TC09659 - [2025] UKFTT 01211 (TC)

For these reasons we decided to allow the appeal in respect of the Input Tax Denials.

The failure of HMRC to investigate BTL between April 2021 (when SKM’s agent sent the BTL invoices to HMRC showing significant trading) and July 2021 was not explained by the HMRC witnesses. We were surprised that, having been sent invoices from BTL by SKN in April 2021, HMRC appears to have done nothing whatsoever to follow up on these until July 2021 in spite of the fact that the lack of a VAT return from BTL reflecting these invoices ought to have been apparent to HMRC from 7 April 2021. Once Officer Borland began his investigation, he determined that BTL was engaged in fraudulent activity and deregistered it for VAT within two weeks. Much of the loss of VAT that arose between the date HMRC were sent the BTL invoices and the date that BTL was deregistered would almost certainly have been avoided if HMRC had acted promptly to investigate BTL in April and de-registered it. It seemed to us it was at least arguable that in failing to investigate BTL and then pursuing the Input Tax Denials, HMRC were in effect trying to shift the burden of investigating fraud from themselves to a trader (which is not permissible per Mahagében, see the remarks at [132]). Since the point was not argued, we did not take this issue into account in our decision and we raise it here merely for completeness.

It was common ground that the Penalty is parasitic on the Input Tax Denials. Accordingly, having allowed the appeal in respect of the Input Tax Denials, it followed that we should allow the appeal in respect of the Penalty.

If we were wrong and the appeal against the Input Tax Denials should have been dismissed, then it would follow that the Penalty should stand.

For completeness, we considered what the position should be in respect of mitigation in the event that the appeal in respect of the Input Tax Denials should have been dismissed. It was common ground that the tribunal has a wide ability to mitigate under s70. Miss Brown had accepted that the HMRC practice of not mitigating where more than 50% of a trader’s input tax arose from fraudulent transactions did not restrict the tribunal in relation to s70. Miss Brown also accepted that the restriction in s70(4)(c) did not apply to mitigation in relation to this matter because mitigation in this matter would be under s69C, and therefore the restriction in s70(4)(c) does not apply. However, if we were wrong about the Input Tax Denials and the appeal should have been dismissed, we concluded that that would be on the basis that SKM either knew, or should have known, that it was involved in fraudulent transactions. In those circumstances, and taking into account the burden of proof in relation to mitigation was on SKM, we did not consider that there were grounds for mitigation under s70.

As with the Penalty, having found that the appeal in respect of the Input Tax Denials should be allowed, it followed that we should allow the appeal in respect of the PLN, since the condition in s69D(1)(a) would not be met, there being no penalty to which SKM was liable.

For completeness, in case we were wrong to dismiss the appeal in respect of the Input Tax Denials, we considered what would be the position had we dismissed that appeal. We would have found that the conditions under s69D were met and accordingly that the PLN was properly charged.

Had the issue being relevant, we would have found that the actions of SKM which gave rise to SKM being liable to a penalty under s69C were attributable SF. While Miss Sheldon was eloquent in her attempts to persuade us that, in these circumstances, the actions of SKM that gave rise to the Penalty were attributable to KG and not SF, we were not persuaded of that. It was clear from the written and oral evidence that SF was the person responsible for the actions of SKM. He was the sole director, had control of day to day activities, control of the bank accounts and was responsible for the due diligence and interactions with HMRC. The evidence suggested that some of the activities of SKM were subject to discussion between SF and KG but it was clear to us that KG's role was not that of running the day-to-day operations of SKM. SF was the person in charge of SKM. KG had a role as the provider of finance and as additional “muscle” in the yard, but he was not in charge of the day-to-day operations. The most that could be said of KG’s roles was that he had a veto on financial decisions and acted as something of a sounding board for SF, but the evidence before us was that decisions were taken by SF. Accordingly, if issue had been relevant, we would have found that SF was liable to the PLN.

For the reasons given above, we allowed the appeal in respect of the Input Tax Denials, Company Penalty and PLN.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.