The First-tier Tribunal have published its judgment in the case of Fulfillment Logistics UK Limited v HMRC [2023] UKFTT 00131 (TC). The tribunal dismissed the appeal in respect of the following matters upholding HMRC’s position that the company was knowingly party to fraudulent activity and as such:
- input VAT deduction should be denied under Kittel principles;
- output VAT should have been charged on supplies to its customer as it had a fixed or permanent establishment in the UK; and
- the relevant assessments were not made out of time.
Background
Fulfilment Logistics UK Ltd (FLL), a UK company, provided fulfilment services to an online contact lenses seller Contactlenses Limited (CLL), a company registered in the Seychelles. Mr Jade Lambert was a director and part shareholder of the appellant company while CLL was owned by a Mr and Mrs Dreyer.
The two companies effectively carried on a business (“the contact lens business”) that had originally been established in the UK, the tribunal commenting that “a layperson observing the premises, principally at the relevant industrial units in Bristol, would find no material difference in the physical operation of the business from 2005 to 2018, save the natural evolution and growth of a small business.”
The tribunal judged on the evidence that:
- “we are satisfied that, notwithstanding there being no direct evidence from the Dreyers, that there was a deliberate scheme to move the Contact Lens Business offshore with a view to evading VAT”; and
- “we did not find Mr Lambert to be a reliable witness. He accepted in cross examination that he has lied and we find his evidence was at times partial, evasive and not credible”.
The input tax issue
Under Kittel an input tax deduction is denied when “…a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods”. It applies “upstream or downstream in the chain of supply”. In failing to charge output VAT on sales to CLL, FLL was party to fraud and the tribunal judged that Mr Lambert was fully aware of this stating:
“We have found Mr Lambert was closely involved with CLL. He was CLL’s finance manager and party to day-to-day activities of the company. He was familiar with the VAT arrangements from working for CLUK and, with his close association with the Dreyers, we find it inconceivable that Mr Lambert did not know the real reasons for the move to CLL. He went along with the 2007 sale, became the finance manager for CLL and took advice on from The VAT Consultancy in 2013. In all that time we find he would have been told the real reason for the CLL structure”.
The output tax issue
The appellant had argued that there was no need to charge output VAT on sales to CLL as it was based in the Seychelles and had no fixed or permanent establishment in the UK. However, the tribunal judged that:
“The Dreyers made decisions outside the UK, but there was no evidence of any presence outside the UK, which is not surprising given answers given by Mr Dreyer and produced in the Seychelles proceedings that in his view CLL was ‘a totally online company with completely outsourced functions’ so that ‘there is no single state or jurisdiction where the company operates from…’ … Nevertheless, we are satisfied that the UK activities taken as a whole represented: ‘…a sufficient degree of permanence and a suitable structure in terms of human and technical resources to enable it to receive and use the services supplied to it for its own needs’ (Implementing Regulation 11). Whilst some decisions were made by the Dreyers the reality is that the CLL business was managed on a day-to-day basis from the UK and specifically by Mr Lambert.”
The time-limit issue
The appellant had argued that the relevant assessments were made out of time. However, the tribunal judged that:
- the 20-year limit (VATA 1994, s. 77(4A)(a) and (b)) applied as its findings in respect of the input VAT issue confirmed that the loss of VAT was brought about deliberately; and
- the one-year limit (VATA 1994, s.73(6)(b)), while potentially applicable to one of the disputed years, was not relevant as HMRC had not acted unreasonably.
https://www.bailii.org/uk/cases/UKFTT/TC/2022/TC08736.html
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