Why our client needed our help
Our client was a director of three construction companies that had become involved in a substantial HMRC VAT investigation.
HMRC alleged that payments made in connection with labour supplies were linked to the fraudulent evasion of VAT. It denied the companies approximately £3.37 million in input VAT and imposed penalties under section 69C of the Value Added Tax Act 1994.
HMRC then sought to make our client personally liable for two-thirds of the penalties under section 69D. The personal assessments were:
- £209,987.20 in relation to the first company
- £307,743.20 in relation to the second company
- £156,522.80 in relation to the third company
Our client therefore faced a total potential personal liability of £674,253.20.
The financial consequences were significant. The case also involved serious allegations concerning transactions said to be connected with VAT fraud, although the Tribunal expressly recorded that HMRC had not alleged criminality by any of the appellants.
Our client needed specialist advice to challenge both the underlying VAT case and HMRC’s attempt to transfer the resulting penalties to him personally.
How we helped
The FWJ tax disputes team, led by Andy Lynch, represented the director throughout the appeal process.
We carefully examined the basis on which HMRC sought to deny the companies’ input VAT and transfer the penalties to our client personally.
HMRC’s case relied on the principles established in Axel Kittel v Belgian State. Under the Kittel principle, HMRC may deny input VAT where it proves that:
- a VAT loss occurred
- the loss resulted from fraud
- the taxpayer’s transactions were connected with that fraudulent loss
- the taxpayer knew, or should have known, about that connection
A key part of the defence was ensuring that each of those requirements was considered separately.
The fact that a business may have had concerns about a supplier, or may have been criticised for its due diligence, does not remove HMRC’s obligation to prove that the disputed transactions were actually connected with a fraudulent loss of VAT.
FWJ instructed Colm Kelly of Counsel to represent our client at the seven-day hearing before the First-tier Tribunal.
The Outcome
The Tribunal allowed the remaining appeals.
It found that HMRC had failed to prove that the relevant payments were connected with the fraudulent loss of VAT. That failure was decisive.
Although the Tribunal considered that the appellants should have known of the connection had one been established, HMRC had not proved that the required connection actually existed.
As a result, HMRC’s substantive VAT case failed. The associated section 69C penalties and the section 69D personal liability assessments against our client could not stand.
The decision removed a potential personal liability of more than £674,000 and brought an end to a lengthy and demanding appeal process for our client.
The judgment also highlights an important principle for directors facing HMRC claims. HMRC must prove every element of its case. Concerns about due diligence or what a taxpayer should have known are not enough where HMRC cannot establish the underlying connection between the transactions and VAT fraud.
How FWJ can help with HMRC claims against directors
Our tax disputes team advises companies, directors and individuals facing complex HMRC investigations, VAT assessments, tax penalties and personal liability claims.
We also advise directors facing claims by HMRC, including appeals to the First-tier Tribunal and cases involving allegations that transactions were connected with tax fraud.
