SK Metals Limited & Anor v The Commissioners for HMRC

Neutral Citation: [2025] UKFTT 01211 (TC) FIRST-TIER TRIBUNAL TAX CHAMBER Case Number: TC09659 Taylor House, London Appeal references: TC/2023/01059 TC 2023/07727 TC2023/01057 TC2023/08092 VALUE ADDED TAX – input tax deductibility – MTIC - right to deduct restricted under principles in Kittel – whether transactions connected with fraudulent VAT evasion – whether actual or ‘blind-eye’ knowledge of the transactions being connected with fraud – whether constructive knowledge in the alternative – appeal allowed Heard on: 15 to 18 September 2025 Judgment date: 10 October 2025 Before TRIBUNAL JUDGE DAVID HARKNESS MEMBER DR PHEBE MANN Between (1) (2) SK METALS LIMITED SPENCER FELDMAN and Appellants THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS Respondents Representation: For the Appellant: Rebecca Sheldon, of Counsel, instructed directly For the Respondents: Charlotte Brown, of Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs We want to thank both counsel for the manner in which they presented their respective cases, which was helpful to the Tribunal. DECISION INTRODUCTION The hearing took place in public on 15 to 18 September 2025 at Taylor House in 1. London. With the consent of the parties the hearing on 17 September was a hybrid hearing, Judge Harkness and Mr Granger, a witness for the Appellants, attending remotely via the Tribunal’s Video Platform. SUMMARY 2. against the following decisions by the Respondents (“HMRC”): The Appellants, SK Metals Limited (“SKM”) and Mr Spencer Feldman (“SF”) appeal (1) TC/2023/01059: HMRC’s decision dated 31 October 2022 to deny input tax of £618,428, later varied by decision on 17 February 2023 to £606,097, for transactions relating to purchases of scrap metal from B Trade Limited (“BTL”) in VAT Accounting Periods 02/21 to 08/21(the “First Input Tax Denial”); (2) TC/2023/10175: HMRC’s decision dated 20 March 2023 to issue a section 69C Value Added Tax Act 1994 (“VATA”) penalty (the “Penalty”) against SKM in the sum of £184,999; (3) TC/2023/07727: HMRC’s decision dated 10 March 2023 to deny input tax of £8091 for further transactions relating to the purchase of scrap metal from BTL in VAT accounting periods 02/21 and 05/21 (the “Second Input Tax Denial” and, together with the First Input Tax Denial, the “Input Tax Denials”); and (4) TC/2023/08092: HMRC’s decision dated 26 April 2022 to make SF personally liable for the entire Penalty issued pursuant to s69D VATA (the “PLN”). 3. The central questions before us were: (1) whether HMRC had properly denied SKM’s right to deduct input tax by way of the Input Tax Denials on the basis that SKM knew, or ought to have known, its transactions with BTL were connected with the fraudulent evasion of VAT (on the basis of the line of case law referred to below as “Kittel”); (2) whether the Penalty was properly charged on the basis that SKM knew or ought to have known that its transactions with BTL were connected with VAT; and (3) whether the PLN was properly charged on the basis that SKM is liable to the Penalty and the actions of SKM giving rise to the Penalty were attributable to SF. 4. We found that SKM neither knew, nor ought to have known, that its transactions with BTL were connected with the fraudulent evasion of VAT and therefore the Input Tax Denials should not have been made. It followed that the Penalty should not have been charged and that there was no PLN to which SF was liable. 5. Accordingly, we allowed Appellants’ appeal. ISSUES FOR DETERMINATION 6. before the Tribunal: HMRC bore the burden of proof, to the civil standard, in relation to the following issues (1) Whether the tax losses in the transactions in dispute were caused by the fraudulent default of BTL; (2) Whether SKM knew or should have known that its transactions with BTL were connected to fraud; (3) Whether SKM is liable for the Penalty; and (4) Whether the actions giving rise to the Penalty are attributable to SF, such that he is liable for the PLN. 7. The Appellants accepted that if we found SKM was in principle liable to penalty, the burden of proof in relation to any possible mitigation of the Penalty under s70 VATA switched and fell to them. 8. Both HMRC and the Appellants accepted that a possible finding by the Tribunal was that SKM knew, or should have known, that some but not all of its transactions with BTL were connected to fraud, in which case the denial of input tax would relate only to those transactions for which SKM has the requisite knowledge/constructive knowledge. In that event, HMRC would be required to recalculate the Input Tax Denials, and attendant Penalty and PLN. 9. On the first day of the hearing, in the course of Officer Borland giving evidence, it was conceded on behalf of the Appellants that the loss of tax occasioned by the transactions in dispute was caused by the fraudulent default of BTL and accordingly the issue raised at [6. (1)] no longer fell to be determined by the Tribunal. EVIDENCE AND SUBMISSIONS 10. The documents to which we were referred were a bundle of 2131 pages, an authorities bundle of 975 pages and five videos. On the final day of the hearing, we were given on behalf of the Appellants a chronology of 2 pages and a note of evidence of 12 pages; and on behalf of HMRC a chronology of 5 pages. Neither party made any objection to these additional submissions. While the papers given to us on the final day of the hearing were helpful because they clarified the respective arguments each party was putting forwards, we treated them with appropriate caution since these documents were not evidence as such; in particular we relied on our own notes of the oral evidence given during the hearing rather than the Appellants’ “note of evidence” which was simply Miss Sheldon’s notes of the evidence given during the hearing, rather than being a transcript. 11. We also had the benefit of skeleton arguments from the Appellants of 13 pages (updated on the final day of the hearing to 15 pages) and the Respondents of 36 pages. 12. The Tribunal heard the evidence in the following order from the parties’ witnesses, each of whom was cross-examined by the opposing party’s representative: (1) page witness statement accompanied by 27 exhibits); Officer James Borland (Day 1 in the afternoon) (Officer Borland had given a 7 (2) a 34 page witness statement accompanied by 96 exhibits); Officer Rakesh Pathak (Day 1 later in the afternoon)(Officer Pathak had given (3) Mr Spencer Feldman (Day 2) (SF had given a 5 page witness statement); and (4) Mr Kane Granger (“KG”)(Day 3) (KG had given a 4 page witness statement). 13. At several points in giving his evidence, SF asserted that there were documents and WhatsApp messages that were not in the bundle before us, which would be supportive of his evidence. We deal with this point below. 14. In our factual findings we preferred to rely upon the contemporaneous documentary evidence and on the oral evidence where corroborated by that documentary evidence. Where oral evidence on factual matters was not so corroborated, we exercised some caution in deciding whether or not it was credible (given the well known human tendency to remember things partially), taking into account the plausibility of the evidence and its consistency with other evidence. We exercised particular caution in relation to oral evidence on factual matters where the witness was not a first-hand witness to the relevant events (for example KG and SF’s evidence on how BTL came to be introduced to SKM). When it came to matters of opinion (for example Officer Pathak’s opinion as to what was the typical trading model of a broker) we listened carefully but did not give the opinion particularly significant weight since the witnesses were not appearing before us as experts. Officer Borland 15. Officer Borland is a Higher Officer of HMRC and has been involved with the HMRC MTIC team in Cardiff since March 2012. He gave evidence as to his investigations of BTL starting on or around 15 July 2021. 16. We found Officer Borland to be a credible and reliable witness and accepted his evidence as to matters of fact as set out in our findings of fact. 17. One point of curiosity in Officer Borland’s evidence is why HMRC did not start an investigation into BTL until 15 July 2021 in spite of having evidence on 7 April 2021 that BTL was trading significant quantities of metal. Officer Borland could not explain why HMRC had not investigated BTL earlier. We refer to this point later. Officer Pathak 18. Officer Pathak is a Higher Officer of HMRC and is currently a member of the Fraud Investigation Service within Organised Crime. He conducts civil investigations predominantly focusing on supply chain fraud and has been in this role since January 2019. He gave evidence of HMRC’s dealings with SKM. Some of HMRC’s interactions with SKM had been by HMRC officers who did not give evidence (we were told they were not available to give evidence); this was not helpful and we indicate in our findings of fact where direct evidence would have been helpful and our approach to those points. 19. Officer Pathak’s evidence as to the facts is set out below in our findings of facts. His view of the facts led to the issue of the Input Tax Denials, Penalty and PLN. Officer Pathak’s conclusion from his investigation was that he believed that SKM engaged in transactions connected with the fraudulent evasion of VAT, acting as a buffer trader in relation to the transactions with BTL and that SKM knew, or ought to have known that. His reasons can be summarised as follows: (1) the errors and profanities in the BTL invoices, when looked at in context of the wider picture and of a company doing multi millions of trading, were indicative of fraud in Officer Pathak’s professional experience; (2) on 18 March 2021 MTIC fraud and the need for due diligence was explained to SF, but he did not undertake more robust due diligence and continued to trade with BTL until BTL was deregistered; (3) trading commenced with BTL on 11 February 2021 but the due diligence email sent to BTL to complete the KYC template was not sent to BTL until 15 April 2021. During this time the total purchases from BTL amounted to £1,525,310. The input tax on these deals totalled £298,693; the lack of due diligence, the dates at which it was requested, and previous due (4) diligence education showed clear contrived trading. The high level of trade with a company SKM have never worked with previously showed a clear intention to defraud the revenue; (5) the due diligence completed by SK on BTL appeared designed to only demonstrate that the supplier existed, was located at the address declared and VAT registered. These checks were designed to protect SK’s input tax claims, but could not have provided them with any certainty that their purchases were not tainted by fraud. Officer Pathak accepted that some due diligence on BTL had been conducted by SKM, but maintained that some trading had been done before the due diligence and that the due diligence was anyway inadequate; (6) other factors suggested that SKM knew or should have known that they were participating in fraudulent transactions chains (e.g. high value transactions, goods not physically seen or inspected, the lack of any written contracts, dramatic and unexplained increase in trade over a short time that was not anticipated in the business plan of SKM); it therefore followed that input tax should be denied and that the penalties issued (7) under section 69C and section 69D VATA were appropriate; and (8) SF was the sole officer of the company at all material times and therefore its controlling mind and the person with sole responsibility for running SK on a day-to-day basis, and accordingly liable to the PLN. 20. We found Officer Pathak to be a credible and reliable witness and accepted his evidence as to matters of fact as set out in our findings of fact. Where his evidence was opinion based on his experience of fraudulent behaviour rather than fact as such (e.g. his assertion that the errors in invoices sent to SKM indicated SKM knew or ought to have known there was a fraud in progress), we applied appropriate caution in assessing the weight to give to that evidence, although we accepted that Officer Pathak has experience of the patterns of trading of fraudsters. Mr Feldman Background 21. SF had given a relatively short witness statement which had been prepared with the guidance of his former advisers. The witness statement was deficient in a number of respects, particularly as to SKM’s trading model and accordingly we allowed Miss Sheldon the opportunity for lengthy examination in chief so as to get a full picture of the events. This was then followed by long cross examination. Our findings of fact in relation SF’s evidence are set out in our findings of fact below. 22. We found SF to be a generally credible and reliable witness and accepted his evidence as to matters of fact as set out in our findings of fact. He gave evidence over an extended court day which was obviously tiring. He remained fairly calm under Miss Brown’s cross examination. At times in cross examination we considered he was putting a favourable spin on his recollection to suit his case (for example the extent of KG’s involvement in the day to day management of SKM). There were also some inconsistencies between different parts of SF's evidence and between his evidence and the documents/the evidence of KG (e.g. the geographic extent of BTL’s scrap licence), but these differences were insignificant in context and seemed to us likely to be caused by the passage of time since the relevant events. In places SF was giving opinion evidence that placed a favourable interpretation on the facts (e.g. was adequate and timely due diligence done on BTL) and we applied appropriate caution in considering those aspects of his evidence. Mr Granger 23. Mr Kane Granger (“KG”) gave evidence (by video) as to his background and his involvement with SKM. His evidence as to facts is set out in our findings of fact. 24. We found Mr Granger to be a credible and reliable witness and accepted his evidence as to matters of fact as set out in our findings of fact. While he is obviously a friend of Mr Feldman, we considered him to be impartial in giving his evidence. Where he was uncertain about something (e.g. the date of the visit to BTL), he said so. Where his recollection contradicted SF’s he was not afraid to stand by his recollection (e.g. whether LP had left the BTL yard before or immediately after the SKM team arrived). Adverse inferences - Mr Perdicou 25. HMRC invited the Tribunal to make adverse inferences from SKM’s failure to call Thomas Perdicou (“TP”) to corroborate the trading with BTL. HMRC asserted that the failure to call TP went to the question of evidence of how the trading started and whether there was evidence of commercial negotiation. 26. The law on adverse inferences from failure to call a witness is conveniently set out in Barnes v Blackburn with Darwen BC [2022] EWHC 2598 (TCC) (“Barnes”): “32. At one end of the spectrum is where a party has been unable to call a witness (or one who would give an open and honest account) for reasons outside its control, where it would plainly be wrong for the court to hold that against the party …. The intermediate position is where, for reasons which have not been sufficiently explained or justified, a party has not called a witness who was involved in the events in question on that party’s side. If the absence of such a witness means that the party is unable to adduce oral evidence in relation to one or more of the factual issues in the case, whereas the other party has adduced such evidence, then it seems to me that the court must make its decision only on the basis of the evidence before it, even if that means there is no evidence from that witness to take into account when deciding the factual issues in dispute, and can take into account the absence of evidence from any witness from that party. At the other end of the spectrum is where the court is being invited to draw a positive adverse inference against that party in relation to a specific issue from its insufficiently explained or unjustified failure to call a crucial witness to give evidence on that issue ….”. 27. We also took into account British Airways PLC v Airways Pension Scheme Trustee Ltd [2017] EWHC 1191 (Ch) (“British Airways”) at [141-143] where in summary Morgan J stated that before the court could draw an inference and made a finding of fact adverse to a witness who was not called, it needed to ask is there some evidence, however weak, to support the suggested inference or finding on the matter in issue. 28. We considered the relevant factors to be as follows: (1) while it would have been helpful to have direct evidence from TP of how SKM first came into contact with BTL and how the trading with BTL was conducted, it was not crucial because evidence was provided by both SF and KG, albeit this was indirect and therefore not as compelling as the direct evidence TP could have given as the person who actually had the alleged introductory conversation with Ripley and all or most of the trading communications with BTL; (2) a good explanation for TP’s absence was provided (having worked hard to build the business, TP was upset about the decision to close SKM and in consequence had fallen out with SF and KG); and (3) importantly, if HMRC had considered TP’s evidence to be significant (especially as the burden of proof was on HMRC), they could have called him themselves since they had been aware of his existence for over a year before the case was heard. 29. In terms of the Barnes categorisation, the failure to call TP was therefore towards the end of the spectrum where it would be wrong to draw any adverse inference. TP’s evidence was not particularly critical and his absence was explicable. Moreover since HMRC had had the opportunity to call him themselves, it was not appropriate to hold his absence against the Appellants, especially as the burden of proof was on HMRC. Accordingly we declined to draw any adverse inferences from the absence of TP. FINDINGS OF FACT 30. We found the following facts. Where the facts were disputed we have indicated that and set out our reasoning for our findings. We have also included in this section some comments on the facts where convenient to understanding the decision we reach later in this judgment and some explanations of the evidence that led us to make findings of fact that were disputed. Further findings of fact are set out later in this decision and where that is the case they are identified as such. Background – SK SF has set up and been a director of a number of companies. During his involvement 31. with them, none of these companies has been investigated by HMRC in relation to VAT or any other tax matters. SF has no accountancy or tax qualifications. None of his experience is in the wholesale metal industry. For 17 years SF has been a director of a company involved in waste management and therefore SF had extensive contacts in the waste management business. 32. Much of SF’s experience is in running companies he described as “brokers” by which we understood him to mean companies that intermediated between suppliers and customers. SF gave the example of his waste collection service which did not have the means to collect waste itself directly and instead used third parties to carry out the collection. Background KG 33. KG’s business background was in FX trading. KG has no accountancy or tax qualifications. He had been introduced to SF by a mutual friend. KG had just sold an FX trading business he had been working in for more than ten years and was looking for a new business to build and grow. Metal trading was an industry he knew something about because his FX clients had included many clients in the wholesale metal industry. He thought that with the capital he had made from selling his FX business and the contacts he had in the metal trading business, there would be an opportunity to build something. In KG’s view SF was a suitable partner given his business experience (albeit this was running a waste business rather than a metal trading business). Background SKM 34. SKM was incorporated on 27 August 2020 with its business listed as “wholesale of metals and metal ores.” SF has been the sole director since incorporation. SF and KG each hold 50% of the shares. 35. SKM’s initial registered address was Northside House, Mount Pleasant, Barnet, Hertfordshire EN4 9EE. On 8 June 2021 this was changed to Eclipse House, Sandown Road, Watford, Herts WD24 7AE. SKM was registered for VAT with effect from 1 November 2020. On its application form the estimated turnover for the next 12 months was stated at £200,000 and its trade class as “scrap metal (wholesale)”. Background SKM – Knowledge of MTIC 36. Before his involvement with SKM, SF did not have knowledge of the risks of fraud in the wholesale metal industry, or the concept of MTIC fraud, although he did have a wide business background so would have been generally aware of the risk of fraud in business. 37. KG had a better knowledge of the wholesale metal industry, but his experience was in the financial sector. Before his involvement with SKM, his knowledge of the risk of fraud in the wholesale metal industry was therefore patchy. We accepted that before his involvement with SKM: his understanding was that MTIC/VAT fraud was “things like carousel trading (1) where fraudsters did not pay the VAT” on their purchases/sales; his contacts in the metal trade had led him to believe that the majority of (2) fraudulent issues were with things like large loads of imported/stolen “bright copper” which were high value; 38. KG’s witness statement included the following “Having come from a finance business I always knew and understood the importance of compliance and always relayed this to Spencer and certainly how rife the metal industry is with fraudsters due to the high value of metals”. We found, based on the oral evidence and KG’s witness statement, that KG had drawn SF’s attention to the need for care in trading wholesale metal when SKM was set up or at the latest when trading had started. However, given the limitations of KG’s understanding of MTIC, that would not have alerted SF to the type of fraud that SKM became involved in. 39. HMRC challenged both KG and SF on the extent of their knowledge of the risks of fraud in the wholesale metal industry. Our findings of fact are based on weighing up the oral evidence after cross examination. SKM’s Business – control 40. The extent of KG and SF’s respective control over SKM’s activities was of importance in determining if SF was liable to the PLN. Broadly HMRC’s argument was that SK was the controlling mind, whereas on behalf of SF Miss Brown argued that, if SKM knew or should have known about its transactions with BTL being connected to fraud, then this was attributable either entirely or predominantly to the actions or inactions of KG. 41. We accepted as fact KG’s evidence that: (1) his role was principally to provide funds; he was not a director of SKM because he was subject to a restriction arising from (2) the sale of his FX business; (3) during this period of restriction, he was “bored”, had little to do, and felt an obligation to his “partner” (i.e. SF); therefore in practice KG spent up to four days a week physically helping in the scrap yard; he did not have any powers over the bank accounts although SF would ask KG (4) whether he thought certain payments should be made; his role was at most a limited power of veto (because “it was my money”) rather (5) than a power to actively control the business. 42. SF’s evidence was that KG was actively involved on a day to day basis and that some decisions were made in discussion with KG because it was “Kane’s money”. SF asserted that KG was a shadow director. 43. We did not accept SF’s assertion that KG was a shadow director, that being a question of law. 44. We preferred KG’s evidence as to his role, that being consistent with the documentary evidence (e.g. SF was the sole director, SF was the person who had interactions with HMRC). It was also more consistent with the overall picture we heard from KG and SF’s respective witness evidence. 45. Accordingly, we found as a fact that SF had operational control of SKM and was responsible for the business activities. SKM’s business 46. SKM started its operations in late summer 2020 using some spare office space in SF’s waste management business. Three1 staff were taken on and initially started working from an unoccupied area of SF's waste management business. The staff spent up to four or five hours each day cold calling contacts. In November 2020 the first loads of metal were secured. At that stage a yard was taken on to which metal could be delivered and the staff moved to a Portacabin in the yard so they could deal with deliveries of metal as well as continuing their sales calling. 47. A good deal of equipment such as cranes, etc would have been needed for a fully equipped yard. Because that would be expensive, SKM acquired or leased the bare minimum of equipment. This proved inadequate as increasing volumes of metal started to be traded. This came to a head when SF suffered an injury dealing with a load of car batteries in April 2021. After that, although SKM continued to run the yard for certain types of delivery (such as catalytic converters), much of SKM’s trading used a “broker model”. Under that model, suppliers sold loads of metal to SKM, but SKM did not take delivery; instead SKM arranged for a third party haulier to collect the metal and take it straight to SKM’s own customer. That customer checked and weighed the metal and informed SKM that the load was in order. SKM then paid its supplier. If a load was not in order SKM took that up with the supplier and paid an adjusted amount (e.g. instances where a load had been described by SKM’s supplier as “clean copper” but turned out to be “dirty copper”, which was of lower value). SKM’s business model was consistent with SF‘s other business experience where he 48. had often acted in a broker role. 49. The business rapidly achieved a turnover which was significantly greater than the turnover stated for the purposes of SKM’s VAT application (an annualised turnover of over £6m compared to the VAT application estimate of £200,000). 50. SKM built its business on the customer side by exploiting KG‘s contacts as customers of SKM (KG having these contacts as a result of his former FX trading business). By making use of KG’s contacts (such as Ashvin Metals Ltd) SKM could offer attractive prices to suppliers. 51. On the supplier side, suppliers were found mainly through cold calling. 52. In cross examination Miss Brown challenged SF as to why SKM had not tried to exploit his contacts in the waste management business as potential suppliers. We found his explanation – that his contacts were typically very large enterprises which would not have 1 KG’s evidence was that there were two staff initially but we preferred SF’s evidence on this point as it was more detailed. In any event nothing turned on the point. been interested in trading relatively small amounts of scrap metal with SKM – to be convincing and accepted that as fact. 53. SKM’s business model was to get wholesale prices from their potential customers (originally identified from KG’s contacts) and then prepare a daily price list for potential suppliers to SKM. Suppliers would be cold called and contact details obtained and put into a database. Price lists were issued daily to potential suppliers in the database. Either SKM then contacted suppliers or suppliers contacted SKM. If suppliers wanted to take up the available prices, then they dealt with one of the SKM team by email/phone/WhatsApp. In the case of BTL that contact was usually with TP. There were no written contacts, with dealings being agreed on the phone/WhatsApp/email, metal then being delivered either to SKM or to SKM’s own customer. 54. The unique selling point of SKM was the cash flow advantage it was able to offer its suppliers. SKM’s customers typically paid about a week after a load of metal was delivered to them. Because SKM had capital (from KG‘s business sale), SKM could pay its suppliers more quickly which gave the supplier a cash flow advantage. Also, because of KG‘s contacts with customers, the prices that SKM was able to get from its customers were attractive and therefore SKM could in turn offer its suppliers slightly better terms than they could obtain elsewhere in the market. Accordingly, SKM had a commercial advantage and was able to use this to start building its business albeit it was a low margin business in a very competitive marketplace (the margin being between 1 and 5%, depending on the size of loads). In summary therefore we found as a fact that SKM was able to offer commercial 55. advantages to suppliers in the form of better cashflow and attractive pricing. 56. SKM carried out its first trades in November 2020. Its first trade with BTL was on 11 February 2021 and its last trade with BTL on 29 July 2021. On 1 March 2022 SKM was deregistered for VAT. 57. The following table sets out a summary of SKM’s trades during its short life as a metal trader. 2/21 5/21 8/21 11/21 2/22 total 49,780 641,251 2,941,185 1,962,128 433,280 301,509 6,335,233 374,841 1,795,039 905,118 0 3,074,998 Period Total Turnove r net of VAT Turnove r with BTL net of VAT 58. SKM carried out some 109 individual trades with BTL for a total value of approximately £3,074,998 net of VAT. In the three VAT quarters when trading with BTL was taking place, this was some 53% of SKM’s turnover by value. The size of trades varied from nearly £70,000 to less than £1000, with the average being about £28,000. 59. When trading with BTL, SKM only made payments by bank transfer which always went to one or other of two UK bank accounts in the name of BTL which SKM verified through electronic checks before making payment. BTL’s business and its dealings with SKM 60. BTL was incorporated on 8 July 2020. On 19 August 2020 Lloyd Perrett (“LP”) was appointed as a director, taking over from Paul Mullan. On 14 October 2020 BTL was registered for VAT. It is not clear when BTL commenced trading. BTL’s scrap metal licence is dated 20 April 2021, over 2 months after trades with BTL commenced. BTL was deregistered for VAT on 29 July 2021. Commencement of trading with SKM 61. SKM came to start trading with BTL. It is necessary to summarise the evidence in order to try to determine as a fact how 62. SF and KG’s evidence was that BTL had been identified by TP. In his witness statement, SF stated that an employee at one of the companies TP had cold called had mentioned BTL as a company he “supposedly dealt with … when the guy worked for another company“. KG referred in his evidence to someone at Ripley having said trading with BTL had been going on “for a while”. In oral evidence, SF and KG both asserted in summary that TP had come across Ripley when cold calling and that when speaking to a member of staff at Ripley, the Ripley employee had explained that he had recently moved from London to Ripley in Surrey and as a result one of his customers, BTL, was no longer able to deliver to Ripley because Ripley‘s yard in Surrey was too far away. TP had accordingly contacted BTL and after 4-6 calls eventually trading with BTL had started. 63. We found this explanation unconvincing, confusing and contradictory. Although some of the inconsistencies were not raised in cross examination: (1) since BTL had only been set up in July 2020 we did not follow how Ripley could have done material trading with BTL by the time of the referral to SKM (January or February 2021); (2) also for most of its trading with BTL, SKM arranged for transport of the metal from BTL’s yard (rather than BTL having to deliver), so it did not make logical sense to us that Ripley had been unable to trade with BTL owing to Ripley’s location (since Ripley could have arranged collection of the metal in the way SKM did); the evidence was also not direct since neither KG nor SF were a party to the (3) exchanges with Ripley. SF and KG both gave evidence that SF, KG and TP had made a site visit to Ripley and 64. that during that visit someone at Ripley had confirmed that they had been buying from BTL before BTL had started trading with SKM. Neither KG nor SF could clearly remember when this visit had taken place and we did not have documentary evidence of it. We did not put much weight on this oral evidence which was vague. This is one of the points in relation to which SF asserted that documents held by his former advisers would have provided evidence, but these documents were not before us. 65. The vagueness and logical contradictions in the evidence meant we were unable to find as a fact how SKM first came into contact with BTL. It seemed most likely this was as a consequence of contact between TP and someone at Ripley, but the evidence for that was weak. Although there was indirect oral evidence that someone at Ripley had introduced BTL to SKM, we did not have sufficient direct evidence to be able to conclude what was involved in that introduction. There was certainly not enough evidence to suggest Ripley had provided a reference for BTL. The details of TP’s alleged call with Ripley and of SF/KG’s alleged visit to Ripley were too vague to provide any conclusive evidence on this issue. This was disputed by Miss Sheldon for SKM but the vagueness of KG/SF’s recollections and the lack of documentary evidence meant we could not find facts on this point. Invoices 66. Some BTL invoices contained errors and profanities. Of the 109 invoices, three contained profanities in the description section (“fuck abouts”, “another fucking amendment” and “fuck about”), 15 were undated and 4 had duplicate invoice numbers. HMRC’s First Investigation of SKM 67. On 18 March 2021 HMRC Officer Sebastian Harvey (“SH”) telephoned SF. SH was looking into SKM because SKM had had its VAT Registration Number verified by several traders who HMRC was monitoring. HMRC’s initial enquiries showed that SKM had made significant supplies in VAT period 02/21 and they were trading in the scrap metal sector which was high risk. 68. On that call, SK explained SKM’s business to SH, noteworthy points being that SK stated SKM had been trading for 7 months, its turnover was £5/6 million (the notes of the call are unclear as to whether that was an expected annual turnover, or turnover for the first 7 months of trading – the former seems more likely) and that SK described a trading model that was the “broker model” since there is reference to inspection of the goods being conducted by the customer when goods are delivered by the supplier. SK’s description of the business in SH’s notes is also consistent with SK’s description in his own evidence. SH and SF discussed MTIC fraud on that call. It was not entirely clear from SH’s notes 69. of that call whether SH explained MTIC fraud to SF and SF confirmed he understood what he was being told, or instead whether SF independently explained what he understood by MTIC fraud. Since SH was not available to give evidence and the notes were capable of more than one interpretation, we preferred the explanation SF gave in his evidence, and found as a fact that SH explained what MTIC fraud was and SF confirmed he understood what he was being told. That is also consistent with SH’s typed MTIC activity report from 18 March which records SH explaining MTIC fraud followed by SH asking SK to explain his understanding. 70. On 18 March 2021 SH produced an activity report stating as his conclusion “The business records would indicate that SKM are a credible business. I have not identified any fraudulent activity”. 71. Following that meeting HMRC emailed SF a letter requesting “information on your trading activity for period 01/12/2020 to 28/02/2021” which included a request for details of “An explanation of the due diligence you performed on this supplier.”. HMRC also sent SF a copy of HMRC’s guidance entitled “How to Spot a Missing Trader” after the telephone interview. This guidance states, “If you are a VAT registered business it is important that you read this leaflet.” It sets out an explanation of what MTIC fraud is, the risks to look out for and how businesses can avoid being caught up in MTIC fraud. It gives a list of suggested checks and examples of specific checks. SF’s evidence was that he had read that leaflet (and we accepted that as a fact) but we were not persuaded, based on his oral answers, that he had read it with care and acted upon the advice in it. 72. Relevant sections of this guidance (referred to below as the “HMRC Leaflet”) read: “What is missing trader fraud? Missing trader fraud involves a ‘missing’ or ‘defaulting’ trader who deliberately fails to pay its VAT liability for taxable supplies made in the UK. Those supplies may pass through a number of intermediary traders before they are either sold to an end user in the UK or to a customer outside the UK. These supply chains are known as ‘tax loss chains’. In some cases the organisers of the fraud will use non-tax loss chains alongside tax loss chains in order to disguise the VAT losses as part of an overall scheme to defraud HMRC. How can missing trader fraud affect your business? If you knew or should have known that your transaction was connected with fraud then HMRC may refuse your VAT claim in respect of that transaction. In determining whether you knew or should have known HMRC will consider all of the circumstances relating to the transaction, including whether you took reasonable steps to verify the integrity of your supply chain. How can a business avoid becoming caught up in missing trader fraud? It is in your interest to check carefully who you are dealing with. It is good commercial practice for businesses to carry out checks to establish the credibility and legitimacy of their customers, suppliers and supplies. These checks may need to be more extensive in business sectors that are commercially risky or vulnerable to fraud and other criminality. HMRC does not expect you to go beyond what is reasonable. However HMRC would expect you to make a judgement on the integrity of your supply chain and the suppliers, customers and goods or services within it. What kind of checks can I undertake to help ensure the integrity of my supply chain? The following are examples of indicators that could alert you to the risk of a connection with missing trader fraud: 1. Legitimacy of customers or suppliers. For example: • What is your customer’s/supplier’s history in the trade? • Have you been contacted within a short space of time by a prospective buyer and seller offering to buy/sell goods of the same specifications and quantity? • Has your supplier referred you to a customer who is willing to buy goods of the same quantity and specifications being offered by the supplier? • Does your supplier offer deals that carry no commercial risk for you –e.g. no requirement to pay for the goods or services until payment is received from the customer? • Are you being offered deals that involve consistent or pre-determined profit margins, irrespective of the date, quantities or specifications of the goods or services being traded? Have normal commercial practices been adopted in negotiating prices? • Are you being asked to make payments to third parties other than your supplier or payments to an offshore bank account? • Are the goods adequately insured? • Are high value deals being offered with no formal contractual arrangements? • Are high value deals being offered by a newly established supplier with minimal trading history, low credit rating etc? • Is a small, newly-established business offering to supply you with goods cheaper than a long-established supplier? • Has HMRC specifically notified you that previous deals involving your supplier were connected to fraudulent VAT losses? 2. Viability of the goods as described by your supplier. For example: • Can you be sure the goods exist in the quantity and specification being offered? • Are they in good condition and not damaged? • Why are large quantities of goods with non-UK specifications being offered for supply to you in the UK? • What recourse is there if the goods are not as described? Examples of specific checks carried out by existing businesses The following examples may help you decide which checks to carry out. This list is not exhaustive and it is for you to decide what checks you need to carry out before dealing with a supplier or customer: • obtain copies of Certificates of Incorporation and VAT registration certificates • verify VAT registration details with HMRC • obtain signed letters of introduction on headed paper • obtain some form of written and signed trade references • obtain credit checks or other background checks from an independent third party • insist on personal contact with a senior officer of the prospective supplier, making an initial visit to their premises if possible • obtain the prospective supplier’s bank details to check whether (a) payments would be made to a third party and (b) in the case of an import, the supplier and their bank share the same country of residence • check details provided against other sources e.g. website, letterheads, BT landline records. Paperwork in addition to invoices may be received in relation to the supplies you purchase and sell. This documentation should be kept to support your view of a transaction’s legitimacy. The following are examples of additional paperwork that some businesses retain: • purchase orders • pro-forma invoices • delivery notes • CMRs (Convention Merchandises Routiers) or airway bills • allocation notification • inspection reports. What will HMRC look out for when considering the extent of my checks? In each case HMRC will seek to identify what actions or precautions you took in response to any indicators of risk. This will focus on the due diligence checks you undertook and the actions taken by you in response to the results of those checks. In each case HMRC will consider: • the due diligence checks that were performed, including any checks designed to address the specific risks of a particular transaction • the extent to which your checks were appropriate, adequate and timely in relation to addressing the risks identified • the results of those checks and what action was taken, if any, in response. Can HMRC tell me exactly what checks I should undertake? No. The examples contained in this leaflet are only guidelines for the kind of checks you could make to help you avoid participating in a fraudulent supply chain. The checks you will need to make, and the extent of them, will vary depending on the individual circumstances of your trade and it is for you to consider what questions you need to ask to protect yourself in the particular circumstances of your individual transactions.” 73. On 7 April 2021SKM’s agent sent HMRC various business records, including a “sample due diligence pack” for Simvic and 15 BTL invoices. 74. On 26 April 2021, SH wrote to SKM’s agent stating “the compliance review of SK Metals Ltd has concluded”. SKM’s approach to Due Diligence 75. Again, in order to explain our findings of fact, it is necessary first to summarise some of the evidence in relation to due diligence. We found that SF had no previous experience of MTIC and that he first heard of this expression in March 2021 during a call from HMRC. In his evidence, SF described the leaflet he was sent after that call as “very generic” about the risks of VAT fraud. SF’s evidence was that he had read that leaflet but he was somewhat vague about what action he had taken in relation to the advice in the leaflet, In deciding what due diligence SKM should do, his evidence was that he had relied much more on SKM‘s own customers; these were big companies buying and selling worldwide and, because of the relationships KG/SKM had with them, SKM was able to obtain the due diligence documents that those companies used. These were used as templates for SKM to develop its own due diligence approach. 76. In relation to BTL and other counterparties, we found as a fact that the due diligence approach of SKM had been to ask for corporate, VAT registration and ID documents. By those means SKM had sought to establish that the entities they were trading with existed and were registered for VAT. SF’s evidence was somewhat unclear as to exactly when and what due diligence had 77. been carried out by SKM on BTL and what the process of evaluation had been. SF accepted that, following the HMRC call in March 2021 and from information given by SKM‘s own customers, SF had appreciated the importance of the need for due diligence but he could not point to a clear chain of due diligence documents being obtained from BTL and then evaluated. 78. We found as a fact that: on 15 April 2021, SF emailed “Russell” at BTL asking for some due diligence (1) information (it is not clear what was supplied and when); (2) material supplied by BTL must have included LP’s ID documents; SKM obtained additional DD documents on BTL (e.g. evidence of corporate (3) existence) from SKM’s accountant who printed them from the internet; the accountant was not involved in evaluating the quality of the due diligence (4) material but we had no evidence on what analysis was done on the documents obtained. 79. SF and KG both gave evidence of a site visit to BTL carried out, probably, in April 2021. This was after trading with BTL had commenced but SF’s evidence was that, at the time the trading had commenced, the principal concern of SKM had been to secure BTL as a client and to make sure the BTL was able to supply the metal they claimed to be able to supply. The site visit had involved SF, KG and TP driving to Wales. SF said that the visit had got off to a bad start; just before the visit LP had said he could not attend because his child was ill. Therefore LP was not present at the site. KG’s evidence was slightly different in that his recollection was that they had seen LP driving away. Both agreed that the SKM team were able to meet “Ian“ and “Russell” who were people TP had spoken to on the phone. SF considered that the scrapyard they visited was a typical scrapyard which had metal and operations going on of the kind he had expected to see from one of SKM‘s suppliers. The only point of concern was that the sign outside the yard was not relevant to BTL; questions were asked about this and SF was reassured that the yard had recently been acquired by BTL from a third-party and the signage had not yet been changed. 80. We found as a fact that this site visit had been carried out as described by SF and KG. It was unnecessary for us to determine if LP had been there and driven away as the SKM team arrived, or had not been present at all. 81. On 21 May 2021 SF emailed “Russell” at BTL asking additional questions relevant to due diligence. It is not clear why that request was made then. The request read: “We are coming across more and more hurdles with our supply chain and KYC's. We are more than satisfied with what we have seen and details you have sent but it always helps if we can gather more information to protect us all from any further issues down the line. Are we able to confirm the following: 1. Proof of supply chain of products, this can be confirmed via weighbridge information, confirming you have been in receipt of goods before sending. 2. Alternatively we may require proof of purchase from you. 3. Lastly can we get copies of you latest VAT returns and confirmation of payments 4. Full names of all staff employed and purchasing metals on your behalf. As you know this industry has a very bad reputation and new companies who seem to be succeeding are looked at more than most. I would appreciate you sending confirmation of the above at your earliest convenience, to avoid any delays in purchasing and supplying materials.” 82. LP replied, refusing to answer any of the questions asked. This was not followed up by SKM. 83. SF maintained in addition that he had regularly checked BTL’s VAT registration. KG’s oral evidence supported that. However, there were no documents to show that these checks had been made, but since BTL was registered throughout the relevant period, there was nothing to undermine SF/KG’s assertion. We therefore accepted SF had made checks on BTL’s VAT registration, but could not make findings as to how often that had been done. 84. KG had no direct involvement in the due diligence done by SKM. HMRC’s investigation of BTL 85. Officer Borland started his investigation on 15 July 2021. He started it because HMRC had established that BTL had made sales of £509,594 in February 2021. This figure was calculated from the invoices HMRC Officers were given by SKM as part of their compliance check of SKM. While we did not have direct evidence from Officer Borland on the point, these invoices must have been the ones sent to HMRC on 7 April 2021 by SKM’s agent as a result of the engagements HMRC had with SKM in March 2021. 86. BTL submitted a nil return for the VAT periods 11/20 and 02/21, the return for 02/21 being submitted on 21 July 2021 (while Officer Borland did not say so, the normal return date would have been 7 April 2021 so this return was late). For the periods 05/21 and 07/21 VAT returns were not submitted. 87. Officer Borland attempted to contact BTL by phone and letter without success. In consequence HMRC cancelled BTL’s VAT registration on 29 July 2021. 88. From the records provided by SKM, Officer Borland determined that BTL traded in scrap metal. This was inconsistent with BTL’s VAT application where the description of the business was “wholesale furniture sales online”. The VAT application gave the main business activity of BTL as “Wholesale of a variety of goods without any particular specialisation (wholesale)” under SIC code 46900. 89. We found as a fact that there were many SIC codes and it would not be obvious other than to a specialist that the industry code was for one business rather than another (Officer Borland accepted this and indeed he did not know the code for a scrap metal business). Although it was not put to Officer Borland, BTL’s VAT certificate, which was obtained by SKM, stated its business activity was “non-specialist wholesale trade” and its trade classification code as 46900; that was quite a similar code to SKM’s own code of 46770 relevant its business of scrap metal trading. 90. Within the records provided to HMRC by SKM was an invoice showing that BTL had made a sale to Avon Metals Ltd. Officer Borland was of the view that SKM should not be holding this record, although he accepted in cross examination that there might be innocent explanations for why SKM came to be holding this invoice (e.g. it was sent to SKM in error). 91. Officer Borland carried out a direct tax check on LP, the sole director of BTL in July 2021, which showed that he was on Employment Support Allowance, with no live employments for a number of years and that he had no Self-Assessment record. There was no employment or self-employment history showing that LP had experience of running a scrap metal business. Together this caused Officer Borland to doubt that it was likely LP could fund a multimillion-pound business. In cross examination, Officer Borland accepted that SKM would not have had access to this information. 92. Officer Borland’s conclusion during his investigation was that BTL was carrying on a fraud as he could think of no reason other than fraud which would have led BTL not to respond to his inquiries. In the course of cross examination, on behalf of the Appellants it was accepted that the losses caused by BTL were connected with fraud. HMRC’s Second Investigation of SKM 93. HMRC Officer Aqeel Beg (“AB”) opened an enquiry into SKM on 17 July 2021. This was opened because SKM had been identified as a new supplier to European Metal Recycling Limited (“EMR”) in period 05/20 from records gathered from a visit to EMR. Another factor prompting the enquiry was that HMRC had noted that SK had purchased goods from BTL which HMRC had identified as a possible missing trader. We inferred that SKM had been identified as a customer of BTL from the invoices SKM’s agent had given to HMRC in April. 94. On 17 July 2021, HMRC requested documents from SKM for VAT period 02/20. Documents requested included “Copies of All Due Diligence records.” SKM’s initial response on 27 July 2021 was to forward AB the confirmation SKM had received from SH that SH’s HMRC enquiry had closed. After review, AB had explained that he required additional information. 95. On 27 July 2021, SF sent HMRC DD on BTL which included the Certificate of Incorporation; other Companies House information (which was incomplete/out of date since it recorded Mr. Paul Mullan, not LP, as the director and the registered address being in Coventry, not Wales); BTL’s scrap metal licence (dated 20 April 2021); details of BTL’s VAT registration number and effective date of registration for BTL as 12 October 2020; a VAT certificate dated 8 December 2020; a copy of LP’s driving licence; and a copy of a DBS check for LP from Disclosure Scotland. 96. On 4 August 2021 SKM’s agent provided the remaining documentation requested by AB. 97. On 6 August 2021 AB requested additional documents relating to transportation of goods and there then followed some correspondence in which SKM’s agent explained SKM’s business model and supplied such information as the agent said was available. 98. On 12 August 2021, HMRC wrote to SKM, to advise that BTL had been deregistered for VAT and in light of that on 17 August SF advised AB that SKM had “taken the decision to cease trading with BTL”. 99. AB continued his investigation, including writing to SKM on 14 September 2021, detailing transactions with BTL which HMRC asserted were with a defaulting trader and had resulted in a tax loss to the public revenue. The letter reserved HMRC’s position on denial of VAT on those transactions and stated “You should satisfy yourself that you have undertaken sufficient due diligence commensurate with the perceived risk to satisfy yourself as to the integrity of your suppliers and customers, and of the underlying supply chains.”. On its face the letter did not require a reply, but SKM’s agent did reply on 8 October 2021, listing the due diligence that had been carried out by SKM into BTL and indicating that in light of the checks carried out SKM did not believe that they should be held liable for any tax loses that may have occurred in their trade with BTL. 100. The last step which AB took in the investigation was to write a note on 27 October 2021 which concluded “[SKM] has submitted copies of documents they submitted for a verification carried out recently by HMRC … further information is awaited … Final out come of the suspected transactions will be established on receipt of records …however the documents received in relation to due diligence checks carried out on suspected supplier of goods; B Trade Ltd., appears to be an established business and does not appear to be a missing trader.”. It would have been helpful to have AB’s evidence in relation to this so as to understand why AB formed this view of the position given that HMRC are arguing in these appeals that SKM knew or should have known their transactions with BTL were part of a fraud. 101. On 8 October 2021, the investigation was allocated to Officer Pathak. After various meetings and correspondence, on 31 October 2022 the First Input Tax Denial letter was issued. On 20 March 2023 the Penalty was issued. On 10 March 2023 the Second Input Tax Denial was issued. On 26 April 2022 the PLN was issued. Officer Pathak’s reasons are set out above. 102. On 15 November 2024, the Appellants’ then agent, issued a letter (the “Kittel Denial”) to the Tribunal in response to “Fairford directions” from the Tribunal setting out the Appellants’ response on various points. In this response the Appellants accepted the transaction chains between BTL and SKM and that a tax loss had arisen. During the course of the hearing, the Appellants accepted that the tax loss arose from fraudulent activity by BTL. LEGISLATIVE FRAMEWORK 103. The parties agreed that the legislative background is as follows (this being largely taken from Miss Brown’s helpful skeleton argument with which Miss Sheldon agreed). EU background 104. Although the decisions in dispute were made after the UK left the EU, as a result of the provisions made by the European Union (Withdrawal) Act 2018, read with s42 of the Taxation (Cross-border Trade) Act 2018, the relevant CJEU case law continues to form part of the law of the United Kingdom and is, therefore, relevant to the decisions to deny input tax. Further, as a result of the provision made by s28 of the Finance Act 2024, the provisions made by the Retained EU Law (Revocation and Reform) Act 2023 has not changed the position. Right to credit for input tax 105. The right of a taxable person to deduct input tax is contained within s24-29 VATA. In particular: (1) s25 VATA requires a taxable person to account for and pay any VAT on the supplies of goods and services which they make and entitles them to a credit of so much of their input tax as is allowable under section 26 (see s25(2)); and (2) under s26(2) VATA a taxable person is given credit in each accounting period for so much of the input tax for that period as is attributable to supplies made by them in the course or furtherance of their business. 106. The evidential requirements to be satisfied by a trader wishing to exercise its right to deduct input tax are set out within the Value Added Tax Regulations 1995 (SI 1995/2518) (the “VAT Regulations”). In particular: the obligation of a registered person to provide a VAT invoice is defined in (1) Regulation 13; the requirements for the contents of a VAT invoice are defined in Regulation 14; (2) and (3) a trader is required to, inter alia, hold or provide the document required in Regulation 13 or such other evidence to support their claim as HMRC may direct, by Regulation 29(2). Liability to a penalty 107. Section 69C VATA states as follows: 69C Transactions connected with VAT fraud (1) A person (T) is liable to a penalty where— (a) T has entered into a transaction involving the making of a supply by or to T ("the transaction"), and (b) conditions A to C are satisfied. (2) Condition A is that the transaction was connected with the fraudulent evasion of VAT by another person (whether occurring before or after T entered into the transaction). (3) Condition B is that T knew or should have known that the transaction was connected with the fraudulent evasion of VAT by another person. (4) Condition C is that HMRC have issued a decision ("the denial decision") in relation to the supply which— (a) prevents T from exercising or relying on a VAT right in relation to the supply, (b) is based on the facts which satisfy conditions A and B in relation to the transaction, and (c) applies a relevant principle of EU case law (whether or not in circumstances that are the same as the circumstances in which any relevant case was decided by the European Court of Justice). (5) In this section "VAT right" includes the right to deduct input tax, the right to apply a zero rate to international supplies and any other right connected with VAT in relation to a supply. (6) The relevant principles of EU case law for the purposes of this section are the principles established by the European Court of Justice in the following cases— (a) joined Cases C-439/04 and C-440/04 Axel Kittel v. Belgian State; Belgium v. Recolta Recycling (denial of right to deduct input tax), and (b) Case C-273/11 Mecsek-Gabona Kft v Nemzeti Adó- és Vámhivatal Dél- dunántúli Regionális Adó Főigazgatósága (denial of right to zero rate), as developed or extended by that Court (whether before or after the coming into force of this section) in other cases relating to the denial or refusal of a VAT right in order to prevent abuses of the VAT system which were decided before the coming into force of section 42 of TCTA 2018. (7) The penalty payable under this section is 30% of the potential lost VAT. (8) The potential lost VAT is— (a) the additional VAT which becomes payable by T as a result of the denial decision, (b) the VAT which is not repaid to T as a result of that decision, or (c) in a case where as a result of that decision VAT is not repaid to T and additional VAT becomes payable by T, the aggregate of the VAT that is not repaid and the additional VAT. (9) Where T is liable to a penalty under this section the Commissioners may assess the amount of the penalty and notify it to T accordingly. (10) No assessment of a penalty under this section may be made more than two years after the denial decision is issued. (11) The assessment of a penalty under this section may be made immediately after the denial decision is made (and notice of the assessment may be given to T in the same document as the notice of the decision). (12) Where by reason of actions involved in making a claim to exercise or rely on a VAT right in relation to a supply T— (a) is liable to a penalty for an inaccuracy under paragraph 1 of Schedule 24 to the Finance Act 2007 for which T has been assessed (and the assessment has not been successfully appealed against by T or withdrawn), or (b) is convicted of an offence (whether under this Act or otherwise), those actions do not give rise to liability to a penalty under this section. 108. It is not necessary for HMRC to prove dishonesty to issue a s.69C penalty: Butt v HMRC [2019] EWCA Civ 554, [2019] STC 1240, at [43]. On behalf of HMRC, Miss Brown was keen to stress that in this case HMRC did not in any event suggest that there was any dishonesty by SKM, Mr Feldman or Mr Granger. Officer’s Liability 109. Sections 69D VATA states as follows: 69D Penalties under section 69C: officers' liability (1) Where— (a) a company is liable to a penalty under section 69C, and (b) the actions of the company which give rise to that liability were attributable to an officer of the company ("the officer"), the officer is liable to pay such portion of the penalty (which may be equal to or less than 100%) as HMRC may specify in a notice given to the officer (a "decision notice"). (2) Before giving the officer a decision notice HMRC must— (a) inform the officer that they are considering doing so, and (b) afford the officer the opportunity to make representations about whether a decision notice should be given or the portion that should be specified. (3) A decision notice— (a) may not be given before the amount of the penalty due from the company has been assessed (but it may be given immediately after that has happened), and (b) may not be given more than two years after the denial decision relevant to that penalty was issued. (5) HMRC may not recover more than 100% of the penalty through issuing decision notices in relation to two or more persons. (6) A person is not liable to pay an amount by virtue of this section if the actions of the company concerned are attributable to the person by reference to conduct for which the person has been convicted of an offence. In this subsection "conduct" includes omissions. (7) In this section "company" means a body corporate or unincorporated association but does not include a partnership, a local authority or a local authority association. (8) In its application to a body corporate other than a limited liability partnership "officer" means— (a) a director (including a shadow director within the meaning of section 251 of the Companies Act 2006), (b) a manager, or (c) a secretary. (9) In its application to a limited liability partnership "officer" means a member. (10) In its application in any other case, "officer" means— (a) a director, (b) a manager, (c) a secretary, or (d) any other person managing or purporting to manage any of the company's affairs. Mitigation 110. Penalties may be mitigated under s70 which provides as follows. Transactions connected with VAT fraud (1) Where a person is liable to a penalty under [section 60, 63,64, 67, 69A or 69C or under paragraph 10 of Schedule 11A], the Commissioners or, on appeal, a tribunal may reduce the penalty to such amount (including nil) as they think proper. (2) In the case of a penalty reduced by the Commissioners under subsection (1) above, a tribunal, on an appeal relating to the penalty, may cancel the whole or any part of the reduction made by the Commissioners. (3) None of the matters specified in subsection (4) below shall be matters which the Commissioners or any tribunal shall be entitled to take into account in exercising their powers under this section. (4) Those matters are— (a) the insufficiency of the funds available to any person for paying any VAT due or for paying the amount of the penalty; (b) the fact that there has, in the case in question or in that case taken with any other cases, been no or no significant loss of VAT; (c) the fact that the person liable to the penalty or a person acting on his behalf has acted in good faith. (5) In the application of subsections (3) and (4) in relation to a penalty under section 69C, subsection (4) has effect with the omission of paragraphs (b) and (c). 111. The only aspect of the legislation on which the parties differed was in relation to mitigation. On behalf of HMRC we initially understood Miss Brown to argue that because more than 50% of SKM’s transactions by value were the subject of the Input Tax Denials, no mitigation under s70 VATA should be given at all. This was based on HMRC’s view in VATF45190. Miss Sheldon argued that there was no such legislative restriction. While we accepted VATF45190 was HMRC’s view, we could see no legislative basis that restricted mitigation under s70 in this mechanistic way. This point was later gracefully conceded by Miss Brown and, accordingly, we approached the issue of mitigation on the basis we could reduce the penalty to such amount as we thought proper under s70. We noted that s70, as it applied to a penalty under s69C, allowed us to take into account whether SKM had acted in good faith. The question of mitigation is dealt with at [202]. CASE LAW AUTHORITIES 112. As with the applicable legislation, there was little or no difference between the parties as to the applicable case law. The following paragraphs summarise the case law put to us by the parties. Other case law was referred to and taken into account by us, but given the law was agreed we have only set out the key authorities relevant to our decision. Denial of credit for input tax - Kittel 113. The right to credit for input VAT may be restricted is made in accordance with the decision of the European Court of Justice (the “CJEU”) in Kittel v Belgium and Belgium v Recolta Recycling (joined Cases C-439/04 and C-440/04 ) (“Kittel”). The CJEU set out the principles applicable to recovery of input tax in cases of fraud. 114. At [51] the court stated: “Traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input VAT”. 115. But the court then went on to hold that where a tax authority finds that the right to deduct input tax has been exercised fraudulently, they are permitted to deny a claim for repayment of the deducted sums. This was expressed (at [56]) as follows: “a taxable person who knew or should have known that, by their purchase, they were taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not they profited by the resale of the goods”. 116. The rationale was put as follows: “That is because in such a situation, the taxable person aids the perpetrators of the fraud and becomes their accomplice [at 57] … In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them” [at 58]. 117. The court went on at [59-61] “Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by [their]2 purchase, [they were] participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of 'supply of goods effected by a taxable person acting as such' and 'economic activity'. It follows from the foregoing that the answer to the questions must be that where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law [which] …. causes that taxable person to lose the right to deduct the VAT [they have] paid…. By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by [their] purchase, [they were] participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.” Mobilx 118. Kittel was considered by the Court of Appeal in Mobilx Limited (in Liquidation) v HMRC [2010] EWCA Civ 517 (“Mobilx”). The court in Mobilx held as follows: 119. At [43]: “A person who has no intention of undertaking an economic activity but pretends to do so in order to make off with the tax [they have] received on making a supply, either by 2 In this decision the Tribunal has amended male references in case law into neutral terms since legitimate traders (and fraudsters) may just as easily be female as male. These amendments are identified in square brackets although for ease of comprehension consequential changes to singular and plural verbs are not always square bracketed. disappearing or hijacking a taxable person's VAT identity, does not meet the objective criteria which form the basis of those concepts which limit the scope of VAT and the right to deduct (see Halifax para 59 and Kittel para 53). A taxable person who knows or should have known that the transaction which [they are] undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and, equally, fails to meet the objective criteria which determine the scope of the right to deduct.” 120. At [52], expanding on the “should have known” part of the Kittel test: “If a taxpayer has the means at [their] disposal of knowing that by [their] purchase [they are] participating in a transaction connected with fraudulent evasion of VAT [they] lose [their] right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met…. A trader who fails to deploy means of knowledge available to [them] does not satisfy the objective criteria which must be met before [their] right to deduct arises.” 121. At [55-56], when considering whether the right to deduct may be denied if the trader merely knew or should have known that it was more likely than not that by a purchase the trader was participating in transaction connected with fraud, the court stated: “… A trader who knows or could have known no more than that there was a risk of fraud will find it difficult to gauge the extent of the risk; nor will [they] be able to foresee whether the circumstances are such that it will be asserted against [them] that the risk of fraud was so great that [they] should not have entered into the transaction. In short, [they] will not be in a position to know before [they] enter into the transaction that, if [they] do so, [they] will not be entitled to deduct input VAT. The principle of legal certainty will be infringed. It must be remembered that the approach of the court in Kittel was to enlarge the category of participants. A trader who should have known that [they were] running the risk that by [their] purchase [they] might be taking part in a transaction connected with fraudulent evasion of VAT, cannot be regarded as a participant in that fraud. The highest it could be put is that [they were] running the risk that [they] might be a participant. That is not the approach of the court in Kittel, nor is it the language it used. In those circumstances, I am of the view that it must be established that the trader knew or should have known that by [their] purchase [they were] taking part in such a transaction …” 122. At [59-60] the court stated that: “The test in Kittel is simple and should not be over-refined, it embraces not only those who know of the connection but those who “should have known”. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which [they were] involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT, then [they] should have known of that fact. [They] may properly be regarded as a participant for the reasons explained in Kittel. The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by [their] purchase it was more likely than not that [their] transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where [they] 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.” 123. At [61] Moses LJ added the following about legal certainty: “A trader who decides to participate in a transaction connected to fraudulent evasion, despite knowledge of that connection, is making an informed choice; [they] know where [they] stand and know before [they] enter into the transaction that if found out, [they] 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 [they have] the means of knowledge available and choose not to deploy it, [they] know that, if found out, [they] will not be entitled to deduct. If [they] choose to ignore obvious inferences from the facts and circumstances in which [they have] been trading, [they] will not be entitled to deduct.” 124. At [64]; “If it is established that a trader should have known that by [their] purchase there was no reasonable explanation for the circumstances in which the transaction was undertaken other than that it was connected with fraud then such a trader was directly and knowingly involved in fraudulent evasion of VAT. The principle in Kittel, properly understood, is, as one would expect, compliant with the rights of traders to freedom from interference with their property enshrined in art I of the First Protocol of the European Convention of Human Rights. The principle in Kittel does no more than to remove from the scope of the right to deduct, a person who, by reason of [their] degree of knowledge, is properly regarded as one who has aided fraudulent evasion of VAT.” 125. At [74-75], the court considered the question of due diligence and whether the lower court had focused on the correct question or had had an undue focus on whether a company director had “exercised due diligence or done enough to protect [themselves]”. The court stated: “That is not the only question. The ultimate question is not whether the trader exercised due diligence but rather whether [they] should have known that the only reasonable explanation for the circumstances in which [their] transaction took place was that it was connected to fraudulent evasion of VAT.” 126. At [81] and [82] in relation to the burden of proof, the court noted that the burden in such cases is on HMRC but went on: “But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. As I indicated in relation to the BSG appeal, tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, [they are] not entitled to ignore the circumstances in which [their] transactions take place if the only reasonable explanation for them is that [their] transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by [their] purchase [they were] taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that [they were].” (emphasis added). 127. At [83] the Court stated in relation to circumstantial evidence: “I can do no better than repeat the words of Christopher Clarke J in Red12 v HMRC [2009] EWHC 2563 (Ch), [2010] STC 589, ‘109. Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and 'similar fact' evidence. That is not to alter its character by reference to earlier or later transactions but to discern it. 110. To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile telephones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands. 111. Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.” 128. At [84 and 85]: “Such circumstantial evidence, of a type which compels me to reach a more definite conclusion than that which was reached by the tribunal in Mobilx, will often indicate that a trader has chosen to ignore the obvious explanation as to why [they were] was presented with the opportunity to reap a large and predictable reward over a short space of time. In Mobilx, Floyd J concluded that it was not open to the tribunal to rely upon such large rewards because the issue had not been properly put to the witnesses. It is to be hoped that no such failure on the part of HMRC will occur in the future. In so saying, I am doing no more than echoing the warning given in HMRC's Public Notice 726 in relation to the introduction of joint and several liability. In that Notice traders were warned that the imposition of joint and several liability was aimed at businesses who "know who is carrying out the frauds, or choose to turn a blind eye" (3.3). They were warned to take heed of any indications that VAT may go unpaid (4.9). A trader who chooses to ignore circumstances which can only reasonably be explained by virtue of the connection between [their] transactions and fraudulent evasion of VAT, participates in that fraud and, by [their] own choice, deprives [themselves] of the right to deduct input tax.” 129. In relation to the “should have known test”, the Court of Appeal (Arden LJ) in Davis & Dann Ltd & Anor v HMRC [2016] EWCA Civ 142 (“Davis & Dann”) found that the FTT must guard against over compartmentalisation of the factors, rather than the consideration of the totality of the evidence and, at [65] “In my judgment … in assessing whether the respondents’ knowledge met the no other reasonable explanation standard, the FTT still had to go on to consider all the circumstances. The question is whether or not a reasonable person mindful of those circumstances ought to have concluded that the Transactions were connected with fraud. What matters is the perspective of the person alleged to have such knowledge.(emphasis added)” 130. In Promeridian Services v HMRC [2025] UKFTT 296 (“Promeradian”) at [24] and [25]: “In considering circumstantial evidence, the Tribunal should take care not to restrict itself to considering each piece of evidence alone and in isolation from the others. This is because circumstantial evidence is not a chain, where a break in one link breaks the chain, but is a cord: one strand of the cord might be insufficient to sustain the weight, but three strands together might be sufficient: see R v Exall (1866) 4 F&F 922, per Pollock CB, cited with approval by the Upper Tribunal CCA Distribution at [91]. Accordingly, the whole can end up stronger than the individual parts: see the decision of Judge Christopher McNall in Wholesale Distribution Ltd v HMRC [2024] UKFTT 00514 (TC) at [49]. Further, it is necessary to consider individual transactions in their context, including drawing inferences from a pattern of transactions, and to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them: see Red 12 at [109] to [111]. In effect, as a facet of the guidance given in Red 12, it is necessary to guard against over- compartmentalisation of relevant factors, and to stand back and consider the totality of the evidence: Davis & Dann and CCA Distribution.” Limits of the relevance of due diligence 131. The question of due diligence was explored in Red Rose Payroll Limited v HMRC [2025] UKFTT 00878 (TC) (“Red Rose”), where it was held that HMRC had not met its burden of proof [74]-[75]: “This means that the only factor indicative of knowledge or tending to show that the Appellant ought to have known that the transactions were connected with fraud is the lack of proper due diligence highlighted above. However, as this tribunal held in PTGI International Carrier Service Limited v HMRC [2022] UKFTT 20 (TC) at [61] : The proper question for us to ask ourselves is not "Did the Appellant carry out proper due diligence?"; but "Did the Appellant have the means at its disposal of knowing that by its purchases it is participating in transactions connected with fraudulent evasion of VAT?" Proper due diligence might be part of the means available to the Appellant. It is not the only means and that is why Moses LJ in Moblix encouraged the courts not to unduly focus on the question of whether the Appellant has acted with due diligence. The point about due diligence and the context referred to in Moblix is that "tick box" due diligence is not enough. So, it will not be open to a trader to carry out superficial due diligence and expect that to, necessarily, be sufficient. The corollary of that is that inadequate due diligence, on its own, will not be enough to establish that the trader ought to have known but had, in effect, turned a blind eye to the connection with fraud. It may be a starting point (and often a good one), but it will rarely be all that is required. As that is all HMRC has been able to establish in this case, we have come to the inevitable conclusion that the Respondents have failed to establish the burden upon them to show that the Appellant's transactions with WM were connected with VAT fraud or that the Appellant ought to have known that they were so connected.” 132. In Mahagében kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága; Dávid v Nemzeti Adó- és Vámhivatal Észak-alföldi Regionális Adó Főigazgatósága (Joined cases C-80/11 and C-142/11) [2012] STC 1934 (“Mahagében”) the CJEU said the following with regard to due diligence: "60. It is true that, when there are indications pointing to an infringement or fraud, a reasonable trader could, depending on the circumstances of the case, be obliged to make enquiries about another trader from whom he intends to purchase goods or services in order to ascertain the latter's trustworthiness. 61. However, the tax authority cannot, as a general rule, require the taxable person wishing to exercise the right to deduct VAT, first, to ensure that the issuer of the invoice relating to the goods and services in respect of which the exercise of that right to deduct is sought has the capacity of a taxable person, that he was in possession of the goods at issue and was in a position to supply them and that he has satisfied his obligations as regards declaration and payment of VAT, in order to be satisfied that there are no irregularities or fraud at the level of the traders operating at an earlier stage of the transaction or, second, to be in possession of documents in that regard. 62. It is, in principle, for the tax authorities to carry out the necessary inspections of taxable persons in order to detect VAT irregularities and fraud as well as to impose penalties on the taxable person who has committed those irregularities or fraud. (emphasis added) 63. According to the case law of the court, member states are required to check taxable persons' returns, accounts and other relevant documents (see EC Commission v Italy (Case C-132/06) [2008] ECR I-5457 , para 37, and Dyrektor Izby Skarbowej w Biaymstoku v Profaktor Kulesza, Frankowski, Jówiak, Orowski (Case C-188/09) [2010] ECR I-7639 , para 21). 64. To that end, Directive 2006/112 imposes, in particular in art 242, an obligation on every taxable person to keep accounts in sufficient detail for VAT to be applied and its application checked by the tax authorities. In order to facilitate the performance of that task, arts 245 and 249 of that directive provide for the right of the competent authorities to access the invoices which the taxable person is obliged to store under art 244 of that directive. 65. It follows that, by imposing on taxable persons, in view of the risk that the right to deduct may be refused, the measures listed in para 61 of the present judgment, the tax authority would, contrary to those provisions, be transferring its own investigative tasks to taxable persons." Reasonable explanations for circumstances of a transaction 133. In AC (Wholesale) Ltd v HMRC [2017] UKUT 191 (TCC) (“AC Wholesale”) the Upper Tribunal held as follows regarding explanations for the circumstance of a transaction (at [30]): “Of course, we accept (as, we understand, does HMRC) that where the appellant asserts that there is an explanation (or several explanations) for the circumstances of a transaction other than a connection with fraud then it may be necessary for HMRC to show that the only reasonable explanation was fraud. As is clear from Davis & Dann, the FTT’s task in such a case is to have regard to all the circumstances, both individually and cumulatively, and then decide whether HMRC have proved that the appellant should have known of the connection with fraud. In assessing the overall picture, the FTT may consider whether the only reasonable conclusion was that the purchases were connected with fraud. Whether the circumstances of the transactions can reasonably be regarded as having an explanation other than a connection with fraud or the existence of such a connection is the only reasonable explanation is a question of fact and evaluation that must be decided on the evidence in the particular case. It does not make the elimination of all possible explanations the test which remains, simply, did the person claiming the right to deduct input tax know that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT or should he have known of such a connection.” THE PARTIES CASES HMRC’s case 134. In summary Miss Brown put HMRC’s case as follows: (1) SKM knew or should have known that its transactions with BTL were connected to fraud and therefore the Input Tax Denials were properly made under the Kittel principles. (2) the Company Penalty is parasitic on the Input Tax Denials and therefore, if the Tribunal found for HMRC in relation to the Input Tax Denials, it follows that the appeals against the Penalty should also be dismissed. (3) if the Penalty is upheld, the Tribunal should find that the actions of SKM that gave rise to the Penalty are attributable to SF on the basis that SF was the sole director of SKM at all material times and the controlling mind with sole responsibility for running the business and the transactions in dispute. although the Tribunal had a wide discretion to mitigate the Penalty, there were no (4) grounds to mitigate it here. The Appellants’ case 135. In summary Miss Sheldon put the case for the Appellants as follows: (1) there was no evidence that SKM in fact knew that its transactions with BTL were connected to fraud and HMRC had not discharged the burden of proof in showing that SKM should have known that its transactions with BTL were connected to fraud and therefore the appeal against the Input Tax Denials should be allowed; (2) if the Tribunal found for HMRC in relation to the Input Tax Denials, although the Company Penalty is parasitic on the Input Tax Denials, the Penalty ought to be mitigated to nil in particular on the grounds SF and KG had acted in good faith; (3) if the Tribunal found against the Appellants on these two issues, the condition that the actions of SKM which gave rise to the liability were attributable to SF is not met (inter alia because the actions of SKM were attributable to KG). 136. These summaries do not set out the cases advanced for the Appellants or HMRC with the eloquence and detail used by Miss Brown or Miss Sheldon respectively. However, the summaries do set out the essence of their cases. We carefully considered all the points which were argued orally and in writing, and, while we may not have set out all the arguments advanced, that does not mean that they were not carefully considered and of much assistance in reaching our conclusions. CONSIDERATION OF THE ISSUES SKM’s state of knowledge 137. three stages: We consider SKM's state of knowledge, when undertaking the purchases from BTL, in first, was there persuasive direct evidence of actual knowledge that the (1) transactions with BTL were connected with fraudulent VAT evasion? second if not, then was there persuasive direct evidence of blind eye knowledge 3 (2) that the transactions were connected with fraudulent VAT evasion? And finally, (3) third, if not were the circumstances sufficiently suspicious that a reasonable businessperson would have known that the transactions were connected with fraudulent VAT evasion; in other words was there was no reasonable explanation for the circumstances in which the purchases were undertaken, other than connection with VAT fraud? 138. In relation to the first stage, we were not presented with any persuasive evidence that SKM had actual knowledge of the trading activity being connected with fraudulent activity and therefore we considered that HMRC had failed to discharge the burden of proof on this issue. 139. In relation to blind eye knowledge, we applied the approach that a person is 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. We applied that judgment of Lord Scott in Manifest Shipping Company Ltd v Uni-Polaris Shipping Company Ltd and others [2001] UKHL [2003] 1 AC 469: “112. ‘Blind-eye’ knowledge approximates to knowledge. Nelson at the battle of Copenhagen made a deliberate decision to place the telescope to his blind eye in order to avoid seeing what he knew he would see if he placed it to his good eye. It is, I think, common ground – and if it is not, it should be – that an imputation of blind-eye knowledge requires an amalgam of suspicion that certain facts may exist and a decision to refrain from taking any step to confirm their existence. Lord Blackburn in Jones v Gordon (1877) 2 App Cas 616, 629 distinguished a person who was ‘honestly blundering and careless’ from a person who ‘refrained from asking questions, not because [they were] an honest blunderer or a stupid [person], but because [they] thought in [their] own secret mind – I suspect there is something wrong, and if I ask questions and make farther inquiry, it will no longer be my suspecting it, but my knowing it…” 140. Taking into account SF and KG’s evidence as to their state of knowledge, we did not consider that HMRC had met the necessary burden of proof to show that SKM had blind eye knowledge. In particular we did not consider HMRC had shown that SKM had suspicions of certain facts and failed to take any steps to confirm the existence of those facts. 141. In relation to actual (and blind eye) knowledge we took into account Miss Brown’s suggestions that the issues with invoices pointed to actual knowledge. We deal with this issue at [164 et seq] in relation to constructive knowledge. Since we found that the invoicing issues did not give constructive knowledge, it follows that we also found they did not amount to actual knowledge. 3 We are aware that “blind eye knowledge” is to be regarded as a form of actual knowledge but we have split it out in our consideration for clarity. 142. We therefore turn to the third stage, which was in any event the primary focus of Miss Brown’s submissions. The factors advanced by Miss Brown to evidence that SKM should have known the transactions with BTL were connected with fraud were as follows: SKM had knowledge of the existence and prevalence of fraud in SKM’s trading (1) sector; (2) SKM carried out significant trade with a fraudulent defaulter; (3) There was no evidence of commercial negotiations; (4) There was a lack of contractual documentation; (5) There were issues with invoices; (6) There was a lack of commerciality in the way the transactions were structured; and (7) There was insufficient due diligence. 143. In relation to the question of whether SKM should have known that its transactions with BTL were connected to fraud Miss Brown urged us not just to look at each item of evidence separately but also to look at the evidence as a whole. We considered that to be the correct approach (see e.g. the approach of the Court of Appeal in CCA Distribution Ltd v HMRC [2017] EWCA Civ 1899; [2018] STC 206 at [31]). So, while inevitably we had to look at and consider each item in turn, we also looked at them collectively. Based on Davis & Dann, we had to consider this from the perspective of SKM (see [129]). Knowledge of the existence and prevalence of fraud in SKM’s trading sector 144. BTL supplied SKM between 11 February 2021 and 29 July 2021. Miss Brown pointed us to various factors that she suggested indicated that SKM had knowledge of the existence and prevalence of fraud in SKM’s trading sector during that period: (1) although SF asserted that he had no prior experience in the scrap metal industry, KG was involved in aspects of the management of SKM and KG had experience of the wholesale metal trade; (2) in his witness statement, KG wrote that he “always knew and understood the importance of compliance and always relayed this to Spencer and certainly how rife the metal industry is with fraudsters due to the high value of metals”; SF has held a number of directorships, including over 15 years’ experience in the (3) waste sector at the time of SKM’s trading; during the meeting on 18 March 2021, MTIC fraud was explained to SF and after (4) that meeting SF was sent the HMRC Leaflet, “How to Spot Missing Trader VAT Fraud” which provide advice on due diligence and examples of indicators that could alert a trader to the risk of connection with supply trade fraud – from that date at the very latest SF was on notice of the risks in the industry SKM was trading in; both SF and KG acknowledged that their customers had told them VAT fraud (5) was a risk in this industry. 145. On the other hand, (1) SF's evidence (which we accepted) was that before the meeting on 18 March he had no knowledge of MTIC fraud. In his view the information given to him after the 18 March meeting was “very generic”. We looked carefully at the guidance sent to SF. It is in our view somewhat general and does not, unsurprisingly, spell out the particular type of fraud which SKM's transactions were part of. We deal at more length with the HMRC Leaflet at [189]. SF asserted that he got more useful information in particular on the appropriate due diligence to protect SKM, from talking to his clients and contacts. (2) KG's evidence was that although he was generally aware of possibility of fraud in the wholesale metal industry, he understood the greatest risk was in trading high value items such as imported bright copper. As KG saw it, BTL traded little copper with SKM; there were no signs that the copper that was traded was imported or stolen bright copper; and buyers from SKM of loads that originated from BTL did not raise concerns that the metal might be stolen or that anything untoward was going on. Accordingly, KG was at no stage concerned that SKM’s trades with BTL were part of a fraud. 146. We concluded that SKM did have knowledge of trade the wholesale metal carrying risks of VAT fraud and that vigilance was necessary. Before 18 March that knowledge was mainly derived from KG’s patchy understanding. Especially after 18 March SKM was aware of the need for vigilance. The due diligence which SKM was carrying out on BTL in May 2021 (see [81]) points to this. On its own, however, the knowledge that the market involved risks of VAT fraud does not mean that SKM should have known that the trades with BTL were part of a fraud. In that context the “reassurance” SKM received from HMRC on 26 April (see [74]) is relevant in showing what a prudent trader in the position of SKM would have been considering. We considered that SKM did know there were MTIC risks in its trading operations and that these risks needed to be addressed (e.g. through due diligence) but that SKM would, or at least might reasonably, have assumed that there was no particular risk with BTL since (a) SKM had done some, albeit limited, due diligence on BTL and (b) HMRC had written reassuringly to SKM once SKM had supplied extensive details of its dealing with BTL including 15 invoices from BTL. Significant trade with a fraudulent defaulter 147. Miss Brown pointed us to the following: (1) The purchases from BTL accounted for more than 50% of SKM’s total business in the periods in dispute and were for significant amounts in absolute terms (more than £3m); (2) BTL was able to supply SKM with over £3m worth of scrap metal in a 5 month period that started only 7 months after BTL’s incorporation and 4 months after it became VAT registered; (3) The level of trade that SKM was able to carry out in such a short space of time ought (we were urged) to have come as a surprise to any prudent business, especially as SKM’s own turnover was wildly in excess of SKM’s expected turnover in the first 12 months according to its VAT application (estimated turnover £200,000) and SF accepted in his evidence that he had not expected this level of turnover; (4) The circumstances in which SKM came to start its trade with BTL were vague and there was no witness evidence from TP to corroborate the position; In summary there was no legitimate commercial explanation for SKM’s sudden (5) increase in turnover, the volume of supplies that the newly established BTL was able to make to SKM or the circumstances in which the companies began trading together. 148. Miss Sheldon suggested that there were other possible reasonable explanations for the increasing transactions with BTL other than connection to fraud. In particular, KG had worked in a relevant industry before and, by the use of his capital and contacts, SKM could offer better pricing and cashflow advantages to its suppliers. Miss Sheldon also urged us to take into account that, according to KG’s evidence, the volume of trade was well within industry norms. We consider the latter of these points to be unpersuasive because in his evidence about the volume of metal being traded in the industry, KG was clearly including very large players trading internationally, not a relatively small startup domestic trader such as SKM. However, we considered the commercial advantages SKM believed it was offering might in the mind of a reasonable and prudent business in the position of SKM have amounted to the reason for SKM’s business growing rapidly. Based on the oral evidence of SF and KG we considered that was what they took to be the case. 149. Miss Sheldon also pointed us to the volume of SKM’s trade with third parties other than BTL. Although the trade with BTL amounted to 53% of SKM’s trades by value in the relevant period, this meant that 47% of SKM’s trade was with legitimate businesses. Miss Sheldon suggested, and we agree, that merely because SKM conducted significant trade with BTL is insufficient to demonstrate that SKM should have known the transactions were connected to fraud. It was also relevant that in the two VAT quarters after SKM ceased to trade with BTL (including the last quarter when SKM shut its business), SKM’s turnover was over £700,000. In a 6 month period, that was more than 3 times SKM’s original estimate of annual turnover for its VAT application and indicates that SKM’s trading model from legitimate transactions was highly successful at least by reference to turnover. 150. We also considered the relevance of SKM’s turnover greatly exceeding the estimate given in its VAT application (a turnover of £6m against an estimate of £200K). In cross examination, Miss Brown made much of this rapid expansion. In his evidence SF asserted that in drawing up business plans for the numerous businesses he had set up, he had never achieved the level of turnover originally used for the business plan, with some businesses achieving a higher and some a lower level of turnover. SF asserted that the estimated turnover for SKM in its VAT application was simply a “low ball”. On balance we did not consider that his point greatly assisted HMRC’s case; although it was a feature that ought to have caused SKM to consider why it was achieving such a high turnover, SKM might reasonably have concluded that was as result of its attractive trading model. 151. We also considered it relevant that the trading with BTL was not a single large transaction, or a small number of large transactions. There were 109 trades in total, each of which, on the evidence of SF and KG, was for a type and quantity of metal that was typical for a supplier such as BTL and did not arouse suspicion with SKM or its customers. This was not a one off large trade (which might have aroused suspicions) but rather a large number of relatively small transactions that fitted a pattern SF and KG reasonably considered to be legitimate. 152. The most we could find on the evidence on this issue that might help HMRC’s case was that a prudent business in the position of SKM would have wondered what commercial advantage BTL was able to offer its suppliers so as to allow BTL to supply such a large amount of scrap to SKM given BTL was a new start up. That ought to have indicated that caution was required in trading with BTL. However, this would not on its own have raised the suspicions of a prudent business in the position of SKM to the level that the trading was fraudulent. No evidence of commercial negotiations 153. Miss Brown urged us to find that the lack of evidence of commercial discussions or negotiations between SKM and BTL and the absence of evidence that SKM had attempted to find other suppliers of scrap (e.g. SF’s waste contacts), suggested that the transactions with BTL were contrived and not legitimate commercial transactions. 154. On this point, we found the oral evidence of SF and KG to be persuasive. In summary the facts we found were that price lists were issued daily to potential suppliers and, if suppliers wanted to take up the available prices, then they contacted one of the SKM team by email/phone/WhatsApp to enter into a contract. In the case of BTL that contact was usually with TP. It would have been helpful to have evidence from TP and to have access to the emails and WhatsApp messages which SF told us in his oral evidence were in existence. But we were persuaded that as a fact the trading had been carried out in this way. This seemed to us to indicate that there had been commercial negotiations. 155. KG's evidence as to the first trade with BTL also seemed to us a point in favour of there having been commercial negotiations. KG’s evidence (which we accepted as fact) was that in the first trade, BTL had been concerned that SKM might not pay for the load of metal that was to be delivered and this concern could only be overcome by way of an arrangement with BTL under which their delivery driver remained onsite at SKM whilst SKM inspected the first load of goods and made payment. To a prudent business, a concern on the part of BTL that SKM might be trying to defraud them might indicate if anything that BTL was a legitimate trader. 156. We accepted SF’s evidence that he did not approach his waste contacts as potential suppliers because they were too large and their needs too complex for SKM to deal with at the start of its trading development. 157. We also took into account that SKM did have other significant suppliers of scrap (which made up nearly half of its turnover in the relevant period) which had been identified by way of cold calling. 158. Therefore we did not consider at this point assisted HMRC's case. Lack of contractual documentation 159. Miss Brown urged us to find that, given the volume of metals traded and the significant sums involved, a prudent business would have had clear written terms in place, to deal with payment and ownership at the very least. 160. Miss Brown made much of the absence of contractual documents as something that ought to have raised suspicions. In relation to this, SF asserted that WhatsApp messages would have shown the trading, but unfortunately these were not available to him since they would have been messages with TP. SF also pointed out that the SKM business had been closed several years ago and therefore it was not surprising he no longer had some of the emails and messages which would have backed up his evidence. In any event, these messages were not before us in evidence. It seemed to us entirely plausible that agreement of terms for delivery of metal (amounts, price, etc) could well have been agreed on the phone or by WhatsApp message. The terms were not complex and would not have required lengthy written contracts. SF’s explanation of why these messages were not in evidence was also entirely plausible. 161. Miss Sheldon urged upon us (a) that lack of documentation is not uncommon in businesses and (b) to SK/KG’s evidence that this was normal in the metal trading business. She pointed out that SKM’s rapidly growing business dealing with relatively small private sector suppliers in the scrap metal trade can be contrasted with the position that would have applied in dealings with large organisations or the public sector where written contracts would be expected. 162. We accepted as a fact SF’s evidence (in the absence of any evidence to the contrary) that there was no particular need for written contractual documentation because either the metal would be delivered (and paid for) or it would not (in which case payment would not be made); and that many of the suppliers were not particularly literate and therefore would not be interested in lengthy contractual documentation. 163. From SK/KG’s evidence and from our own experience of dealing with small businesses we agreed with Miss Sheldon. We consider that there is a range of business models some with more and some with less formality. Again therefore, we did not consider at this point assisted HMRC's case. Issues with invoices 164. Miss Brown urged upon us that there were numerous issues with invoices which called into question the validity and commercial legitimacy of the transactions. These include undated invoices; duplicate invoice numbers; invoices not in numerical order; invoices containing profanities; different bank account details on some invoices; and the presence of an invoice from BTL to its customer, Avon Metals Ltd in SKM’s records. 165. Miss Brown suggested that the issues with the invoices were indicative of actual knowledge; she suggested SKM knew that the transactions were connected to fraud or turned a blind eye, so that it did not matter to them that the invoices were littered with issues. If they were not sufficient to amount to actual knowledge, then they amounted to constructive knowledge. 166. In his oral evidence Officer Pathak gave his opinion that in his experience invoicing errors of the kind in these invoices indicated fraud. It was put to him that the errors simply showed informality not fraud, but he maintained that in his experience and looking at the wider picture the errors did show fraud and that SKM knew, or should have known, that they were participating in a fraud. We accepted that this was his experience, but treated this with caution given that he was not providing expert evidence. 167. SF’s evidence that his main interest was in the description of the goods and their value rather than other aspects of the invoices and that he was not suspicious about invoices which contained what he regarded as minor errors. SKM’s accountant raised with SF issues with some of the invoices, the issue being that they were not in numeric order. In turn this had been raised with BTL and thereafter the invoices were in numeric order. SF’s evidence was that there was nothing in the invoices that had caused SF to be concerned that BTL was engaged in a fraud. 168. On balance we agreed with Miss Sheldon that, while errors in invoices probably indicated a lax attitude to VAT compliance, they did not necessarily indicate fraud. Indeed, errors in invoices do not assist in carrying out fraud. We considered that a careful fraudster might issue perfect invoices (indeed it would be in their interests to do so), whereas an honest but chaotic business might issue invoices with errors. Having ourselves received invoices in error from legitimate businesses (including invoices addressed to third parties sent in error and invoices wrongly describing the goods or services provided) we did not consider this point on its own materially assisted HMRC’s case. Lack of commerciality in the way the transactions were structured 169. Miss Brown accepted that this was not HMRC’s strongest point in light of the explanation given by SF and KG as to why BTL (and others) traded with SKM, namely the price and cashflow advantages SKM was able to offer. We considered that the evidence from SF and KG presented a convincing picture of the USP of SKM which explained the trading model and was a plausible explanation why BTL would use SKM as a broker when SKM was an even younger company than BTL and had no previous experience in the scrap metal sector. 170. In his oral evidence Officer Pathak had given his view that SKM’s brokerage business model was not commercially credible. He asserted, but without producing evidence to back his assertion, that HMRC had evidence of brokerage businesses and that the model SKM operated was not a normal model. He was challenged on this by Miss Sheldon. 171. In relation to this issue, we preferred SF and KG’s evidence as to the commerciality of SKM’s model in preference to Officer Pathak’s. The latter was unsupported by documentary evidence and was in essence opinion evidence in contrast to SF and KG’s direct evidence of SKM’s business model. 172. Therefore we did not consider this point assisted HMRC’s case. Insufficient due diligence 173. Miss Brown argued that SKM’s due diligence was inadequate; it was not carried out in good time (i.e. it should have been done before trading commenced), it was not thorough enough (e.g. SKM should have obtained BTL’s VAT records) and that there was insufficient analysis of the documents that were obtained (e.g. these did not show LP to be a director). Miss Brown suggested that SF’s attitude to due diligence had been cavalier, and that SKM had continued to trade with BTL in spite of obvious shortcomings in the due diligence and LP’s point blank refusal to provide certain due diligence material. 174. Miss Sheldon urged us to take into account (as set out above in Mobilx) the danger in over-focusing on due diligence: “tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, [they are] not entitled to ignore the circumstances in which [their] transactions take place if the only reasonable explanation for them is that [the] transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by [their] purchase [they were] was taking part in a transaction connected with fraudulent evasion of VAT.” 175. In cross examination, various potential issues with the due diligence materials obtained in respect of BTL were put to SF. These included that the corporate documents did not show LP as a director of BTL, BTL’s scrap metal dealers’ licence was dated 20 April 2021 (in other words after trading with BTL commenced) and the DBS check on LP was from Disclosure Scotland in spite of the fact that LP lived in Wales. SF said that these points did not cause him concern. Given the information he had from SKM‘s customers about the appropriate things to ask for in due diligence, he considered the right things had been obtained and that SKM could not have done more. 176. SF’s evidence was that he was not suspicious of BTL. He considered that it was not suspicious that BTL was able to supply the quantities of metal to SKM that it was supplying. BTL had a scrap licence for a large area of Wales and SF considered that this would provide a sufficient geographical area for BTL’s supplies to be legitimate. At one stage in his evidence, SF asserted that the licence was for the whole of Wales, but when taken to the licence, he accepted it was for part of Wales not all of it. 177. Looking at the due diligence caried out by SKM, (1) DD was carried into BTL by way of the KYC undertaken after the first trade with BTL which elicited the information referred to at [78]; (2) We found as a fact that SF regularly checked BTL was still VAT registered (which it was), see [83]; a request for evidence of BTL’s VAT returns and payments was made in May (3) 2021 by SF (see [81]); (4) Both SF and KG visited BTL’s site in order to check it was a legitimate business (see [80]). 178. We considered there were distinct shortcomings in the due diligence. For example, (1) It was certainly not carried out until after trading had commenced; (2) There was no convincing evidence that the “introduction” from Ripley (see [65]) was followed up and it was certainly not documented and followed up as it should have been and therefore we could not find as a matter of fact what the introduction involved; (3) The documents held by SKM on their file (or at least those before us in evidence) were inadequate as to the identity of the director of BTL; (4) The waste licence was not in place when BTL commenced trading with SKM; (5) There was no follow up of the refusal by LP to answer the 21 May email; (6) Insufficient efforts were made to check that the person claiming to be LP was indeed LP (since SKM never met him, they could not know if the ID documents they held were for him or not). 179. In relation to the 21 May email, SF’s evidence was that he did not consider that it was appropriate for SKM to have pursued this, since he regarded another entity’s VAT return as private to it. SF considered that there were some types of supplier record that it would not be appropriate for SKM to obtain. SF gave the example of details of the suppliers to SKM‘s own suppliers. SF evidence was that even asking for details of the suppliers to SKM’s suppliers might lead the supplier to SKM to fear that SKM was trying to cut them out of the chain; for that reason SF considered that asking for such details would be inappropriate. 180. We considered this issue carefully cognisant of a potential danger in looking at this due diligence material of judging it by reference to the quality of material and the analysis of it which a large institution (for example a bank) would apply. We took into account that SKM was a new entity and relatively small. We did not consider a new and relatively small entity could be excused from doing appropriate due diligence but we considered the due diligence appropriate for a relatively small business might be less formal and less detailed than that performed by a large and well established entity. We took into account the point made in Red Rose that inadequate due diligence, on its own, will not be enough to establish that the trader ought to have known they were involved in a fraud. We considered that the appropriate question to ask was whether the due diligence done by SKM was such that SKM should have known that they were taking part in a transaction connected with the fraudulent evasion of VAT, taking into account the position that SKM found itself in. 181. Looking at the shortcomings of the due diligence, we did not consider that the failure to obtain the VAT returns of BTL or the failure to discover who was supplying metal to BTL was a shortcoming in the diligence. We accepted SF’s evidence that even asking these questions was potentially inappropriate in the commercial circumstances in which SKM found itself. 182. We did not consider that the failure to identify that LP did not have the business background or personal tax record that might be expected of someone running a multimillion pound turnover business could be said to be a failure on the part of SKM. Officer Borland accepted that this was information that would simply not have been available to SKM. 183. As for the documents in evidence before us provided by SKM not showing that LP was a director and not showing that BTL had a waste licence when trading had commenced, we did not find these shortcomings were of particular significance. The fact was that LP was a director of BTL (even if SKM did not have a document evidencing that) and that by April 2021 BTL did have a waste licence. The only sense in which these inadequacies might be said to show anything of significance is that they indicate shortcomings in the due diligence rather than that the underlying facts would have pointed to a fraud had the diligence been performed more carefully and the results appropriately analysed. 184. The fact that SKM was still doing due diligence on BTL in May 2021 (see [81]) can be taken in two ways. On the one hand it shows that diligence was not completed before trading had started, as it should have been. On the other hand, it showed that SKM was taking due diligence seriously and still pursuing points in May 2021. 185. We also considered that it was relevant that HMRC's own investigation in March 2021 had concluded with an email to SKM stating that there was no evidence of fraudulent activity (the e-mail of 26 April 2021 at [74) which would have provided comfort to SKM that there was nothing untoward. 186. Looking at the position in which SKM found itself, we considered what further steps SKM could have taken in order to discover that they were participating in a fraud. On behalf of HMRC, Miss Brown urged upon us that SKM could have done more by way of due diligence such as credit checks on BTL, obtaining trade references and by way of further site visits either to Ripley or to BTL. It seemed to us doubtful that credit checks were appropriate since SKM was not taking credit risk on BTL. SKM did have an “introduction” from Ripley for BTL, although we could see that further investigation of the introduction of BTL by Ripley would have established that there was something odd about it because the explanation for it provided by SF and KG in their oral evidence did not ring true, although this was indirect evidence since we did not have the benefit of TP as a witness. It could not be said to be a meaningful “trade reference”, although on balance the evidence before us suggested BTL had not simply appeared out of the blue on SKM’s doorstep. It would have been prudent to try to meet LP in person. But these were points of detail. The crucial thing that had identified BTL as a fraudulent business to HMRC was the lack of payment of VAT, the lack of credibility of LP from his income tax records and the lack of response when HMRC (in its official role) tried to contact BTL; none of these were avenues available to SKM. 187. Looking at the HMRC Leaflet, we could understand why SF considered this to be “very generic” and why he preferred to us information provided by his industry contacts as the basis for developing SKM’s due diligence approach. The HMRC Leaflet gave a general description of MTIC fraud and explained that HMRC may refuse a VAT claim in respect of a transaction where a trader who knew or should have known that the transaction was connected with fraud then. It explained that HMRC would consider all of the circumstances relating to the transaction, including whether the trader took reasonable steps to verify the integrity of the supply chain. It confirmed that HMRC does not expect traders to go beyond what is reasonable. 188. We found as a fact that SF read the leaflet, but his answers on this in cross-examination were vague and caused us to doubt how carefully he had read it or what steps he had taken to action the advice given. 189. As a means of assessing whether SKM ought to have known its transactions with BTL were connected with fraud, we have gone thorough each of the examples in the HMRC Leaflet of the indicators that could alert a trader to the risk of a connection with missing trader fraud and considered how they applied to SKM: Legitimacy of customers or suppliers. (1) What is your customer’s/supplier’s history in the trade? BTL had only a short history (2) Have you been contacted within a short space of time by a prospective buyer and seller offering to buy/sell goods of the same specifications and quantity? Here the evidence is that SKM contacted BTL rather than vice versa Has your supplier referred you to a customer who is willing to buy goods of (3) the same quantity and specifications being offered by the supplier? SKM had the customer base and found BTL as a supplier (4) Does your supplier offer deals that carry no commercial risk for you –e.g. no requirement to pay for the goods or services until payment is received from the customer? Here the position was again the reverse, with SKM paying BTL before SKM’s customers paid it (5) Are you being offered deals that involve consistent or pre-determined profit margins, irrespective of the date, quantities or specifications of the goods or services being traded? Here, no. Have normal commercial practices been adopted in negotiating prices? Here this yes based on the evidence we accepted from SF and KG (6) Are you being asked to make payments to third parties other than your supplier or payments to an offshore bank account? Not relevant here, payments all being made to one of two bank accounts in the UK verified by SF (7) Are the goods adequately insured? We did not have evidence on the insurance position, but in the broker model where SKM was arranging transport, the responsibility for insurance would have fallen to SKM. (8) Are high value deals being offered with no formal contractual arrangements? Each deal was not high value and the contract for each was, based on SF’s evidence, industry standard (9) Are high value deals being offered by a newly established supplier with minimal trading history, low credit rating etc? In aggregate there was a high value of trading, but each transaction was relatively small and typical for the industry Is a small, newly-established business offering to supply you with goods cheaper (10) than a long-established supplier? No (11) Has HMRC specifically notified you that previous deals involving your supplier were connected to fraudulent VAT losses? No and to the contrary, HMRC appeared to have given comfort to SKM by way of the 26 April email Viability of the goods as described by your supplier. For example: (12) Can you be sure the goods exist in the quantity and specification being offered? Yes, verified by SKM’s customers (13) Are they in good condition and not damaged? The evidence was that the goods satisfied SKM’s customers and where there was an issue, this was raised with BTL and the invoices adjusted (14) Why are large quantities of goods with non-UK specifications being offered for supply to you in the UK? No (15) What recourse is there if the goods are not as described? The evidence was that the goods satisfied SKM’s customers and where there was an issue, this was raised with BTL and the invoices adjusted Examples of specific checks carried out by existing businesses (16) obtain copies of Certificates of Incorporation and VAT registration certificates. This was done (17) verify VAT registration details with HMRC – this was done (18) obtain signed letters of introduction on headed paper – not done (19) obtain some form of written and signed trade references – not done (20) obtain credit checks or other background checks from an independent third party – not done, but SKM was not taking credit risk on BTL insist on personal contact with a senior officer of the prospective supplier, making (21) an initial visit to their premises if possible – a visit was made albeit LP was not met (22) obtain the prospective supplier’s bank details to check whether (a) payments would be made to a third party and (b) in the case of an import, the supplier and their bank share the same country of residence – SF’s evidence as that payment was only made to verified bank accounts of BTL (23) check details provided against other sources e.g. website, letterheads, BT landline records. Not done 190. The HMRC Leaflet explained that the examples contained in the leaflet are guidelines for the kind of checks a trader could make to help avoid participating in a fraudulent supply chain. It went on to state that the checks a particular trader needs to make, and the extent of them, will vary depending on the individual circumstances. 191. Some due diligence was undertaken by SKM and some of the examples of steps that traders could take were not relevant to SKM. However, there were additional steps that could have been taken. Balancing these factors we considered that the due diligence by SKM was inadequate but that, as with a number of the other factors set out above, that would not on its own have put a prudent trader in the position of SKM into the position that it should have known that it was participating in a fraud. The most that could be said is that SKM ought to have identified there was a risk it was participating in a fraud. Looking at the overall picture 192. Having considered each of these points on their own, as we inevitably had to, we then considered the points into totality. We took into account that these points should not be regarded as a chain where any single link being broken breaks the entire chain. Rather, as indicated in Red 12 the points should be looked at as a whole in which the totality of the points might provide strength to one another. 193. In looking at the overall picture we framed the question we should consider, based on the judgment in Davis & Dann, as whether SKM should have known that its transactions with BTL were connected to fraud. In other words the question was not whether or not a reasonable person mindful of all the circumstances ought to have concluded that the transactions with BTL were connected with fraud. What mattered was the perspective of SKM as the person alleged to have constructive knowledge of the fraud. 194. Although we could see that one way of looking at all the points did suggest that the overall picture ought to have made SKM aware they were engaged in a fraud, we thought that the correct analysis showed the opposite. Standing back from the detail and looking at the overall picture, SKM ought arguably to have identified that they were engaged in a transaction where there was a risk of fraud. The factors point to that are identified above and consisted of the level of knowledge SKM had of the existence and prevalence of fraud in SKM’s trading sector, the significant trade with a relatively new entity, the apparent lax attitude to VAT compliance evidenced by the invoicing errors and the lack of sufficiently timely and well considered due diligence (the oddity of the introduction from Ripley being an example of that). 195. However, we did not consider that these points were such that we could conclude, on the balance of probabilities, that SKM should have concluded that they were engaged in a fraud. Some points should have aroused suspicion but there were numerous factors that appeared to (and perhaps did) have an innocent explanation (for example, the rapid growth in SKM’s turnover with BTL and third parties may well have been brought about by the attractive terms of trading which SKM was offering). Although SKM's due diligence was inadequate in certain respects, and some factors should have raised suspicion, the overall picture showed reasonable explanations for the transactions. The rapid turnover increase was linked to SKM’s business model, and commercial negotiations were evident. 196. In terms of the approach set out in Mobilx we concluded that there were reasonable explanations for the transactions between SKM and BTL and SKM did not ignore obvious inferences from the facts and circumstances. 197. Taking all of the above factors into account, cumulatively, we concluded that SKM should not have known they were engaged in a fraud. Fraud was by no means the only reasonable explanation of the trading with BTL. Conclusion 198. For these reasons we decided to allow the appeal in respect of the Input Tax Denials. HMRC’s Investigation 199. The failure of HMRC to investigate BTL between April 2021 (when SKM’s agent sent the BTL invoices to HMRC showing significant trading) and July 2021 was not explained by the HMRC witnesses. We were surprised that, having been sent invoices from BTL by SKN in April 2021, HMRC appears to have done nothing whatsoever to follow up on these until July 2021 in spite of the fact that the lack of a VAT return from BTL reflecting these invoices ought to have been apparent to HMRC from 7 April 2021. Once Officer Borland began his investigation, he determined that BTL was engaged in fraudulent activity and deregistered it for VAT within two weeks. Much of the loss of VAT that arose between the date HMRC were sent the BTL invoices and the date that BTL was deregistered would almost certainly have been avoided if HMRC had acted promptly to investigate BTL in April and de- registered it. It seemed to us it was at least arguable that in failing to investigate BTL and then pursuing the Input Tax Denials, HMRC were in effect trying to shift the burden of investigating fraud from themselves to a trader (which is not permissible per Mahagében, see the remarks at [132]). Since the point was not argued, we did not take this issue into account in our decision and we raise it here merely for completeness. The Penalty 200. It was common ground that the Penalty is parasitic on the Input Tax Denials. Accordingly, having allowed the appeal in respect of the Input Tax Denials, it followed that we should allow the appeal in respect of the Penalty. 201. If we were wrong and the appeal against the Input Tax Denials should have been dismissed, then it would follow that the Penalty should stand. 202. For completeness, we considered what the position should be in respect of mitigation in the event that the appeal in respect of the Input Tax Denials should have been dismissed. It was common ground that the tribunal has a wide ability to mitigate under s70. Miss Brown had accepted that the HMRC practice of not mitigating where more than 50% of a trader’s input tax arose from fraudulent transactions did not restrict the tribunal in relation to s70. Miss Brown also accepted that the restriction in s70(4)(c) did not apply to mitigation in relation to this matter because mitigation in this matter would be under s69C, and therefore the restriction in s70(4)(c) does not apply. However, if we were wrong about the Input Tax Denials and the appeal should have been dismissed, we concluded that that would be on the basis that SKM either knew, or should have known, that it was involved in fraudulent transactions. In those circumstances, and taking into account the burden of proof in relation to mitigation was on SKM, we did not consider that there were grounds for mitigation under s70. The PLN 203. As with the Penalty, having found that the appeal in respect of the Input Tax Denials should be allowed, it followed that we should allow the appeal in respect of the PLN, since the condition in s69D(1)(a) would not be met, there being no penalty to which SKM was liable. 204. For completeness, in case we were wrong to dismiss the appeal in respect of the Input Tax Denials, we considered what would be the position had we dismissed that appeal. We would have found that the conditions under s69D were met and accordingly that the PLN was properly charged. 205. Had the issue being relevant, we would have found that the actions of SKM which gave rise to SKM being liable to a penalty under s69C were attributable SF. While Miss Sheldon was eloquent in her attempts to persuade us that, in these circumstances, the actions of SKM that gave rise to the Penalty were attributable to KG and not SF, we were not persuaded of that. It was clear from the written and oral evidence that SF was the person responsible for the actions of SKM. He was the sole director, had control of day to day activities, control of the bank accounts and was responsible for the due diligence and interactions with HMRC. The evidence suggested that some of the activities of SKM were subject to discussion between SF and KG but it was clear to us that KG's role was not that of running the day-to- day operations of SKM. SF was the person in charge of SKM. KG had a role as the provider of finance and as additional “muscle” in the yard, but he was not in charge of the day-to-day operations. The most that could be said of KG’s roles was that he had a veto on financial decisions and acted as something of a sounding board for SF, but the evidence before us was that decisions were taken by SF. Accordingly, if issue had been relevant, we would have found that SF was liable to the PLN. DISPOSITION 206. For the reasons given above, we allowed the appeal in respect of the Input Tax Denials, Company Penalty and PLN. RIGHT TO APPLY FOR PERMISSION TO APPEAL 207. 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: 10th OCTOBER 2025 42