- In the case of Crow Metals Ltd and The Commissioners for Her Majesty’s Revenue and Customs [2020] UKFTT 423 (TC) HMRC alleged that Crow knew or should have known that its transactions were connected with the fraudulent evasion of tax
- The knowledge principle that HMRC applied is well known as the “Kittel principle”
- Crow carries on a business as a scrap metal trader
- HMRC made two input tax denial decisions and both appeals proceeded together
- Under the Kittel principle the burden is on HMRC to establish
- There was a tax loss
- The loss resulted from a fraudulent evasion
- Crow’s transactions were connected with that evasion
- Crow knew or should have known that its transactions were connected with a fraudulent evasion of VAT
- During the hearing HMRC no longer pursued the allegation that Crow knew, but continued to allege that Crow should have known
- The FTT’s approach was to consider each supplier in turn and whether HMRC had discharged its burden of establishing a tax loss and that the tax loss was fraudulent
- The FTT found that, on the balance of probabilities, there were tax losses as alleged by HMRC and these were fraudulent
- Next, the FTT considered whether Crow should have known that its transactions were connected with the fraudulent evasion of VAT by considering a number of recurring features relied upon by the parties and then relating those features to Crow’s dealings with each supplier
- Crow accepted that they had an awareness of fraud in the industry
- HMRC had notified Crow of missing trade fraud in the metal trade sector and transactions leading to tax losses in respect of suppliers
- Crow received 26 veto letters of which 18 related to traders who had supplied Crow, as well as 24 failed VRN check notifications over 4 years
- The FTT found that Crow’s awareness of fraud in the industry isn’t enough on its own to mean that they should have known that the transactions were connected with fraud
- Crow had mechanisms in place for due diligence but on numerous occasions failed to carry out the checks prior to commencing dealing with suppliers and wouldn’t complete the documentation if they had an existing relationship with a supplier
- Crow was trading with suppliers before making validation requests
- The FTT found that a failure to conduct or question due diligence doesn’t of itself give rise to finding that Crow should have known of the fraud
- The FTT said the task is to consider whether in respect of each individual supplier the circumstances are such that Crow should have known of the connection to the fraudulent evasion of VAT
- The FTT found in its submissions and discussions that, on the balance of probabilities, HMRC failed to establish that Crow should have known that its purchases were connected with the fraudulent evasion of VAT. Each supplier was discussed in turn but some of the reasons were;
- The manner in which the contracts came about were not unusual or suspicious
- Crow held reasonable views about its suppliers
- It was not suspicious that suppliers didn’t operate from a scrap yard or have premises to receive goods
- Even where Crow were unknowingly making payments to a personal bank account, this would not be a sufficient concern to override other factors
- HMRC notified Crow that a supplier’s VAT registration had been cancelled but did not explain why which is in contrast to other veto letters in respect of other traders – also HMRC’s letter came after trading has ceased
- The FTT summarised for one supplier that indicators of genuine trading outweigh the negative concerns
- The FTT concluded that HMRC is unable to satisfy the burden of proof in establishing that for each of the suppliers Crow should have known its transactions were connected with the fraudulent evasion of VAT
- HMRC’s submissions focused on due diligence being poor or late, however the FTT found that this isn’t enough to establish that the only reasonable explanation for the transactions is that they were connected to the fraudulent evasion of VAT
Aspire Business Partnership ("Aspire") provide WK1 with practical and commercially sound advice in relation to all aspects of compliance, business strategy and conflict resolution. WK1 engage Aspire on a retained basis through which Aspire provide WK1 with advice on an ad-hoc basis.
