DMC Business Machines Plc
| Jurisdiction | UK Non-devolved |
| Judgment Date | 15 March 2021 |
| Neutral Citation | [2021] UKFTT 72 (TC) |
| Date | 15 March 2021 |
| Court | First-tier Tribunal (Tax Chamber) |
[2021] UKFTT 72 (TC)
Judge Zachary Citron, Mr Ian Abrams
David Scorey QC and Luke Tattersall, counsel, instructed by Keystone Law, appeared for the appellant
Howard Watkinson and Joshua Carey, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Input tax deductibility – Restriction of right to deduct under principles in Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 – Appellant's purchases of printer consumables were connected with fraudulent VAT evasion – Did the appellant know the purchases were so connected? – Held – No – Should it have known? – Held – No – Appeal allowed.
The FTT held that a business neither knew nor should have known that its transactions were connected to fraud, its claims for input tax incurred on its purchases should therefore be allowed.
One of DMC's business activities is trading in copier and printer consumables (e.g. ink etc.) in the secondary or grey market.
HMRC investigations revealed that some of DMC's suppliers and customers were involved in missing trader or MTIC fraud. HMRC determined that £13m of input tax claimed by DMC on purchases should be disallowed on the grounds that DMC either knew or should have known that these transactions were connected with the fraudulent evasion of VAT (see Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 and Mobilix [2010] BVC 638).
The FTT provided a detailed overview of the case law precedent relating to the “knew or should have known” test (para. 111–124) and the approach to be taken when considering the evidence before it (para. 125–146).
It was not disputed that the suppliers and customers identified by HMRC were involved in the fraudulent evasion of VAT. HMRC's core case against DMC was that it was part of a wider scheme to defraud the revenue because 1) sales it made to EU customers (which were zero-rated intra-EU supplies) were critical to the success of this wider scheme and 2) DMC was not operating in a genuine market because its trade was inherently uncommercial (para. 151).
HMRC provided extensive evidence that DMC's trade in printer consumables was uncommercial, this included noting that its due diligence procedures were not followed (e.g. DMC would trade with companies which had poor credit histories) and it had dealings with suppliers and customers who were relatively unknown to it (para. 156).
HMRC further alleged that DMC's head salesman who, because his remuneration was largely based upon his sales figures was not incentivised to turn away business (para. 162), took advantage of DMC's lax procedures to knowingly trade with fraudulent parties (para. 164). The fact that one of the suppliers employed the salesman's brother was, HMRC argued, further evidence of his knowledge (para. 172–175).
In response, DMC argued that all the transactions were “standard, workaday transactions which one would expect to find in the secondary market for printer consumables” (para. 206). In essence, its case was that the uncommerciality alleged by HMRC was based upon misconceptions of the way the secondary or grey market in which it traded worked. For example it was common in this market for businesses to trade with new, start-up suppliers. DMC agreed that some of its suppliers had poor credit histories but stated that it managed this commercial risk by, for example, only paying for goods when they had been delivered (e.g. para. 210).
Concerning the connection between DMC's salesman and his brother, the salesman advised the FTT that he was estranged from this brother and, although his brother was employed by one of DMC's suppliers, he dealt with someone else at the company.
The FTT did not agree with HMRC that DMC's business was not commercial. It noted that a “veil of discretion” was a feature of the secondary market which explained DMC's lack of knowledge of its suppliers and customers (para. 223 and 242). It accepted that DMC managed its commercial risk by not paying suppliers with poor credit histories until goods were delivered and agreed that this was a normal commercial practice (para. 251). The FTT also accepted that the salesman and his brother were estranged and did not cooperate business matters (para. 288).
An element of the “knew or should have known test” is the level of awareness of MTIC fraud held by the business. DMC argued, and the FTT accepted, that although its staff were aware that MTIC fraud existed, they were not aware of the presence of that fraud within the printer consumables market (para. 286).
Having made extensive findings of fact (not all of which are summarised above), the FTT concluded that HMRC had not demonstrated that DMC knew of a connection to fraud. It rejected HMRC's arguments that the transactions were uncommercial and accepted that they bore “the hallmarks of ordinary commercial activity from DMC's perspective” (para. 300).
The FTT then considered whether DMC “should have known” of a connection to fraud. The FTT agreed that, looking at DMC's business a “reasonable businessperson” would have known that there was a risk of connection to fraud, but would have determined that this was not the only explanation for the transactions in question. Although there were “questionable” aspects to the transactions, they all had reasonable explanations which involved no criminality (para. 305).
To deny input tax recovery to DMC, it was not sufficient to show that there was a risk of connection to fraud, there had to be knowledge that there was a connection. The FTT concluded that a “reasonable businessperson would not have known that the [transactions] were connected with fraudulent VAT evasion; such a person would not have concluded that DMC ought to have known that the only reasonable explanation for the [transactions] was that they were connected with fraudulent VAT evasion” (para. 306).
The FTT thus ruled that DMC neither knew, nor should have known, of the connection to fraud. The appeal was allowed.
In common with most cases where input tax is disallowed on Kittel grounds the evidence considered in this decision is extensive and complex. DMC won its case for two reasons. First, it satisfied the FTT that features of its business which HMRC viewed as being non-commercial were, in fact, normal features of the particular market in which it operated. Second, it demonstrated that it was not aware of MTIC fraud being an issue in its market which explained why it had not taken specific actions to guard against it.
In many of the “Kittel cases” which HMRC win there is evidence that, at an early stage in their investigations, HMRC made the taxpayer aware of MTIC fraud and its risks. The taxpayer's response to this knowledge is then assessed by the Tribunal.
[1] This appeal was about whether the appellant (“DMC”) knew, or should have known, that hundreds of purchases of printer ink cartridges and toner (“printer consumables”) by it, costing over £13 million, were connected with the fraudulent evasion of VAT.
[2] In this decision, the terms “input tax”, “output tax” and “VAT credit” have the meanings they have in the Value Added Tax Act 1994.
[3] HMRC notified DMC on 6 September 2017 that they were denying it the right to deduct input tax of £2,196,418 claimed on 802 purchases of printer consumables in VAT periods 11/14–08/16 inclusive, on the grounds that the purchases were connected with the fraudulent evasion of VAT, and that DMC knew, or should have known, of such a connection. The value of the purchases (net of VAT) was £13,178,508.
[4] The denial of the right to deduct led to HMRC assessing DMC for £1,114,962.58 for VAT periods 11/14–02/16 and adjusting the VAT credit claimed by DMC on its VAT returns for the 05/16 and 08/16 periods by £1,081,455.42. A notice of assessment for £1,114,962.58 was issued on 2 August 2017.
[5] DMC appealed by way of a notice of appeal dated 17 January 2018.
[6] HMRC later realised that the assessment amount for £361,126 for the 02/16 VAT period was incorrectly allocated to the 02/15 VAT period. On 14 March 2019 HMRC therefore amended the original incorrect assessment to reallocate the sum of £361,126 to the 02/16 VAT period. DMC appealed by way of a notice of appeal dated 30 April 2019. At the hearing DMC withdrew one of its grounds for this appeal (being that the assessment was made out of time.)
[7] There were a number of interruptions to the video hearing, mostly due to wi-fi connectivity being lost; in each case, however connectivity was restored after a relatively short period (or upon resumption of the hearing after a break or the end of the day). Overall, the hearing was completed comfortably within the time allocated. The Tribunal invited comments on the video format in closing submissions and the point was made by the appellant's counsel that the format made it somewhat more difficult to communicate by “body language”; for example, it was more difficult for cross examining counsel to indicate to a witness that their answer was going on too long or was off the point. HMRC's counsel commented that whilst the hearing was fair, it would have been more “effective and efficient” if held face to face.
[8] Overall the Tribunal was satisfied that the hearing had been fairly held.
[9] We had three pdf court bundles and a supplementary bundle, amounting to 7,495 pdf pages. This contained (inter alia)
- witness statements of five HMRC officers:Elizabeth Agyekum-SakiBola OmolaGerard DixonShaheen RehmanKirsten Forrester
- witness statements of five employees and/or directors of DMC at relevant times:Damian Kelly, head of the Distribution business, a division of DMCAziz Talati, sales executive in the Distribution businessJonathan Hill, chief executive officer and a...
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