A scrap metal trader has lost a First Tier Tribunal (FTT) appeal related to a fraudulent claim for VAT input tax totalling £3.5m
The appellant, PPX Metal Management Ltd (PPX) appealed against an HMRC decision to deny the deduction of VAT input tax totalling £3,571,232 on purchases of scrap metals, asserting that the claims were not fraudulent.
HMRC issued the assessments for 659 transactions to purchase scrap metals in the VAT periods ending 11/14 to 11/15 on the grounds that the purchases were connected with the fraudulent evasion of VAT.
It said that the appellant knew or should have known that the transactions were connected to fraud because they permitted no other reasonable explanation.
PPX argued that the transactions were ‘part of regular trading as a wholesaler’ of scrap metal and did not stand out as different.
While the company acknowledged that its due diligence had some deficiencies, PPX denied that further due diligence would have resulted in sufficient knowledge about the purchases.
The denial of credit for input tax is based on the Kittel principle, which requires that there is a fraudulent evasion of VAT.
The purchases on which the input tax had been denied were from 11 defaulting suppliers, of which there had been a fraudulent VAT default at the start of each of the transaction chains.
Paul Pearce was the sole director of PPX, which was incorporated on 15 September 2011, and supplied non-ferrous metals in the UK. It was registered for VAT from 26 September 2011.
Pearce purchased scrap metal from suppliers MayX1 Ltd, London Project Interiors Ltd, Fortified Recycling Ltd, and others. The first of these transactions was on 1 September 2014 for £620,342.42, of which £499,120.07 was traded to fraudulent VAT losses.
The final transaction was made on 26 November 2015 for £1,250,518.26, with £338,349.43 linked to fraudulent losses.
During the relevant periods, PPX conducted around 25,000 transactions with more than 4,000 suppliers.
In total, £5,053,670.46 was claimed in input tax, of which £3,710,348 (73%) was traced to fraudulent VAT losses, according to HMRC.
HMRC started an investigation into PPX on 27 November 2014 and sent the company a ‘tax loss letter’ detailing transactions with GPSE Ltd. The tax loss in this instance was £96,043.77.
Further letters were sent between February and June 2013 related to other transaction chains. In 2015, HMRC sent further letters concerning other suppliers, which totalled £1.15m.
At the FTT, HMRC asked the tribunal to dismiss the appeal on the basis that PPX was aware of an orchestrated scheme to defraud the tax authority.
It submitted that where a party’s transactions are part of an overall scheme to defraud HMRC, that proves its state of knowledge as to whether the transactions were part of such a scheme, and were connected with the fraudulent evasion of VAT.
Judge Jeanette Zaman said: ‘We have concluded that HMRC has satisfied the burden of establishing that, on the balance of probabilities, PPX knew that the transactions were connected with the fraudulent evasion of VAT.
‘We were not satisfied that Mr Pearce’s evidence was entirely credible, and we have not accepted some of his key evidence, for example checking that suppliers were VAT-registered or that PPX did not pay the VAT element of the purchase price until the VAT registration number had been checked.
‘We have found that Mr Pearce knew of the risk of fraud in the metals sector and that this was not confined to traders who had moved into the sector from mobile phones or computer chips.’