MD Construction (Bradford) Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 01 May 2018 |
| Neutral Citation | [2018] UKFTT 532 (TC) |
| Date | 01 May 2018 |
| Court | First-tier Tribunal (Tax Chamber) |
[2018] UKFTT 0532 (TC)
Judge Christopher Mcnall, Miss Susan Stott
Mr J Christopher Yewdall FCA, an Accountant, of Spenser Wilson Ltd, Accountants and Business Advisers, appeared for the appellant
Ms Natasha Barnes, Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – Wholesale scrap metal transactions undertaken by appellant building company – Denial of input tax – Was there a tax loss? – Yes – Did that loss result from fraudulent evasion? – Yes – Were the transactions subject to the appeal connected with that evasion? – Yes – Did the Appellant know or should it have known that the transactions were connected with fraud? – Yes – Appeal dismissed.
The First-tier Tribunal (FTT) considered whether a company should be entitled to recover input tax incurred on a transaction which was associated with fraudulent transactions.
MD Construction (Bradford) is a small family-owned construction company which trades as a housebuilder and commercial contractor. The company is owned by its directors, Mr & Mrs Dunbar. In 2013 the company engaged in six back to back scrap metal deals. The company purchased large quantities of scrap which was sold on the same day it was bought.
The deals were arranged by a Mr Howard who introduced the sellers and purchasers of the metal to the directors, Mr & Mrs Dunbar. The scrap metal was never transported to MD Construction's premises or subject to any process by the company such as sorting or verification.
HMRC visited MD Construction after the first deal and provided Mr Dunbar with information regarding potential frauds such as missing trader intracommunity (MTIC) fraud.
Following subsequent enquiries HMRC determined that the back to back transactions entered into by MD Construction were part of a chain of transactions which involved fraudulent trading in scrap metal. As a result, HMRC disallowed the input tax that MD Construction claimed on three of its purchases of scrap metal.
The FTT set out the relevant case law and summarised the issues. MD Construction could be denied input tax recovery if the answer to all of the following questions is “yes”:
- Was there a tax loss? (Issue 1)
- If so, did this loss result from a fraudulent evasion? (Issue 2)
- If so, were the transactions which are the subject of this appeal connected with that evasion? (Issue 3)
- If so, did or should the Appellants have known that the transactions were so connected? (Issue 4)
Issues 1, 2 and 3 were not contested. MD Construction accepted that there had been tax loss resulting from fraudulent evasion and that its deals were connected with that evasion. On issue 4 the directors denied that they had known about the fraud or that they should have known.
The FTT heard evidence from the HMRC officers which conducted the enquiry and also from the company directors. Mr Dunbar spent two days giving evidence but was unable to provide either evidence of having undertaken any due diligence regarding the deals or an explanation of the role of Mr Howard (the individual who introduced the deals to the company).
The Tribunal concluded as follows (para. 127):
The way in which [the first deal] came about, and the ease with which it happened was obviously indicative of contrivance. This deal really appeared “too good to be true”. It should have alerted Mr Dunbar, or any reasonable person in his position, that all was not as it seemed. But Mr Dunbar was just interested in the profit, and how much the Company would make. He was closing his eyes to everything else
The circumstances of the deals which followed this first deal were similar.
The Tribunal was satisfied that the circumstances of the deals were “such that the company should have been aware that the transaction was connected to fraud” and, therefore, the appeal was dismissed.
The Tribunal stopped short of finding that “the company did, through its directors actually know of a connection to fraud.”
The decision contains a useful analysis of the legal tests which apply when determining whether VAT recovery can be denied to a taxpayer who is not directly involved in fraud but whose transactions are connected to a fraud.
In their first deal the company directors were persuaded to act as an intermediary in a £140,000 back to back sale of scrap metal between two companies with which they had no prior connection. The deal took place within days of being first proposed and MD Construction made a £2,300 profit. There was no due diligence surrounding the deal which was judged to be “too good to be true”. Despite the fact that this deal prompted a visit by HMRC at which the risks of becoming involved in fraud were covered, the directors entered into five more deals with a similar lack of curiosity regarding the provenance of the product or the identities of the contracting parties.
This case underlines the fact that the test to be applied in such cases is whether the fact that fraud was involved “should” have been known.
[1] This appeal was brought by MD Construction (Bradford) Limited (“the Company”) on 20 April 2015. It challenges HMRC's decision dated 9 December 2014 (upheld at departmental review on 23 March 2015), following extended verification, to deny the Company's claim for input tax amounting to £70,993.33 in relation to the period 1 June 2013 to 31 August 2013 (i.e., VAT quarter 08/13) and to amend the Company's VAT return accordingly.
[2] The VAT owed was adjusted to £45,240 owing to an inaccuracy in the return for the 08/13 period. In a summary decision released on 19 February 2016, the Tribunal (Judge Richard Thomas) decided that the requirement to pay £45,240 would cause the Company to suffer hardship, and so decided that the appeal could be entertained by the Tribunal without the payment of that sum.
[3] The Appellant is a legal person. It operates through natural persons, namely its directors, Mr Michael Dunbar and Mrs Keeley Dunbar, who are a married couple. There are no other directors. The Appellant has about 23 employees. At the time of the wholesale scrap metal deals in question, the Company had been trading in the construction industry – as a house-builder and commercial contractor – for over 20 years, and had been registered for VAT since 1997.
[4] The denied claim for input tax relates to a series of individually identified transactions (“the Deals”), each involving the wholesale purchase and sale of non-ferrous (copper) scrap metal.
[5] The details of the Deals are as follows:
| Deal | Purchase Invoice Date | Quantity (Kg) | Supplier to the Appellant | Customer from the Appellant | Net Invoice £ | VAT £ 1 |
| 1 | 14.6.13 | 23,469 | Parr Metals UK Ltd | Inter Trade Global | 89,299 | 17,859 |
| 2 | 26.6.13 | 47,000 | Parr Metals UK Ltd | Douglas Waste Management | 175,780 | 35,156 |
| 3 | 16.7.13 | 23,545 | Parr Metals UK Ltd | Douglas Waste Management | 89,980 | 17,978 |
[6] The Company had only ever undertaken three scrap metal transactions before Deal 1. They are referred to in this Decision as Deals A, B, and C. The earliest, Deal A, took place on 28 March 2013 and was a purchase by the Company from Douglas Waste Management Ltd with a sale to Manholme Associates trading as Yorkshire Metal Recycling Ltd. Deals B and C both took place on 17 May 2013. Both were purchases by the Company from GTC Young Ltd and were sales by the Company to Morley Waste Traders.
[7] Deals A, B and C (i) all fell into the VAT period (05/13) immediately preceding the VAT period which is under scrutiny in this appeal, (ii) were not subject to extended verification, and (iii) were not subject to any denial of input tax. Indeed, in its Skeleton Argument, HMRC accepts that it has been unable to trace Deal A definitively to a tax loss.
[8] Nonetheless, it seems to us that the circumstances of Deals A, B, and C do have some relevance for the purposes of this decision. They provide an important part of the Company's overall trading picture, and it would be artificial to ignore them, especially given two particularly prominent features: (i) they were all “back-to-back” purchases and sales; and (ii) they involved Mr Chris Howard, who played an important role in introducing the Appellant to the scrap metal business, and in bringing about those deals. We shall return to both these features below.
[9] The right to deduct input tax is derived from articles 167 and 168 of Council Directive 2006/112/EC of 28 November 2006 which has been implemented into UK domestic law by sections 24–26 Value Added Tax Act 1994 and regulation 29 of The VAT Regulations 1995 (SI 1995/2518).
[10] In brief terms, if a trader has incurred input tax which is properly allowable, he is entitled to set it against his output tax liability (or to receive a repayment if the input tax credit due to him exceeds that liability). Evidence is required in support of a claim: see article 18 of the Sixth Directive and regulation 29(2) of the 1995 Regulations. Traders are required, amongst other things, to hold or provide any document required by regulation 13 of the 1995 Regulations or such other evidence to support the claim as HMRC may direct.
[11] An exception to the above entitlement was identified by the European Court of Justice in the joined cases Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559. In a judgment on references for a preliminary ruling, the ECJ articulated the legal basis and circumstances in which the right to deduct may be lawfully denied by the taxation authorities:
51. […] it is apparent that traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of...
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