At the First Tier Tribunal (FTT), the owner of Harry Construction Limited (HCL), of North London, accepted that ‘the VAT losses arose through dishonesty on the part of the defaulting traders’, but tried to blame HMRC for failing to alert him about the risks.
HCL is a commercial construction business based in North London, and the company appealed against a number of HMRC decisions on input tax issued on 1 February 2019, relating to three separate notifications.
In total, the input tax in dispute was £927,987, which HCL claimed should have been repayable by HMRC.
Two instances related to decisions to deny the company the right to deduct input tax totalling £705,741 over the VAT periods 10/15-07/18 on the basis that HMRC said the company ‘knew or should have known that its transactions upon which the input tax reclaim was based were connected with VAT fraud’.
HCL also disputed a third refusal decision by HMRC amounting to a further £222,246 in the VAT periods 10/15, 01/16, 04/16, 07/16, 10/16, 01/17, 04/17, 07/17, 10/17, 01/18 and 07/18, where HMRC asserted that the invoices from UP Construct Ltd upon which the input tax reclaim was based, were invalid.
At stake
In law, a taxable person has a right to deduct input tax, which includes VAT on supplies under the Principal VAT Directive (PVD). However, under Kittel principle that right can be lost where the taxable person knew or should have known that the purchases were connected with the fraudulent evasion of VAT.
At the tribunal, which ran for eight days, HMRC presented a list of 12 companies involved in the HCL supply chain, and involved with fraudulent invoices, some of which were ‘buffer traders’, sitting between the arm’s length fraudulent trader and HCL, which HMRC argued was ultimately liable under the Kittel principle.
All 12 companies had been deregistered over time as HMRC discovered they were evading VAT. At the tribunal, a number of HMRC officers presented evidence to illustrate this, including instances of communications with HCL’s co-owner and director, Harvinder Singh, warning of the fraud.
For example, on 3 July 2012, HMRC sent HCL a ‘veto letter’ in relation to its use of a business called Call Premier. The letter told HCL that Call Premier had been deregistered for VAT purposes, adding: “Please note that any input tax claimed in relation to transactions involving this company may be subject to verification.” At the same time, it pointed the company to information on due diligence.
The very next day on 4 July 2022 HMRC began to investigate HCL because it had made payments totalling £466,199 to Call Premier. An onsite meeting was held at HCL’s accountant’s premises where HMRC discussed the labour issues and was told until a year previously HCL employed the staff directly but went to external providers “because the staff/workers were not being reliable”.
The supply chain of labour providers was not disputed by HCL at the tribunal. The company, represented by Tim Brown of counsel, accepted that there had been “a VAT loss in each of these transaction chains and that there was a connection between that default and HCL’s purchases,” and that ‘the VAT losses arose through dishonesty on the part of the defaulting traders’.
At the tribunal, however, Singh said that he only became aware of the practice of subcontracting labour in the construction industry around 2011/12 and he only became aware of the problem of VAT fraud in the construction industry when he received HMRC officer Hammouda’s letter in October 2017, despite various HMRC veto letters sent to him.
Singh stressed that he had contacted his accountants about all letters about due diligence as ‘the business was relying on them for advice and support related to its tax affairs’.
He also criticised HMRC for its failure to stop the VAT fraud prevalent across the construction industry, telling the tribunal: “We only can do so much, we can do so much checks on them by getting verifications on VAT and tax and all that. The rest is all down to the HMRC. If they know that – they’re doing the checks on the companies, why don’t they make us aware at that time?”
Due diligence
However, tribunal Judge Mark Baldwin, said Singh “had a tendency to resort to stock answers, along the lines of ‘HCL had done all the due diligence it could’ and the current situation is largely/entirely of HMRC’s making for not telling HCL what to do”.
On the Kittel appeal, Brown argued that “HMRC have not produced any evidence that there was an ‘overall scheme to defraud the Revenue’ perpetrated through supply chain VAT fraud. Even if there was an overall scheme, HCL denies either knowing of it or being knowingly involved in it”.
While due diligence was not completed, the invoices supporting VAT recovery were also invalid.
Judge Baldwin said: “We do not consider that an invoice which simply refers to ‘valuation total’ comes anywhere near providing sufficient information to enable an independent observer to be satisfied as to the identification and quantification of the services supplied.”
“Someone seeking to find out the nature and quantity of what was supplied would not even be able to begin to answer that question from the invoice or any other document it referred to, let alone reach a conclusion. The invoices clearly do not meet the requirement in regulation 14(g).”
The tribunal dismissed the appeal on all grounds and rejected the appellant’s claim that HMRC was being ‘unreasonable’.
Sara White is the Editor of Business & Accountancy Daily.
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