VAT & Constructive Knowledge

The First-tier Tribunal has allowed an appeal in part in A & A Contractors Midlands v HMRC, and in doing so has shown how the date of constructive knowledge is fixed in a Kittel case.

The company provided concreting work on construction sites and sub-contracted labour from suppliers who all defaulted on their VAT obligations. HMRC concluded that each was engaged in the fraudulent evasion of VAT. It denied input tax on Kittel grounds, cancelled the VAT registration on Ablessio grounds, raised assessments to recover the input tax deducted, penalised the company, and made the sole director personally liable for the whole of that penalty.

The Tribunal accepted that the suppliers were fraudulent but parted company with HMRC on timing, finding that the company did not have the necessary knowledge when the transactions began. The turning point was when HMRC wrote to the company about one supplier, advising that transactions with that entity had been traced to tax losses.

That letter, concerning a single supplier, triggered an immediate obligation to make reasonable enquiries into the trustworthiness of all of the company's suppliers, because the suppliers, the supplies and the transactions were similar in character. No enquiries were made and trading continued. From that point the company should have known that its further transactions were connected to fraudulent evasion, and the denial and assessments were restricted to transactions entered into HMRC's first notification.

Deregistration was upheld as proportionate, given the continued trading with fraudulent suppliers without due diligence after that date. The company penalty was ordered to be reduced to reflect the shorter period of culpability. The director's liability for the full penalty was upheld, the company's conduct being entirely attributable to him, so his exposure falls only because the company's penalty falls.

Two points follow. A tax loss letter naming one supplier is not a self-contained item to be answered and filed. Where a business buys similar supplies from similar suppliers, it puts the whole supply base in question, and the enquiries made in response need documenting. Second, the date of knowledge is worth contesting, because a successful challenge to HMRC's timeline reduces the assessment, the penalty and the director's personal liability together.