TC09590 - [2025] UKFTT 00878 (TC)

Mr Kelly, whilst maintaining the arguments set out in his skeleton argument, focussed on three key submissions in his oral closing.

Firstly, he submits that Mrs Walmsley is an intelligent professional with experience of FCA regulatory work and someone who was aware of the risk of fraud with CIS workers. We tend to agree. However, this does not translate into a knowledge or awareness of the risk of “supply chain” fraud. Mrs Walmsley’s evidence on oath, which was not (perhaps could not be) seriously challenged by the Respondent, was that she was not so aware. Given the absence of any evidence to the contrary and Mrs Walmsley’s maintenance of the position under cross examination, we accept this to be the true position.

Secondly, Mr Kelly submits that Mrs Walmsley failed to carry out proper due diligence into WM and Mr Hamilton. Mrs Walmsley had accepted that it was best practice to ascertain who both the shareholders and directors of companies were before doing business with them. If she had done so in this case, she would have found that Mr Hamilton was neither a director not a shareholder of WM and, just as had been the case with Mr Robino, this should have raised a red flag. Further, Mrs Walmsley had made no effort to contact Mr Davis and Mr Vause had not carried out any due diligence into WM or Mr Hamilton either. Again, had she asked the right questions or probed further she might have found significant red flags.

We do not accept Mrs Walmsley’s attempts to draw a distinction between the fact that Mr Robino had told her that he was a director (only for that not to be the case), but in the case of Mr Hamilton for him to never have told her that he was a director. The point is that in Mr Robino’s case she had tried to find out who the directors of UKPSL were. In the case of WM she did not. The question is why not? Some explanation might be found in the fact that RRP was already dealing with IAH and Mrs Walmsley had already been provided with a due diligence “pack” in relation to IAH by Mr Vause and found this to be satisfactory. This coupled with Mr Hamilton’s apparent knowledge of the sector and the fact that she was introduced by Mr Vause to him may have caused her to lower her guard. We would have been very interested to hear what Mr Vause had to say about his role in all of this; but, for reasons not given to us, he was not called as a witness (by either party).

Mrs Walmsley’s position is not helped by her suggestion that she knew that Mr Hamilton “had” a number of other companies and that he was not the director or shareholder in relation to any of them. To the extent that she sought to suggest that acting as “shadow” director (in particular) or as a “shadow” shareholder (which in the case of the latter would render any declaration as to the significant ownership or control of a company potentially false and/or meaningless) was “normal” in her industry, we emphatically reject such an assertion. Absent a cogent explanation, any attempt to obscure the ownership or control of a company cannot be regarded as consistent with ordinary commercial practice. Mrs Walmsley neither sought nor received any explanation from Mr Hamilton.

Thirdly, Mr Kelly points to the fact that the Appellant accepted numerous payments from other “Hamilton companies” in relation to services provided to WM without any proper query. We accept, of course, that contracts can be concluded by two parties and a third party (who is not a party to the contract) may discharge a financial obligation of one of the contracting parties. This can and does happen in the business world, especially where one of the contracting parties is part of a group of companies. However, this was not the case here and the Appellant made (on its own evidence) no attempt to establish any relationship between the paying entities and WM. The Appellant appeared to be concerned solely with the receipt of payment in the correct amount and within the expected timeframe, without further inquiry as to the identity or authority of the payer.

It seems, therefore, fairly clear to us, and we agree with the submission, that RRP failed to carry out proper due diligence on WM in two key respects. Firstly, RRP failed to properly identify who it was providing services to. Secondly, it failed to establish who it was being paid by or attempt to discover the reason behind third party payments.

As we have set out earlier in this decision, and for the avoidance of doubt, we reject the assertion that Mrs Walmsley had background knowledge about “supply chain” fraud in the labour industry prior to the relevant transactions.

We further reject, on the evidence, that HMRC had provided, prior to the relevant transactions, any meaningful education to RRP about “supply chain” fraud in the industry or around due diligence.

Nor do we accept that there was no commercial logic to the Appellant’s existence in the transaction chains involving the supply of labour. Mrs Walmsley’s evidence (and for that matter Mr Ashford’s concession during cross examination) was clear on the point.

Lastly, we reject the notion that the Appellant’s decision to continue to trade with WM after being notified of WM’s deregistration indicates that RRP knew or ought to have known that its transactions with WM were connected to fraud. The evidence shows that:

This means that the only factor indicative of knowledge or tending to show that the Appellant ought to have known that the transactions were connected with fraud is the lack of proper due diligence highlighted above. However, as this tribunal held in PTGI International Carrier Service Limited v HMRC [2022] UKFTT 20 (TC) at [61]:

“The proper question for us to ask ourselves is not “Did the Appellant carry out proper due diligence?”; but “Did the Appellant have the means at its disposal of knowing that by its purchases it is participating in transactions connected with fraudulent evasion of VAT?” Proper due diligence might be part of the means available to the Appellant. It is not the only means and that is why Moses LJ in Moblix encouraged the courts not to unduly focus on the question of whether the Appellant has acted with due diligence.”

The point about due diligence and the context referred to in Moblix is that “tick box” due diligence is not enough. So, it will not be open to a trader to carry out superficial due diligence and expect that to, necessarily, be sufficient. The corollary of that is that inadequate due diligence, on its own, will not be enough to establish that the trader ought to have known but had, in effect, turned a blind eye to the connection with fraud. It may be a starting point (and often a good one), but it will rarely be all that is required. As that is all HMRC has been able to establish in this case, we have come to the inevitable conclusion that the Respondents have failed to establish the burden upon them to show that the Appellant’s transactions with WM were connected with VAT fraud or that the Appellant ought to have known that they were so connected.