Middlesex Wines Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 24 March 2022 |
| Neutral Citation | [2022] UKFTT 107 (TC) |
| Court | First-tier Tribunal (Tax Chamber) |
[2022] UKFTT 107 (TC)
Judge Zachary Citron, Ms Gill Hunter
First-tier Tribunal (Tax Chamber)
Value added tax – Input tax disallowance – Kittel – Taxpayer ran cash and carry alcohol business – Small business – Sold to hundreds of retailers – Input tax denied on 81 purchases of alcohol from three suppliers over eleven months – Taxpayer had been told by HMRC that others of its suppliers linked to fraudulent defaulters – Taxpayer's checks on suppliers were formalistic, tick box – Only reasonable explanation of circumstances of purchases was that they were connected with fraudulent VAT evasion – It therefore should have known of the connection – Appeal dismissed.
[1] This was an appeal against HMRC's decision denying input tax of £581,104 claimed by the appellant (“Middx”) in the 07/16, 10/16, 01/17 and 04/17 VAT quarterly accounting periods. HMRC's grounds for the input tax denial were that the purchases (the “purchases”) on which the input tax was incurred were connected with the fraudulent evasion of VAT and Middx either knew, or should have known, this.
[2] HMRC's decision was made on 26 July 2018 and upheld by them on review on 2 October 2018. Middx notified its appeal to the Tribunal on 29 October 2018.
[3] In this decision, “input tax” and “output tax” have the meanings they have in the Value Added Tax Act 1994.
[4] We had an electronic hearing bundle of 4,309 pdf pages. This included witness statements of seven officers of HMRC (Mandalia, Crofts, Harris, Foster, Noble, Gardam, Bulsara and Musson) and of Mr Dalil Singh, director of Middx.
[5] We heard oral evidence from Officer Mandalia (the only one of HMRC's officers that Middx wished to cross examine) and Mr Singh.
[6] The burden of proof in this appeal fell on HMRC. We found their evidence as to matters of fact of which they had first-hand knowledge to be reliable (and largely unchallenged). Where their evidence (or indeed Middx's) made inferences from such facts, or expressed opinions, and those inferences or opinions were relevant to the matters before us in this appeal, we considered them carefully, but did not afford them inherent evidential value, as the making of inferences, and coming to conclusions on the matters in this appeal, was ultimately a matter for our own judgement, based on our findings of fact (which follow).
[7] We treated Mr Singh's factual evidence cautiously, given the dearth of contemporaneous documentary evidence about the purchases (apart from formalities like invoices) such as emails, letters, company board minutes or notes of commercial interactions between Middx and the three suppliers involved in the purchases. In general we accepted Mr Singh's evidence where it was corroborated by contemporaneous documents or by HMRC's evidence, or expressed common-sense commercial notions from the perspective of an operator of a small business.
[8] There were 81 purchases of alcoholic goods from three suppliers over an eleven month period:
- 52 purchases from Thames Wines Ltd (Thames Wines) over six months, between 5 May and 2 November 2016;
- 4 purchases from N&R Supplies Ltd (N&R) over 24 days, between 24 November and 17 December 2016; and
- 25 purchases from Safina London Ltd (Safina) over two months, between 27 January and 31 March 2017
[9] It was an agreed fact that all the purchases were connected to a “tax loss”.
[10] The purchases from N&R and Safina were Middx's first transactions with those suppliers; however, Middx had transacted with Thames Wines prior to the first purchase (Middx made payments to Thames Wines on 15 October 2015 of about £15,000).
[11] Middx was a small business run by the company director and (with his wife) shareholder, Mr Singh. Mr Singh was the controlling mind of Middx. In 2016/2017 (i.e. around the time the purchases took place) the business was principally a “cash and carry” selling alcoholic goods to retail customers. Middx had operated since 2013 from an 8,500 sq ft warehouse in Hayes (West London). Middx had three vans (used for deliveries to customers) and rented forklift trucks for use in the warehouse; it had a handful of staff, mostly family members.
[12] Middx had many hundreds of customers, mostly retail outlets for alcoholic goods. Middx's onward sales of the goods acquired in the purchases were commercial and arm's length.
[13] A sentence in an HMRC note of a visit to Middx in 2012 said: “Trader maintained that throughout the chain of transactions, the customer pays before the supplier purchases goods”. On our assessment of the evidence as a whole, this sentence was describing the situation in 2012, when Middx's business was “under bond” trading, rather than the “cash and carry” business which predominated in 2016/2017. We find that Middx's “cash and carry” business in 2016/2017 did not operate by, first, receiving orders from customers, and then, obtaining those precise supplies. Rather, it was a fast-moving business with hundreds of customers that, like any such business, had to estimate how much stock it needed to meet demand (and did not precisely match orders made by customers to supplies procured from suppliers).
[14] Middx had about 15–20 suppliers for its “cash and carry” business in 2016/2017.
[15] Middx's “cash and carry” business was conducted on the basis that Middx did not pay suppliers prior to delivery. This meant that insurance of the goods prior to delivery was not a commercial risk for Middx. It also meant that Middx had no commercial reason to insist on – and did not in fact enter into – written contracts with its suppliers. Similarly, Middx did not take credit risk on its suppliers and had no commercial reason to check their credit rating.
[16] On applying for VAT registration in 2012, Middx said the estimated value of the taxable supplies it would make in the next 12 months was £300,000. A summary of Middx's VAT returns is in the appendix to this decision.
[17] The input tax denied by VAT period (and percentage of Middx's total input tax for the period) was as follows:
- 07/16: £270,258 (58%)
- 10/16: £168,197 (50%)
- 01/17: £65,798 (38%)
- 04/17: £76,851 (34%)
[18] HMRC made six visit to Middx between 2012 and 2016.
[19] On 13 January 2016 HMRC raised VAT assessments in the amount of £694,180 plus interest in relation to denied input tax in the 1/2015 and 4/2015 VAT quarterly accounting periods (on the grounds that records were not provided to support deduction of the input tax in question); the decision was upheld on statutory review by HMRC on 29 July 2016. The Tribunal informed HMRC on 17 August 2016 that it had received an appeal against this decision by Middx.
[20] HMRC requested records for VAT quarterly accounting periods 01/15, 04/15. 07/15, 10/15 and 01/16 in May 2016 – HMRC received information from Middx in response in August 2016 and, in response to further requests from them, in October 2016.
[21] On 3 March 2017 Middx's application for approval under the Alcohol Wholesaler Registration Scheme (AWRS) was refused. Its appeal against that decision is ongoing.
[22] In 2016/2017, Middx was well aware that there was a serious problem with fraudulent VAT evasion in the alcohol market in which it was trading: it had received letters from HMRC telling it this in 2012 and again in May 2016; HMRC had given it a copy of, and referred it to, their Notice 726Joint and several liability for unpaid VAT; HMRC had spoken of the problem on their visits to Middx. Notice 726 had a section with HMRC's recommendations as to “checks to undertake to help make sure the integrity of your supply chain.”
[23] Middx knew (from the letters from HMRC in 2012 and May 2016) that HMRC operated a “verification” service, under which Middx could send basic details of new suppliers and customers to HMRC, and HMRC would respond within a short time verifying the VAT registration details. HMRC made clear that this service did not serve to guarantee the status of suppliers and purchasers; nor did it “absolve” traders (like Middx) from undertaking their own enquiries in relation to proposed transactions. Middx did not take advantage of this service in relation to the suppliers involved in the purchases.
[24] Middx also specifically knew, because of “tax loss” letters it received from HMRC, that certain of its suppliers were in chains that commenced with a “defaulting trader”:
- prior to the first of the purchases, Middx had been told by HMRC (through four letters, in July and December 2015, and February 2016) that 30 of its transactions in January-June 2015, with a supplier called SS Traders Ltd (a small privately owned company with no public profile), were in a chain that commenced with a defaulting trader, resulting in a loss to the public revenue of approximately £240,000. The gross value of the purchases in question was over £1.2 million.
- during the period in which the purchases took place, Middx was told by HMRC (in letters) of the following further transactions that were in a chain that commenced with a defaulting trader, resulting in losses to the public revenue:on 21 June 2016 Middx was told about losses of approximately £90,000 arising from 13 transactions with a supplier called Neat Trading Ltd (a small privately owned company with no public profile) in February 2015 (the gross value of the purchases was over £0.5 million);on 21 December 2016 Middx was told about losses of nearly £1 million arising from 176 transactions with 12 different suppliers (one of which was Thames Wines), mostly in 2015, but including some in early 2016 and one in 2014. The gross value of the purchases was over £6.7 million. All 12 suppliers were small privately owned company with no public profile. We note that none of the purchases from Thames Wines was...
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