TC09659 - [2025] UKFTT 01211 (TC)

Fecha: 18-Sep-2025

Limits of the relevance of due diligence

Limits of the relevance of due diligence

131.

The question of due diligence was explored in Red Rose Payroll Limited v HMRC [2025] UKFTT 00878 (TC) (“Red Rose”), where it was held that HMRC had not met its burden of proof [74]-[75]:

“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.”

132.

In Mahagében kft v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága; Dávid v Nemzeti Adó- és Vámhivatal Észak-alföldi Regionális Adó Főigazgatósága (Joined cases C-80/11 and C-142/11) [2012] STC 1934 (“Mahagében”) the CJEU said the following with regard to due diligence:

"60.

It is true that, when there are indications pointing to an infringement or fraud, a reasonable trader could, depending on the circumstances of the case, be obliged to make enquiries about another trader from whom he intends to purchase goods or services in order to ascertain the latter's trustworthiness.

61.

However, the tax authority cannot, as a general rule, require the taxable person wishing to exercise the right to deduct VAT, first, to ensure that the issuer of the invoice relating to the goods and services in respect of which the exercise of that right to deduct is sought has the capacity of a taxable person, that he was in possession of the goods at issue and was in a position to supply them and that he has satisfied his obligations as regards declaration and payment of VAT, in order to be satisfied that there are no irregularities or fraud at the level of the traders operating at an earlier stage of the transaction or, second, to be in possession of documents in that regard.

62.

It is, in principle, for the tax authorities to carry out the necessary inspections of taxable persons in order to detect VAT irregularities and fraud as well as to impose penalties on the taxable person who has committed those irregularities or fraud. (emphasis added)

63.

According to the case law of the court, member states are required to check taxable persons' returns, accounts and other relevant documents (see EC Commission v Italy (Case C-132/06) [2008] ECR I-5457 , para 37, and Dyrektor Izby Skarbowej w Biaymstoku v Profaktor Kulesza, Frankowski, Jówiak, Orowski (Case C-188/09) [2010] ECR I-7639 , para 21).

64.

To that end, Directive 2006/112 imposes, in particular in art 242, an obligation on every taxable person to keep accounts in sufficient detail for VAT to be applied and its application checked by the tax authorities. In order to facilitate the performance of that task, arts 245 and 249 of that directive provide for the right of the competent authorities to access the invoices which the taxable person is obliged to store under art 244 of that directive.

65.

It follows that, by imposing on taxable persons, in view of the risk that the right to deduct may be refused, the measures listed in para 61 of the present judgment, the tax authority would, contrary to those provisions, be transferring its own investigative tasks to taxable persons."