G.M.P. Baird Limited & Ors v The Commissioners for HMRC

The principle in Kittel is that a trader who wishes to recover its input tax must deploy means of knowledge. This means asking awkward questions of suppliers which might drive defaulters away or put the trader on notice that something was wrong and thus cease trading with the defaulter. In this case it is clear that the appellants were on notice of the heightened risk of dealing in scrap and indeed were on specific notice regarding tax losses of some of their suppliers. Yet their due diligence was woeful and consisted merely in ensuring that the supplier was VAT registered in which case that was sufficient for the appellants. In truth they would have traded with anyone who had a VAT registration number since they simply wanted to make money. It would not have mattered what they found out, they would have continued to trade. Indeed, they did not want to find out that there might have been fraud in their supply chain since they wanted to trade at all costs. They failed to ask the awkward questions required of them by Kittel and thus failed to deploy means of knowledge. They should have known of the connection with fraud because they made no genuine effort to check the integrity of their supply chain. It was not up to HMRC to tell the appellants what checks to carry out, and indeed the evidence shows that there was nothing that HMRC could have said or done which would have prevented the appellants trading with the defaulters. The only reasonable explanation for the circumstances of their trades was that they were connected with fraudulent evasion.

To have means of knowledge, a trader must have the means of discovering that its supplies were connected with fraud. The appellants had no such means of discovering that during the period in question. During that period, they bought scrap from defaulters and non-defaulters and carried out precisely the same checks on both. There was nothing to put them on notice that the trades with the defaulters were any more suspicious than those with the non-defaulters. There is nothing more that they could have done to ascertain that they were trading with defaulters. HMRC must show that the only reasonable explanation for the purchases was that they were connected with fraud. They have not done so. There is a reasonable alternative explanation for the circumstances surrounding those purchases, namely that they were normal trades of scrap metal, something which the appellants had carried out for many years. The due diligence undertaken by the appellants was commensurate with the risks which they faced, which had not been heightened by information or warnings provided by HMRC.

The relevant legislation and case law is set out in the Appendix to this decision. Words and phrases defined in the Appendix bear the same meanings in the body of this decision.

We have set out the case law in considerable detail. But to cut a long story short the essential principles are these:

A trader who participates in the fraudulent evasion of VAT loses their right to deduct input tax.

A trader may be regarded as a participant where they knew or should have known that the only reasonable explanation for the circumstances in which their purchase took place was that it was a transaction connected with such fraudulent evasion.

A trader who deliberately shuts their eyes to facts which they would prefer not to know is taken to have actual knowledge of the facts to which they have shut their eyes (i.e. blind eye knowledge).

A trader who has the means of knowing that their transaction was connected to fraudulent evasion but chooses not to deploy it will not be entitled to deduct. A trader who fails to make enquiries may satisfy the only reasonable explanation test. This introduces the concept of due diligence (or “DD”) into the mix.

However, this tribunal should not focus unduly on the question of whether a trader’s DD is adequate but must focus on the essential question of whether the trader knew or should have known of the connection between their trades and fraudulent evasion.

When considering this question, we are entitled to (and should) look at the totality and characteristics of the transactions and what the trader did or omitted to do, and what it could have done, together with the surrounding circumstances in which the trading took place.

We were provided with two bundles of documents comprising, in total, a little over 12,500 pages. Much of the documentation was irrelevant given the concessions made by the appellants regarding fraudulent tax losses by the defaulters. We reminded the parties that we could not be expected to take account of every document in the bundle and would only take account of documents to which we were expressly referred.

Oral evidence was given by officer Jeanette Lucas (“Officer Lucas”) on behalf of HMRC. Mr Baird and Mrs Baird both gave oral evidence on their own behalf and for the first appellant. In each case these individuals had tendered witness statements on which they were cross-examined.

Officer Lucas was the assessing officer, but it was not she who conducted the investigation into the affairs of the appellants, nor was she present at any of the visits, details of which are set out below. It was her role to review the documentary information with which she was provided and to consider whether there was sufficient justification to raise assessments on the basis that the appellants knew or should have known of the fraud and tax losses. She was not tasked with carrying out any form of independent investigation into the information with which she was provided.

No suggestion was made that the assessments were not made to best judgement. And so, although Mr Ahmed suggested that there was insufficient evidence for Officer Lucas to reach the conclusion that the appellants knew or should have known of the tax losses, that, frankly, is not particularly relevant. Means of knowledge is for us to decide. So, whilst we record some of the reasons given by Officer Lucas for reaching her conclusions, we have not considered her justification for reaching those conclusions in any detail.

When considering the oral evidence of the Bairds we bear in mind the case law relating to the fallibility of human memory and the importance of contemporaneous documentation. The visit reports go back to 2017, and it is hardly surprising that they could not recall precisely what was said at those visits. Where, therefore, there has been a conflict between the oral evidence concerning those reports with the written word, we have preferred the written word. Furthermore, given the difficult personal circumstances during the period in question (George Baird, Mr Baird’s father and Mrs Baird’s husband, who had contracted dementia sometime before, died in June 2020, and Mrs Baird herself was diagnosed with cancer and hospitalised during that period) it is inevitable that their minds were on other things at that time. We have, therefore, only found as facts from their evidence, matters which were either unchallenged or were corroborated by documentary evidence.

Where their evidence was not corroborated or unchallenged, we exercised some caution in deciding whether or not it was reliable (given the human tendency to remember things in a way which might assist one’s own case) and taking into account the plausibility of the evidence and its consistency with other evidence which we considered credible.

Miss Rao submitted that neither Mr Baird nor Mrs Baird were reliable or convincing witnesses. Where this is material, we have dealt with it in the discussion below.

However, we say at this stage that (notwithstanding the difficult personal circumstances referred to above), it is our view, having heard all of the evidence and seen the way in which that evidence was given, that the Bairds were fully capable of understanding the information provided, orally, by HMRC during the relevant visits. Furthermore, the written documentation provided by HMRC (for example Notice 726) was something which Mrs Baird was fully capable of understanding.

The company was incorporated on 1 March 1977 and registered for VAT on the same date. Its trade classification was dealing in scrap and other waste materials. It submitted VAT returns on a quarterly basis.

During the period in question the Bairds were both shareholders and directors.

The company originally specialised in recycling industrial batteries and dealt in scrap metal. That scrap metal was processed in some way. It was not the case that it was simply acquired and sold on in the same state.

The processed batteries had originally been sold to a company based in Israel but in around 2018 another company, who had been given a large grant, priced the company out of the battery market. The company was thus forced to move more into scrap.

Scrap was bought from both new and established business suppliers as well as private suppliers who simply walked onto the site and offered scrap for sale.

During the periods in question, that scrap was processed using machines which broke the scrap down into its component parts (for example cables were broken down into the plastic and the core ferrous material) which was then sold on. It was clearly a business advantage to sell on as quickly as possible, but the processing of the scrap took some time, and so whilst scrap could be obtained and supplied on the same day even after processing, it was commonly the case that the scrap was received on one day, then processed, and its component parts sold several days later. Furthermore, given the way in which this scrap is processed, it was not possible to identify specific items of scrap sourced from suppliers with those specific items subsequently sold to customers.

A considerable amount of “stock” was therefore held on site, which was uninsurable, and was at risk from (and actually suffered from) theft.

Whilst George Baird was alive, he ran the show. Mrs Baird dealt with the paperwork. Mr Baird’s role included driving the lorries to collect scrap from customers, and so he would meet those customers face-to-face. After George Baird’s death, when Mr Baird took over his father’s role, he no longer drove as he had to look after the staff and the activities on the site. He therefore met fewer, if any, suppliers face-to-face in the way that he had prior to his father’s death.

It was Mr Baird’s role to conduct negotiations and do deals with suppliers. This was his area of expertise. Mrs Baird had no expertise in this field. On the other hand it was Mrs Baird’s role to deal with the “paperwork” as Mr Baird does not read well. She generally worked in her house, which was physically located away from the site (on which there is an office). As regards interaction with suppliers, and apart from due diligence, more of which later, her role was to check the invoices, liaise with her son to make sure that they accurately reflected the deal that he had cut with suppliers, and then pay them.

She would also liaise with the company’s accountant. She would provide him with the invoices on a quarterly basis to enable the accountant to compile VAT returns and submit them to HMRC. The accountant also ran the payroll. He also compiled and submitted the company’s corporation tax return. He was paid for doing this work.

If Mr Baird was approached by a supplier, it was Mr Baird who suggested a price for the commodity that he was being offered. There would then be a negotiation around that price, which, if satisfactory to both parties, would result in a deal to purchase that commodity. During the periods in question this commodity was almost exclusively scrap.

During the period in question details of the suppliers and the default amounts of VAT, are set out in the table below:

Between August 1978 and October 2022 HMRC had meetings with the Bairds initially on a face-to-face basis and subsequently by way of video. Records of these meetings, termed “visit reports” were in the bundle. It is to be noted that those visits which took place on and after 17 August 2021 took place after the period in question. These visit reports evidence the following:

In person visit on 14 February 2017. The company staff comprised six family members and five other full-time staff. Mrs Baird did the wages. The company bought forklift truck batteries, extracted the lead, which was then sold to an Israeli company to be made to batteries again. In the previous two years they had moved into selling scrap, copper, brass and plastic. They owned lorries, two copper granulators, and a grab machine.

In person visit on 17 August 2017. This was requested because the company was involved in dealing with high risk businesses. A further description of the way which the business operated was provided. Mrs Baird explained that they had known most of their customers and suppliers for years. In response to a question “what sort of due diligence do you carry out on customers”, Mrs Baird is recorded to have responded “what is due diligence”. The officers explained what due diligence was and gave Mrs Baird Notice 726. The report states that one of the officers “made a point of emphasising section 6”. Mrs Baird is reported to have responded that she didn’t realise that she had to undertake due diligence but “don’t worry I will start doing it as I don’t want to get into trouble”.

In person visit on 6 December 2017. The report records that due diligence was done at Companies House and a VAT number check and that the officer gave Notice 726 to the Bairds and to the company accountant who was present. It was explained to the participants by the officer that if tax losses are found in deal chains and insufficient due diligence has been carried out, HMRC can deny the company its input tax recovery.

Video meeting on 19 January 2021. This followed up a letter dated 27 November 2020 from HMRC’s fraud investigation service, in which HMRC recorded their concern that the company’s business may be at risk of involvement in supply chains that are connected to fraud and one consequence was that the company may be unable to recover the input VAT it is charged on supplies which are connected with that fraud.

In that meeting the Bairds confirmed their shareholdings and that they were both directors and explained that the accountant submitted VAT returns for the company. At that stage there were seven employees of the company and both of the directors were also employees. They explained the recent change to the nature of the business from reconditioned batteries to an emphasis on scrap. It made good business sense to move stock on as quickly as possible. At that stage the value of stock on site was approximately £100,000. A typical deal would involve identifying goods offered by a supplier which were potentially inspected, a price was agreed, and due diligence was conducted. Due to covid, contact at that stage was usually by phone or email. The company had a small weighbridge but generally it would rely on the customers weighbridge from which an outturn/return report was produced which would be sent to the supplier for an invoice to be raised. Mr Baird would inspect the goods to ensure that what was supplied tallied with what had been described. Payments were made by bank transfer.

Video meeting on 26 March 2021. The Bairds provided an estimate of the turnover for the 02/21period. Batteries were described as the main commodity dealt with in that period FM4U was still a major supplier. The Bairds reported there had been no new customers or suppliers. They make sure that they get due diligence. There has been no further trade since November with Stephen Evans Environmental. The officer advised there had been tax losses identified in the chains with which that company was involved. There had been no further deals with Greystone Brown since November 2020. There was no ongoing trade with Morgan Beaumont. The Bairds advised that they had never heard of Fuel Systems UK. They also said that they no longer dealt with Paradigm Construction. The officer emphasised the importance of due diligence especially on new suppliers. The officer also asked whether the fact that suppliers used the same invoices raised concerns with the Bairds who responded by saying that they had other things on their plate for example a “dying husband”. The officer indicated that having identified tax losses in the chains with which the company was trading, they would send letters notifying those tax losses to the company.

An email dated 1 April 2021 from HMRC to Mrs Baird had, annexed to it, a tax loss letter in relation to Stephen Evans Environmental Ltd. That email confirmed that that company was no longer registered for VAT.

In letters dated 14 May 2021 (tax loss letters) HMRC notified the company that purchase invoices with Fuel Systems UK Ltd, Wealthy International Ltd and Greystone Brown Ltd had been traced to transaction trains commencing with a VAT loss.

Video meeting on 18 May 2021. The officers and the Bairds discussed the then current state of the company’s business. FM4U was still a main supplier as was Calderbanks. The Bairds confirmed that they had received a tax loss letter relating to Stephen Evans Environmental. The officer asked for the due diligence undertaken on that company. He also explained that for the periods 08/20 and 11/20 tax losses had been identified in transactions with Greystone Brown, Fuel Systems, FM4U and potentially Paradigm Construction. The Bairds supplied due diligence comprising a VAT certificate, VAT registration letter and VAT number check (dated 14 December 2020 i.e. after the end of the period in which the deals took place) for Greystone Brown.

Mr Baird explained that his mother was going in for a cancer operation next week. They were under a lot of pressure. There are going to speak to a solicitor as they thought they were being harassed. Mrs Baird explained that they didn’t owe any money. The officer wanted to understand the checks that they had undertaken on their suppliers and customers. Mrs Baird explained that they were not a big company, that she did most of the due diligence, and whilst they would undertake due diligence on a new customer, they would not do so on a company which was an established customer. The officer said that he would be issuing tax loss letters in respect of FM4U.

Tax loss letters dated 29 June 2021 were sent by HMRC to the company identifying VAT losses in transaction chains relating to supplies by Paradigm Construction.

Video meeting on 17 August 2021. The directors reported that business was picking up and that they were dealing in batteries (60%) scrap and some steel. The directors also confirmed that FM4U and Calderbanks were their main suppliers.

A tax loss letter dated 1 October 2021 was sent by HMRC to the company relating to purchases from FM4U. It explained that purchase invoices with that company had been traced to transaction chains commencing with a VAT loss.

Video meeting on 23 November 2021. The current state of the company’s business was discussed. The officers notified the company of the deregistration of Alpine Aggregates, and that tax loss letters in relation to that company would be issued to the company.

On 2 December 2021, a tax loss letter was sent by HMRC to the company identifying purchase invoices with Alpine Aggregates as having been traced to transaction chains commencing with a VAT loss. A further tax loss letter in respect of Alpine was sent to the company on 17 December 2021 and on the same date, tax loss letters were sent to the company in relation to FM4U.

In person meeting on 25 May 2022. A new caseworker had been assigned to monitor the company which had not been taken off monitoring and that monthly contact and bimonthly visits would continue for the foreseeable future. The company had procured a new supplier Empirical Metal Solutions, and the questions were largely based on the new supplier. Mr Baird explained that the director of Empirical had called him up and then been to visit the company’s premises. They arranged to swap due diligence information and agreed prices for scrap. Trading commenced. Empirical delivered the goods directly to the company’s yard. There were no delivery notes but the weights were confirmed by the company on site. Staff unloaded the lorries and although no specific quality checks were undertaken, Mr Baird was able to see whether the goods were the right grade. The company was expecting to take delivery of a new granulator to replace their two older machines. Mrs Baird said that she did not understand the term tax loss letter, which was explained to her by HMRC’s officers, as was its relevance.

In person meeting on 25 July 2022. The directors reported that the new granulator had been delivered and worked at a much faster pace than the previous machines which it replaced. Business was good. The battery side was steadily increasing. The officers emphasised the importance of due diligence on both returning customers and suppliers given that changes might be made by their suppliers to management and the way in which they carried out their operations. Battery and scrap processing, the use of haulage companies, and card payments were discussed. Mrs Baird expressed her concern that if customers are checked, they would lose business. She didn’t want their customers bothered. Nor did she want to attend any more meetings. They were inconvenient and she could not see the point of them.

In person visit on 24 October 2022. The officers emphasised they could not discuss the assessments which had recently been visited on the company as they were under independent review. They discussed a new customer, KAS Metal Trading. Mr Baird confirmed they had an account with that company for over 10 years, but it was dormant and they had not done much business with them recently. The officers recommended that due diligence should be conducted on this customer. The transactions with a significant supplier, Empirical Metal Solutions was discussed as was the due diligence undertaken on that company. Mr Baird explained that he had known the director for some years. Empirical had also supplied batteries. The officers explained that Empirical is a broker rather than a scrap merchant and did not have a yard.

The tax loss letters referred to above followed a common format. They identify that HMRC had been making enquiries into transaction chains which might be linked to supply chain fraud. As a result of those enquiries, and in respect of a specific VAT return, HMRC know that a number of the transactions (where the whole chain has been established) commenced with a defaulting trader and resulted in a VAT loss.

The letters then go on to identify purchase invoices which had been traced in transaction chains commencing with a VAT loss. Those purchase invoices, the identity of the supplier, and the value of the supply gross and net of VAT amounts, is set out in the letters.

The letters then identify that VAT input tax recovery may be denied where transactions are connected with the fraudulent evasion of VAT and the person claiming input tax either knew or should have known of that connection.

The letters go on to say that if HMRC denies a company the right to recover input tax it would also be liable to a penalty which could be applied to company officers.

They also state that the company should satisfy itself that it has undertaken sufficient due diligence commensurate with the perceived risk to satisfy itself as to the integrity of the company’s suppliers and customers and of the underlying supply chains. And that it is the company’s responsibility to determine which checks should be carried out and whether to undertake transactions in light of the results of those checks.

The letters go on to provide links to gov.uk websites which provide further information regarding spotting missing trader VAT fraud and criminally facilitating tax evasion.

The following due diligence documents were submitted as evidence:

An undated letter on WHU headed notepaper which provided the bank details for Wealth International Ltd;

A VAT certificate for WHU with registration number 340 0812 48 dated 23 January 2020 identifying the effective date of registration as being 10 January 2020;

A certificate of incorporation for WHU evidencing incorporation of that company on 2 December 2019;

A certificate of registration under the Waste Regulations 2011 which identifies that WHU is registered as an upper tier waste carrier, broker and dealer with a registration number CBDU326453.

None.

A Companies House change of name certificate evidencing a change of name from Beaumont Morgan Demolition Ltd to Morgan Beaumont Demolition Ltd dated 19 October 2018;

An undated letter on MB headed notepaper giving bank details and a VAT registration number;

A photographic driving licence for Christopher Kevin Giblin;

A certificate of registration under the Waste Regulations 2011 which identifies that MB is registered as an upper tier waste carrier, broker and dealer under registration number CBD U297125.

None.

A VIES VAT number validation dated 2 October 2020.

A certificate of incorporation dated 11 June 2019;

A Companies House application to register SEE as a company dated 10 June 2019;

A Companies House document evidencing the appointment of Mr Stephen Evans as a director;

A Companies House document declaring that one ordinary share in the company had been allotted to Stephen Evans and that on incorporation Stephen Evans was someone who would count as a person with significant control in relation to the company;

A Companies House statement of compliance given by Stephen Evans;

The final page of the Memorandum of Association of the company declaring the subscriber to be Mr Stephen Evans dated 10 June 2019. The Memorandum itself was not provided.

A certificate of incorporation dated 14 August 2017;

A VAT online enrolment acknowledgement from HMRC to Alpine dated 27 November 2017 identifying the company as having VAT registration number 282 2435 10.

A VIES VAT number validation for VAT number 338555181 dated 14 December 2020;

A certificate of incorporation dated 11 December 2019;

A VAT certificate for registration number 338555181 evidencing the effective date of registration as 12 December 2019, a certificate being dated 22 October 2020;

A document of uncertain provenance declaring a valid UK VAT number of 338555181 has been registered to Greystone Brown Ltd;

The photographic page of a passport for Mr Peter Stubbs.

A Companies House change of name certificate from Local Heroes Ltd to Facilities Management 4 U Ltd dated 17 March 2016;

A VAT certificate confirming FM4U was registered for VAT on 19 May 2015 with VAT number 213906427, the certificate date being 18 November 2019;

A document of uncertain provenance identifying a new trading address for FM4U;

A certificate of registration under the Waste Regulations identifying FM4U as having been registered as an upper tier waste carrier, broker and dealer with registration number CBD257663.

Officer Lucas provided the following evidence in her witness statements. For the reasons given at [16-17] above, the following is a synopsis, rather than a blow-by-blow account, of her evidence in chief:

She recorded the VAT background of the company, and a table comprising the history of the company’s VAT returns from the period 05/89 through to 05/23.

She provided a detailed summary of the interactions between HMRC and the company including details culled from the visit reports.

She explained the numerical basis of the assessments and the amendments to those arising from the statutory reviews. These numbers are not challenged She also explained the basis of the company penalty and the individual penalties. Again, the amount of these penalties are not challenged.

She set out the trades which the company undertook with their suppliers and the connection between those supplies and fraudulent tax losses. She did this on a supplier by supplier basis which are summarised in the table at [33] above. She explained that of the nine suppliers with whom the company traded during the period in question, all apart from FM4U were defaulters. The defaulters in the chain with FM4U, were firstly a company called Merchant Trader Ltd which had purchased the scrap from a company called Sehrina Ltd (08/20, 11/20 and 01/21) and; secondly, Best Buy Scot Ltd (01/21 and 05/21) who had on supplied it to FM4U.

In her view the company knew or should have known that its transactions were connected to VAT fraud. She said this for a number of reasons.

The company had been provided with Notice 726 and had been told about the importance of undertaking due diligence on its suppliers and customers since 2017. Notwithstanding that, the company continued to trade in the same manner having undertaken little or no effective due diligence. No attempt was made to make credit checks or to ask for trade references. The company dealt with direct defaulters on a back to back basis. In 2018 the company started to regularly make taxable outputs of over £1 million which is approximately two thirds more than the average before that date. This coincided with the transition into scrap metals.

A number of the suppliers used an identical invoice format, something which was raised at the visit on 26 March 2021. The company traded with companies whose trade classes and business activities did not include the supply of scrap metal. The company’s markup cannot be easily seen. The company had no written contracts. Goods were delivered to the company’s yard and transported from there. Money paid by customers was used to fund purchases.

Due diligence comprised simply the collection of evidence of incorporation and evidence of VAT registration. Some of the due diligence collected was only obtained after a transaction had been concluded. There was no financial risk to the company as their customers were lined up prior to them purchasing goods from suppliers and virtual payment transactions are carried out on the same day.

In cross examination Officer Lucas’ evidence was:

HMRC had undertaken little investigation into the customers. She accepted that the customers were the same in the fraudulent chains as in the legitimate chains.

She had not investigated the pattern of buying and selling in the legitimate chains and so was not able to compare that pattern with the buying and selling in the fraudulent chains. She did not know, for example, whether the company had written contracts in place when dealing with legitimate trades.

She had not understood from the visit reports that the company processed scrap. She knew that it processed batteries.

The risks in dealing with batteries, where there is no history of fraud, are very different from dealing in scrap where fraud is prevalent. Furthermore, the suppliers and customers in relation to the transactions and batteries appear to be long standing.

It was Mr Baird’s evidence that:

Throughout the periods in question, he and Mrs Baird made the business decisions for the company. He was hands on, doing deals with suppliers and customers and looking after the processing of scrap and the staff in the yard. Mrs Baird’s role was dealing with the paperwork, for example invoicing, waste notes, paying suppliers, and banking.

They had no obligation to send quarterly reports to the Environment Agency for certain of the goods that they brought onto the site (for example batteries).

He accepted that the company had been given Notice 726 by HMRC during their visits. He was not entirely certain why the company was required to undertake due diligence, but thought the due diligence was basically obtaining the suppliers VAT registration certificate and as much information as he could obtain. In 2017 he was learning about obtaining due diligence.

In 2020, during the periods in question, he would ask the supplier for a KYC pack. At the time he assumed that, for example, the one he received from Morgan Beaumont, which contained a change of name certificate, a letter containing bank and VAT details, photo ID of the contact individual, and a waste regulation registration certificate, was the sort of information that would be included in such a pack. He had no objective justification however for this. He accepted that what he was given was relevant information.

Generally speaking, provided he obtained a VAT registration certificate which Mrs Baird checked, and which confirmed that the VAT registration number was that of the supplier, he would proceed with the deal.

In 2022/2023, he had become aware that he needed to do due diligence on all his suppliers. He was also aware of this in 2020 when he took over running the business from his father. He was told by some of his customers that he should provide them with a VAT number, and so he asked his suppliers to do the same.

He had received a tax loss letter for FM4U on 17 December 2021 and sent a copy to Mr Kainth asking for an explanation which he received by return email on the same day. On 24 December 2021 the company’s records appear to show that it purchased more scrap from FM4U (Mixed Cables for £47,610 with VAT of £9,522). The reason for this was that the company owed FM4U some money. The company also held their stock. He was not clear whether the ostensible purchase from FM4U was a further purchase or simply a money movement to reflect the money that they own.

He carried on trading with FM4U as he wanted to make money for the family and had to keep his staff in employment. If he had taken fewer risks he would have made less money. There was not enough money in the batteries.

He asserted that he didn’t understand what the tax loss letter meant and they did not definitely say that the supplier was not paying its VAT.

As far as he was concerned, if he was paying VAT to the supplier, that supplier would have been paying the VAT over to HMRC. It never occurred to him, having been notified by way of a tax loss letter, that he should only pay the supplier the amount he owed less the VAT.

If HMRC had deregistered a supplier, then the company would stop trading with that supplier. His view was that you could not trade with somebody who is not VAT registered.

In fact he relied not just on VAT registration, but also that he had met some of the people and also seen their Environment Agency registration number.

Although he accepted that he had been given Notice 726, he had not read it. He does not read well. He was busy in the yard and in any event had his staff of nine or so people to look after. In his words “I was the field man where I just bought materials, bought and sold and tried my best to get us due diligence”.

It was Mrs Baird’s role to check the validity of the VAT registration number of the supplier.

It was his view, as it was Mrs Baird’s, that the VAT certificate was crucial as you could only deal with VAT registered suppliers. He had not taken this view after consulting HMRC or his accountant but thought that it had arisen because he had spoken to people in the trade who told him that you should only deal with people who are VAT registered and could prove this.

Mr Baird either met in person or had video calls with new suppliers. He trusted himself to judge the character of the individuals who were behind the suppliers. For example, in respect of Mr Avtar Kainth of FM4U, who had come over at Christmas bringing drinks and some chocolate, he assumed that he was a good fellow.

The scrap that he bought and processed was supplied to existing and long-term customers.

His customers also supplied him with scrap.

When he was offered scrap by a supplier, which he couldn’t view in person, he would get pictures of it from the supplier. When it arrived, he checked that it conformed with the pictures. He was responsible for quality control. There has only been one occasion where the scrap he had received was contaminated and when he raised this with the supplier, the supplier took it back. He kept a record of each load in his diary.

He was always on the lookout for new customers or suppliers. These would contact him by phone or emails or indeed might come to see him in person.

For most of the suppliers during the period in question, he was contacted by the supplier.

When negotiating prices, if he could make some extra money, he would do so. If he saw the opportunity of making £150 rather than £100, he would take that especially from an existing customer. Once he knew a customer, he would take the same opportunity.

He was unaware that his suppliers were fraudsters.

They did not ask their accountant to help out with the due diligence. To do so would have meant paying the accountant and they didn’t have the money. So they decided to do it themselves.

In his view they had paid all the VAT they owed to HMRC. There was no tax due from them.

Whilst he now knows what a tax loss letter is, at the time he was not “fully clued up on tax matters” and although he knew them to be tax loss letters, did not understand what the consequences were.

He denied that he saw any pattern in the way in which suppliers seem to replace each other so when one stopped supplying the company, there was a seamless transition to another defaulting supplier.

It was Mrs Baird’s evidence that:

Her role was to deal with the paperwork whilst Mr Baird dealt with the scrap in the yard. She would file and send the relevant records to the accountant who would compile the VAT returns. He would also deal with the wages. She was not fully acquainted with the way in which the business was run on the ground, nor how Mr Baird ran the business and dealt with the suppliers and customers.

Due to competition with which they could not compete, the company moved away from batteries and into more scrap in or around 2018. She hoped this would be temporary and they would go back into batteries which she found easier to cope with. They had to keep scrap at the yard which was uninsurable and they had had break-ins.

However, stock had to be kept at the yard because it was processed so there was always going to be this risk.

They were acquiring larger customers who were asking for their due diligence (waste licences, VAT certificate, company registration documents, for example), and this made her aware that she needed to do more due diligence on her suppliers. The requests for due diligence from their customers informed the due diligence that she asked for from her suppliers. The company was asked for things like the VAT certificate and certificate of incorporation and that is how she knew what to obtain from her suppliers.

The company had a good reputation in the trade. It complied with all regulatory requirements and had the relevant licences.

She has never been asked for a trade reference for another trader. She might have supplied one had she been so asked.

By 2018, she understood the concept of due diligence. She asked her son to get it for her or she would email the supplying company. If there was a new customer, she told Mr Baird that she needed the supplier’s VAT number, an invoice, and at least some identification from the company. She also needed bank details if she was going to pay them. If she could get a company registration certificate she would, but sometimes the buying and selling was so fast that she did not have time to obtain it.

She also needed the bank details of the customers. In her view, she could rely on the fact that the supplier was VAT registered, and that they had a bank account, because HMRC and the banks would have conducted their own due diligence on the suppliers.

In hindsight she realises that it was not particularly sensible to trade without having all the paperwork. But if they did not do deals with suppliers, they would move on and trade with somebody else and so the company would lose business. With the benefit of that hindsight, she recognises that she could and should have done more.

Whilst she might have looked on the Companies House website at the certificate of incorporation, she did not go further and consider the accounts or other details regarding directors, which might have been available on that website. She accepted that it would not have taken much time to do so. She did not ask the company’s accountant to do so. In her view, he would not have taken it on due to his imminent retirement.

There were occasions when they did not have the necessary documents and did not trade with the supplier.

The due diligence that the company conducted on the nine suppliers did not differ from the due diligence that the company conducted on other trading partners.

She was diagnosed with lung cancer in January 2021 and had an operation in May 2021. Around that time, she was terrified and was uncertain whether she would survive the operation. Mr Baird had a great deal to worry about at that time and was not “in a good place”.

Following her husband’s death, Mr Baird took over the business and wanted to increase its turnover.

She took issue with a number of comments made in the visit reports. However, while she accepted that she had been sent these to consider as part of the preparation for the appeal, she had not really read them through in any detail because there was too much of it. She had not therefore raised her misgivings about the inaccuracy of the visit reports in her witness statement.

They carried on trading with FM4U after May 2021, when they had been told that tax losses has been identified in relation to that company, because they just wanted to pay what they owed, and it still had a VAT certificate which was valid and had never been cancelled. If a supplier had a VAT number, in her view she was legally obliged to pay their bills.

She did not ask FM4U where they had obtained their scrap, and she wouldn’t have had time to do it. She was trying to keep the business going.

She denied ever having been told that if a tax loss was identified in a chain with which the company was involved, HMRC could deny the company input tax recovery for a transaction with a member of that chain.

If she had been given Notice 726, in 2017 (which she could not remember receiving), it is more than likely she would have read it. She denied that she had been told by HMRC officers that even a VAT registered business sometimes fails to account for VAT to HMRC.

She was taken through paragraph 6.1 of Notice 726. She accepted that she probably did not consider any of the factors, nor undertake any of the checks set out in that paragraph.

As regards paragraph 6.2, then they did obtain incorporation certificates and VAT registration certificates but not letters of introduction. Mr Baird undertook personal contact with existing and potential suppliers. They do not have formal contracts with other suppliers or customers. They never checked credit ratings. They checked bank details but did not check them against other documents.

If she been told by HMRC officers that there was a risk of the company’s involvement in supply chains connected to fraud, she did not seriously consider the consequences for the company.

She accepted that in the case of Paradigm, they had dealt with them without having undertaken appropriate due diligence, but she had tried her best to get everything that she could from them.

She also accepted that in the case of Alpine Aggregates that they were trading with that company before they had completed their due diligence.

She initially denied that she was present at the telephone meeting on 18 May 2021 notwithstanding she is reported, in that visit report, as having attended. However, she subsequently accepted that her memory might have been faulty and that the meeting might have taken place. However, if it did, she could not recall any of the comments reported to have been made at that meeting. She had not raised this before as she had not read this report in detail prior to compiling her witness statement or attending the hearing.

On receipt of the tax loss letters of 14 May 2021, she might have contacted a solicitor but could not remember.

She could not recall saying that she was sick of being monitored, as is recorded in the visit report for the meeting on 25 July 2022. She did however make the point at that meeting that she did not want HMRC telling their customers that the company was being investigated by HMRC as they would lose business.

She denied that she had not undertaken sufficient due diligence on her suppliers (nor indeed asked her accountant to do so) because she was concerned that they might discover things which meant that they could not undertake profitable trade with those suppliers.

She accepted that the company’s accountant had said that they should undertake more due diligence.

At the meeting on 25 July 2022, the company’s accountant was able to go online during the meeting using his mobile phone and obtain information about a new supplier. It was her view that this would not have been possible for her to do, and it wasn’t something she wanted to ask the accountant to do.

When the company received the tax loss letter of 17 December 2021 in relation to FM4U, she asked Mr Baird to clarify the situation with Mr Kainth to see why they hadn’t paid their VAT. She accepted that the tax loss letter did not state that it was FM4U who had not paid the VAT but that it was someone in their transaction chain. Her understanding of the letter was that in FM4U’s trading, someone hadn’t paid their VAT.

She understood that when HMRC was telling the company that there was a supply chain fraud that somebody had not paid their VAT. And that she should have done more due diligence than she did. It was an HMRC problem that someone was not paying VAT to them which should have been paid. She had not fully understood that HMRC could obtain that unpaid VAT from the company. “I didn’t really commit a great deal of thought to where it comes from, as long as my transaction was fine and the people I was dealing with were paying the VAT…”.

The fault of not paying VAT lies with the defaulter and not with the company or with HMRC.

She would not trade with a company who she knew was not paying their tax. However, she was not told that by HMRC.

She accepted that it appeared that they continued to trade with FM4U on 20 December 2021 and 24 December 2021 which was after they received the tax loss letter on 17 December 2021.

She had not noticed that the bank account details given on the Greystone Brown invoices differed from the bank account details provided by that company on the VAT certificate that she was sent by that company.

She accepted that a VAT number in the body of a letter provided by Morgan Beaumont as part of the due diligence contained an extra number and differed from the VAT registration number set out at the foot of that letter. She had not picked this up at the time.

She could not recall the receipt of the individual tax loss letters nor when specifically the company received them. She did recall that she received a whole pile of them and “I didn’t know what to do”.

In summary Ms Rao submitted as follows:

When assessing the appellants’ state of knowledge, we must adopt the perspective of the appellants but must then go on to consider whether a reasonable person with that perspective would have concluded that the transactions were connected with fraud.

As set out in Mobilx, a trader who has means of knowledge at his disposal of knowing that by his purchase he is participating in a transaction connected with fraud, he loses his right to deduct. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises.

A trader who fails to make those enquiries may have knowledge which meets the no other reasonable explanation standard. This is consistent with the meaning and purpose of blind eye knowledge and “should have known” knowledge. Those types of knowledge are sufficient to justify denial because without them a trader who does not wish to find out about fraudulent activities cannot simply choose not to make enquiries or acknowledge the circumstances of their transactions. This would defeat the purpose of Kittel.

The principle in Kittel is that if a trader wishes to recover its input tax, it must deploy means of knowledge. This involves checking up on its suppliers. By asking awkward questions this might drive a defaulting supplier away and protects an innocent trader by discouraging it from trading with that defaulter.

In this case the appellant’s due diligence was woeful and wholly inadequate. This was largely because the appellant did not want to discover whether a supplier was involved in the fraudulent evasion of VAT since the company needed to trade to generate profits. And, shortly stated, it wouldn’t have mattered what due diligence it carried out, nor the results of that due diligence. The company simply went through the motions and carried on trading. This is clearly demonstrated by its attitude towards the information it was given regarding tax losses for FM4U. It is clear that the company was told about tax losses at the May 2021 visit. It was equally clear that it received tax loss letters in October 2021, yet it continued to trade with that company thereafter.

It is also demonstrated by the fact that they carried out a number of trades with defaulters notwithstanding that, knowing that they should obtain due diligence, they had no such diligence in their possession at the time of those trades.

It is not for HMRC to tell the appellants what due diligence they should carry out, nor is it up to HMRC to say what, if any, further questions should have been asked in order to drive out the information that would have put the appellants on notice that they were trading with defaulters. The point is that they need to ask the questions in the first place. In fact, when you consider the due diligence that was supplied by the various traders, there were a myriad of further questions that they should and could have asked which would have been awkward for the suppliers to answer, and which therefore might have protected them from participating in the fraud.

The question for us is not whether the appellants carried out proper due diligence, but whether they had the means at their disposal of knowing that by their purchases, they were participating in transactions connected with the fraudulent evasion of VAT.

In her submission, the appellants had more than adequate means to know this but chose not to use those means. They made no genuine effort to check the integrity of their supply chain. Their due diligence was wholly inadequate and their approach to due diligence is a very good indicator that they knew, before entering into the transactions, that if found out, they would not be entitled to deduct input tax.

They had blind eye knowledge. Where a trader chooses not to ask relevant questions, the issue is not what the answers would have been, but the fact that they were not asked in the first place, and indeed, as here, whatever the answers, provided the supplier was VAT registered, the appellants would have continued trading.

The appellants decided that they did not need to make any real enquiries because they were paying their own taxes correctly and their suppliers were VAT registered. They wanted to make money and keep the business afloat. They prioritised this above compliance checks which had been recommended by HMRC or withdrawing from potential transactions when DD was not forthcoming.

The appellants’ reliance on the fact that their suppliers were VAT registered is misconceived. There is no principle of law or reality which allows the VAT registration of a supplier to be a substitute for due diligence. Indeed, the evidence shows that they undertook trades without having conducted appropriate VAT registration checks.

The fact that the appellants paid their own VAT is wholly irrelevant.

The Bairds were capable both financially and intellectually of conducting proper enquires had they wanted to. If time or ability was an issue they could have engaged someone to conduct enquiries on their behalf. They chose not to.

In truth, there was nothing that HMRC could have said or done which would have caused the appellants to conduct more intrusive DD or to persuade them to stop trading with defaulting suppliers. They thought that because they were paying their own VAT and had VAT registration evidence of the suppliers, that was good enough.

HMRC had clearly told the appellants of the heightened risk of trading in scrap. They were warned not only of this heightened risk, but also of tax losses in the supply chain, but they ignored these warnings.

The trading of scrap with Calderbanks during the period in question, was minimal. An examination of the Calderbanks’ paperwork shows that it was very much more authentic than those of the defaulting traders. Both might have been treated with the same level of commerciality, but if proper due diligence had been carried out on both, it would have been apparent that Calderbanks was a bona fide trader, whilst the defaulting traders were not. It is because the appellant did not ask awkward questions that trades with fraudulent and bona fide suppliers both seemed to be equally commercial.

The Bairds had an ambivalent attitude towards due diligence. If it was to protect themselves, then why did they trade with suppliers before they received any due diligence. The fact that they did so strongly suggests that it was simply window dressing. The appellants were concerned with making profits and nothing that they discovered or could have discovered would have deflected them from that. They had blind eye knowledge in the sense that they did not want to raise awkward questions which would result in knowledge of a default which would have denied them the deals, and thus the profits, which were generated by the trades with defaulting suppliers.

HMRC rely on a number of particulars for their assertion that the company had actual knowledge/means of knowledge. These include: the unlikelihood of coincidence that so many of the companies in the scrap metal transactions should have traced to fraudulent tax losses; the ease with which the company entered into the new trade of trading in scrap; invoices from several suppliers in the same format and using the same wording; the ready replacement of companies within the supply chain with other similar companies, replacing each other in sequential order; HMRC’s repeated warnings from 2017 until 2021 concerning DD and tax losses in the trade of scrap metal; inadequate commercial documentation, no terms of business, written contracts, written business introductions, or credit checks on trading partners; inadequate due diligence; back to back trading.

It is clear from the visit reports that HMRC provided advice and education to the company. This included the following:

Credit checks and evaluating credit scores can assist in evaluating risk with new suppliers. Due diligence should be more robust with new suppliers rather than established suppliers, and on those where the supplier’s director have no background in scrap or which have no physical premises;

Checks should be carried out on existing and well-known customers as they may have changed their business structure, management or finances;

Trading should not commence until due diligence has been carried out especially when trading with new companies for the first time;

The scrap metal sector is at high risk of fraud;

Tax losses had been identified in the company’s supply chains;

Furthermore, it is clear from the visit reports that the company had traded with suppliers before it had obtained satisfactory DD.

It is also clear from those reports that the company’s attitude towards DD was that it is cumbersome and unnecessary. It took time and money to complete it properly.

WHU was newly incorporated and had minimal trading history.

The VAT certificate was dated months before trading began, and no evidence it was checked for validity at the time of trade.

The business description was vague, and the bank details referred to a different company name, which should have prompted further enquiries.

The appellants failed to investigate these discrepancies.

No DD was produced despite claims to have conducted it.

Mr Baird claimed a long-standing relationship, but MPRL was only incorporated in 2017, undermining this assertion.

The company changed directors and addresses multiple times in a short period, which should have raised red flags.

The appellants made no enquiries which reflected a clear desire to avoid obtaining information.

DD consisted of four photographs sent via WhatsApp, with inconsistent addresses and no verification.

The appellants did not examine any documentation. Any VAT check was conducted well after trading began.

Mr Baird claimed to have found MB via internet search but later admitted to a word-of-mouth introduction, which he tried to retract.

The invoices lacked weights and showed limited trading history.

This is a clear case of blind eye knowledge.

No DD was provided despite claims by the appellants that they had carried out DD.

Mr Baird gave inconsistent explanations for the missing documents.

The company had undergone multiple name changes, including unrelated business types (e.g., beverages, freight forwarding), which should have prompted questions.

The appellants did not investigate and even failed to recall the company name during HMRC visits.

Only a VAT check was provided, and it was dated after the transactions occurred.

The company was newly incorporated and traded nearly £200,000 worth of goods over 7 days.

The appellants traded without DD and ignored the lack of documentation, demonstrating blind eye behaviour.

Recently incorporated with a retired director and no evidence of industry experience.

Mr Baird gave contradictory statements about whether DD was received.

Despite missing DD, the appellants traded nearly £500,000 in one month.

This again shows deliberate avoidance of proper checks.

DD consisted of incorporation and VAT certificates from 2017, with no recent checks.

The director had a history of forming and dissolving multiple companies in similar industries, which should have raised concerns.

The promised KYC pack was never received, yet trading continued until deregistration.

Recently incorporated with inconsistent bank details between VAT certificate and invoices.

Business descriptions were unrelated to scrap metal.

Similar invoice formats were used by GB, Paradigm, SEE and FSUK, suggesting a pattern.

The appellants failed to notice or investigate these issues.

No review of company history, which showed dormant accounts and strike-off actions.

VAT certificate was outdated and not rechecked before trading.

FM4U lacked physical premises, and the appellants did not verify its role as a broker.

Mrs Baird displayed selective understanding and dismissed HMRC’s warnings.

The appellants did not want to and ignored all indications that there was a problem.

Despite receiving tax loss letters and warnings, the appellants continued trading with FM4U for months, prioritising profit over compliance.

Neither Mr Baird nor Mrs Baird were reliable or convincing witnesses on material points. Mr Baird, for example, said in his witness statement that he had carried out due diligence when in fact he did not conduct any VAT checks, and the paper due diligence was conducted by Mrs Baird.

Mrs Baird’s approach was largely to avoid reading the papers or providing her evidence on it in advance. She then told the tribunal that she could not remember what had happened or that the visit reports contained accurate records of what she had said.

In summary Mr Ahmed submitted as follows:

Throughout its trading history, the company has traded in both batteries and scrap metal. It is not true to say that it has only recently (say 2017) focused on scrap metal, and the figures do not show, as asserted by Officer Lucas, that there was a significant increase in trading scrap metal during the periods in question.

The company processed both batteries and scrap. They did not simply buy scrap from a supplier and pass it onto a customer having made a markup. The company had machinery which processed scrap into its various component parts which it then sold to a variety of established customers.

The company largely determined the price at which it would buy scrap from its suppliers. The suppliers did not come to the company with a proposed price. The price was suggested by Mr Baird and was then negotiated.

There were no customers lined up for the scrap when it was purchased, other than Mr Baird’s knowledge of the industry and of his customers, and the fact that if you bought scrap and processed it, he would be able to sell it to those established customers.

The transactions, therefore, were not “back to back”. The company purchased scrap from a variety of sources, negotiated a price, processed the scrap and then sold the processed scrap to various well-established customers. That scrap might have come in on, say, a Wednesday, but that processed scrap would not be sold and transferred to various customers until the following Monday.

There is no evidence, nor is it any part of HMRC’s pleaded case, that customers played any part in any fraud.

The so-called fraudulent transactions during the period in question were no different from the transactions with non-defaulters within that period, nor from the transactions in batteries which have not been impugned by HMRC. The company carried on precisely the same method of trading in both batteries and scrap and undertook similar due diligence for both fraudulent and non-fraudulent trading in scrap. For example, the company traded scrap with Calderbanks during the period in question and carried out precisely the same checks on that company as they did with the defaulting suppliers.

Suppliers of scrap come from all walks of life. They could be large organisations, or individuals who walk in off the street. The pattern of buying scrap did not change during the period in question.

These transactions, therefore, are very different from standard MTIC transactions where the price markup is usually determined by the supplier, and when nothing is done to the goods other than being passed on, the trader taking a markup when on supplied to a preordained customer.

The focus of the enquiry is whether the only reasonable explanation for any uncommercial features of the deals was that they were connected to fraud. The test uses an objective standard. The focus is on what a reasonable person in the trader’s circumstances should have known, not just on the traders subjective knowledge or lack of due diligence.

It is clear that the tribunal should not put undue importance on due diligence. The company genuinely did what it thought was sufficient to protect itself from the risks. Even if it could have done more, it was not through turning a blind eye. Whilst superficial due diligence is not necessarily sufficient, it will not, on its own, be enough to establish that the company ought to have known or that it had turned a blind eye to the connection with fraud.

It is not enough for HMRC to show that the appellant is running the risk that by their purchases they might be taking part in a transaction connected with fraud. It must be established that the appellant knew or should have known that by those purchases they were taking part in a fraudulent transaction.

No additional due diligence would, in any event, have identified a connection to fraud. Officer Lucas accepted that she could not point to any additional checks that could have been conducted that would have identified fraud.

The company did not knowingly trade with any supplier after it had received tax loss letters in relation to that supplier.

In relation to FM4U, it is not clear that the officer told the appellants about tax losses associated with this company at his visit on 18 May 2021. Furthermore, it is equally unclear whether the tax loss letters of 1 October 2021 were in fact sent. It is accepted that the appellants received the tax loss letters of 17 December 2021, but did not trade with FM4U after that date. Even if they were told, it was after the periods in question and thus not relevant.

Had the company the means at its disposal to identify fraud and simply turned a blind eye, that would be one thing. But simply not being in a fit state to conduct enough due diligence is not relevant to this appeal, particularly for events after the period in question.

Generally speaking, the company’s due diligence was not comprehensive, but it was commensurate with the risks that the directors thought they were running. These risks had not been heightened by information provided by HMRC during their visits.

Evidence of recent incorporation by a supplier does not mean that those behind the supplier are inexperienced in the field. When scrap dealers discuss things with each other, it is the individual’s experience that matters, not that of the company through whom they are trading.

To deploy means of knowledge, a trader must know that there is something for it to know, and the appellants here did not have that means. There was nothing more that they could have done to detect fraudulent trading. They traded in precisely the same way with the nonfraudulent traders as with the fraudulent traders.

There is a reasonable alternative explanation for the circumstances which surrounded their trades, namely that they were conventional acquisitions of scrap from bona fide traders.

There was nothing that the appellants could have done to put them on notice that the only reasonable explanation for the circumstances was that they were participating in a fraud.

We need to consider the position as it appeared to the appellant during the periods in question. At that time there was no difference between the deals with the defaulting traders and the bona fide traders. It is only now when you look at things with the benefit of hindsight and those transactions are scrutinised, that one can see that there were fraudsters in the chain. There was absolutely nothing which put the appellants on notice that the deals with the defaulters were any more suspicious than those with bona fide suppliers.

The officer’s investigation was seriously flawed. She did not carry out any independent investigation other than simply check on the written material with which she had been supplied. She did not know what, if any, written contracts were industry practice within the scrap metal industry. She had not realised that the company processed scrap. She did not know what due diligence was undertaken with non fraudulent suppliers. She simply made up her mind that the transactions were associated with fraud, using standard MTIC criteria and then came up with characteristics of the way in which the appellant traded which fell within those criteria.

HMRC’s indicators that the appellants have means of knowledge do not bear scrutiny.

There is no evidence of an overall scheme to defraud, merely fraud associated with dealing in scrap metal. There is no coincidence that the company’s scrap metal transactions should have been traced to fraudulent tax losses. Transactions of a similar nature were conducted both before, during and after the period in question which were not connected to fraud. There were no additional checks which could have been conducted which had identified a connection to fraud. The fact that new businesses were traded with and which had a limited trading history is not an indicator of fraud. The company has dealt with plenty of new/small scrap metal traders over the years where there is no connection to fraud. The company could not have detected that invoices from several suppliers appeared to have the same format. Nor could the company see, or be expected to see, whether there was indeed some pattern to the way in which their suppliers (as asserted by HMRC) replaced each other in a sequential order.

The appellant was aware of the risk associated with trading in scrap and took adequate precautions. The terms and commercial arrangements on which the company traded with suppliers was the same when purchasing from fraudulent suppliers as it was non fraudulent suppliers.

The company carried out due diligence on Lloyds Metals Ltd which supplied scrap to it. This was the same due diligence which it carried out on fraudulent traders. Yet there is no suggestion that this supplier was involved in fraud.

HMRC’s warnings about fraud in the appellant’s chains were not adequate nor was there any evidence that Notice 726 was presented in a forceful way. The company should have been told, in the 2017 visits that their due diligence was poor and not good enough to protect them.

No level of due diligence would have uncovered the fraud, and the lack of discussion and criticism in 2017 suggests that the warnings were nothing more than a box ticking bolt on to another routine visit.

There was no contact between HMRC and the company between 2017 and 2020 which sent the message to the company that their supply chains were clean. Furthermore, it suggests that HMRC were satisfied by the level of due diligence which was being undertaken by the company.

Contact by HMRC during the period in question was too little too late.

Notice 726 is not fit for purpose. It deals with mobile phones and computer chips and someone examining it would not have considered it relevant to trading in scrap metal.

However, if the appellant had gone through it and in particular paragraphs 6.1 and 6.2, its responses to the questions posed would have confirmed the commerciality of the transactions with its suppliers and that it would have been in good shape to trade with those suppliers.

The due diligence was commensurate with the risk.

It had a waste licence in 2019 and the appellant had been trading with it from at least early 2020. There have been no serious warnings raised by HMRC. What more could the appellant have done.

This company had supplied scrap for many years.

This company had been formed over a year before the first transaction.

This appears to have been an oversight because the VAT registration check which was conducted on 2 October 2020 was after the last transaction. Due diligence may well have been carried out but the documents are missing.

The VAT registration and company incorporation details show that the company was formed and registered for VAT three years before the transactions.

Mr Baird had spoken to Mr Singh, the Alpine director, who had more than 21 years experience in the construction waste industry.

Although the DD shows a VAT registration verification on 14 December 2020, a month after the first transaction, the appellant already had evidence it was incorporated and registered for VAT a year before the transactions.

This company changed its name four years before the period in question and was VAT registered for five years before that period. It had a waste licence from October 2018.

The due diligence was reasonable considering the risk.

Scrap metal can be sourced from all sorts of industries.

The Birds were operating in very stressful circumstances during the periods in question. The combination of Covid, the passing of Mr Baird senior in June 2020 and Mrs Baird’s cancer diagnosis and subsequent operation in that year meant that there were very significant personal circumstances which had an impact on their relationship with HMRC and as regards the company’s trading.

It is hardly surprising, therefore, that the Bairds cannot remember, with any certainty, matters that were discussed at their visits with HMRC.

The parties agree that when assessing the appellants’ state of knowledge we should consider the appellants’ perspective but then go on to test this against an objective standard, namely whether the reasonable person in the traders circumstances knew or should have known of the connection with fraud. We describe this as the “objective trader” test.

We have adopted a similar approach to that adopted by the tribunal in the cases of HMRC v SK Metals Ltd [2025] UKFTT 01211 (“SK Metals”), and HMRC v Deos [2025] UKFTT 01018 (“Deos”).

We will consider the appellants state of knowledge by first considering whether the appellants had direct actual knowledge that the purchases were connected with the fraudulent evasion of VAT.

We then consider whether the appellants had blind eye knowledge of that connection.

We then consider whether the evidence shows that the appellants had means of knowledge that the purchases were connected with fraud.

Finally, we consider the objective trader test, namely whether it can be inferred from all of the circumstances that the objective trader would have known that the purchases were connected with the fraudulent evasion. This last test has been described in those two cases as one in which we need to consider where there was no reasonable explanation for the circumstances in which the purchases were undertaken other than the connection with VAT fraud.

We start this exercise by making further findings of fact. We then review (briefly) the appellants’ due diligence, and their approach to it. We then consider the competing submissions made by the parties about due diligence and extend this to considering means of knowledge. We then consider the indicia that HMRC say should have led the appellant to the conclusion that its purchases were connected to fraudulent evasion. Finally, we go on to consider the competing submissions made by the parties regarding the principles which we have set out above.

Firstly, we make further findings of fact as set out in bold below.

The appellants were fully aware that there was a heightened risk of fraud in supply chains involving scrap metal compared with trading batteries.

We say this because:

It is abundantly clear to us from the visit reports that HMRC had told the appellants of this (the visit report of 17 August 2017 report that “a robust education on due diligence was given and information on sectio 726 in a paperwork form was handed over for them to refer back to”).

They had been given Notice 726. This is clear from the visit reports for the August 2017 and December 2017 meetings.

It is also clear from Mr Baird’s evidence that he had received that notice.

As we have mentioned above, notwithstanding Mrs Baird’s equivocal evidence, we have preferred the contemporaneous written evidence of the visit reports.

We do not accept Mr Ahmed’s submission that Notice 726 is not fit for purpose, nor that the Bairds were confused by its application by dint of the fact that the notice refers to commodities such as phones and computer chips rather than to scrap metal. The evidence is that it was given to them in the context of their scrap metal business. In our view there could have been no misunderstanding that they were being told that the principles set out in that notice applied to them in their scrap metal business.

It is our view, too, that the objective trader would have been aware of the heightened risk of fraud in supply chains involving scrap metal.

The appellants were fully aware of the need to conduct due diligence along the lines set out in Notice 726 on their suppliers.

We say this because:

Both Mr Baird and Mrs Baird accepted in their oral evidence that following the meetings with HMRC in 2017, they were aware of the need to conduct due diligence on their suppliers.

Mr Baird thought this was limited to obtaining the suppliers VAT registration certificate but accepted that it was also obtaining as much information as he could about the supplier. Mrs Baird’s evidence was that provided there was a VAT registration certificate and details of the bank account, she could rely on HMRC and the bank having checked out the validity of the suppliers.

We have found as a fact they were given Notice 726 in the relevant meetings.

Notice 726 sets out, at paragraph 6, the sort of checks that should be undertaken by a trader where there is a heightened risk of fraud.

It is our view that the objective trader would have been fully aware of the need to conduct due diligence along the lines set out in Notice 726 on their suppliers.

The appellants understood the reasons why this due diligence was required.

We say this because:

The text of Notice 726 explains how a trader could be made jointly and severally liable for the unpaid VAT of another VAT registered business and the circumstances in which this might arise (if the trader knew or had reasonable grounds to suspect that VAT on the purchase or any previous purchase would go unpaid to HMRC).

We have found as a fact that the appellants were given Notice 726.

Mrs Baird’s evidence was that if she had received Notice 726, she would have read it but denied receiving it. In light of our finding of fact that it was so received, we take the view that she would have read it and was perfectly capable of understanding what it meant. It is couched in plain English. This was given to her in 2017 long before the difficult personal circumstances recorded above.

It is our view that the objective trader would have understood the reasons why this due diligence was required.

We now consider the appellant’s attitude towards due diligence.

As can be seen from the evidence, the documentary evidence of the due diligence undertaken by the appellant on its suppliers during the period in question falls far short of the due diligence which Notice 726 suggests should be undertaken by a trader in the appellants’ position. In Miss Rao’s view this is woeful and wholly inadequate. It is her view too, that it would not have mattered what due diligence the appellant carried out, nor what the results of that due diligence was, the appellant would have traded with a supplier in any event subject, perhaps, to only trading with a supplier where the appellant had evidence that the supplier was VAT registered. One reason for this was that the appellant was more concerned with making money than it was with investigating the integrity of its supply chain.

There is considerable merit in this submission.

According to Mr Baird, provided he obtained a VAT registration certificate which was checked by Mrs Baird and which confirmed the VAT registration number was that of the supplier, he would proceed with a deal.

Mrs Baird’s evidence was along similar lines. Provided there was a VAT certificate (which as far as she was concerned evidenced the fact that HMRC had checked out the supplier) and she had bank account details (which suggested to her that the bank had checked them out as well as providing the information she needed to pay the supplier), the company would have traded with the supplier.

Pausing there, this evidence is not in fact borne out by the information which was provided to us. Whilst VAT registration certificates were obtained for FM4U, GB and WHU, the only evidence of Alpine, Paradigm, and MB being VAT registered was the provision of a document on which their VAT registration number was identified. No due diligence paperwork at all was provided for SEE and FSUK.

It was Mrs Baird’s evidence that she probably had been provided with this due diligence but that it had not made its way into the hearing bundle. This is pretty poor. We are not prepared to accept her word that such due diligence had in fact been carried out. But even if it had been, it is likely to have been limited to a consideration of whether the suppliers were VAT registered, something which we consider below.

So the appellant was prepared to trade with companies before it received any due diligence, notwithstanding the evidence of the Bairds that they understood that they had to undertake due diligence before trading and the reasons for doing that (namely to protect themselves from joint and several liability for unpaid VAT due from a fraudulent trader).

It is clear to us from the evidence given by the Bairds, as set out above, that they considered that the obligation to undertake due diligence was a considerable chore and cut across their ability to undertake trades in a timely fashion which in turn meant that they would lose business and thus would either lose money, or be unable to make sufficient money to continue in business, paying their employees and their creditors.

It is unsurprising, therefore, that they paid lip service to their obligation to conduct due diligence, and never considered that failure to do it might have profound ramifications. We have come to the conclusion that as far as they were concerned, it was simply a box ticking exercise, and in essence, provided they had a VAT registration number for a supplier, they were prepared to trade with that supplier.

Quite why they thought that simply having a VAT registration number meant that a supplier was not involved in fraud, is something that we never fully got to the bottom of. It seems that it was something which was suggested to them by other traders in the industry. But it was not something that they checked either with HMRC nor with their accountant.

Given that they were on notice of the heightened risk of fraud when trading in scrap, this is something which surprises us and is certainly something which the objective trader would have verified.

We also accept Miss Rao’s submission that the fact that the appellants were prepared to trade with FM4U after they had been told that tax losses had been associated with that company at the May 2021 visit and even after they received the tax loss letters in October 2021, is evidence that even serious negative indicators of the integrity of their suppliers would not have had an impact on their willingness to trade with those suppliers. All the appellants wanted to do was to trade and whatever its due diligence might have thrown up was, and would have been, disregarded in the pursuit of making money.

Mr Ahmed made a valiant attempt to demonstrate that the appellants had not been told about the tax losses at the visit on 18 May 2021, nor that they had received the tax loss letters in October 2021. We do not accept the former submission given that it is clear from the visit notes that Mrs Baird (in response to the officer’s advice that tax losses has been identified within the deals done in the periods 08/20 and 11/20, and that tax loss letters would be forthcoming and having been told that FM4U was still VAT registered) responded that “that’s not our problem then. Why is there a tax loss for them?”.

So Mrs Baird knew in May 2021 that there were tax losses associated with FM4U. We can see no magic in the issuance of a tax loss letter. If HMRC had told Mrs Baird of the tax losses, as far as we are concerned, she was fixed with actual knowledge of that on and from that May 2021 meeting.

And the company traded with FM4U after that date (albeit this is outside the period in question).

There is no doubt that the company received the tax loss letters of 17 December 2021. Yet they traded with FM4U after that. We do not understand the Bairds’ evidence that they only did so because they owed money to FM4U.

So if the company was prepared to trade with a supplier which the company knew was identified with tax losses in its chain, that amply demonstrates to us that no matter what the company was told, or what it actually found out, or could have found out, about its suppliers and their chains, the company would have traded with a supplier come what may.

In the foregoing section, we have focused on due diligence. This is because a large part of the hearing was taken up with a detailed examination of the evidence of the DD which the appellant had undertaken.

But of course, the focus of the enquiry is not whether the appellants have carried out adequate due diligence, but whether the company had means of knowledge.

Miss Rao submits that the company had means of knowledge and failed to deploy it because it failed to check the integrity of the supply chains.

Mr Ahmed submits that no matter what means of knowledge the appellant deployed, it could not have discovered that the purchases were associated with fraud.

We now consider those competing submissions in more detail.

We start by considering the indications which HMRC consider should have put the appellants on notice that there was fraud in the supply chains. They do not say that any one of these is a “smoking gun”, but they do say that these indications, considered collectively, demonstrate that the trades were fraudulent and that the appellant should have known of that.

Firstly, a considerable increase in turnover during the period in question.

Having considered the figures, we cannot see this. For the periods in question the net outputs were (in round figures); £1 million, £1.7 million, £980,000 and £1.1 million. Yet for the immediately preceding five earlier periods, the turnover was; £1.1 million, £1.4 million, £2.5 million, £3.1 million and £2 million.

This does not demonstrate to us that the turnover had markedly increased and was thus an indicator of involvement with fraud.

We would also make the point that during the periods in question, not all of the input tax claimed by the appellant was denied by HMRC. This is because some of that input tax related to supplies from non fraudulent traders of scrap and from suppliers of batteries. For the period 08/20, (again using round figures) 76% of the company’s input VAT was denied. For 11/20, the figure was 86%. For 02/21 it was 67%, and for 05/21, only 2%.

We will consider in greater detail below the appellants submission that they did not have means of knowledge because the company was carrying on trades with bona fide suppliers in exactly the same way (and undertaking exactly the same level of due diligence) as it was when dealing with defaulting suppliers. But we make the point at this stage simply to show that we accept the submission made by the appellants that during the periods in question they were trading with both defaulting suppliers and bona fide suppliers.

Secondly, HMRC say that it should have been apparent to the appellants that, even on the figures above, there was inherent unlikelihood that the company was trading, during these periods, with defaulting traders.

We do not think that they had any knowledge at the time of trading that there was this coincidence. This was not a factor which was known to them at the time of trading.

HMRC also say that it should have been apparent to the appellants that there was a succession of companies (the defaulters) who were queueing up to provide scrap, and as one defaulter disappeared from the scene, another defaulter replaced it.

Again, we do not think that this pattern was apparent to the appellants. It might have become so (on HMRC’s case) had the appellants deployed the means of knowledge available to them. But it was not a factor known to the appellants during the periods in question and thus not an indicator of suspicious activity.

HMRC say that there was back to back trading. In our view this is clearly not the case. It is Mr Baird’s evidence, which we accept, that although he was approached by the suppliers (apart from one) the way in which the price for that scrap was determined was negotiated between the parties. Furthermore, it is clear that the scrap was processed and then sold to customers with whom, we are prepared to accept, the company had long-standing relationships.

There was nothing in this pattern of buying and selling which would arouse the suspicion of the Bairds that they were dealing with a defaulting supplier, nor would it have aroused the suspicion of the objective trader.

In our view the same is true with HMRC’s assertion that the company was not trading on comprehensive contractual terms. We received no expert evidence about what is common contractual practice in the scrap trade, but it seems pretty likely to us that paperwork is minimal. And the fact that this was a case in both bona fide and fraudulent trades suggest to us there was nothing to put the company on notice that it was trading with fraudsters when it dealt on minimal written terms and conditions.

We have dealt above with our conclusion that the Bairds were fully aware that by trading scrap metal, they were more likely to be involved in fraudulent supply chains than was the case when they were trading batteries.

This brings with it a commensurate duty to carry out more and detailed due diligence (and to deploy means of knowledge) and to consider the results of that due diligence.

HMRC say that it was not just Notice 726 which demonstrated the heightened risk that the Bairds were running when trading with these particular defaulters. There were indicators which they either knew of (from their limited DD) or should have known of (by carrying out checks on those defaulters which would ultimately have led them to the conclusion that the suppliers were defaulters).

These indicators and HMRC’s comments on them is set out at [46 (28)-(64)] above, and we do not repeat them here. We find, however, that the factual assertions set out therein are correct.

The appellants’ response is at [47 (34)-(44)] above. Again, we do not set this out again here.

Broadly speaking, it is HMRC’s assertion that there was sufficient information from the documents that were actually obtained by the company to put them on notice that the circumstances of the trades were slightly suspicious. Even if that did not of itself evidence fraudulent trade, given their heightened awareness, the Baird’s should have asked further questions which would have resulted in that conclusion. This would have been proper deployment of means of knowledge.

As we have said, it is the appellants’ view that there was nothing suspicious in the information that they obtained, and indeed even if there had been, there was nothing more that they could have done which would have led, conclusively, to the conclusion that the suppliers were fraudsters.

So we examine these competing contentions in respect of the following: some of the defaulters were recently incorporated; similar invoice formats were used; business descriptions did not relate to scrap metal; lack of physical premises; inconsistent details with the paperwork (for example between VAT certificates and invoices, and in relation to bank details).

A number of the suppliers had been incorporated relatively recently before the relevant trades. This was apparent from the documents received from certain suppliers (for example GB’s certificate of incorporation indicated that it had been incorporated on 11 December 2019 and Alpine had been incorporated in August 2017). We do not think that, in and of itself, is something which should have made the appellants suspicious. Nor do we think it would have been suspicious to the objective trader.

It was Mr Baird’s evidence that he had met some of the people behind these companies. His judgment might have been at fault, but personal contact is an important part of means of knowledge. To our mind he cannot be criticised for failing to deploy it even though, in the case of MP, there is some inconsistency in his evidence regarding the time at which he met the individual behind that company. It must, however, be borne in mind that no evidence of any due diligence on that company was provided by the appellants.

Similar invoice formats were used by GB, Paradigm, SEE and FSUK. These invoices in any event contained minimal information when compared to invoices used by a bona fide supplier, Calderbanks.

What this demonstrates to us is that the appellants were in a position to compare the invoices used by their suppliers. Whilst there might not be a common format in the industry, it might have caused them to think why some suppliers provided substantial information (for example, weights and measures), whilst others didn’t.

But more importantly, the fact that several suppliers were using common form invoices is something which we think is relatively suspicious, and should have put Mrs Baird, who was responsible for the paperwork, on notice that something might not have been wholly satisfactory.

Our criticism here is largely with the fact that with her heightened awareness of fraud in scrap metal chains, it was incumbent on Mrs Baird to review the documents that she was provided with by her suppliers. This included these invoices. Her evidence was that she had no idea that these invoices were in a substantially common format as she had not examined them. And that is the main point. She should have done. That would not have taken long and by dint of that examination she might have paused to consider why these traders were using common form invoices. She undertook no such consideration.

It might, as Mr Ahmed has submitted, have led to the conclusion that using common form invoices, in this day and age, when they can be readily downloaded from the Internet, is not of itself suspicious. But Mrs Baird did not undertake that exercise and did not come to that conclusion.

Business descriptions set out in the information obtained by the Bairds did not appear to include trading in scrap metal. For example, the WHU VAT certificate describes its business as “Non-specialised wholesale trade”. The VAT certificate for FM4U is 46 900 (which is apparent on its face) and had that been checked by Mrs Baird (which it wasn’t) would have told her that this too is “non-specialised wholesale trade”. GB’s business is listed as “other service activities not elsewhere classified” at Companies House. Again, this was not something that was checked by Mrs Baird. Had she checked the names previously used by FSUK, she would have seen that it had previously been ostensibly involved in freight forwarding and beverages.

We accept Mr Baird’s evidence that scrap metal can come from many sources, and simply because a supplier’s trading activities do not include the trading of scrap metal is not per se suspicious. But it is relevant to the amount of scrap metal which that supplier is able to trade.

As Miss Rao submitted, the information which was available to Mrs Baird from Companies House regarding FSUK might have caused her to wonder why that company was able to supply the company with nearly £200,000 worth of scrap in August 2020.

Whilst trading with a supplier whose activities do not ostensibly fall slap bang within the activities with which they are trading is not generally something which should put a trader on notice of fraud, the situation is different where the trader is fully aware that the commodity in which they are dealing is one in which there is recognised fraudulent activity in the supply chain. This is the case with scrap metal, and we have found as a fact that the Bairds were fully aware of this.

In the circumstances it was incumbent on the Bairds to take greater heed of the discrepancy between trade descriptions of the businesses ostensibly conducted by their suppliers, and the scrap metal that they were being offered.

Miss Rao submits that there were suppliers with no physical premises (FM4U), or suppliers which had moved premises a number of times, something which would have been apparent from a proper scrutiny of the relevant paperwork. Her point is that a bona fide supplier (and she does not include brokers in this category) would have had the capacity to store the scrap which it sold on to the company.

We certainly think that the appellants should have conducted an enquiry into the capability of its suppliers to physically store scrap. This would have either generated an answer which would satisfy them that there was that physical space. Alternatively, it might have generated an answer that they were simply broking the scrap and arranging for it to be supplied from a yard, building site, or some other source, elsewhere. If it was the latter, then this might have put the Bairds on notice that someone who they thought was a substantive scrap metal dealer was in fact broking, or back to backing, a transaction. It would have given the objective trader pause for thought.

In the case of MB, the VAT registration number provided in the body of a note on MB headed notepaper as part of the due diligence, is incorrect. It is a 10 digit number. The correct nine digit VAT number is set out at the bottom of the letter. Mrs Baird said that she would have used the correct VAT number to check that MB was still registered at the time of the trade yet also said that she had not noticed the correct VAT number at the bottom of the letter.

Leaving aside the evidential difficulty faced by Mrs Baird (how could she have conducted a VAT check when she didn’t know the correct VAT number) this is an example of information which was provided to the appellants and which, if it had been properly examined (which should have been in light of their heightened awareness of fraud in scrap metal trading) should have put the appellants on notice that something was not quite right. This might have started a chain of enquiry to check why there was this discrepancy and the reason for it.

The information provided by WHU showed a bank account for a company called Wealth International Ltd. Whilst this might not of itself have been sinister, it seems to us that paying money to the bank account of a different company from the supplier is something which should have been queried. We accept that if there was no association between fraud and trading in scrap this is likely to be of marginal relevance. But where there was heightened awareness, it is just another detail which should have been clarified. Something which we think the objective trader would have done.

Finally in this section we consider the analysis undertaken by Mr Ahmed in which he considered paragraph 2 and paragraph 6.1 (2) of Notice 726.

He ran through each of the bullet points in paragraph 2 and concluded that if this had been done by the Bairds, the company “looks in good shape to trade with the suppliers are traded with”.

He also submitted that it demonstrates that even if the Bairds had carried out the exercise and requested the information that would have enabled them to answer those questions, that would not have meant that they would have known of the fraud perpetrated by their suppliers (even if it might have meant that they had known that there was a greater risk of that fraud, which of course is not enough to get HMRC home).

A number of points occur to us regarding this analysis and conclusions Mr Ahmed asks us to make from it.

Firstly, as he accepts, means of knowledge goes beyond due diligence. And answering the questions in Notice 726 is not intended to be a box ticking exercise which enables a trader to say that having undertaken those checks, he has demonstrated deployment of means of knowledge. It is simply asking a trader to consider various matters which might put a trader on notice that there is something suspicious about its trades. That suspicion is not restricted to those matters which were identified in Notice 726, but, as we have already mentioned above, can arise from any of the circumstances associated with the relevant trades.

What matters is whether the deployment of means of knowledge would have led to the conclusion that their suppliers were fraudsters. And it is no answer to say that a tick box exercise against the questions in Notice 726 demonstrates that the company was in “good shape…”, and the logical conclusion must, therefore, be, that the appellant could not have discovered that fraud.

Secondly, if this had been an exercise undertaken by the Bairds at around the time they were trading with defaulters, then that would have demonstrated to us that they had taken on board the warnings given by HMRC and were conscious of their “obligations” to check up on their suppliers (and indeed their supply chain). But the Bairds did not do this. That is clear from the evidence.

Thirdly, the importance of Notice 726 in the context of this appeal is that it was given to the Bairds on a number of occasions in conjunction with the explanation by HMRC officers that, by trading in scrap metal, there was an increased likelihood of their being caught up in fraudulent evasion of VAT. And the consequence was that they would, as set out in that notice, become jointly and severally liable for the fraudsters evaded VAT.

The parties agree that it is up to HMRC to prove, on the balance of probabilities (i.e. that it was more likely than not) that the company either actually knew or should have known from the circumstances which surrounded the supplies to it during the periods in question, that those supplies were connected to fraudulent evasion of VAT.

We agree with this. We also agree that the analysis has both a subjective and objective element. We must consider the perspective of the company and then go on to consider whether a reasonable person, with that perspective (or in those circumstances) would have concluded that the transactions were connected with fraud.

Generally speaking, a trader has a fundamental right, based on the principle of fiscal neutrality, to deduct input VAT.

Where fraud is involved, “traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud… must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input VAT” ([51] of Kittel).

And “… where a recipient of the supply of goods is a taxable person who did not and could not know that the transaction concerned was connected committed by the seller…”. A trader does not lose their right to deduct input VAT ([52] of Kittel).

However, at [56] “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… be regarded as a participant in that fraud…” And so loses the right to deduct input VAT.

This is for two reasons. Firstly [56] because the taxable person aids the perpetrators of the fraud and becomes their accomplice. Secondly [57] “… such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them”.

In Mobilx the court considered what was meant by “knew or should have known” and concluded at [51] that it meant “knowing or having any means of knowing”.

It went on to say at [52] “if a taxpayer has the means at his disposal of knowing that by his purchase he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct… A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises”.

And at [61] “…A trader who decides to participate in a transaction connected to fraudulent evasion, despite knowledge of that connection, is making an informed choice; he knows where he stands and knows before he enters into the transaction that if found out, he will not be entitled to deduct input tax. The extension of that principle to a taxable person who has the means of knowledge but chooses not to deploy it, similarly, does not infringe that principle. If he has the means of knowledge available and choose not to deploy it, he knows that, if found out, he will not be entitled to deduct. If he chooses to ignore obvious inferences from the facts and circumstances in which he has been trading, he will not be entitled to deduct”.

Finally, at [60] “… 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… fraudulent evasion”.

Miss Rao submits that the evidence shows that it is more likely than not that the appellants knew that the transactions were connected with fraud. We disagree. We have not been presented with any persuasive evidence that they had actual knowledge of the fraud.

However, in the alternative she submits that the appellant had blind eye knowledge (we accept that blind eye knowledge could be construed as comprising actual knowledge, but we consider it separately).

We have set out the relevant case law relating to this principle in the Appendix.

The essence of the principle, however, is that:

Blind eye knowledge approximates to knowledge.

It requires a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist.

The suspicion must be firmly grounded and targeted on specific facts.

The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe.

In other words, If the company through the agency of the Bairds had a good reason to believe that there was fraud in its supply chain and made a deliberate decision to avoid obtaining confirmation of the facts on which they had based that belief, they and the company are deemed to have actual knowledge of the fraud.

Mr Ahmed submitted that in order to have blind eye knowledge, you need to have actual knowledge in the first place and it was the failure to confirm that actual knowledge which comprised blind eye knowledge. We disagree. The principles are set out above. If someone has actual knowledge, then that is an end to it. There is no need to deem them to have blind eye knowledge. The whole point about blind eye knowledge is (put colloquially) that you suspect a certain state of affairs but don’t want to confirm it in case you get the wrong answer.

Our view of the Bairds’ attitude towards means of knowledge is this. They did not really consider means of knowledge but did consider due diligence. There was however a complete disconnect between due diligence on the one hand and the trading they did on the other.

The Bairds were not interested in conducting due diligence or following up the documents that they received in response to a request for information. As far as they were concerned it was simply lip service to the information that they had been given by HMRC that because there was fraud in supply chains associated with trading in scrap, they should carry out due diligence.

They say that they did not really know what this meant and simply asked for the sort of information from their suppliers that they in turn have been asked by their customers. Provided they had a VAT registration number they would trade with a supplier. Bank details were supplied but never scrutinised and used by Mrs Baird only for the purpose of making sure that she paid for the supply.

But we have found that they had been given, and Mrs Baird had probably read Notice 726. She was certainly capable of understanding its contents.

The truth was that the Bairds had no inclination to do anything other than simply ask for VAT registration and perhaps incorporation and banking information. These were wholly inadequate to check the integrity of their supply chain given that they knew full well that fraud was prevalent when dealing in scrap.

They would have traded anyway as they were concerned with making money (not a fortune but enough to ensure that the company survived and was able to pay its employees and other creditors).

Furthermore, they clearly traded before they received some of the due diligence (for example VAT registration) and for some traders they received no due diligence information whatsoever.

In our view this is reckless behaviour. But that is not enough for HMRC. They must show that, on the balance of probabilities, the Bairds took a deliberate decision not to investigate their supply chains in greater detail because they had good reason to believe that there was fraud in those chains and did not want to obtain confirmation of that.

The Bairds clearly took a deliberate decision not to ask for comprehensive due diligence information, or as Miss Rao put it “ask awkward questions” either in the first place or as a follow-up to the responses they got to that very limited due diligence.

But this was not because they had good reason to believe there was fraud in the supply chains. They did this because they could not be bothered with due diligence and simply wanted to carry on trading as they had done before they had been notified by HMRC of the danger of fraud when trading in scrap metal. As far as they were concerned, undertaking proper due diligence was something which would have got in the way of closing out a deal. It would have taken time to consider the information that they received, and to ask further questions if it was not satisfactory. On their evidence, this would have meant that a potential deal would have fallen through as the supplier would have gone elsewhere.

Whilst HMRC might consider this to be reprehensible, we do not think that it means that the Bairds deliberately shied away from seeking confirmation that there was fraud in their supply chains. And given that blind eye knowledge is a form of actual knowledge, it is their position that matters and not that of the objective trader.

We find, therefore, that the appellants did not have blind eye knowledge of fraud in the supply chains.

It is for HMRC to show that, on the balance of probabilities, the Bairds had the means of knowing that the only reasonable explanation for the circumstances in which the purchases took place was that they were transactions connected with fraudulent evasion of VAT.

The parties competing positions are essentially this. Miss Rao says that the Bairds had the means at their disposal of knowing that by their purchases they were participating in such transactions. They have more than adequate means but chose not to deploy them.

Essentially this reflects the sentiments expressed at [61] of Mobilx: “… If he has the means of knowledge available and chooses not to deploy it he knows that, if found out, he will not be entitled to deduct…”.

Mr Ahmed accepts that principle, but says that in the Bairds’ circumstances, no matter what they might have done, they could never have found out that the purchases were associated with fraud. And so even though their due diligence was on the light side, this does not matter. Even if they had done in-depth due diligence, which they had then interrogated, they would still never have discovered the association with fraud. What questions, he asks rhetorically, could the Bairds have asked of their suppliers which would have allowed them to deduce that they were participating in a fraud. He notes that HMRC have not specifically identified those questions.

Miss Rao’s first response is that it is not for HMRC to tell a taxpayer what questions to ask. There were sufficient indications from the information they received from their suppliers to warrant further investigation, they chose not to undertake that further investigation.

We have considerable sympathy for this submission. As we have said above, it is clear to us that the Bairds found the prospect of undertaking comprehensive due diligence an unattractive one, and one which would cut across their desire to trade and to make money. So they did the minimum possible, basically checking out that the supplier was VAT registered, under the mistaken apprehension that this meant that they were a bona fide supplier as HMRC would have checked their integrity.

They knew that there was an enhanced risk of VAT fraud when they were dealing in scrap metal.

They also traded with suppliers even when they had not received due diligence. There were also certain negative indicators arising from this limited DD which they then disregarded.

They had the means of undertaking significantly more probing due diligence. They were perfectly capable, intellectually, of interrogating the information they received and asking further questions if they thought the information was not entirely satisfactory. They could have asked for further documents. Once they had reviewed those, if there were aspects which were not satisfactory, they could have sought further information.

Not only did they not do this, but by adopting their cavalier approach to due diligence, they never gave themselves the opportunity of doing so. It is not as though they are able to say that certain suspicious responses to their due diligence had, in their view, an innocent explanation. They simply never reviewed those responses.

And it is no defence to a charge of failing to conduct proper due diligence to say that they were dealing in a real commodity, namely scrap, which was physically delivered to their yard in the quantities that were consistent with the description given by their supplier, and that that scrap was processed and sold to several customers. We accept that trading in scrap is very far away from broking computer chips, but the Bairds had been specifically warned that trading in scrap carried with it a high risk of involvement with fraud.

Miss Rao further submits that whether the appellants could or would have uncovered irrefutable proof of fraud had they done due diligence is not the test that HMRC must satisfy. Her case is that the appellants knew or should have known because they made no genuine effort to check the integrity of their supply chain.

Whilst we accept that they made no genuine effort to check the integrity of their supply chain, we do not think that the law says that it is therefore axiomatic that they therefore knew or should have known that the only reasonable explanation for the circumstances of their purchases was that they were connected with fraudulent evasion.

In [51] of Mobilx, knew or should have known is deemed to have the same meaning as “knowing or having any means of knowing”. Knowing here seems to us to mean actually knowing. So the Bairds would need to have the means of actually knowing that the only reasonable explanation for the circumstances in which their purchases took place was that they were connected with fraud.

Contrary, therefore, to Miss Rao’s submission at [170] we do not accept that all HMRC have to show is that the appellants made no genuine effort to check the integrity of their supply chains, and it therefore follows that they knew or should have known of the participation in fraud.

They have to show that the Bairds had the means of actually knowing that their purchases related to fraud. And that connection was the only reasonable explanation for the circumstances of the purchase.

The question is not whether the Bairds exercised adequate due diligence. We need to consider all of the surrounding circumstances, and when so doing, we can look at what the Bairds did or did not do, and what they could have done.

We start by considering HMRC’s view towards due diligence. It seems to us that their case is that because there was fraud (which is admitted) had the Bairds asked a sufficient number of awkward questions, they would have discovered that fraud. They do not say what those questions might have been, but that, as night follows day, they would have discovered it. And so they have means of knowledge.

We can see no logical reason for this. Simply because there was a fraud does not mean that it is inevitable that it would be discovered provided the right questions were asked and any information received suitably interrogated. As we say later, no matter what questions might have been asked, it is perfectly feasible that a trader would have inadequate knowledge of the fraud. It is only with the benefit of hindsight that HMRC knew that a fraud had been perpetrated. The issue is whether the Bairds would have been able to know about that fraud at the time that it conducted its trades during the periods in question.

It is no defence for the Bairds to say that in the circumstances they would have lost trade as the deal would have gone off (they could clearly have traded, it is just that they were risking their right to recover their input VAT on those trades). But it is a defence that whatever time and effort that was in their gift to employ to check whether the circumstances of the purchases were connected to fraud would not have revealed that connection.

We need to consider those circumstances.

One of these is the fact that HMRC did not know of the frauds during the period in question. Their own due diligence had not permitted them to conclude that there was fraud in the purchase chains before the company dealt in the relevant goods. Indeed, it is difficult to see how, when in some cases the fraud was non-payment of the VAT on the supplies to the company, this would have been possible for HMRC to ascertain in real time.

This is something that the tribunal considered relevant in PTGI-ICS [2022] UKFTT 00020 at [61].

In Mobilx, which also dealt with the appeal by Blue Sphere Global (“BSG”), the Chancellor in the High Court had said (essentially and as reported in Mobilx at [11]) that if a contra trader from whom BSG had purchased goods, did not know of the fraud, “how could BSG have known of any fraud before it happened?...”.

The same can be said for HMRC in this case. If HMRC did not know of the fraud at or before the time that the company was purchasing the goods, how could the company be expected to know of that fraud.

The answer of course is that the circumstances of the purchases was so suspicious that the only reasonable explanation for them was that they were connected with fraud.

One aspect of this is to undertake proper due diligence and to follow it up especially where that due diligence throws up red flags.

And in this case, where the company traded after receiving due diligence, as we have noted above, they failed to follow up where the documents it received should have raised suspicions.

But, we ask ourselves, what further enquiries might the Bairds have made which would have led to a knowledge of the fraud.

We have said that the fact that certain traders had no physical premises, traded on common invoices, had unlikely trade descriptions, and there were inconsistencies in the paperwork, were all matters that should have been investigated further.

HMRC have posed a number of questions that might have been asked both of themselves and of their suppliers. But we can also consider what those answers might have been. So, even though there were inconsistencies, for example, between the trade descriptions of some of their suppliers, it is also true that, as reported by Officer Lucas, the Bairds might have discovered that the trade descriptions of MB and Alpine (if the available trade description reflected that on their respective VAT 1’s) involved demolition waste and recycling aggregates. A question about the inconsistencies between the paperwork might have resulted in an answer that the VAT number was a typographical error. The question about the identity of the recipient of the purchase monies might have resulted in an answer that the recipient was a connected company.

And these were certainly feasible answers if the Bairds asked themselves the questions rather than of their suppliers. Indeed, if they answered those questions in that way, they would not have gone on to ask them of those suppliers.

We use these examples to demonstrate that there may have been a reasonably innocent explanation for the inconsistencies. And to illustrate the flaw in HMRC’s position that, as night follows day, simply because a fraud has been perpetrated, this would have been apparent to the company if only it had conducted the appropriate enquiry. We think that it is equally feasible that further enquiries might have thrown up answers which were not indicative of fraud.

The facts of this case are very far away from those of BSG, where the questions which the tribunal felt should have been asked are set out at [72] of Mobilx. These demonstrate obvious shortcomings in the circumstances of the trader’s commercial situation in that case. None of these apply to the company.

It is also very far from the circumstances of Eurolaser IT Ltd [2025] UKFTT 00405 where the appellant’s agent (whose behaviour was attributed to the appellant) had been found by a previous tribunal to have been involved in an MTIC fraud (as a result of which he had been disqualified from acting as a director) and who was responsible for arranging the deals for the appellant which were ultimately found to be connected to fraud (see the facts and inferences drawn at [61] of that decision).

The circumstances in which the company traded for the periods in question are, in a nutshell, these:

The company traded in real goods (scrap) which they received on their premises and then processed.

They traded in precisely the same manner with defaulting suppliers as with their bona fide suppliers.

The processed materials were then sold to a number of customers.

There is no cogent evidence that their customers specifically and regularly asked the company to trade with certain suppliers.

There are no standard terms and conditions on which the Bairds traded. But this seems to have been par for the course in the industry.

Mr Baird and his father had met many of the individuals who were behind their company suppliers.

The Bairds did not know, and in our view could not have known, of the broader, overall scheme to defraud, in which they were involved and is asserted by HMRC (see [90-91] above). They could not have worked out the statistics set out at [88] above.

Nor did they know of any arrangements pursuant to which one defaulting supplier would stop supplying the company and another defaulting supplier would take their place.

There was no obvious or dramatic increase in turnover for the periods in question compared with the earlier periods (see [86] above).

Notwithstanding that they had been warned on several occasions that trading in scrap brought with it an increased likelihood of involvement with fraud, and that they should therefore conduct due diligence along the lines set out in Notice 726, the Bairds undertook only limited due diligence. They sometimes traded without receiving it. They never genuinely considered the documents that were produced in response to those requests other than to check that their supplier had a valid VAT registration number. They worked on the erroneous belief that trading with a VAT registered trader reflected due diligence undertaken by HMRC and that the supplier was bona fide. There was no objective justification for that belief.

In particular, as set out above, the evidence that they did have should have started a chain of enquiry into the reasons why there were common invoices, the reasons why certain traders did not appear to have physical premises, inconsistencies in some of the paperwork, and the inconsistencies between the business descriptions of the activities of certain of their suppliers, and why they were able to provide such large quantities of scrap.

For HMRC to succeed, they must persuade us on the balance of probabilities to reach a conclusion that these circumstances were so suspicious and raised such bright red flags that the only reasonable explanation is that they should have known of the fraud.

Standing back and considering these circumstances in the round, and from the point of view of the Bairds, we cannot come to that conclusion.

Although, as we have said at [169] above, that it is no defence to a charge of conducting inadequate due diligence, that the traded commodity was real and was physically delivered to their yard. However, it is a highly relevant circumstance when considering means of knowledge. These were real goods which accorded with the descriptions and amounts provided by the suppliers, and which were processed and sold to a variety of customers. There was no back to back trading. Although in the vast majority of cases it was the supplier who contacted Mr Baird, the prices were negotiated and agreed. Furthermore, in many cases Mr Baird knew the individual behind the supplying company.

There was nothing here which would have put the Bairds on notice that they were being supplied with parcels of scrap which was tarnished by fraud.

HMRC was not aware of the frauds. Nor were the Bairds.

If there was an overall scheme to defraud, the Bairds were not aware of it. Nor were they aware of a pattern of defaulting suppliers “stepping in previous supplier’s shoes”.

Such red flags as there were, are set out above, and were limited to common invoices, trade descriptions, suppliers lacking physical premises and inconsistent details in certain of the paperwork provided by their suppliers.

However, whilst, as we have said above, these warranted further enquiry, we do not think that they are sufficient to fix the appellants with means of knowledge. Whilst it is clear that they took little heed of such red flags as there were, we do not think that they were so suspicious that, in and of themselves, the only reasonable conclusion that the Bairds could have reached was that the supplies were connected with fraud. In our view the circumstances surrounding the trades were not sufficiently suspicious as to put the Bairds on notice that the only reasonable explanation for the circumstances of those purchases was that they were connected with the fraudulent evasion of VAT.

This is the case notwithstanding the woeful due diligence undertaken by the Bairds, their wholly unjustifiable belief that possession of a valid VAT number was evidence of a suppliers bona fides, and their heightened awareness of the likelihood of participating in fraud by dint of trading in scrap metal.

It is clear that the Bairds might have asked further questions in response to the answers that they received from their limited due diligence. However, as we have said at [173]-[177] above, simply because they failed to check the integrity of their supply chains does not fix them with means of knowledge. Furthermore, it is perfectly feasible that no matter what questions might be asked, a trader would never obtain actual knowledge of the fraud.

The focus of the enquiry concerns the circumstances of the purchases and is not restricted to the adequacy of due diligence. To fail to deploy means of knowledge, the Bairds must have had means of knowledge in the first place. HMRC need to demonstrate that they had the means of actually knowing that their purchases related to fraud.

In this case they have failed to do so.

The same is true if we put ourselves in the position of the objective trader.

The objective trader in the position of the Bairds would have undertaken the analysis we have set out above and reached the same conclusion.

They would not have had any greater means of knowledge than the Bairds.

The only difference, in our view, is that the objective trader would not have assumed that simply because they were trading on the same terms with all their suppliers, they were somehow inoculated from means of knowledge. In our view the objective trader would not have thought that, in light of the warnings given concerning the likelihood of there being fraud when trading in scrap metal and would not have concluded that simply because they were trading on the same terms, they could not be trading with fraudsters.

However, that is not sufficient for us to conclude that the objective trader would also have concluded that the only reasonable explanation for the transactions was that they were connected with fraud.

The objective trader would have reached the conclusion that there was another reasonable explanation for the transactions, namely that they were bona fide trades. To put it another way, fraud was not the only reasonable explanation for those trades.

For the foregoing reasons, it is our decision that the company, through the agency of the Bairds, did not know, and had no means of knowing, that the only reasonable explanation for the circumstances in which their purchases took place, during the period in question, was that they were transactions connected with the fraudulent evasion of VAT.

Accordingly, we allow the appeals.

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.