The First-tier Tribunal has rejected the appeal in Everyday Wholesale Ltd v HMRC  UKFTT 60 (TC). The appellant had appealed assessments denying input VAT deductions on the grounds that the input tax was incurred in connection with the fraudulent evasion of VAT, and that the appellant either knew or should have known this.
The earlier Kittel judgment had established that “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”.
The business owner, Mr Johal, who denied knowledge of fraud by other parties in his supply chain, was held to be an unreliable witness. In deciding this, the tribunal judged that, because of the lack of contemporaneous documents, it was correct to draw adverse inferences in respect of his evidence.
The tribunal judged that “on the balance of probabilities, Mr Johal, as the person to be attributed with the knowledge in relation to the appellant, had actual knowledge that the transactions the appellant undertook … were all connected with fraudulent evasion of VAT.”
However, even if he had not actual knowledge then “the transactions in question were devoid of commercial reality to the extent that a taxpayer … should have known that the ‘only reasonable explanation’ for the transaction in which he was involved was that it was connected with fraudulent evasion of VAT. By that reckoning, Mr Johal ‘should have known of that fact’.”
Furthermore, “if a taxpayer chooses to turn a blind eye to the ‘only reasonable explanation’ being of fraud, or if he chooses not to make the necessary enquiries as concerns the legitimacy of a transaction as expected of a prudent trader, then the taxpayer ‘should have known’”.