The First-tier Tribunal has dismissed an appeal by a company (Konstruct Recruitment Ltd – “Konstruct”) against the denial of input VAT recovery arising because the transaction was connected with the fraudulent evasion of VAT by another person and the company knew or should have known. The FTT also dismissed the appeal against the associated penalty and an appeal by the company’s director (Rajanbir Singh – “RS”) against a personal liability notice (PLN) (Konstruct Recruitment Ltd and Anor v HMRC [2023] UKFTT 745 (TC)).
The company acted as a middleman in the construction industry, supplying labour sourced from other companies to its customers. Whenever a supplier was found to have committed VAT offences, Konstruct rapidly and fortuitously found a new supplier, which in turn was subsequently found to be guilty of an offence.
The FTT were satisfied that HMRC had established fraudulent tax losses and that there was an overall scheme for the fraudulent evasion of VAT connected with transactions that were the subject of the appeal. The issues to determine were whether Konstruct, through its sole director, RS, knew or should have known that the relevant transactions were connected to fraud and, if so, were the actions of Konstruct, which give rise to the s. 69C penalty, attributable to RS? Considering the facts, the FTT concluded:
“Having carefully considered all of the circumstances of this appeal, we have come to the conclusion for the reasons set out below that, at the very least RS, and therefore Konstruct, should have known that the transactions the subject of the Denial Decision were connected to the fraudulent evasion of VAT. There was no specific factor or single piece of evidence that led us to our conclusion, rather, it was the overall circumstances surrounding the transactions entered into by Konstruct. The transactions which were undertaken by Konstruct all bore features that, in our view, would concern a legitimate businessman or trader. “
In summary, the matters considered by the FTT in reaching their conclusion were:
- Overall scheme to defraud HMRC – “We are satisfied that this was an orchestrated fraud … We do not accept that Konstruct was an innocent victim of fraudsters or just “unlucky”.
- Knowledge of fraud – “Konstruct knew it was trading with suppliers linked to tax losses and demonstrated no interest whatsoever in ceasing to do so. It was only when HMRC made trading sufficiently inconvenient for Konstruct that it then moved on to the next labour supplier.”
- Due diligence – “Konstruct deliberately closed its eyes to the risks and did not ask any questions about the inconsistency between the sub-contractors’ trade descriptions and the labour supply work that they were engaged in.”
- Contracts – “We find that Konstruct’s willingness to assume sole liability for potential penalties for ‘breach of contract’ is further evidence of the transactions not being typical commercial arrangements or agreements.”
- No evidence of negotiations with suppliers – “in our judgment, if the transactions had been commercial transactions, we consider that some evidence (electronic or otherwise) of the negotiations would exist particularly as RS was very rarely in the office as he was either working on construction sites or travelling.”
- Position within the chain of transactions – “On each occasion the labour was supplied direct by Konstruct’s supplier to the main contractor without Konstruct adding any value to the transactions. … we agree with HMRC that there must be a limit to how many companies, each adding no value to the transactions, can take such a mark-up before the minimum wage payable to the worker is consumed.”
- Nature of suppliers – “We do not accept as plausible RS evidence that it was coincidence or plain bad luck that Konstruct happened to purchase a supply of labour from six successive traders all of whom were responsible for tax loss and who were predominantly newly incorporated businesses with no obvious experience in the supply of labour to the construction industry.”
- RS’s role – “RS confirmed that he was solely responsible for the sourcing and supplying of labour. His evidence was that he rarely attended the office and continued to work on construction sites as a concrete pourer whilst simultaneously running a labour supply business with a turnover of £500,000 to £1 million per quarter with responsibility for hundreds of workers. We do not accept that evidence as plausible and agree with HMRC’s submission that these circumstances are consistent with someone with no previous labour supply experience who is required to put very little time into running a labour supply business because the trading is being conducted in an artificial environment as part of an orchestrated scheme.”
https://www.bailii.org/uk/cases/UKFTT/TC/2023/TC08925.pdf
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