Northside Fleet Ltd v R & C Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 September 2022 |
| Neutral Citation | [2022] UKUT 256 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2022] UKUT 256 (TCC)
Judge Jonathan Richards, Judge Nicholas Aleksander
Upper Tribunal (Tax and Chancery Chamber)
VAT – Denial of input tax recovery – Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559– Limb four of the Kittel test – Whether taxpayer should have known that its purchases were connected with fraudulent evasion – Whether FTT followed correct approach – Yes – Whether decision perverse – No – Appeal dismissed.
In Northside Fleet Ltd v R & C Commrs [2022] BVC 509, the Upper Tribunal (UT) upheld the decision of the FTT in Northside Fleet Ltd [2021] TC 08230 that the taxpayer should have known of the connection to fraud and HMRC were therefore correct to deny input tax recovery.
Northside was involved in the sale of used cars. They were refused recovery of input tax on certain vehicles under the Kittel principles. The vehicles had been purchased from four suppliers, each of which fraudulently defaulted on their obligations to pay output tax. The FTT was satisfied all four limbs of the Kittel test were satisfied in relation to the disputed transactions and upheld the denial of the right to recover input tax.
It was accepted by both parties to this appeal the first three limbs of the Kittel test were satisfied but Northside challenged the approach of the FTT in relation to the fourth limb and the conclusion they should have known of the connection to fraud. They made four submissions:
- The FTT applied the wrong test.
- The FTT impermissibly focused too narrowly on the extent of Northside’s due diligence and ignored other relevant factors.
- The FTT was diverted from the practical application of the ‘should have known’ test by consideration of a lack of written records of vehicle specifications.
- The overall conclusion of the FTT could not be supported by its findings of primary facts, which were not disputed.
Both parties accepted the FTT’s statement of the applicable law and their findings of primary fact but submission 1 asserted the FTT proceeded on the basis that means of knowledge of a risk was sufficient to satisfy the ‘only reasonable explanation’ test. The UT rejected this. It was permissible for the FTT to proceed on the basis that means of knowledge existed if a cumulation of factors, each pointing to a risk, taken together demonstrated to a reasonable trader the disputed transactions actually were connected with fraud. The FTT had also stated it was aware connection with fraud must be the only reasonable explanation for the transactions.
Submission 2 was also rejected, the UT being satisfied all the factors to which Northside referred had been considered.
Submission 3 was rejected because it was based on a single paragraph in the decision but, read as a whole, the decision is both clear and accurate as to the test to be applied.
In relation to submission 4, the FTT had concluded that appropriate due diligence would have identified potential discrepancies. Two of the four suppliers had no connection to the declared business premises and the FTT concluded this would have been discovered had a check been made on the premises, while a search of records at Companies House would have highlighted a connection to a person HMRC had expressly warned the taxpayer about. Although there were other factors pointing away from fraud the FTT was entitled to decline to be persuaded by them. The UT was also satisfied that, in asking itself what information Northside would have discovered had it made rudimentary checks on the third supplier, the FTT was following a reasonable line of enquiry as to its means of knowledge. Although critical of some aspects of the written decision, those criticisms were insufficient to demonstrate the conclusion was perverse. Similarly, whilst recognising different tribunals may have reached different conclusions on the strength of some indications, relating to the fourth supplier, the UT were, nonetheless, satisfied the FTT was entitled to make the evaluative judgements that it did and were not satisfied the overall conclusion was perverse.
The appeal was dismissed.
This decision underlines the difficulty taxpayers face in attempting to overturn a decision of the FTT in a Kittel case. It was not enough to establish, given the findings of fact, that the FTT could have come to a different conclusion, as may well have been the case here. Northside had to establish, that no reasonable tribunal could have reached the same conclusion as the FTT. This is a much higher hurdle, particularly where several factors must be evaluated and weighed against one another, creating a degree of latitude.
It will also be of interest to anyone considering the fourth limb of the Kittel test and what may be required of taxpayers.
Comment by Angela Bedi, Senior Tax Writer at Croner-i.
Howard Watkinson, Counsel, instructed by ASW Legal Limited appeared for the appellant
Joanna Vicary, Counsel, instructed by General Counsel and Solicitor for HM Revenue & Customs appeared for the respondents
[1] The appellant company (“Northside”), at material times, carried on a business involving the sale of used cars. Its sole director and shareholder was Mr Alan Harford. By a decision released on 11 August 2021 (the “Decision”) of the First-tier Tribunal (Tax Chamber) (the “FTT”), the FTT upheld HMRC's decision to refuse Northside's claims to recover input tax on purchases of certain vehicles in its VAT periods 01/17 to 07/17. Also, by the Decision the FTT allowed Northside's appeal against HMRC's decisions that certain vehicles sold in those VAT periods should be standard-rated for VAT purposes, rather than zero-rated as Northside had claimed. With the permission of the FTT, Northside appeals against the Decision as relating to the denial of input tax credit. Neither party seeks to disturb the FTT's conclusions on the zero-rating issue.
[2] In the remainder of this decision, references to numbers in square brackets are to paragraphs of the Decision unless we specify otherwise.
[3] HMRC justified their decision to deny Northside credit for input tax by reference to the judgment of the Court of Justice of the European Union in Kittel v Belgium; Belgium v Recolta Recycling SPRL(Joined Cases C-439/04 and C-440/04) [2008] BVC 559 (“Kittel”). Under the Kittel principle, Northside's entitlement to input tax credit would be denied if all of the following conditions were met:
- HMRC had suffered a loss of VAT.
- That loss resulted from fraudulent evasion.
- Northside's purchases of vehicles were connected with that fraudulent evasion.
- Northside knew, or should have known, that its purchases were so connected.
[4] Northside's relevant purchases of vehicles (the “disputed transactions”) were from four suppliers, defined at [30] as “Mohawk”, “Instant”, “KWD” and “DLL”. The identity of these suppliers, and the persons with whom Northside dealt when arranging purchases of vehicles from them was of some significance in the proceedings and can be summarised as follows:
- Mohawk was the trading name of a business carried on by a Mr Joseph Murdock as sole trader. Northside dealt with Mr Murdock in relation to vehicle purchases.
- Instant was a private limited company. Northside dealt with a Mr Maguire, who was a director of Instant, in relation to vehicle purchases.
- KWD was a private limited company. The evidence of Mr Harford was that he could not remember who he dealt with at KWD.
- DLL was a private limited company. Mr Harford's evidence was that he dealt with a Mr Paul Donnelly at DLL. However, the FTT concluded at [65(5)] and [112] that Mr Donnelly had no authority to represent DLL at relevant times in 2017 since he had ceased being a director of DLL and had sold all of his shares to a Ms Seanan McNulty in 2016. HMRC invite us to read [65(5)] and [112] as finding that Mr Harford was lying when he said that he had dealings with Mr Donnelly and that, in fact, he was dealing with someone else. However, in our judgment, the FTT's findings were more nuanced. It certainly found that Mr Donnelly was not representing DLL in 2017. However, at [112] the FTT said only that this conclusion admitted of two possibilities: either that Mr Harford did have dealings with Mr Donnelly, but in those dealings Mr Donnelly had no authority to represent DLL, or that Mr Harford did not deal with Mr Donnelly at all but in fact dealt with someone else who did have authority to represent DLL. It did not decide between these two competing possibilities. The FTT made detailed criticisms of Mr Harford's evidence at [57] and [58]. If it had concluded that he was lying about his dealings with Mr Donnelly, it would have said so expressly rather than simply commenting, at [58], that Mr Harford's claim to be dealing with Mr Donnelly was strange.
[5] Northside accepted that limb (1) of the Kittel test was satisfied by reference to purchases of vehicles from these four suppliers ([33]). It put HMRC to proof on limb (2). The FTT found at [72], [75], [78] and [84] that limb (2) was satisfied because each of these suppliers fraudulently defaulted on their obligations to pay output VAT. Since neither party seeks to challenge that conclusion, we need say little about the process of reasoning that led the FTT it.
[6] Northside accepted (see [36]) that, to the extent that limb (2) of the Kittel test was satisfied, so was limb (3).
[7] Northside's challenge to the Decision is solely to the FTT's conclusion on limb (4). More specifically, since both sides are content to accept the FTT's conclusion, at [104], that Northside did not have actual knowledge that its purchases were connected with fraudulent evasion of VAT, the challenge is to the FTT's conclusion that Northside “should have known” of such a connection.
[8] Both parties accept the FTT's statement...
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