Minstrell Recruitment Limited & Ors v The Commissioners for HMRC
[2024] UKFTT 82 (TC)
Konstruct Recruitment Limited & Anor v The Commissioners for HMRC
1 September 2023
[2023] UKFTT 745 (TC)
First-tier Tribunal
A construction company used several subcontractors who turned out to be involved in tax fraud. The tax authorities warned the company multiple times about the risks, but the company didn't do enough to check if their subcontractors were legitimate. Because of this, the company had to pay back the taxes and a penalty.
Key Facts
- •Konstruct Recruitment Limited (Konstruct) appealed a decision by HMRC to deny input tax deductions (£264,124.40) and impose a penalty (£79,237.20) for transactions with Combat Construction Limited and Sandhar Consultancy Limited.
- •Rajanbir Singh (RS), Konstruct's director, appealed a Personal Liability Notice (PLN) for the same amount.
- •HMRC alleged Konstruct knew or should have known the transactions were connected to VAT fraud.
- •Konstruct's suppliers, Combat and Sandhar, were involved in VAT fraud schemes.
- •HMRC issued multiple warnings to Konstruct about the risk of fraud and the need for due diligence.
- •Konstruct's due diligence was deemed inadequate by the Tribunal.
- •Konstruct repeatedly changed suppliers after each was linked to fraud, suggesting knowledge or recklessness.
- •Konstruct lacked formal contracts with suppliers and did not retain timesheets initially.
- •RS's testimony was deemed unconvincing and unreliable by the Tribunal.
Legal Principles
Taxable persons who knew or should have known their purchases were connected to fraudulent VAT evasion are not entitled to deduct input tax.
Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL C-439/04 & C-440/04
The 'should have known' test includes those who should have known from circumstances that their transactions were connected to fraudulent evasion.
Mobilx Ltd v HMRC [2010] EWCA Civ 517
HMRC doesn't need to prove the taxpayer knew the details of the fraud or the identities of the fraudulent defaulters.
Megtian Ltd v HMRC [2010] EWHC 18 (Ch)
The standard of proof is the balance of probabilities, and dishonesty doesn't need to be proven.
HMRC v Citibank NA & Anor [2017] EWCA Civ 1416
A contractor must verify a subcontractor's CIS status with HMRC before making payments.
Income Tax (Construction Industry Scheme) Regulations 2005/2045, Regulation 6
Outcomes
Appeals dismissed.
The Tribunal found that RS, and therefore Konstruct, should have known the transactions were connected to VAT fraud due to the overall circumstances, repeated warnings from HMRC, and inadequate due diligence.