TC09659 - [2025] UKFTT 01211 (TC)

Miss Brown argued that SKM’s due diligence was inadequate; it was not carried out in good time (i.e. it should have been done before trading commenced), it was not thorough enough (e.g. SKM should have obtained BTL’s VAT records) and that there was insufficient analysis of the documents that were obtained (e.g. these did not show LP to be a director). Miss Brown suggested that SF’s attitude to due diligence had been cavalier, and that SKM had continued to trade with BTL in spite of obvious shortcomings in the due diligence and LP’s point blank refusal to provide certain due diligence material.

Miss Sheldon urged us to take into account (as set out above in Mobilx) the danger in over-focusing on due diligence:

“tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, [they are] not entitled to ignore the circumstances in which [their] transactions take place if the only reasonable explanation for them is that [the] transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by [their] purchase [they were] was taking part in a transaction connected with fraudulent evasion of VAT.”

In cross examination, various potential issues with the due diligence materials obtained in respect of BTL were put to SF. These included that the corporate documents did not show LP as a director of BTL, BTL’s scrap metal dealers’ licence was dated 20 April 2021 (in other words after trading with BTL commenced) and the DBS check on LP was from Disclosure Scotland in spite of the fact that LP lived in Wales. SF said that these points did not cause him concern. Given the information he had from SKM‘s customers about the appropriate things to ask for in due diligence, he considered the right things had been obtained and that SKM could not have done more.

SF’s evidence was that he was not suspicious of BTL. He considered that it was not suspicious that BTL was able to supply the quantities of metal to SKM that it was supplying. BTL had a scrap licence for a large area of Wales and SF considered that this would provide a sufficient geographical area for BTL’s supplies to be legitimate. At one stage in his evidence, SF asserted that the licence was for the whole of Wales, but when taken to the licence, he accepted it was for part of Wales not all of it.

Looking at the due diligence caried out by SKM,

We considered there were distinct shortcomings in the due diligence. For example,

In relation to the 21 May email, SF’s evidence was that he did not consider that it was appropriate for SKM to have pursued this, since he regarded another entity’s VAT return as private to it. SF considered that there were some types of supplier record that it would not be appropriate for SKM to obtain. SF gave the example of details of the suppliers to SKM‘s own suppliers. SF evidence was that even asking for details of the suppliers to SKM’s suppliers might lead the supplier to SKM to fear that SKM was trying to cut them out of the chain; for that reason SF considered that asking for such details would be inappropriate.

We considered this issue carefully cognisant of a potential danger in looking at this due diligence material of judging it by reference to the quality of material and the analysis of it which a large institution (for example a bank) would apply. We took into account that SKM was a new entity and relatively small. We did not consider a new and relatively small entity could be excused from doing appropriate due diligence but we considered the due diligence appropriate for a relatively small business might be less formal and less detailed than that performed by a large and well established entity. We took into account the point made in Red Rose that inadequate due diligence, on its own, will not be enough to establish that the trader ought to have known they were involved in a fraud. We considered that the appropriate question to ask was whether the due diligence done by SKM was such that SKM should have known that they were taking part in a transaction connected with the fraudulent evasion of VAT, taking into account the position that SKM found itself in.

Looking at the shortcomings of the due diligence, we did not consider that the failure to obtain the VAT returns of BTL or the failure to discover who was supplying metal to BTL was a shortcoming in the diligence. We accepted SF’s evidence that even asking these questions was potentially inappropriate in the commercial circumstances in which SKM found itself.

We did not consider that the failure to identify that LP did not have the business background or personal tax record that might be expected of someone running a multimillion pound turnover business could be said to be a failure on the part of SKM. Officer Borland accepted that this was information that would simply not have been available to SKM.

As for the documents in evidence before us provided by SKM not showing that LP was a director and not showing that BTL had a waste licence when trading had commenced, we did not find these shortcomings were of particular significance. The fact was that LP was a director of BTL (even if SKM did not have a document evidencing that) and that by April 2021 BTL did have a waste licence. The only sense in which these inadequacies might be said to show anything of significance is that they indicate shortcomings in the due diligence rather than that the underlying facts would have pointed to a fraud had the diligence been performed more carefully and the results appropriately analysed.

The fact that SKM was still doing due diligence on BTL in May 2021 (see [81]) can be taken in two ways. On the one hand it shows that diligence was not completed before trading had started, as it should have been. On the other hand, it showed that SKM was taking due diligence seriously and still pursuing points in May 2021.

We also considered that it was relevant that HMRC's own investigation in March 2021 had concluded with an email to SKM stating that there was no evidence of fraudulent activity (the e-mail of 26 April 2021 at [74) which would have provided comfort to SKM that there was nothing untoward.

Looking at the position in which SKM found itself, we considered what further steps SKM could have taken in order to discover that they were participating in a fraud. On behalf of HMRC, Miss Brown urged upon us that SKM could have done more by way of due diligence such as credit checks on BTL, obtaining trade references and by way of further site visits either to Ripley or to BTL. It seemed to us doubtful that credit checks were appropriate since SKM was not taking credit risk on BTL. SKM did have an “introduction” from Ripley for BTL, although we could see that further investigation of the introduction of BTL by Ripley would have established that there was something odd about it because the explanation for it provided by SF and KG in their oral evidence did not ring true, although this was indirect evidence since we did not have the benefit of TP as a witness. It could not be said to be a meaningful “trade reference”, although on balance the evidence before us suggested BTL had not simply appeared out of the blue on SKM’s doorstep. It would have been prudent to try to meet LP in person. But these were points of detail. The crucial thing that had identified BTL as a fraudulent business to HMRC was the lack of payment of VAT, the lack of credibility of LP from his income tax records and the lack of response when HMRC (in its official role) tried to contact BTL; none of these were avenues available to SKM.

Looking at the HMRC Leaflet, we could understand why SF considered this to be “very generic” and why he preferred to us information provided by his industry contacts as the basis for developing SKM’s due diligence approach. The HMRC Leaflet gave a general description of MTIC fraud and explained that HMRC may refuse a VAT claim in respect of a transaction where a trader who knew or should have known that the transaction was connected with fraud then. It explained that HMRC would consider all of the circumstances relating to the transaction, including whether the trader took reasonable steps to verify the integrity of the supply chain. It confirmed that HMRC does not expect traders to go beyond what is reasonable.

We found as a fact that SF read the leaflet, but his answers on this in cross-examination were vague and caused us to doubt how carefully he had read it or what steps he had taken to action the advice given.

As a means of assessing whether SKM ought to have known its transactions with BTL were connected with fraud, we have gone thorough each of the examples in the HMRC Leaflet of the indicators that could alert a trader to the risk of a connection with missing trader fraud and considered how they applied to SKM: