Wholesale Distribution Limited v The Commissioners for HMRC
[2024] UKFTT 514 (TC)
Elbrook (Cash & Carry) Limited v The Commissioners for HMRC
28 April 2023
[2023] UKFTT 403 (TC)
First-tier Tribunal
Elbrook bought drinks from dodgy suppliers who cheated on their taxes. Even though Elbrook didn't directly cheat, they should have known the suppliers were up to no good because of lots of warning signs – like really strange pricing and missing paperwork. The judge said Elbrook should have done more checks and wasn't allowed to keep the tax money back.
Key Facts
- •Elbrook (Cash & Carry) Limited appealed HMRC's denial of £1,273,739.55 in input VAT deductions for 335 soft drink transactions.
- •HMRC alleged the transactions were connected to fraudulent VAT evasion and Elbrook knew or should have known.
- •Elbrook purchased soft drinks through chains of suppliers, with the initial supplier in most chains defaulting on VAT.
- •Elbrook's due diligence on suppliers was inadequate and lacked documentation.
- •HMRC conducted surveillance on an organised crime group (OCG) connected to Elbrook's suppliers, revealing links to money laundering.
- •Elbrook's prices from its suppliers were often higher than those offered directly from manufacturers.
- •Elbrook lacked sales invoices for a significant portion of the purchased soft drinks and had poor accounting records.
- •Mr. Amjad Khalid, Elbrook's director, gave evidence deemed largely unreliable due to inconsistencies and lack of supporting documentation.
- •Multiple suppliers involved in the transactions were subsequently convicted of VAT fraud.
Legal Principles
A taxable person has the right to deduct input tax, except where they knew or ought to have known the purchases were connected to fraudulent VAT evasion.
Articles 167 and 168 of Council Directive 2006/112/EC; sections 24, 25, and 26 of the Value Added Tax Act 1994; Regulation 29 of the Value Added Tax Regulations 1995
The 'ought to have known' test focuses on whether the only reasonable explanation for the transaction is that it was connected with fraudulent evasion of VAT.
CJEU in Axel Kittel v Belgium and Belgium v Recolta Recycling SPRL; Mobilx (in liquidation) v HMRC
A trader's failure to deploy available means of knowledge does not satisfy the criteria for input tax deduction.
Mobilx (in liquidation) v HMRC
The tribunal can consider the totality of the taxpayer's deals, their actions, and surrounding circumstances when determining knowledge.
Mobilx (in liquidation) v HMRC; Red 12 Trading v HMRC
It is not necessary for a taxpayer to be dishonest or know the identities of the fraudulent defaulters to be denied input tax deduction.
HMRC v Citibank NA, E Buyer UK Limited; Megtian Ltd (In Administration) v HMRC
A company's knowledge can be determined by the knowledge of its director.
None explicitly stated, but implied throughout the decision.
Companies must keep adequate accounting records.
Section 386 Companies Act 2006
Outcomes
Appeals dismissed.
The Tribunal found that Elbrook either knew or ought to have known that the transactions were connected to fraudulent VAT evasion based on numerous factors, including inadequate due diligence, suspiciously consistent pricing, lack of documentation, and links to an OCG.
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