£110k VAT penalty upheld as fraudulent trading

£110k VAT penalty upheld as fraudulent trading

Jun 21, 2024

A scrap metal trader has lost a claim against a personal tax penalty of £110,127.60 as tribunal persuaded he knew his company’s activity was fraudulent

In this case at the First Tier Tribunal, the appellant, Gary Turner was sole director of Loy Commodities Limited, a company involved in trading scrap metal and based in Sheffield.

At the appeal Turner disputed an HMRC decision dated 3 December 2020 to impose a company officer’s liability penalty for £110,127.60, subsequently reduced to £107,306.55.

The penalty related to the denial of input tax claimed by Loy Commodities, where Turner was at all material times the only director. HMRC issued the penalty for VAT periods 03/18 to 03/19 under section 69D Value Added Tax Act 1994.

The majority of the input tax denied was upon Kittel grounds; namely, HMRC believed that Loy knew or should have known that the transactions were connected with the fraudulent evasion of VAT.

Loy went into a creditors’ voluntary liquidation on 8 December 2020 and was dissolved on 13 August 2022. The company itself played no part in the appeal and (prior to its dissolution) did not appeal against any decision or penalty in its own right.

However, the parties agreed that HMRC must still establish within the present appeal that Loy was liable to the penalty imposed upon it (and so, in turn, that the relevant input tax was correctly denied) and that Loy’s actions giving rise to its liability to a penalty were attributable to Turner.

The scale of HMRC’s concerns about Turner’s operations was highlighted by the fact that HMRC officers made five separate visits to his business and met with Turner to discuss the issue, warning him about carrying out correct due diligence checks on Agar Brown Bawtry Limited, which had been investigated by HMRC resulting in a £1.18m tax bill.

On the first visit, HMRC officers Ian Nolan and Ben Caines visited Loy’s premises on 30 January 2018 and met with Turner. They provided him with general information about the risks of fraudulent traders in the sector, and explained the requiremnts of Public Notice 726 entitled ‘Joint and several liability for unpaid VAT’.

On subsequent visits they also flagged notified tax losses at a number of Turner’s suppliers and clients, including Ashwell Metals Ltd and Roman Traders Ltd, then wrote a letter dated 18 December 2018, notifying Loy of tax losses in the 09/18 period relating to its transactions with Metal Room Ltd.

On 5 March 2020, HMRC disallowed Loy’s input tax claim for the periods 03/18 to 03/19 for £367,095.73 and raised assessments for the same sum. All but £9,407.16 of this was upon the basis that, in HMRC’s view, Loy knew or should have known that the transactions which formed the input tax claim were connected with the fraudulent evasion of VAT. The remainder was denied upon the basis of insufficient invoices to support the claims.

HMRC also cancelled the company’s VAT registration on the basis that ‘the principle aim of the registration was in order to abuse the VAT system by facilitating fraud’.

Then in July 2020, HMRC issued a penalty assessment against Loy for £110,127.60, which was 30% of the input tax denied. This was subsequently fractionally reduced to £107,306.55 to reflect only the Kittel transactions, not the missing invoices.

HMRC’s in-house lawyer Charlotte Brown argued that Turner was the controlling mind of Loy and was responsible for the company entering into the disputed transactions, which even Turner himself acknowledged as he conducted all Loy’s deals.

She also submitted that Turner had the requisite actual knowledge or means of knowledge about the potential fraudulent transactions.

Turner’s solicitor Glen Henry argued that HMRC had not disclosed any evidence of matters concerning the Kittel accusations, adding that Turner was ‘a man of good character without any criminal convictions, he has carried out his business activities lawfully, and he has co-operated with HMRC’. He also noted that there had been no criminal investigation into his conduct.

The tribunal found that all the companies Loy was trading with were involved with ‘tax losses as alleged by HMRC and that these were fraudulent’.

Judge Chapman said: ‘Turner does not advance any positive case as to the tracing of the supply chains, instead simply putting HMRC to proof of the same.

‘We find that each of the supplies to Loy for which input tax had been denied have been traced through (and so are connected) to one of the defaulters’, adding that ‘in the absence of any contrary evidence, we accept HMRC’s evidence’.

In the view of the tribunal, the tax losses were all deemed to be related to fraudulent transactions.

They also noted that ‘Turner’s due diligence and checks upon the suppliers at issue within this appeal were not sufficient to enable him to take a view upon commercial risk as they did not involve any analysis of his suppliers’ commercial background or commercial standing save for identity, location and VAT registration’.

Turner was without doubt the controlling mind at the company and that he ‘knew or should have known that Loy’s transactions were connected with the fraudulent evasion of VAT’.

Tribunal Judge Richard Chapman KC said: ‘We have no reason to doubt that Mr Turner is a man of good character. However, that is not the test and has no bearing upon the question of attribution… We make no findings – and do not need to make any findings – as to whether Mr Turner was acting dishonestly or as to whether he committed a criminal offence.’