Wholesaler loses £1.2m VAT appeal

Wholesaler loses £1.2m VAT appeal

May 13, 2023

A cash and carry business has lost a First Tier Tribunal (FTT) appeal related to the deduction of VAT input tax totalling £1.2m, which HMRC argued held a connection with fraud 

The appellant, a cash and carry business trading as Elbrook Limited, appealed against two assessments made by HMRC to deny the deduction of VAT input tax totalling £1,273,739.55.

HMRC issued the assessments in respect of 335 transactions to purchase soft drinks in the VAT periods ending 04/12 to 07/14 on the ground that the purchases were connected with the fraudulent evasion of VAT.

It also determined that the appellant either knew or should have known this. Thus, HMRC disallowed input tax totalling over £1.2m.

Elbrook accepted that 331 of the transactions were connected to fraud but maintained that four transactions related to a supply which was not connected.

They also submitted that there was no loss of VAT in relation to a transaction involving Sparrowhawk Ltd, which was the original supplier in a chain that sold soft drinks.

Amjad Khalid was appointed director of Elbrook in 2002, which provided food, tobacco, alcohol and soft drinks. It had a turnover of £95m in 2009.

Elbrook purchased soft drinks from the suppliers Golden Harvest, Horizon and DZ during the VAT periods in question. It also purchased some drinks from GSK and Coca-Cola Enterprises Limited.

The business had SAGE accounting software which they used for accounting purposes but did not use to monitor sales or record the stock levels. Khalid relied on paper records, which were taken weekly by staff.

HMRC commenced an investigation into Elbrook’s within the VAT periods 01/13 to 10/13 regarding 92 transactions with Gold Harvest, which had been discovered to have been involved in money laundering through an undercover operation.

Through the operation, HMRC found that six of the 23 companies in the chains, which Elbrook had been involved with, had been the subject of successful criminal prosecutions. These were Golden Harvest, Horizon, Alexsis, Hobbs Choice, Gujarr Ltd and Euro Choice Ltd.

A meeting was held on 9 April 2014 at Elbrook’s offices between Mr Khalid, HMRC officer Piers Craig Ginn and another officer of HMRC.

On 26 June 2014, a ‘tax loss letter’ concerning the transactions with Golden Harvest was delivered to Elbrook detailing that it had failed to account to HMRC for output tax. The tax loss in the case was £350,122.41.

Further letters were sent between September and November 2014 related to the transactions with Gold Harvest and DZ. On 6 January 2017, HMRC issued an assessment for £771,430.20 to Elbrook in respect of these transactions.

On 12 January 2015, Elbrook requested a review. HMRC sought additional information that Elbrook may have wished to provide to the reviewing officer.

However, no new information was received. On 18 February 2015, the review was concluded, and a letter was sent to Elbrook confirming the original decision to deny input tax deduction.

At the FTT, HMRC invited the tribunal to dismiss the appeal on the basis that Elbrook knew that the transactions were connected with fraud or ought to have known.

Its case was based on, among other things, the transactions lacking ‘ordinary commerciality’, the appellant’s lack of due diligence on suppliers, and their failure to ‘adequately explain’ documents identified by HMRC.

In their argument, Elbrook submitted that HMRC had failed to show that there was a tax loss in the chain, and if there was such a loss, the tax authority had failed to show the loss that was brought about fraudulently.

Judge Gething said: ‘There were 335 transactions for the purchase of soft drinks to which Elbrook was a party over a 30-month period with three suppliers all of which were connected with fraud. We find it difficult to accept that such a large number is the result of coincidence.

‘Considering the above, we consider on the balance of probabilities, that Mr Khalid and therefore Elbook knew that the 335 transactions were connected with fraud.

‘If we are wrong, we consider that Mr Khalid and therefore Elbrook ought to have known that the only reasonable explanation for the circumstances in which the 335 transactions were undertaken was that they were connected with fraud.’