Hillhead Limited v The Commissioners for HMRC
[2023] UKFTT 215 (TC)
Wholesale Distribution Limited v The Commissioners for HMRC
6 June 2024
[2024] UKFTT 514 (TC)
First-tier Tribunal
A company tried to get back millions in VAT. The taxman said the company's transactions were linked to fraud. The court agreed with the taxman because the company didn't check its suppliers properly, even though they had many warning signs. The company was too careless and didn't do enough to avoid dealing with fraudulent businesses.
Key Facts
- •Wholesale Distribution Limited (WDL) appealed HMRC's denial of input tax deduction for £8,167,855.44 relating to 1081 deals involving fast-moving consumer goods (FMCG).
- •HMRC alleged the transactions were connected to VAT fraud.
- •WDL's sole director, Mr. Crothers, was the central figure in the appeal.
- •The appeal focused on whether WDL knew or should have known about the connection to fraud (Kittel denial).
- •WDL's due diligence practices were severely criticized as inadequate and negligent.
- •Significant evidence was presented on WDL's dealings with multiple suppliers later found to be involved in VAT fraud.
- •Several 'red flags' indicating potential fraud were ignored by Mr. Crothers, including late incorporation of suppliers, lack of proper verification checks, and reliance on minimal due diligence.
- •WDL's dramatically increased turnover in 2016, mostly from the disputed deals, was unexplained.
Legal Principles
Kittel principle: A taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraud must be regarded as a participant in that fraud.
CJEU in Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (C439/04 and C-440/04)
The Kittel test embraces not only those who know of the connection but those who 'should have known'.
Mobilx Ltd (in administration) v HMRC [2010] EWCA Civ 517
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.
Red 12 Trading Ltd v Revenue & Customs [2010] STC 589
The Tribunal should take account of, but not focus unduly, on the question of whether the trader has acted with due diligence.
Mobilx Ltd v HMRC
The FtT’s task is to apply the impersonal standard of the reasonable businessman to the facts.
S&I Electronics plc v HMRC [2015] STC 2076
Adverse inferences can be drawn from a party's failure to produce reasonably expected evidence.
Wisniewski v Central Manchester HA [1998] PIQR P324 and Efobi v Royal Mail Group Ltd [2021] 1 WLR 3863
Outcomes
WDL's appeal was dismissed.
HMRC proved, beyond the balance of probabilities, that WDL (through Mr. Crothers) should have known the transactions were connected to VAT fraud due to their seriously negligent due diligence practices and the numerous 'red flags' present.