- Lynton Exports (Alsager) Limited (“LEL”) has been successful in defending itself against various Kittel and Mecsek assessments raised by HMRC under the “known or should have known” principal
- HMRC raised the following assessments;
- Two assessments denying LEL’s input tax in 12/15, 01/16 and 11/15 to 10/16 on the basis that LEL’s transactions were connected with a scheme to defraud the Treasury of VAT and LEL knew or should have known that this was the case (“the Kittel Principle”)
- Two assessments assessing LEL for output tax in 12/15, 01/16 and 11/15 to 10/16 on the basis that LEL’s claim to zero rating was denied on the bases that the relevant transactions were connected with a scheme to defraud the Treasury of VAT and LEL knew or should have known that this was the case (“the Mecsek Principle”)
- Two matters had to be determined by the tribunal;
- In relation to the Kittel assessments, did LEL know that the deals were connected with the fraudulent evasion of VAT, or should they have known that the transactions were connected with fraud? Importantly the tribunal highlighted that it would be the case that LEL should have known if the only reasonable explanation for the deals was that they were connected with fraud
- In relation to the Mecsek assessments, did LEL know, or should it have known, that the deals were part of a tax fraud, and that it had not taken every reasonable step within its power to prevent its own participation in that fraud?
- Prior to the hearing in this case, the following was agreed between the parties;
- The assessments were all made within the relevant time limits
- The assessments covered a total of 374 deals in the VAT periods 11/15 to 10/16
- The amounts of the disputed assessments are agreed and detailed within Appendix Two to the full judgement
- The goods in all the deals covered by the assessments are soft drinks or confectionery
- Kittel assessments all relate to purchases from Wholesale Distribution Limited (“WDL”) and LEL accepted that the transactions could be traced back to the fraudulent evasion of VAT
- The Mecsek assessments relate to sales to two customers in the Republic of Ireland – Swift Valley Trading (“Swift”) and PKC Wholesale (“PKC”)
- Some of HMRC’s allegations were as follows;
- No satisfactory explanation was provided by LEL as to why they chose to take on a completely different style of trade with little profit which had been proven to be linked to fraud
- It was too good to be true that by taking on the new style of business, LEL’s turnover doubled from around £16m to £31m
- The new business only had a small number of suppliers (WDL) and customers (Swift and PKC) in comparison to the existing business which involved a significant number of different and varied suppliers and customers
- The extra turnover was not legitimately sourced – LEL never took steps in its due diligence to check the legitimacy of WDL’s trading
- HMRC also state that LEL was warned on multiple occasions by HMRC as to the risks of MTIC fraud in the soft drinks industry
- LEL defended its position as follows;
- LEL was an established business in the grocery export industry and has been carrying out straight wholesaling transactions for over forty years and the deals covered by the assessments were all straight wholesaling, so no different to the business LEL had been carrying out for over forty years
- There was nothing unusual in the challenged deals and the commercial documents relating to the transactions are indistinguishable from the commercial documents that exist for all of LEL’s other trading activities
- It was misleading to compare the margin of the established business activity and the new (potentially attractive) market LEL entered into
- HMRC confirmed that they made no allegation of dishonesty against LEL and LEL argued that as a long standing, established and successful business, it made no sense why they would put its existence at risk for a small increase in profits
- LEL counteracted HMRC’s submission by producing evidence which showed that HMRC’s file notes confirmed that HMRC officers stated at a meeting that they would make LEL aware if any tax losses were identified in the supply chain
- The full judgement contains extended detail about LEL’s due diligence approach and the ongoing communications between LEL and HMRC
- The tribunal made the following comments;
- It was accepted that Mr Robert Sandell (son of the proprietor of LEL - Mr David Sandell) wanted to expand the business into new areas and that the margins obtained by LEL on the new business were comparatively smaller than those on the existing business activities
- The differences between the longstanding business activities and the new business sought by Mr Robert Sandell were not as stark as HMRC suggested
- The allegations, particularly in relation to the Kittel assessments, stem from concerns and suspicions of the HMRC case officer, Mr Stephen Mills, and his predecessors but in defending Kittel assessments at the tribunal HMRC have to go beyond concerns and suspicions and must advance probative evidence of the issue in question . The tribunal went further to say that it is possible to infer relevant facts from circumstantial evidence but that circumstantial evidence must exist and be presented in a credible and persuasive form
- HMRC do not put forward any evidence to support why they consider winning around £15m of new business in the first year was “too good to be true”
- HMRC did not call any evidence in support of the assertion that it was not feasible for WDL to build up turnover totalling millions of pounds given its trading base (WDL traded from a small retail shop using a mobile phone and had no website)
- The tribunal concluded;
- There was no convincing evidence to support HMRC’s contention that LEL had actual knowledge of the deals being connected to the fraudulent evasion of VAT
- HMRC also did not satisfy the tribunal that LEL should have known that the deals were connected with the fraudulent evasion of VAT (to determine this the tribunal considered whether the deals being connected to fraud was the only reasonable explanation for the transactions)
- Further to the above conclusions, HMRC did not satisfy the Kittel Principle and so the appeal against the Kittel assessments was allowed in full
- In determining the position on the Mecsek principles, the tribunal considered the position in relation to both customers (Swift and PKC) and found that despite PKC being deregistered for VAT (and potentially deemed a VAT fraudster), LEL took every reasonable step in its power to prevent its own participation in the tax fraud perpetrated by KPC
- The tribunal also found that despite HMRC’s concerns over aspects of Swift’s trading, HMRC had taken no action and the company was still trading at the date of the hearing and so the tribunal was satisfied that on the balance of probabilities HMRC had not discharged their burden of proof that Swift was a VAT fraudster
- On the basis of the findings in relation to LEL’s two customers, the tribunal reduced the Mecsek assessments to remove all sales to both Swift and KPC which meant that none of the sales detailed in the judgement justified HMRC’s action of denying the zero-rating under the Mecsek principle meaning that LEL’s appeal was successful in full
A link to the full case can be found here.
Aspire Comment
An overwhelming success for the taxpayer in this Kittel/Mecsek case which does highlight the fact that HMRC often do not take the time to understand a supply chain before making decisions which can be crippling to a business.
The case also highlights the importance of having performed effective, robust and proportionate due diligence on your supply chain.