sale of aggregates to the construction industry. 4Site has no trucks of its own; it acts as a middleman, responding to tenders to building firms for work and, if successful, subcontracting the work to others. Work done was evidenced by ‘tickets’ completed onsite, signed by a site representative. 4Site invoices their customers weekly, providing their copies of the tickets with the invoice to support the work invoiced.

The input tax denied on the Kittel basis was in respect of the supplies provided by two suppliers, CMUS and GCorp. Neither CMUS nor GCorp paid VAT to HMRC during the relevant VAT periods. Central assessments were issued but were not paid.

4Site used CMUS from around March 2018 until June 2019. CMUS was incorporated on 7 July 2017 and VAT registered from 26 February 2018. It was deregistered for VAT on 23 October 2018 but continued to provide services to 4Site and issue invoices to them which contained its VAT number and charged VAT until 4Site ceased to use them. Following deregistration, CMUS eventually filed a nil return on 7 May 2019 for the period 1 September 2018 to 23 October 2018, despite having issued VAT invoices to 4Site (at least) in that period. It was dissolved on 20 August 2019.

4Site used GCorp from June 2019 to June 2020. GCorp was incorporated on 3 September 2018 and VAT registered from mid-September 2018. It was deregistered for VAT when it was dissolved in November 2020. It filed nil returns for the 10/19 period and the period 1 November 2019 to 18 November 2020 on 16 August 2021, despite issuing VAT invoices to 4Site (at least) during those periods. It was dissolved following compulsory strike off on 17 November 2020.

4Site contended that the assessment raised for the 06/20 VAT period on 6 August 2020 and reduced on review had already been determined by the Tribunal.

The assessment was raised in the amount of £43,594 on the basis that 4Site had not provided evidence to support input tax claims. 4Site contended that on 28 September 2020, following a review, the assessment was reduced to £25,637.

On 2 September 2021, HMRC sent a Kittel denial letter to 4Site stating that their claim to input tax in respect of the transactions on the 06/20 period was denied because HMRC were satisfied that those transactions were connected with fraudulent evasion of VAT and that 4Site knew, or should have known, that this was the case. 4Site contended that the effect of this letter was to amend the assessment raised 6 August 2020. They contended that if it had been intended to be an alternate assessment, it would have clearly stated that it was raised in the alternative. As there was no such statement, it was contended that this letter was an amendment of the assessment raised on 6 August 2020. Further, the reasons for an assessment have been found not to be part of an assessment: therefore, where an assessment is raised for the same amount, the fact that it is raised for different reasons does not mean that it cannot be an alteration of an earlier assessment for that amount.

That assessment had been appealed; HMRC had withdrawn from the appeal on 10 January 2022 and the appeal had been allowed by the Tribunal.

However, on 19 January 2022, HMRC wrote to 4Site asserting that the assessment remained in place, notwithstanding their withdrawal from the appeal process. On 19 August 2022, HMRC issued a further assessment for the 06/20 appeal period. On statutory review, it was concluded that the decision should be cancelled as the previous decision had been allowed by the Tribunal and so the input tax could not be denied a second time. The associated penalty was stated to have been cancelled, as it was calculated as a percentage of the denied input tax.

4Site contended that the correspondence of 19 August 2022 was not a new assessment but, instead, an attempt to amend the original assessment. They contended that the Tribunal had no jurisdiction to hear an appeal in respect of the 06/20 period as the liability for that period had already been determined by the Tribunal. It was not disputed that HMRC had the power to raise alternate assessments, but 4Site contended that there had only been one assessment, which had been varied a number of times. As this assessment had been upheld by the Tribunal, the input tax could not be denied a second time.

HMRC contended that there were two separate assessments, not an assessment and variations of that assessment, and that they were entitled to raise assessments on alternative bases. They contended that the correspondence showed that assessments had been raised in the alternative, one based on invalidity of invoices and the other on the Kittel basis. Only the first assessment, based on invalidity of invoices, had been appealed and withdrawn. The alternative assessment remained valid.

The appeal to the Tribunal on 27 October 2020 stated in the grounds of appeal that it was against the assessment raising on 6 August 2020, disallowing input tax on the basis of invalid invoices.

The Kittel denial letter of 2 September 2021 made no mention of the assessment of 6 August 2020. It denied (inter alia) input tax of £43,593 claimed on the purchase of services for the 06/20 period. Whilst it did not specifically state that it was an alternate assessment, the letter stated that it was “notification of an assessment. If adjustments to the VAT return are needed, you will receive a separate letter”. We consider that this would have been differently worded if it were intended to amend the original decision, or the review of that decision.

We note 4Site’s contention that case law has established that alternate assessments must be stated to be alternate. The case referred to was University of Glasgow [2003] STC 495 which confirms that assessments can be made in the alternative for the same period. At [14] the decision states that “Where two assessments in different amounts, made and notified contemporaneously, are so made and notified expressly as being in the alternative, they are … mutually exclusive and not exigible in the aggregate.” The decision concluded that “the use of distinct but alternative assessments was, in our view, competent”. We do not consider that this case concluded that all alternate assessments must be notified expressly to be alternate; it was addressing a different situation, where two assessments were issued in the same letter.

With regard to the contention that the reasons for an assessment are not part of an assessment, so that an assessment in the same amount for different reasons should be regarded as an amendment of the original assessment and not a new assessment, we note that this contention was based on BUPA Purchasing No2 [2007] EWCA Civ 542. At [48] the decision concludes that “reasons for an assessment do not form part of an assessment under s 73(1) to which statutory consequences as to alteration apply.”

This does not, however, mean that an assessment based on different reasons must be regarded as an amendment of the original decision: the appeal in BUPA Purchasing No2 was considering the question of whether the reasons for an assessment could be changed. It concluded that the reasons for an assessment could be amended; it did not conclude that a separate assessment issued for different reasons must be regarded as an amendment of the original assessment.

Considering the evidence and case law, we find that the Kittel denial letter was a separate alternate assessment for the 06/20 period. It was not an amendment of the previous assessment.

On 23 December 2021, HMRC reviewed the Kittel denial decision letter. That letter noted that 4Site had appealed the 06/20 “invalid invoices” decision to the Tribunal. It also stated that the review considered only the VAT assessments notified in the Kittel denial letter of 2 September 2021 and that this assessment was an alternative assessment for the 06/20 period.

The review conclusion letter stated that it was varying the 06/20 assessment made in the Kittel denial letter from £43,593 to £25,367. We find that this review decision did not, as contended by 4Site, amend the original assessment made in August 2020.

On 10 January 2022, HMRC sent a letter of withdrawal. This was stated to be in respect of the assessment sent on 6 August 2020, the assessment raised on the basis of invalid invoices.

On 4 February 2022, the penalty assessed on 2 September 2021 was varied; there was a general reduction in all of the penalties to 30% of the potential lost VAT. The penalty for the 06/20 period was reduced to reflect the arithmetic amendment in the review letter. This penalty review letter also stated that HMRC did not agree that there was no assessment for the 06/20 period in place as only the “invalid invoices” assessment had been withdrawn and the Kittel assessment remained valid.

On 19 August 2022, HMRC sent a further Kittel denial letter in respect of the 06/20 period, stating that they had undertaken an extended verification of the transactions for that period. That letter stated that “Input tax denials have been made in relation to all the supplies relating to Glassoncorp Ltd for this period totalling £43,593.69. The balance of £25,367 has been denied in the Notice of VAT assessment issued on 2 September 2021.”

We find, therefore that this was therefore not a further assessment for that period; instead, it confirmed the Kittel assessment made earlier without the arithmetic errors in that assessment.

In conclusion, and considering all of the evidence before us, we find that HMRC raised alternate assessments for the 06/20 period: the first, on the basis that invoices were invalid and the second, on the basis of Kittel denial. The first assessment was withdrawn. That withdrawal did not affect the validity of the second assessment and so this Tribunal has jurisdiction to consider that second assessment.

As noted above, 4Site accepted that there was a tax loss in respect of the relevant VAT periods relating to transactions undertaken with CMUS and GCorp and accepted in the hearing that the tax loss arose from fraudulent evasion.

Although 4Site did not, in the hearing, dispute that there was a tax loss and that the tax loss arose from fraudulent evasion, HMRC must establish that there was a tax loss and that the loss resulted from fraudulent evasion. We note the following:

We accept Officer Stock’s characterisation that these were fraudulent defaulters.

On the evidence before us, and on the balance of probabilities, we find as a fact that there was a tax loss in the relevant VAT periods related to those transactions and that it arose from fraudulent evasion of VAT by those suppliers. 4Site’s denied transactions were direct purchases from CMUS and GCorp. Connection to the fraudulent evasion is therefore established.

The question for the Tribunal was whether 4Site knew or should have known that any of the transactions were connected with that fraudulent evasion.

The Tribunal had written and oral evidence from the two directors of 4Site (DP and CD) and also from two HMRC officers, Mr Stock and Mr Moore.

Officer Stock gave evidence concerning CMUS and GCorp’s defaulter status. As 4Site accepted that a tax loss had arisen and that it arose from fraudulent evasion we have not discussed his evidence in any detail below.

Officer Neil Moore gave evidence about the Kittel decision and the evidence review, particularly describing the matching exercise undertaken by HMRC in reviewing purchase invoices, 4Site sales invoices, and tickets for exemplar transactions, and the perceived inconsistencies. His evidence as to the matching exercise was carefully presented; while not every invoice or ticket could be matched, the pattern of inconsistencies was clear.

DP became a qualified accountant in 2008 and set up his own accountancy business, providing tax compliance services, in 2007. He continued to operate that business whilst acting as a director of 4Site.

DP handled paperwork, VAT returns and matching tickets to customer invoices. He undertook due diligence by checking basic publicly available information on new suppliers: the company name, directors, VAT number. He considered that there was no reason to repeat due diligence checks unless there was an issue with a supplier. He had not kept any evidence of due diligence checks at the time that CMUS and GCorp were engaged, on the basis that the information was a matter of public record and could be checked at any time. He did not consider that there was any requirement to keep every check undertaken.

CD accepted prior tax misconduct (undeclared income as an electrician and other undeclared cash receipts) and that he had been disqualified as a director for 11 years for VAT irregularities within a previous company. His role within 4Site was to source customers and suppliers. Suppliers were generally found by word of mouth. He therefore sourced many suppliers from a particular lorry park and was only concerned with price and capacity when dealing with suppliers.

CD would offer work to known suppliers, only seeking new suppliers if he was unable to get a competitive price from known suppliers. He conducted no due diligence on suppliers, leaving that to DP. He had, for example, assumed that CMUS and GCorp had trucks and could carry out work themselves because he believed he had seen trucks with their logos on, although he had not checked what they actually owned. In the hearing he stated that he did not recall meeting with anyone from GCorp, dealing with them only by telephone; in his witness statement, he said that he had met representatives of GCorp although he did not provide any names. He confirmed that he had met a director of CMUS. His communications were largely verbal or via messaging.

HMRC stated that all major subcontractors used by 4Site since March 2015 had defaulted on VAT obligations, with the transactions accounting for between 48% and 99% of 4Site’s input tax in each VAT quarter from 03/15 to 06/19. Only one quarter had less than half of the claimed input tax connected to defaulting traders; 11 of the 18 VAT quarters had 70% or more of the claimed input tax connected to defaulting traders. This evidence was not challenged, although DP stated that this was not information which could have been checked by 4Site in the course of due diligence.

HMRC argued the overall pattern was inconsistent with mere misfortune.

Supplier invoices arrived by post with tickets, which DP checked for count and overall value and then invoiced the customer (with ticket references) and requested payment by the factor. He did not reconfirm supplier VAT registrations absent a trigger such as a change of bank.

CD agreed prices with customers and suppliers, with communication by telephone and messaging. Prices were not routinely recorded in writing although some customers provided purchase orders with the relevant details. DP would have to obtain price information from CD in order to be able to check the invoices from suppliers. He did not know how this information was kept by CD.

Invoices from CMUS and GCorp were in similar format and provided only a single line generic description of work with an overall price. There was no detail as to the quantities of work charged for, nor unit prices for the work done. DP did not query the inadequate information. He considered that, if customers did not complain, then the tickets were sufficient evidence.

DP accepted he did not provide HMRC with a full reconciliation of supplier invoices to tickets when asked, stating he had been advised to stop preparing this once assessments were raised.

The generic information in the invoices from CMUS and GCorp also contained substantial discrepancies in the description and/or location of work done, compared to 4Site’s corresponding invoices and those of non-defaulting suppliers. DP did not query these discrepancies, asserting the tickets were the controlling evidence of supply.

No queries were raised when the tickets showed that another subcontractor had carried out the service, rather than CMUS or GCorp. Some of the subcontractors used by CMUS or GCorp had been contacted by 4Site but had quoted a price too high for 4Site to accept, given that they operated on the basis of a 5% margin. CD offered backloading (effectively, being able to offer back to back work to and from a waste disposal site) as a possible explanation for why such a subcontractor might be able to offer a lower price to CMUS or GCorp but provided no supporting evidence and did not suggest that he had ever checked whether this explanation might be anything other than an assumption as to why CMUS and GCorp were able to subcontract most if not all of their work for 4Site whilst offering a price within 4Site’s margins.

The burden of proof in this case is on HMRC to show that 4Site knew or should have known that the transactions with CMUS and GCorp were connected to fraud. The standard of proof is the ordinary civil standard of the balance of probabilities.

We note the guidance in Mobilx [2010] EWCA Civ 517: the Kittel test is simple and not to be over refined; circumstantial evidence may establish knowledge; the Tribunal should stand back and consider the totality (CCA Distribution v HMRC [2017] EWCA Civ 1899); and the question is whether the taxpayer knew or should have known that, by its purchases, it was participating in transactions connected with fraudulent evasion of VAT. Blind eye knowledge is sufficient; the taxpayer need not know the detailed mechanics of the fraud (Fonecomp [2015] STC 2254).

4Site contended that they did not know and that there was no reason why they should have known that the transactions with CMUS and GCorp were connected with a tax loss arising from fraudulent evasion.

HMRC contended that all major subcontractors used by 4Site since the 03/15 period had defaulted on their VAT obligations. HMRC contended that this was relevant to the question of knowledge and quality of due diligence carried out by 4Site and its directors. 4Site’s evidence was that they were unaware of these defaults.

While coincidence cannot be entirely excluded, the repeated engagement of defaulting suppliers over years, sourced through a narrow network (a single lorry park), is a strong indicator that 4Site did not carry out adequate due diligence and that, if they had done so, they would at least should have known there was a materially elevated risk of VAT fraud in its supply chain.

HMRC demonstrated multiple instances where supplier invoices from CMUS and GCorp described work (e.g., “muck away from Mill Hill/Watford Road/Abbots Hill”) while the tickets and the Appellant’s sales invoices evidenced different work types (daywork) and different locations (e.g., Persimmon Homes at Andover; Plaza Walk NW9). 4Site did not query these discrepancies and proceeded to pay substantial sums (over £1.2m to CMUS and GCorp across the four periods). We regard such significant discrepancies across many invoices as red flags that would have alerted a reasonable trader to the risk of fraud.

We note that DP is a qualified accountant, with his own practice, and that he clearly understood the requirements for a VAT invoice. 4Site’s own invoices were detailed, setting out not only a clear description of work done but also providing a summary of all of the tickets attached to the invoice and providing prices for the work done. We do not consider that an experienced accountant in these circumstances would have simply accepted the persistently inadequate and inaccurate invoices without question; nevertheless, DP did not question those invoices.

The tickets from CMUS and GCorp frequently named other hauliers, indicating that CMUS/GCorp subcontracted most or all work for which they were engaged by 4Site. 4Site contended that subcontracting was nothing unusual in this industry and that the tickets were evidence that the work had been done. Given the narrow margins on which 4Site operated, we consider that a reasonable trader would have queried the frequent subcontracting, particularly as the evidence was that such subcontractors had been unable to agree to provide work to 4Site at a price that worked with 4Site’s relatively tight 5% margin. Neither DP nor CD asked any questions about the level of subcontracting shown by the tickets.

4Site continued trading with CMUS for months after CMUS was deregistered for VAT, paying and claiming VAT amounts on their invoices. Although DP said he did not routinely re-verify VAT registration absent a trigger, the continued receipt of unusual invoices lacking detail and persistent errors in descriptions of work should have prompted periodic checks; any such check would have shown deregistration.

The consistency and scale of descriptor/location mismatches, coupled with lack of detail on CMUS and GCorp invoices, is well beyond what we would expect in the ordinary course of business. We find that a prudent trader would have re verified VAT registration periodically or upon receiving atypical invoices, particularly when dealing with suppliers which were new companies with minimal trading histories.

4Site produced no documentary evidence of supplier due diligence (e.g., VAT number lookups retained, Companies House checks recorded, site visits, contract terms, insurance/waste carrier licences, or supply chain integrity steps). Statements of practice and public guidance exist to encourage such checks (though not prescriptive) but we note that Mobilx cautions against focusing on “due diligence” rather than the Kittel question. Nevertheless, we find 4Site’s approach fell far short of what a reasonable trader would do in these circumstances.

We also note that there was an absence of normal commercial communications with principal suppliers over extended periods, with communication primarily by phone and messaging. DP had to rely on CD telling him what prices had been agreed, rather than this being recorded in writing. The Tribunal finds that, considering all of the evidence, this demonstrates a low level of supplier scrutiny despite the substantial monetary flows to CMUS and GCorp and the recurrent anomalies visible in documentation from those suppliers.

4Site contended that they had carried out all reasonable checks and that HMRC had not warned them that they were dealing with defaulting traders, such that there was no basis on which they should have known that their transactions were connected with fraud. We note that HMRC did not issue early “tax loss” or due diligence warning letters to 4Site before December 2020. Whilst this may explain why 4Site did not alter its practices earlier we consider that the absence of HMRC warnings does not negate the objective problems apparent in the documentation received by 4Site. We attach limited weight to HMRC’s non notification when considering 4Site’s means of knowledge.

Standing back, we find that, during the relevant periods, the only reasonable explanation for 4Site’s pattern of transactions and the surrounding circumstances was that its purchases were connected to fraudulent evasion of VAT.

We find there is insufficient direct evidence to conclude that 4Site actually knew of fraud; however, on the balance of probabilities the cumulative indicators were sufficiently clear that 4Site deliberately refrained from making enquiries which would have confirmed the existence of fraud risk. That conduct approximates “blind eye” knowledge (Manifest Shipping Company Limited v Uni-Polaris Shipping Company Limited and Others [2001] UKHL 1); at a minimum it satisfies “should have known”. On the facts, we find that 4Site should have known that its purchases were connected with the fraudulent evasion of VAT.

We therefore find that 4Site should have known that its purchases from CMUS and GCorp were connected with fraudulent evasion of VAT. The right to deduct input tax is therefore lost for the relevant periods.

HMRC issued a penalty under s 69C VATA. 4Site argued that Conditions A–C were not met and, alternatively, that mitigation should reduce the penalty. For greater mitigation, it was contended that 4Site was not provided with HMRC sector guidance on supply chain fraud or letters warning of “missing trader” risk relating to CMUS or GCorp until late in 2020. HMRC accepted at the hearing that such letters were not sent before December 2020, and that the first explicit fraud risk communication (the 2 December 2020 letter) followed GCorp’s dissolution.

Given our findings that 4Site knew or should have known (under Kittel), the statutory conditions for s 69C are met. As to mitigation, we take into account that 4Site cooperated to an extent (attended meetings; provided documents), and that HMRC did not issue earlier supply chain warnings. However, the absence of warnings does not diminish 4Site’s obligations. Considering all of the evidence, we consider that the reviewed penalty figure (£80,409.60), which reflects HMRC’s mitigation determinations, is not disproportionate and we uphold it.

HMRC have proved, on the balance of probabilities, that:

We find that the withdrawal by HMRC of the original assessment for 06/20, raised on the basis of invalid invoices, did not affect the validity of the alternative Kittel denial.

The appeals are therefore dismissed. The denial of input tax of £268,032 stands (including £25,367 for 06/20) and the penalty of £80,409.60 is upheld.

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.