Eurolaser IT Limited v The Commissioners for HMRC

Neutral Citation: [2025] UKFTT 00405 (TC) FIRST-TIER TRIBUNAL TAX CHAMBER Case Number: TC09479 Taylor House, London Appeal reference: TC/2021/19599 TC/2023/01225 VAT – Kittel and Mecsek assessments and penalties – whether self-employed agent knew or should have known of fraud in supply chain – yes – whether such knowledge/means of knowledge to be attributed to Appellant – yes – whether Mecsek requires HMRC to nevertheless show reasonable steps not taken by Appellant – yes – whether reasonable steps taken – no – appeal refused Heard on: 24, 26 and 27 March 2025 Judgment date: 4 April 2025 Before TRIBUNAL JUDGE AMANDA BROWN KC GILL HUNTER Between EUROLASER IT LIMITED and Appellant THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS Respondents Representation: For the Appellant: Mr L Ahmed, CTM Law For the Respondents: Mr J Olphert of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs DECISION INTRODUCTION 1. (HMRC) (collectively Decisions): This appeal concerns the following decisions issued by HM Revenue & Customs (1) Assessments dated 20 August 2019 in respect of output tax for VAT periods 02/18 – 04/18 and 09/18 – 12/18 issued pursuant to section 73 Value Added Tax Act 1994 (VATA). The total assessed is £503,409.29. The basis of these assessments being that HMRC consider, in accordance with the judgement of the Court of Justice of the European Union (CJEU) in Mecsek Gabona KFT v Nemzeti Ado (C-273/11) (Mecsek), that Eurolaser IT Limited (Appellant) was not entitled to zero rate supplies of goods made to two European counterparties as the counterparties to those transactions had failed to account for or pay the corresponding VAT due from them (Mecsek Assessments). (2) Assessments dated 20 August 2019 recovering input tax for VAT periods 02/18 – 04/18 and 09/18 – 12/18 also issued pursuant to section 73 VATA. The total amount assessed is £574,663.17. The basis of these assessments being that HMRC consider that the Appellant had no entitlement to deduct such VAT as the Appellant knew or should have known that certain identified suppliers within the supply chain leading to the Appellant had failed to account for and pay output tax in respect of supplies of the very goods on which the Appellant sought to deduct input tax. Such assessments thereby applying the principles established by the CJEU in Axel Kittel v Belgian State and Belgian State v Recolta Recycling SLRL (C-439/04 and C-440/04) (Kittel) (First Kittel Assessments). (3) Section 73 VATA Assessments dated 1 July 2020 recovering input tax for VAT periods 02/18 – 12/18 where HMRC had identified further suppliers within the Appellant’s supply chain who had failed to account for and pay VAT on supplies of the goods ultimately purchased by the Appellant (Second Kittel Assessments). The total amount assessed is £1,053,861.99. (4) Penalty assessments dated 22 January 2020 issued pursuant to section 69C VATA consequent upon the First Kittel Assessment only (Kittel Penalty). The penalty assessed is £172,398.93 representing 30% of the sums assessed on the First Kittel Assessment. (5) Penalty assessments dated 5 February 2020 also issued pursuant to section 69C VATA consequent upon the Mecsek Assessments (Mecsek Penalty). The penalty assessed is £140,007.23 representing 30% of the sums assessed. DRAMATIS PERSONAE 2. Mr Stephen Pallister (Mr Pallister) is the sole director of the Appellant. Mr Moshin Darr (Mr Darr), a self-employed consultant, for the Appellant. 3. All purchases were made by the Appellant from one of three suppliers: Asma Trading Limited (Asma), Sirius Limited (Sirius) and Fortune Communications Limited (Fortune). Sirius was a defaulter. Neither Asma not Fortune were defaulters but participants in supply chains where there were earlier defaulters. Sales were all made to one of two companies Borax Company s.r.o (Borax) and Sights 4. Digital D. O. O. (Sights). Both Borax and Sights were defaulters. ISSUES TO BE DETERMINED 5. HMRC accept that the Appellant actually supplied physical goods which were exported to customers in the EU and that the Appellant held all relevant documentation thus that the formalities for zero rating of supplies were complied with. There is also no allegation that the goods were obsolete. 6. The Decisions were issued on the sole basis that the Appellant knew or should have known that it was participating in chains of supply involving fraudulent defaulters. The relevant knowledge or means of knowledge was originally attributed to the Appellant through Mr Pallister. However, following a request for review of the Decisions HMRC concluded as follows: “… Considering the information provided to me as part of this review … I do not agree that the evidence demonstrates that you [Mr Pallister] knew or should have known that the transactions were fraudulent in nature. Therefore, HMRC cannot state that Eurolaser knew or should have known, that the transactions were connected with the fraudulent evasion of VAT, due to yourself having knowledge. However, as I have noted above, if anyone within Eurolaser is considered to have that knowledge, then it would be accepted that Eurolaser also had that knowledge and so the Kittel and Mecsek tests would be met. … It is considered that with regards to the transactions Mr Darr has conducted on behalf of Eurolaser, that on the balance of probabilities, given his history and knowledge in this area that he knew of should have known of the connection those transactions had with fraud. Consequently, that knowledge is transferred to Eurolaser and as I have discussed above and because of the Upper Tribunal case of Greener Solutions Ltd, Eurolaser is held to be accountable for the tax loss as a result of these fraudulent transactions.” 7. By email dated 27 November 2023, the Appellant formally accepted that: (1) for each supply made by the Appellant and in respect of which there was a Mecsek Assessment the recipient of the supply had defaulted giving rise to a fraudulent tax loss; and (2) in respect of each claim to input tax in respect of which there was a Kittel Assessment there had been a fraudulent tax loss in the supply chain prior to the supply to the Appellant. 8. Assuming it is liable under the Decisions at all, the Appellant also accepts that all the Assessments are correctly calculated and made within the statutory time limits. The Penalties are challenged only on the basis that there is no liability to the underlying tax. In view of the position taken by HMRC in their review conclusion and the admissions 9. made by the Appellant there were four substantive issues for us to determine: (1) Whether Mr Darr knew or should have known of the connection to the admitted fraudulent evasion of VAT by others in the supply chain (Darr’s Knowledge Issue). (2) If so, whether that knowledge or means of knowledge can be attributed to the Appellant such that the Assessments stand despite an acceptance that Mr Pallister did not know and should not have known of the connection to fraud (Attribution Issue). (3) If so attributed, whether in respect of the Mecsek Assessments, there is a third limb to the test i.e. that the Appellant had taken every reasonable step in its power to prevent its own participation in that fraud (Mecsek Test Issue). If so, whether, on the evidence, the Appellant had taken such steps (Reasonable (4) Steps Issue). For the reasons set out below we make the following determinations on each of the 10. identified issues: (1) Darr’s Knowledge Issue – we find as a fact that Mr Darr knew that the transactions were connected to the fraudulent evasion of VAT both up and downstream from the Appellant. (2) Attribution Issue – Mr Darr’s knowledge is properly attributed to the Appellant. (3) Mecsek Test Issue – there are three limbs to the Mecsek test: connection to fraud, knowledge or means of knowledge and absence of reasonable steps to avoid participation. (4) Reasonable Steps Issue – we find as a fact that the Appellant did not take every reasonable step to prevent participation in supply chain fraud by Borax and Sights. 11. As a consequence of those determinations the appeal fails, and the sums assessed on all the Assessments and Penalties are due. BASIC KITTEL AND MECSEK TESTS 12. The parties agree that HMRC were entitled to issue the Mecsek Assessments thereby denying zero rating for supplies made if, on the balance of probabilities, they are able to show: “in light of the objective evidence, that [the Appellant] … knew or should have known that the transaction which it carried out was part of a tax fraud committed by the purchaser, and that it had not taken every reasonable step within its powers to prevent its own participation in that fraud.” (Mecsek [55]) 13. As is evident from the Mecsek Test Issue, there is a dispute between the parties as to whether it is sufficient for HMRC to show that attribution of an agent/contractors knowledge meets this test. We deal with this dispute at paragraphs 84 to 101 below. 14. The parties also agree that HMRC were entitled to issue the Kittel Assessments where they are able to show, again, on the balance of probabilities, that the Appellant: “knew or should have known that, by [its] purchase, [it] was taking part in a transaction connected with fraudulent evasion of VAT, …” (Kittel [56]) 15. In the context of “should have known” and applying the judgment of Moses LJ in Moblix Limited (In liquidation v HMRC [2010] EWCA Civ 517 we must determine objectively whether the Appellant had the “means at [its] disposal of knowing that by [its] purchase [it was] participating in a transaction connected with fraudulent evasion.” Determining whether a person has the means of knowledge can be established from the circumstances which surround the transaction and by reference to asking oneself whether there was any reasonable explanation for the transaction other than that it was connected to fraud. Relevant circumstances indicating fraud were highlighted to include: (1) (2) compelling similarities between one transaction and another; patterns of transactions; (3) (4) (5) transactions which have identical percentage markups; transactions forming part of a huge and unexplained turnover; no stock left over. In Fonecomp Ltd v HMRC [2015] EWCA Civ 39 the Court of Appeal excluded the 16. following factors as negating knowledge or means of knowledge: (1) (2) a requirement for tangible assistance in the fraud; lack of knowledge of the specific mechanics of the fraud. EVIDENCE 17. We were provided with a bundle of documents containing 9950 pages. Much of the bundle unnecessarily consisted of the documentation on which HMRC might have needed to rely but for the Appellant’s concession that the transactions in which it participated were connected to fraud. In the circumstances and cognisant of the guidance provided in Adelekun v HMRC [2020] UKUT 244 (TCC) we reminded the parties that we could not be expected to take account of every document in the bundle. Instead, we would take account of documents to which we were expressly referred. There were, in the end, only a limited number of documents relevant to the issues we needed to determine. 18. Despite its size, the bundle did not include evidence which Mr Pallister had considered important, and which he had been provided to HMRC in late 2019. This evidence was referred to in the hearing as “the suitcases of evidence” we deal with the absence of this evidence and any inferences to be drawn from it, below at paragraphs 44 to 46 below. 19. Mr Pallister provided a witness statement in which he sought to explain how he managed and ran the Appellant business and the oversight he had of all of the employees and self-employed consultants including, specifically, Mr Darr. It explains the knowledge and information he believed was available to Mr Darr when entering the transactions which led to the Mecsek and Kittel Assessments. 20. We were provided with a medical report on Mr Pallister. In the opinion of the consultant psychiatrist providing the report it was considered that Mr Pallister’s health would suffer/be compromised was he required to give evidence and in particular were he subject to cross examination. Respecting the potential need for evidence and cross examination we were provided with very detailed reasonable adjustments that would need to be made should Mr Pallister give evidence. We explored with HMRC the extent to which Mr Pallister’s evidence was relevant given the conclusions reached on review. Following such exploration HMRC agreed that he would not be required to be cross examined. We did not take this as wholesale acceptance of Mr Pallister’s evidence simply that they accepted those parts of Pallister’s evidence which were material to an assessment of Mr Darr’s knowledge or means of knowledge. We set out this evidence in paragraphs 23 to 28 below. 21. The only live evidence was given by Mr Lebedavas now a Higher Officer of HMRC. Mr Lebedavas was not the investigating officer but took over from such officer on their retirement. Mr Lebedavas had thoroughly reviewed the file and gave a very detailed statement derived from and narrating the documents. We accept Mr Lebedavas’s evidence as introducing and narrating the documents relied on by HMRC. It thereby assisted us in our understanding of background and factors leading to the Decisions. 22. We did not have a statement from Mr Darr, and he did not give evidence. Relevant and accepted evidence derived from the statement of Mr Pallister 23. Mr Pallister has operated in the market purchasing and selling IT equipment for 33 years. Other than the transactions at the heart of this appeal he has not previously been assessed as jointly and severally liable for VAT associated with fraud in the supply chains of which the Appellant is part. His principal business has earned him gold trading status with household name suppliers of computers and associated peripherals. 24. In the period from late 2017 through to December 2018 the Appellant transacted its business through 6 or 7 employed and self-employed traders including Mr Darr who was self- employed. 25. Mr Darr had been identified though the Indeed recruitment website. Mr Pallister interviewed him and considered him an able salesperson. He did not undertake any due diligence on Mr Darr’s background and therefore did not know of Mr Darr’s previous involvement in supply chain fraud or that he was disqualified as a director. 26. Mr Pallister operated the business in a very hands-on way. He expected and/or undertook due diligence on trading counterparties principally focused on ensuring a reasonable length of trading history, under consistent and stable management, and that the counterparties were VAT registered. Regarding Asma, Sirius and Fortune such due diligence was undertaken. 27. All emails sent or received by the traders, including Mr Darr, were retained by the Appellant and all landline calls were recorded. Traders, including Mr Darr, principally conducted their trades from the Appellant’s premises and worked within earshot of one another, and Mr Pallister. 28. Mr Pallister was responsible for all final decisions on what transactions were undertaken including controlling payments, delivery, storage of goods etc. All invoices were processed by Mr Pallister and payments to suppliers only made on his instruction. The invoices received and terms of payment whereby customers paid before the Appellant paid suppliers was consistent with the legitimate business carried on by the Appellant who was offered credit facilities by his suppliers. Some deliveries were received at the principal place of business where the Appellant undertook inspections of the goods. Evidence from Mr Lebedavas Over 36 paragraphs of his statement (586 – 621) and by reference to his answers in 29. cross examination, and other documents, Mr Lebedavas set out the factors on which HMRC are said to rely and/or which are relevant to, the knowledge and means of knowledge limbs of both the Kittel and Mecsek tests. There was no evidence separately addressing reasonable steps: (1) HMRC consider that the Appellant had an awareness of supply chain fraud through the issue of HMRC’s VAT Leaflet “How to spot VAT Fraud” and Notice 726 “Joint and Several Liability”. Mr Lebedavas recites the occasions on which Mr Pallister was issued with guidance concerning supply chain fraud from 2009 onwards. There were conversations between HMRC and Mr Pallister in December 2016, and November 2017 which demonstrated to HMRC’s satisfaction that he was aware of the risk of supply chain fraud. (2) Commencing in November 2017 HMRC undertook verification of returns for 09/17 – 11/17. Significant repayments had been claimed principally as a consequence of transactions with a Lithuanian customer. Following such verification, HMRC were satisfied these transactions were not connected to fraud and the claimed repayments were made. (3) HMRC again became concerned of a potential connection to fraud in early 2018 and visited the Appellant on 23 May 2018. However, returns continued to show significant repayments and a marked and significant increase in turnover. Accordingly, on 23 August 2018, the Appellant was issued with a Trader Monitoring letter informing it of a proposed visiting programme through which HMRC would assess the risk to the revenue presented by the Appellant’s trading. No repayments claimed on returns submitted following the commencement of monitoring were authorised for repayment. (4) On 11 December 2018 HMRC issued notification of an extended verification for the 11/18 VAT return despite the return being a payment return. (5) Whilst some due diligence was carried out on both suppliers and customers it was not as thorough as HMRC considered to be appropriate, particularly given the other risk factors identified. They were concerned that where documentation was obtained regarding the customers introduced by Mr Darr (both of whom appeared to be established and operating in the EU) such documentation was not in English and had not been translated. Further, there had been no independent verification of VAT numbers provided by suppliers. With regard to Borax HMRC contended that a simple internet search would have identified that throughout the period in which the Appellant sold to Borax it had been insolvent (though no date stamped evidence was produced to demonstrate the veracity of such a statement). (6) An analysis of markups achieved on the trades introduced by Mr Darr was carried out. We were provided with the spreadsheet from which Mr Lebedavas had calculated that the average markup on these transactions was 5%. This was said to be higher than that achieved by the Appellant in the context of its legitimate trade in respect of which Mr Pallister had considered a markup of 4% to be “good”. (7) Mr Lebedavas stated that the deal sheets demonstrated that no party in any of the deals had made a loss each taking a markup. This statement was not challenged by the Appellant. (8) The deal sheets, and a summary of them, demonstrated that the same quantities of goods were often traded back-to-back, and the same type of goods were ordered from the same supplier and sold on to the same customer on occasions several times in a single day. For example on 12 December 2018, by way of 13 independent transactions, the Appellant purchased Samsung 960 units of Pro 2TB m.2. Pcle SSDs in the following quantities: 100, 015, 95, 110, 90, 115, 55, 110, 90, 95, 100 and 30 from Sirus selling them on to Borax at an identical markup of 5.73%. The orders had not been amalgamated so as to obtain a bulk discount. (9) The frequency and speed with which Mr Darr was able to source goods and find a customer for them was inconsistent with a normal pattern of trade generally and more specifically by reference to the Appellant’s normal pattern of legitimate trade and thus “too good to be true”. (10) In each case the suppliers were businesses with a UK VAT registration and yet all those from Sirius and Fortune were conducted in Euros. In cross examination Mr Lebedavas accepted in theory that there may have been a legitimate explanation for the currency of such purchases, but he remained of the view that purchasing in euros from a UK company was also a hallmark of fraudulent trading. It was noted that, in respect of all the deals introduced by Mr Darr, the Appellant (11) did not need to pay for the goods purchased until it had received payment from its customer. Schedules had been produced by Mr Lebedavas which demonstrated the proximity and order of payments. (12) None of the supply chains included a manufacturer or final consumer. The Appellant became a wholesaler in a chain of other wholesalers with which the Appellant had not previously traded and throughout the deal chains the same characters appeared again and again. This was noted as not reflecting the Appellant’s legitimate trade where purchases were from established corporate suppliers or direct from a manufacturer (and hence gold status having been achieved) and to final consumers. (13) All the transactions connected with fraud were introduced by Mr Darr as a self- employed trader whose services had been engaged through the Indeed online recruitment platform without due diligence establishing his previous connection to supply chain fraud. He had commenced working with the Appellant in November 2017. His first deal on 14 February 2018 was the purchase and sale of 2,000 1TB Seagate ST1000DM101 Barracuda 7200.14 SATA III (hard drives). They were purchased from Asma and sold to Sights. The purchase and sale transaction took place on the same day. Three weeks earlier the goods had been sold by a UK trader who defaulted without declaring and paying VAT on the sale by it. Sights, whilst having a façade of legitimacy had nevertheless failed to properly account for VAT on the zero- rated purchase made by it. A further 36 deals over the period to 12 December 2018 were entered into by the Appellant, having been arranged and introduced by Mr Darr. Every purchase and sale arranged by Mr Darr was connected to fraud in the supply chain leading to the Appellant and to a fraudulent default by the Appellant’s direct customer. (14) Mr Lebedavas appeared to be of the view that there were no written contracts for the transactions assessed. He did however acknowledge that there were standard terms and conditions for all three of the Appellant’s immediate suppliers. However, there were no terms agreed with customers. (15) There were two periods during which the Appellant’s turnover leapt materially. In late 2017 when it made supplies to the Lithuanian company. These transactions had prompted HMRC’s verification exercise which revealed no supply chain fraud. There was a more marked increase in turnover associated with the transactions introduced by Mr Darr. These took a consistent pattern of trading of approximately £0.5m per month to regularly exceeding £1m and in period 09/18 exceeding £2m. (16) Mr Lebedavas asserted in his statement that stock was not inspected. However, in cross examination he accepted that some stock was delivered to the Appellant’s principal place of business and that it at least may have thereby been inspected by Mr Pallister. Documentary evidence Tribunal decisions concerning Euro Stock Shop Limited 30. By reference to the FTT decision in Euro Stock Shop Limited (ESSL) we derive the following information. 31. HMRC denied ESSL input tax recovery on Kittel grounds for periods 04/06 and 05/06 in the total sum of £1,710,930.39. The assessments issued in connection with such denials were appealed by ESSL. In a judgment of the FTT dated 23 July 2009 the Tribunal set out its understanding of what needed to be proven: “[87] The Commissioners must prove their assertion of fraud by reference to cogent evidence. Since the allegations are serious, mere assertions are not enough and the evidence must be strong. Where a person simply disregards obvious signs of dishonesty, Nelsonian blindness if you like, then that person cannot say that they were not dishonest. If a person comes by a deal which is too good to be true and asks no questions then they may be knowingly participating in a transaction where there is dishonesty. An honest person would not deliberately close their eyes and not ask questions but will seek to learn more about suspicious transactions. Similarly, a person acting recklessly where there are tell tale signs of dishonesty could be taken to be acting with knowledge. … 88. The Commissioners must raise a sufficient case for the Appellant to answer and the case must be that the Appellant knew or ought to have known of the fraud. We know that the fact that a person has not taken every precaution or check does not mean they lose the right to deduct input tax. Faulty due diligence does not mean guilt. The evidence presented to the tribunal must be assessed to establish whether the Appellant had the means of knowing that they were participating in a fraud. It is expected that due diligence would be conducted on one’s immediate supplier and, if there is an indication that of impropriety higher up in the chain, a “dirty” chain, then comprehensive due diligence should also be conducted at that level. The Appellant should therefore act in a reasonable and proportionate manner to establish the bona fide of transactions and if in doubt about the legitimacy of the transactions, the Appellant should cease to trade with those parties. 32. Having set out that test the Tribunal then proceeded to consider the evidence presented in the case. The Tribunal noted: (1) The same parties were involved in the various supply chains which were considered to be contrary to the principles of supply and demand in a competitive marketplace. (2) The parties in the fraudulent supply chains were unexplained, with various suppliers performing the same functions with marginal profit being made on each link in the chain. (3) The goods were sold in similar quantities in a very short period of time. (4) ESSL’s profit margins were constant in each deal by reference to a specific, to the penny, mark-up and higher than those on other links in the supply chain; and there was no price reduction for greater volumes when sold. (5) ESSL often paid their supplier for the goods after they had been paid by their customer. There were also other non-commercial features of the arrangements made along the supply chain for payment. (6) The terms and conditions of sale between the supply chain participants provided for title to be retained by a seller until they had received payment but permitted possession of the goods to be transferred prior to title passing down the chain of supply thus exposing the participants to bad debts. (7) Within the supply chains some participants received commissions rather than buying and selling the goods. (8) There was circularity within the supply chains with participants appearing on more than one occasion within the overall chain of supply. (9) ESSL did not take physical possession of the goods which remained in a freight forwarding warehouse at all times. (10) Turnover of the business was significant during the period in which the transactions connected to fraud were undertaken. (11) ESSL sought to defend its position providing an asserted explanation for the terms on which they dealt. They also provided evidence of due diligence carried out. 33. Having considered the evidence the Tribunal concluded: “[109] It was clear that the director of [ESSL] [Mr] … Darr [was] aware of MTIC fraud and its operation as far back as 2001. This was the reason that they closed their ESL business. When they resumed overseas trading in 2004, they felt that there were adequate safeguards in the industry to protect against MTIC fraud and the checks which businesses were expected to undertake of suppliers and customers. The directors had over 13 years’ experience in the computer business supplying both the domestic and the overseas market. From the pattern of the transactions in which they were involved, the Tribunal believes, on the balance of probabilities, that the appellant knew that the transactions were not legitimate. They may not have known the identity of the defaulting trader but they are likely to have known that there was a missing trader somewhere in the chain and of connection of that transaction to their transactions. The chain of transactions were [sic] planned and the clear inference is that the participants had actual knowledge of the fraud. … [116] The directors, at the time of entering into the transactions had substantial experience and knowledge of the industry. They understood the transactions with which they were involved. The trading pattern which, without substantial explanation provided by the Appellant, allows one to draw an inference of dishonesty. The Appellants have not rebutted the case which has been put to them … The transactions were without commercial substance and are contrived. The tribunal has no hesitation in saying that directors of [ESSL] … Darr were fully aware of the risk inherent in trading substantial quantities of CPU's and of the fraud in that industry and they knew the transactions which they undertook in the VAT periods 04/06 and 05/06 were part of the scheme to defraud the Revenue.” 34. ESSL appealed the FTT decision to the UT. In a judgment dated 23 July 2010 Arnold J rejected the appeal considering that there was evidence before the Tribunal from which it was entitled to conclude that ESSL had actual knowledge of the connection with fraud. Company’s House Information 35. Mr Darr was disqualified from appointment as a director pursuant to section 7 Company Directors Disqualification Act 1986 with effect from 13 March 2013 to 12 March 2025 in connection with his conduct whilst acting as a director of ESSL. Supplier terms and conditions 36. Available to us in the bundle were the terms and conditions for Asma and Sirius. We understand that there were terms and conditions for Fortune, but they were not in the bundle. 37. Asma’s terms and conditions were part of the trader application form signed by Mr Pallister. The notable terms were: (1) Payment was required on receipt of invoice however Asma reserved the right to obtain a security interest in the products when sold by the Appellant and in the proceeds of sale. (2) In respect of business customers it was stated that all goods supplied remained the supplier’s property until paid for in full. The Appellant was required to store them so that they were clearly identifiable as belonging to Asma and insured in Asma’s favour. However the Appellant was entitled to use the goods and sell them in the ordinary course of its business unless the right to do so was revoked by the supplier. (3) Goods were to be sent by Asma using first class Royal Mail or delivered same day for local customers. 38. Those for Sirius were again signed as part of the trader application process. Their notable terms were: (1) (2) (3) Prices were said to be in UK Pounds. Sirius reserved the right to adjust prices where its costs varied. Payment terms were 30 days from invoice with time being of the essence. (4) Risk in the goods passed on delivery but title did not pass until the goods had been paid for. Until title passed the Appellant was required to hold the goods on a fiduciary duty basis storing them separately and identifiably to Sirius. However, notwithstanding that title had not passed, the Appellant was entitled to sell the goods in the ordinary course of business holding the proceeds of sale on trust pending payment for them. Sales documentation 39. We were taken only to a limited number of sales documents. 40. However, we noted that in respect of the first purchase made through Mr Darr, from Asma, the sales invoice requires that the goods be paid for in advance (contrary to the terms and conditions which required them to be paid on invoice). The delivery note for the same goods and dated the same day as the invoice states that the payment terms were cash on delivery. The delivery address is shown as the Appellant’s principal place of business. 41. A draft purchase order issued to Fortune also provided for the delivery address to be the Appellants principal place of business. 42. We were shown an invoice for a shipping company which demonstrated that, for goods sold on 18 November 2018 to Borax, the goods were collected from the Appellant’s principal place of business and delivered to the address shown as the registered address for Borax as stated by Borax on the Appellant’s trade application form and confirmed by other documents concerning Borax. Visit report for visit to Mr Darr 43. On 8 January 2019, a team independent of the investigation team visited Mr Darr in connection with the registration of his consultancy business. The report records: (1) Mr Darr’s business involved acting as a sales consultant/agent of IT products to various UK and Dutch buyers and transacting deals for the Appellant. Deals were stated to be arranged starting with a customer order and then finding a supplier, principally through the Appellant. (2) He commenced trading on 2 January 2018. (3) He hit the turnover limit (i.e. by reference to commission payable by the Appellant and/or his own trades) on 2 November 2018. (4) The visiting officers considered that the business appeared to be legitimate and that he had become aware of the Appellant through Indeed. (5) All due diligence of suppliers was said to have been carried out by the Appellant. (6) HMRC flagged the suggestion to revisit in six months. Documents concerning suitcase of evidence 44. Mr Pallister’s evidence, as set out at paragraph 26 above, was that he retained all email correspondence to and from his employees and self-employed consultants together with recordings of all landline calls. Over a period up to December 2019 he extracted all emails concerning the disputed deals in the period May – August 2018 and had the calls made to or from Mr Darr’s landline in April 2018 transcribed. These documents were noted as having been taken by Mr Pallister to a meeting at HMRC’s offices on 17 December 2019. The meeting note also confirms that the Appellant continued the process of transcription. It also records that Mr Pallister’s view was that the emails and transcripts demonstrated nothing untoward in the transactions. The note indicates that HMRC would go through the binders Mr Pallister had brought with him and would contact him if anything further was required. A receipt was given for the records. 45. We were told that in the end HMRC did not review the documents provided. They were never scanned into HMRC’s systems, and some were eventually returned. It is understood that due to covid and the closure of the office in which they were being held some were never retrieved and are lost. 46. HMRC do not dispute that Mr Pallister retained the records. Adverse inference 47. The Appellant invited us to draw an adverse inference from the fact that Mr Pallister had produced documents that, in his view, demonstrated that the transactions entered into by the Appellant through Mr Darr appeared legitimate on their face and gave no indication of connection to fraud, but HMRC had neither reviewed them nor included them in the bundles. 48. There was also some discussion as to whether an adverse inference should be drawn against either party in connection with the absence of any evidence from Mr Darr himself. 49. We considered the judgment of Judge Rupert Jones in Tower Bridge GP Limited v HMRC [2019] UKFTT 176 (TC) which summarises the law on adverse inference by reference to the summary provided by the Supreme Court in Prest v Prest [2013] 2 AC 415 at [44] and Wisniewski v Central Manchester Health Authority [1998] PIQR P324 the two summaries having been accepted as the same in British Airways PLC v Airways Pension Scheme Trustee Ltd [2017] RWHC 1191 (Ch). It is apparent from these cases that we are entitled to draw an adverse inference from the absence of evidence (certainly the attendance of a witness) which might have been expected to be material to an issue to be decided. An adverse inference serves to strengthen evidence of the party against whom the evidence was relevant or weaken the evidence of the party who could have adduced it. However, in order to draw an adverse inference there must be some evidence as to the primary issue and a case to answer t. Where the reason for a failure to adduce the evidence is accepted by the court or Tribunal no adverse inference should be drawn. A credible but incomplete explanation for absence of the evidence is likely to impact the strength of any adverse inference to be drawn. 50. On the absence of any evidence from Mr Darr we are satisfied that it would have been potentially open to either party to have approached him and called him as a witness. However, we consider that there is sufficient evidence available to us from which we are comfortable drawing inferences as to his knowledge and means of knowledge. The evidence is circumstantial against him but in supply chain fraud cases that is often the case and has rarely inhibited other Tribunals from making appropriate findings of fact to enable them to determine appeals. We do not therefore consider we needed Mr Darr to give evidence and accept that there would have been challenges for whichever party had sought to call him. 51. As regards the “suitcase of evidence” we are satisfied that there is no dispute as to its existence and the inferences that can be drawn about the manner in which Mr Pallister ran the Appellant’s business and the records retained. We consider the undisputed existence of the records to be relevant to Mecsek Test Issue or the Reasonable Steps Issue but do not consider the detail of what the emails and phone calls recorded to be so relevant. 52. The information may have been relevant to the Darr Knowledge Issue. Once it was clear that the documents had not been included but that the Appellant considered them to have potential relevance, we invited the Appellant to make any application it wished to make as to the admission of the documents or a sample of them. Despite that invitation the Appellant determined to proceed without them. We do not consider it appropriate to draw an adverse inference against the Appellant for failing to adduce them. They are voluminous and, in our view, would have been unlikely to materially impact the decision we reach. We have determined the appeal on all the evidence before us. 53. We also draw no adverse inference against HMRC. In the end, and for reasons likely to be associated with the covid lock down, HMRC never scanned and retained the materials (they were returned or lost). We accept that HMRC never actually looked at them with the consequence that it cannot reasonably be inferred that they failed to adduce the evidence because they knew it was detrimental to them. 54. We have therefore determined the appeal on all the evidence before us. DARR KNOWLEDGE ISSUE HMRC’s submissions 55. HMRC rely on the general red flags of supply chain fraud risk identified by Mr Lebedavas relating to the Appellant and seek to overlay on them the following facts they consider adequately proven in relation to Mr Darr that: (1) He had previously been involved in missing trader intracommunity (MTIC) fraud, the Tribunal in ESSL having found on the evidence that he knew of the connection to fraud. (2) He had been disqualified as a director in consequence of his connection to the MTIC. (3) Mr Darr arranged every one of the deals and transactions making up the Assessments in a business that otherwise has an unblemished history. (4) Mr Darr ceased to be involved with the Appellant immediately following HMRC’s visit to his business and/or after the issue of the extended verification letter in respect of the 11/18 return. 56. HMRC contend that there are simply too many inexplicable co-incidences for the true answer not to be that Mr Darr knew of the frauds both up and down the supply chain from the Appellant and was complicit in it. Alternatively they contend that he should have known. Appellants submission 57. It is contended on behalf of the Appellant that Mr Darr knew and should have known no more than Mr Pallister did. Mr Pallister had control of the business including due diligence, invoicing, and payments. He had access to Mr Darr’s emails and his landline calls. On the basis that HMRC have accepted that Mr Pallister did not know and should not have known, the same conclusion should be reached in respect of Mr Darr. 58. The Appellant notes that Mr Darr’s previous involvement in an MTIC fraud is the only material factor differentiating the knowledge of Mr Pallister and Mr Darr. The Appellant contends that it should not be enough to tip the balance. Findings of fact 59. HMRC’s review conclusion letter defines the scope of the findings we must make regarding Mr Darr’s knowledge or means of knowledge as HMRC accept that the Appellant, a body corporate, did not know and had no means of knowing of the connection to fraud through matters known to Mr Pallister. For present purposes therefore we have considered the evidence available to us to discern what it is reasonable to infer and therefore find that Mr Darr knew or should have known and not what was or would have been known to the Appellant through a combination of Mr Darr and Mr Pallister. 60. In that context we find the following facts: (1) Mr Darr had been disqualified as a director because of his involvement with ESSL and as a consequence of his involvement in a significant tax loss. Whilst we understand that he did not given evidence to the Tribunal in that case, he was considered to have been culpably involved in transactions connected to fraud on the basis of the evidence recorded in the judgment of the Tribunal as accepted by the UT. (2) Mr Darr, a self-employed consultant/trader, providing services to the Appellant by introducing buyers and sellers to the Appellant’s business and negotiating trades which were then executed by the Appellant through Mr Pallister. (3) Trading as a sole trader, he was registered for VAT and told HMRC at a visit on 8 January 2019 that he had 2 lines of business: acting for Eurolaser and as an intermediary between UK and Dutch businesses. (4) His principal means of arranging trades was by email and telephone. The Appellant retained copies of all email correspondence and recordings of landline calls but not mobile phone calls. (5) Mr Pallister required f that details of the counterparties were obtained including, for the UK suppliers: Companies’ House records demonstrating a trading history. Mr Darr would have been aware of this and is likely to have contributed to obtaining the information. (6) When conducting business he was regularly at the Appellant’s principal place of business and sat amongst the other traders in sufficient proximity and with office collegiality that his activities and those of the others were visible to the group. (7) His introduction to the Appellant was through Indeed. By his curriculum vitae he provided details of his previous employers but did not disclose that he had been disqualified as a director or the result of the Tribunal decision in ESSL. (8) He began working with/on behalf of the Appellant in November 2017. He did not conclude his first deal on behalf of the Appellant until 14 February 2018 but then continued to transact deals buying from Asma, Sirius or Fortune and selling to Borax and Sights throughout the period until 12 December 2018. (9) In that period 87 purchase transactions were undertaken by him on behalf of the Appellant, 9 from Asma over the period 14 February 2018 to 24 April 2018; 32 from Sirius over the period 23 February 2018 to 12 December 2018 and 46 from Fortune over the period 30 May 2018 to 6 December 2018. Analysis of those purchases reveals: (a) 900 units of a single product were purchased on 28 June 2018 from Fortune across two transactions; the first for 500 units at 5.32% and the second for 600 units at 5.36%. (b) There were again two purchases each for 500 units of a product purchased from Fortune on 29 June 2018 both at a 5.59% mark-up. (c) 27 July 2018 saw the purchase of 15,000 units of a product, one transaction for 10,000 units and the second for 5,000 units at a mark-up of 5.62% and 5.66%, respectively. (d) On 20 August 2018 there were seven transactions for 5000 units of the same item from Fortune; the first three at a mark-up of 4.86% and the last 4 at 4.91%. (e) On 23 October 2018 purchase transactions were undertaken of 300 units of the same product across 3 transactions of 100 purchases each. The mark-up on each transaction was 4.54%, 4.5% and 4.52%, respectively. A further three transactions again for 100 units of the same produce as purchased on 23 October 2016 were made on 30 October 2018, these at mark-ups of 5.37%, 5.47% and 5.47%. (f) Six transactions were undertaken for the same product on 19 November 2018. Total units purchased were 1,950. The first two transactions on that day were at a mark-up of 5.7%, the second two at 5.82% and the final two at 5.79%. (g) On 12 December 2018 Mr Darr arranged the purchase of 1,110 units of the same product across 13 separate transactions of circa 100 units (one transaction was for 30 and another was for 55) from Sirius. The mark-up on each of these individual transactions was 5.73%. (h) Of the 87 purchase transactions 41 were back-to-back. (10) In respect of each of the sales made, precisely the same quantity required by the customer was purchased by the Appellant from the supplier, again a matter of which Mr Darr would have been well aware. (11) The model adopted by Mr Darr (as evidenced in the transaction documentation and by reference to the explanation of his business as recorded in the report of the visit made to him on 8 January 2019) was such that he was well aware that many deals were back-to-back, and that they involved uncommercial hallmarks. (12) The Appellant had not transacted with Asma, Sirius, Fortune, Borax or Sights prior to 14 February 2018 or after 12 December 2018 and did not do so otherwise than through Mr Darr. (13) The business Mr Darr transacted for Eurolaser, involved UK suppliers but Czech and Croatian customers and was outside the pattern of his business as stated to HMRC at the registration visit. (14) Mr Darr had no authority to process invoices or make payments to suppliers, but these documents simply recorded and put into effect the transactions he arranged and of which he would have been aware. (15) Mr Darr was the only consultant/employee engaged by the Appellant to be connected to the transactions giving rise to the Assessments. 61. In addition to these facts and by reference to them we draw the following inferences: (1) We are satisfied that despite Mr Darr not processing invoices or making bank payments he had sufficient visibility of the invoices for purchases, the issue of sales invoices and when payments were made for him to have a complete picture of the transactions, including knowledge that Sirius was invoicing in euros despite terms and conditions providing for invoicing in pounds. (2) Given the proportion of turnover attributable to the trades he made and the proximity and interaction of traders in a small office Mr Darr would reasonably be expected to have known that he was outperforming the other traders and that the business transacted by him did not follow the pattern of the business as a whole. (3) There was some attempt, on occasions, to ensure that the mark-up on a larger transaction was better than one on a smaller transaction (even if only marginally). However, this was not uniform and there are instances (see paragraph 60.(9) where the inverse was the case). (4) However, even where there were better mark-ups on larger numbers of units purchased there can be no explanation for multiple purchases on one day at different mark-ups. In a non-contrived and non-fraudulent situation all transactions on a single day would reasonably be expected to be transacted as one transaction at the best markup achievable. As the person responsible for arranging these deals, Mr Darr would have known that the mark-up arrangements did not reflect normal commercial practice. (5) We consider that the transactions stopped because it became clear to Mr Darr that HMRC had become aware of the fraudulent deal chains and the Appellant’s involvement in them. From August 2018 the Appellant was on a programme of trader monitoring of which we consider it was likely Mr Darr was aware as he was working in the open plan office HMRC visited as part of their monitoring. (6) The final deals were on the day it is likely that the 11/18 extended verification letter was received by the Appellant. Further, it was at about the time the 12/18 VAT return was rendered that he (7) received the visit from HMRC. The visit was unconnected to the trader monitoring from HMRC’s perspective, but we consider that it is likely that it represented the final straw causing Mr Darr to cease trades, at least those involving the Appellant. We know he in fact ceased entirely shortly thereafter as he deregistered from 11/19 and his final two returns were nil returns. (8) Whilst there is not a complete match to the pattern of trading established as connected to fraud and of which Mr Darr was found to have direct knowledge in ESSL there are strong similarities: (a) All the Appellant’s trades involved Asma, Sirius or Fortune as the supplier and Borax or Sights as the customer, there was therefore a confined group of traders involved. (b) The goods were bought and sold in similar quantities in a very short period of time. There was no material price reduction for greater volumes when purchased (c) or sold. (d) Both ESSL and the Appellant often paid their supplier for the goods after they had been paid by their customer. There were also other non-commercial features of the arrangements. (e) The terms and conditions of sale between the supply chain participants provided for title to be retained by a seller until they had received payment but permitted possession of the goods to be transferred prior to title passing down the chain of supply thus exposing the participants to bad debts. (f) Within the supply chains some participants (in this case Mr Darr) received commissions rather than buying and selling the goods. (g) The fraudulent transactions contributed to a significant increase in turnover. (9) We do not consider that the differences between the situation in ESSL and the present transactions to be sufficient so as to permit a conclusion that Mr Darr was inadvertently used by fraudsters. 62. By reference to our findings of fact and the inferences we have drawn we have little hesitation in concluding that Mr Darr did know of the connection to fraud. In ESSL it was determined that he fully knew how supply chain fraud operated in connection with the trades relevant to this appeal, and he represents the principal common link in respect of all transactions and was the only trader engaged by the Appellant so connected. Whilst HMRC have accepted that what are commonly seen as red flag features of supply chain fraud were not known to Mr Pallister, we consider that Mr Darr’s background makes it all but inconceivable that he did not recognise them precisely for what they were – a connection to further VAT frauds. We do not need to make any conclusion beyond that, but we consider it would be reasonable to conclude on the evidence before us that Mr Darr sought out engagement with the Appellant through Indeed (whether that was by responding to a job application or otherwise offering his services) in order to introduce a legitimate trader into the supply chain. 63. If we are wrong to conclude that he knew, we consider his history and continued disqualification as a director should have made him hypervigilant in the desire to avoid further involvement in supply chain fraud. And yet he was not hypervigilant, he became involved in trades which bore many of the hallmarks of risk that should have been clearly obvious to him in light of the ESSL judgement. 64. We recognise that in so concluding we at least appear to be accepting that the connecting factor of Mr Darr and his previous involvement in supply chain fraud are what tips the balance in concluding that Mr Darr knew of the connection to fraud when HMRC have accepted that Mr Pallister did not. 65. There is no explanation in the review conclusion letter as to why HMRC reached the conclusion they reached concerning Mr Pallister and we must proceed on the evidence we have in reaching our conclusions on the facts. However, and in any event, even were we to say that without the ESSL experience we would have accepted that Mr Darr did not know and should not have known of the connection to fraud, we are satisfied that his previous involvement is a matter which is relevant and to which we are entitled to give weight, drawing an analogy with the approach to bad character evidence in criminal proceedings as set out in sections 101(1)(d) and 103(1)(a) Criminal Justice Act 2003. By virtue of section 103, a prior conviction (or other bad character evidence) may be adduced where the evidence demonstrates a propensity to commit the same kind of offence. In light of HMRC’s conclusion that an “innocent” (Mr Pallister) did not draw a connection between the hallmarks of fraud, we consider it reasonable that someone with previous knowledge and involvement would have done so, such that Mr Darr’s involvement in ESSL did render it more likely that he knew and/or should have known of the connection to fraud when acting on behalf of the Appellant. ATTRIBUTION ISSUE 66. It is most commonly the case that knowledge or means of knowledge subsists with the directors and/or shareholders of a limited company trader and as such individuals can be assimilated to the guiding mind of the company there is little question that their knowledge is taken to represent the knowledge or means of knowledge of the company. That situation does not arise here in light of review conclusion letter. We must decide whether, in law, the knowledge (and means of knowledge) we have found Mr Darr possessed can be attributed to the Appellant. Case law on attribution 67. HMRC v Greener Solutions Limited [2012] UKUT 18 (TCC) (Greener Solutions) concerned assessments in which HMRC had denied recovery of input tax under Kittel principles in respect of transactions connected to VAT fraud in circumstances in which an agent knew of the fraud to which the transactions were connected. HMRC argued that the knowledge of the agent should be attributed to the taxpayer. The agent was appointed by Greener Solutions to identify buyers and sellers, undertake due diligence on those suppliers, finally introducing the deal to the taxpayer for final sign off. Before both the FTT and the Upper Tribunal (UT) it was not questioned that the agent’s knowledge was to be attributed to the taxpayer under the normal principles of agency; the critical question arose as to whether what is known as the “Hampshire Land” principle or “fraud exception” applied. 68. By reference to the judgment of Lord Hoffman in Meridian Global Funds Management Asia v Securities Commission [1995] 2 AC 500 (Meridian) the UT notes that it is a necessary part of corporate personality that there must be some scheme of attribution of the knowledge of natural persons. Knowledge will be attributed through the company’s constitutional documents, company law and the principles of agency. Further, specific situations may require the fashioning of specific/substantive rules. In the context of the facts in Meridian (concerning a failure to notify the use of managed funds to acquire shares in a public issuer) Lord Hoffman considered it appropriate to impute to the company the knowledge of the only party who knew of the relevant investment, i.e. the investment manager concerned in the acquisition of the relevant (and notifiable) interest. Such investment manager did not need to be “the directing mind and will” of the company generally but, as a servant of the company with authority to act on its behalf to make the investment, his knowledge of the transaction was to be attributed to the company. Lord Hoffman considered it essentially a matter of statutory construction, determining by reference to the statutory purpose the “particular purpose, tailored … to the terms and policies of the substantive rule.” 69. Considering the judgment in Stone & Rolls v Northard Lowe and Wills Ltd [2009] 1 AC 1391 (Stone & Rolls) the UT noted that the fraud exception appropriately negated any attribution of knowledge to a company where such attribution would be contrary to justice and common sense. 70. The UT also considered the High Court judgment in McNicholas Construction Ltd v HMRC [2000] STC 553. That case concerned improper claims to input tax on subcontractor invoices in consequence of wrongdoing by the taxpayer’s site managers. Those site managers were facilitating fraud against the revenue authorities (at that time Inland Revenue and HM Customs and Excise) by the subcontractors. The Court refused the taxpayer’s appeal against the Tribunal decision which concluded that the knowledge of the site managers was to be attributed to the taxpayer and that the fraud exception did not apply because the taxpayer was not the victim of the fraud, the revenue authorities were. In the context of that appeal the Court considered that, for the purposes of determining whether input tax was correctly deductible and when imposing penalties for dishonest conduct, the statutory scheme required that the knowledge of the employees playing a part in the making and receiving of supplies on which the input tax was deducted was appropriately attributed to the company. As the taxpayer was not the intended victim, and indeed suffered only indirectly because the fraud had been detected and the input tax denied, the fraud exception did not negate the attributed knowledge of the site managers. The adverse consequence of losing entitlement to input tax recovery and having to pay a penalty for incorrect claims on returns were insufficient. Only where the site managers’ breach of duty was aimed at harming the company would the exception come into play. 71. The UT considered the context of Kittel input tax denials. It was noted that the agent had caused Greener Solutions to enter transactions which were connected to fraud orchestrated against “the fisc”. If the fraud succeeded the agent and, albeit innocently, the taxpayer would have benefited (through the profit made on the transactions). Only where the connection to fraud was identified did the taxpayer stand to lose in consequence of being deprived of its right to recover as input tax the VAT it had paid to its suppliers. The risk of input tax denial under Kittel did not cause the taxpayer to be the victim of fraud by the agent and was “irrelevant in deciding whether [the taxpayer] was a victim of [the agent] and whether his knowledge should be attributed to if [sic] for the purposes of the Kittel principle.” This was because the context of the rule denying input tax where the terms of Kittel are met is objectively to combat fraud, necessitating that the knowledge of the agent be attributed to the taxpayer. 72. In this context the UT stated: “47. … The purpose, or at least a major purpose, of the Kittel principle is to combat fraud. The Tribunal’s decision [not to attribute the knowledge of the agent to the taxpayer] would make a serious in-road to that principle: in cases where there were innocent shareholders or directors who had been deceived by a fraudulent employee or director, the company might be able to escape liability notwithstanding that it was able to profit considerably from the transactions conducted on its behalf.” 73. Greener Solutions has more recently been considered by the UT in Mobile Sourcing Limited v HMRC [2016] UKUT 274 (TCC) (Mobile Solutions). That case again concerned Kittel assessments in respect of transactions entered by Mobile Solutions through an agent who knew or should have known of a connection to fraudulent loss elsewhere in the supply chain. The FTT had attributed the knowledge of the agent to the taxpayer and upheld the assessments. The UT in Mobile Solutions was called to consider whether the UT judgment in Greener Solutions had been affected by the Supreme Court judgment in Jetivia SA and another Bilta (UK) Ltd [2015] UKSC 23 (Bilta). 74. The UT summarises the findings in McNicholas, Stone & Rolls and Greener Solutions and proceeds to consider Bilta. Bilta concerned frauds in connection with carbon credit trading. The liquidators of the company claimed that the directors were knowingly party to trades intended to defraud creditors (specifically HMRC) and for other fraudulent means, thus requiring them to be ordered to contribute to the company’s assets. The directors sought to attribute their own knowledge to the company thereby depriving the company of any cause of action against them. 75. The UT concludes that Bilta “throws new light” on the principles to be applied when considering whether to attribute Kittel knowledge to a body corporate. In this regard it noted the following principles: (1) As the question of whether knowledge is to be attributed to a company depends on the considerations of context and purpose, in a Kittel situation knowledge is ordinarily to be attributed (see [41]). (2) Such attribution is not alleviated in an action as between the company and a third party (such as HMRC) by reference to the fraudulent intent of the director, agent, or employee. Even where liability arises for the company as a result of such attribution, the intended victim of the unlawful conduct takes priority over the loss which the company will suffer as a consequence. However, the position would be otherwise as between the company and the dishonest director, agent, or employee (see [42] setting out quotation from Bilta [84], [44] and quotation from [87] – [88] Bilta). 76. Applying those propositions to the facts before it, the UT decided, in the case of Kittel assessments, the attribution of knowledge of a director/agent/employee was necessarily required as the claims to input tax themselves relied on the actions of the agent. Such attribution was then the end of the matter in the context of assessments issued by HMRC to deny input tax as a third party to the relationship between the taxpayer and the party with knowledge or means of knowledge of the fraud. 77. Finally, the UT expressed the view that denying input tax to a taxpayer in the circumstances of Mobile Solutions did not breach the EU principle of proportionality on the basis that, even were proportionality relevant, once knowledge had been attributed to the taxpayer, the taxpayer was treated as complicit in the fraud as established in Kittel. HMRC’s submissions 78. HMRC rely on the UT judgments in the cases of Greener Solutions and Mobile Sourcing to contend that such knowledge is properly attributed to the Appellant despite the accepted absence of knowledge or otherwise the “innocence” of Mr Pallister. 79. In this regard they contend that the basic rules of attribution to a body corporate of the knowledge of an appointed agent such as Mr Darr applies and what is known as the “fraud exception” or Hampshire Land principle does not apply as against HMRC, although it might/would apply were the Appellant to look to Mr Darr to recover the sums which fall due in relation to the Decisions. Appellant’s submissions In substance the Appellant invites us to distinguish this case from both Greener 80. Solutions and Mobile Sourcing. In the Appellant’s submission it is simply unfair that it should be liable to pay VAT on a joint and several liability basis when HMRC accept that Mr Pallister did not know and should not have known of the connection to fraud. He is the guiding mind and will of the company and the rightful acceptance made by HMRC as to his knowledge should be enough to absolve the Appellant. Discussion 81. We are bound by the decisions of the UT in Greener Solutions and Mobile Sourcing. Those judgments clearly establish that the knowledge of an agent acting on behalf of a body corporate will be attributed to the company save as between the agent and the corporate. This is so whether or not the corporate is otherwise unknowing – indeed if the corporate otherwise knew then there would be no need for attribution. 82. Mr Pallister may consider the position unfair, but the purpose of the legislation is to ensure that, where any participant acting with authority in a transaction knows or has the means of knowledge of the connection to fraud, joint and several liability attaches to the company. We have found that Mr Darr knew of the connection to fraud and that knowledge is therefore attributed to the company with the necessary consequences that flow from that. 83. As regards the Kittel Assessments and the Kittel Penalty therefore, the Appellant is established as liable. Liability on the Mecsek Assessment and Mecsek Penalty, however, also depends on the Mecsek Test and Reasonable Steps Issue. MECSEK TEST ISSUE 84. As set out above, the test the CJEU has provided for when denying the ability to zero rate requires that there be a fraud in the supply chain and that the supplier is shown to have known, or that it should have known “that the transaction which it carried out was part of a tax fraud committed by the purchaser, and that it had not taken every reasonable step within its powers to prevent its own participation in that fraud.” 85. We have already satisfied ourselves that the Appellant, through the attributed knowledge of Mr Darr, knew or should have known that the sales to Borax and Sights were part of a fraud committed by those customers. 86. This issue therefore requires us to determine whether “and that it had not taken every reasonable step within its power to prevent its own participation in that fraud” is a composite element of knowledge or means of knowledge or represents an additional limb of the test and, if so, how that limb is to be applied where, as here, the relevant knowledge component has been attributed to the Appellant. 87. We understood HMRC’s submission to be that there was a single test and/or that, by virtue of the actions of Mr Darr, it could not be said that the Appellant had taken all reasonable steps to prevent its involvement in the frauds committed by Borax and Sights. The Appellant restated its position that the actions of Mr Darr could not result in assessments on the Appellant in circumstances in which HMRC had determined Mr Pallister, as the guiding mind of the company, was innocent of any knowledge or means of knowledge of frauds. Further, the Appellant points to the due diligence undertaken, and the rigorous and hands on approach of Mr Pallister, including the existence of the suitcase of evidence. 88. Neither party referred us to any case law in support of its position. We however undertook some research of our own. In this regard we identified that in Staatssecretaris van Financien v Schoenimport 89. ‘Italmoda’ Mariano Previti vof and other cases (C-131/13, C-163/13, C-164/13) (Italmoda), the CJEU approved the Mecsek principle but in terms which did not repeat “and that it had not taken every reasonable step within its power to prevent its own participation in that fraud” (see paragraphs 49 and 69). 90. The CJEU has considered Italmoda and Mecsek on one further occasion (as far as relevant to this issue). Litdana UAB v Valstybinė mokesčių inspekcija prie Lietuvos Respublikos finansų ministerijos (C-624/15) (Litdana) concerned the use of the margin scheme for second-hand vehicles in circumstances in which Litdana purchased vehicles which had been treated as sold exempt from VAT (and thereby entitling the use of the second-hand margin scheme). In fact, as a consequence of fraud earlier in the supply chain, the goods were not eligible to be sold under the margin scheme: “34. Accordingly, it is not contrary to EU law to require a trader to act in good faith and to take every step which could reasonably be asked of him to satisfy himself that the transaction which he is carrying out does not result in his participation in tax evasion. … … 36. It follows that, even if all the substantive conditions giving rise to the right to the exemption of an intra-Community supply from VAT or to deduct VAT were not met, the Court has held that a taxable person who has acted in good faith and taken every step which could reasonably be required of him to satisfy himself that the transaction which he is effecting does not result in his participation in tax evasion cannot be refused that right … … 42. … the question whether Litdana acted in good faith and took every step which could reasonably be required of it to satisfy itself that the transactions which it carried out were not connected with tax evasion is a matter for the referring court to assess … … 44. As to whether Litdana took every necessary step to satisfy itself that the transactions which it carried out were not connected with tax evasion, the referring court may, in the context of its overall assessment, take into consideration, inter alia, the fact that the supplies at issue in the main proceedings appear to form part of a long-standing commercial relationship between Litdana and Handicare Auto, in the context of which Litdana in the past took care to verify with the tax authorities the meaning of the reference ‘Sections 69-71’ on the invoices issued by Handicare Auto and received confirmation from those authorities that the invoices featuring that reference provided sufficient evidence for it to apply the margin scheme. In such circumstances, it would be contrary to the principle of proportionality to require the taxable person to systematically verify, in respect of each supply, that the supplier actually applied the margin scheme, at least when there is no indication giving grounds for suspecting an infringement or fraud within the meaning of paragraph 39 of the present judgment.” 91. Although arising in a lightly different context (i.e. the margin scheme) we consider that Litdana indicates that joint and several liability for VAT fraud committed by others arises unless the party being held jointly and severally liable did not know, should not have known and otherwise acted in good faith taking every reasonable step to avoid their inadvertent involvement transactions connected to fraud. We consider that it is at least implicit that the Mecsek test and the Kittel test are the same, such that demonstration of good faith will preclude the imposition of liability whether as to the recovery of input tax, entitlement to zero rating or use of the margin scheme. 92. Domestically the only cases which have considered Mecsek, Italmoda or Litdana have been FTT cases. 93. Our view as set out above in 91 above, though not by reference to Litdana, was adopted in Taylors Service Centres Limited v HMRC [2018] UKFTT 474 (TC) (Taylors). Initially, the Tribunal records its approach as follows: “106. It is worth reiterating that the relevant formulation in considering a denial of zero-rating is not Kittel but Mecsek … Paragraph [55] of Mecsek replaces the closing words of this passage with what in our judgment is a more appropriate test, namely “every reasonable step within its power to prevent its own participation in that fraud”. … 110. The application of the Mecsek formulation to Taylor in this appeal in practice involves ascertaining the knowledge, means of knowledge, and steps taken by three individuals. They are Mr Taylor, Mr Kempster and Ms Harvey. Mr Taylor the owner of Taylors and the controlling force behind it; it is his business. Mr Kempster acted with the full authority of Taylors in buying and selling each of the vehicles in the appeal, it was his familiarity with Alan Simpson on which Taylors relied in setting up and carrying on this new business, and he dealt with Mr Fay in relation to the sale and dispatch of the vehicles. Ms Harvey was responsible for the documentation and paperwork and detailed VAT compliance in respect of the sales. Mr Brown did not seek to challenge that it was the knowledge of these three individuals which was to be imputed to Taylors. 94. However, when considering the evidence the Tribunal notes: “167. In terms of the detailed Mecsek formulation, HMRC have a somewhat stronger argument that in failing to raise and discuss the new activity with HMRC Taylors may have failed to take “every reasonable step within its power” to prevent their participation in fraud, but even that argument is relatively weak on the facts, and we have afforded it little weight in reaching our conclusions.” 95. At paragraph 168 it then elides “the knowledge/reasonable steps test in Mecsek,” a position it continues when setting out its conclusion from paragraph 177 onwards. 96. It is at least implicit therefore that the Tribunal did not see the failure to take reasonable steps as distinguishable from the knowledge/means of knowledge test and, by reference to the factual conclusions, the knowledge and absence of reasonable steps having been taken by Mr Kempster contributed to the conclusion that the appeal failed. 97. In Turkswood Limited v HMRC [2021] UKFTT 166 (TC) (Turkswood) the Tribunal appears to have concluded that the taking of reasonable steps is a separate limb but one in respect of which the Appellant bears the burden of proof: “26. It is clear that the burden lies on HMRC to show that the relevant frauds have taken place, that the Appellant by its transactions was participating in those frauds and that it knew or should have known that it was doing so. To the extent that the Appellant might be relieved from liability in relation to the Mecsek appeal by showing that it had nonetheless taken every reasonable step within its power to prevent its own participation in the relevant frauds, the burden clearly lies on the Appellant to do so – it could not be right that HMRC should be required to prove that the Appellant had not taken every reasonable step within its power to prevent its own participation in the frauds, as this would effectively be requiring HMRC to prove a negative by reference to facts which, almost by definition, would be outside their knowledge.” 98. On the facts however, the Tribunal concluded that there was knowledge of participation in fraud and it therefore it “follows that rather than take all reasonable steps to avoid participating the fraud [the taxpayer] engaged enthusiastically in it from the outset.” 99. In Neegum Sheth and Sam Ghazi v HMRC [2022] UKFTT 167 (TC) at paragraph 117 and Lynton Exports (Alsager) Limited v HMRC [2022] UKFTT 224 (TC) at paragraph 51 the Tribunal treated the requirement to have taken all reasonable steps as a separate limb of the Mecsek test. However, in neither case did the Tribunal need to consider that separate limb as as in both cases HMRC had failed to establish knowledge or means of knowledge of fraud. 100. Having considered the position taken in all these cases we take the view that the requirement to have “not taken all reasonable steps” is an inherent feature in establishing whether a taxpayer is liable to be denied zero rating under Mecsek. We agree with the Tribunal in Turkswood that where HMRC have established, on the balance of probabilities, that a taxpayer knew (or had the means of knowing) of a connection to fraud, in either a Kittel or Mecsek situation, a prima facie case for joint and several liability will have been established. If, however, the taxpayer can demonstrate that it has taken “every reasonable (and proportionate) step in its power to prevent its own participation in the fraud” it will demonstrate thereby that it acted in good faith. 101. Having concluded that it is for the taxpayer to demonstrate that it took every reasonable step in its power demonstrating good faith, we consider that the principles of attribution of knowledge established in Greener Solutions and Mobile Sourcing will apply. Drawing a parallel to the position articulated in paragraph 72 above, it would be surprising in the context of a principle aimed at combatting fraud, if liability were avoided unless all those associated within the company and authorised in respect of the transactions established that they had acted in good faith and had taken every reasonable step within their power to avoid participation in the fraud. REASONABLE STEPS ISSUE 102. On the basis of our finding that Mr Darr was a knowing and active participant in both the Kittel and Mecsek frauds and, adopting the language of the Tribunal in Turkswood, we find that Mr Darr did not take every reasonable step within his power to prevent the Appellant’s participation in the Mecsek fraud, on the contrary we find that he engaged enthusiastically in it from the outset and for the full period until it was detected and his time ran out. As Mr Darr’s failure is to be attributed to the Appellant that is enough for us to conclude that the Mecsek Assessments and Penalty stand and the appeal against them be dismissed. 103. However, and for completeness, we note that, despite HMRC’s acceptance that Mr Pallister did not know and should not have known of the connection to fraud and his hands on approach, including the suitcase of evidence, we also do not consider that he took “every reasonable step in his power” to avoid participation in the fraud. This is because, in November 2017, Mr Pallister had been alerted to the potential risks to his business in wholesale trades involving EU counterparties. Although HMRC were satisfied that the Lithuanian transactions were not connected to fraud, the risks should have been elevated in Mr Pallister’s mind. At precisely the time HMRC were visiting and communicating over the Lithuanian deals, Mr Pallister was beginning his relationship with Mr Darr. Mr Darr provided a curriculum vitae with previous employers in it but Mr Pallister did not take up references, neither did he do a Companies’ House search which would quickly have facilitated a chain of enquiry that would have made him aware of Mr Darr’s previous involvement in MTIC fraud. We consider these comparatively simple steps to have been ones which might reasonably and proportionately have been undertaken. Further reasonable steps may have been expected to have been undertaken once HMRC again opened verification of the Appellant’s returns and, as Mr Pallister observed, there was a significant increase in his turnover attributable to one trader. 104. Accordingly we also uphold the Mecsek Assessments and Penalty. DISPOSAL 105. For the reasons stated we refuse the appeal and uphold the Decisions in full. COSTS 106. This appeal was allocated to the complex category in accordance with rule 23 Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The Appellant did not opt out of the cost shifting rules as prescribed in rule 10 of those rules. 107. HMRC applied for their costs, and we award them the reasonable costs in this appeal to be taxed if not agreed. RIGHT TO APPLY FOR PERMISSION TO APPEAL 108. 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. Release date: 04th APRIL 2025 24