In N Sheth and another v HMRC [2022] UKFTT 167 (TC) (17 May 2022), the FTT ruled that HMRC’s evidence to penalise a taxpayer connected with missing trader VAT fraud was insufficient, and it had not met the necessary burden of proof and so discharged the penalties against the individuals.
HMRC suspected that a company was involved in missing trade VAT fraud and issued an assessment for circa £3m of output VAT (denying the application of the zero-rate to the cross-border movement of goods from the UK). The company went into liquidation and did not pay the tax demanded. However, HMRC has the power to transfer a penalty to officers of the company and did so here. The penalty in question was circa £1.8m.
Firstly, HMRC argued that the individual’s appeal against the penalty should be struck out as an abuse of process. This was because the company had initially appealed against the assessment, but this appeal had been withdrawn because the liquidator did not have the funds to peruse it. It said that the officers should not be allowed to argue that the input tax was recoverable: the company had had the opportunity to do that, but by withdrawing its appeal must be taken to have conceded the matter. The FTT did not agree and held that it was in the interests of justice that the individuals should be allowed to appeal.
It then went on to consider the substantive point: whether the company, through its officers, should have known that its transactions related to the fraudulent evasion of VAT. This is where the burden of proof point comes in. There is no doubt that the supply chain was questionable, mainly involving transactions in Poland, but HMRC had not provided compelling evidence, as supposed to supposition, of this particular company’s involvement in the supply chain. The FTT identified several problems with HMRC’s evidence in this case, not least that much of it focused on the position of another UK company in the supply chain. Much of HMRC’s evidential approach was to produce large volumes of information describing a general web of VAT fraud, rather than evidence directly linked to the taxpayer.
The FTT was highly critical of the appellants at various points in the decision but nonetheless concluded that HMRC’s evidence was insufficient, and it had not met the necessary burden of proof and so discharged the penalties against the individuals.
Why it matters: This is an important case which demonstrates yet again how crucial questions of burden of proof are in tax appeals. The decision revisits well-trodden principles relating to missing trader VAT fraud and provides a useful summary of the procedural elements. The decision is also helpful in setting out precisely what a ‘deliberate inaccuracy’ means in the context of VAT returns.
In N Sheth and another v HMRC [2022] UKFTT 167 (TC) (17 May 2022), the FTT ruled that HMRC’s evidence to penalise a taxpayer connected with missing trader VAT fraud was insufficient, and it had not met the necessary burden of proof and so discharged the penalties against the individuals.
HMRC suspected that a company was involved in missing trade VAT fraud and issued an assessment for circa £3m of output VAT (denying the application of the zero-rate to the cross-border movement of goods from the UK). The company went into liquidation and did not pay the tax demanded. However, HMRC has the power to transfer a penalty to officers of the company and did so here. The penalty in question was circa £1.8m.
Firstly, HMRC argued that the individual’s appeal against the penalty should be struck out as an abuse of process. This was because the company had initially appealed against the assessment, but this appeal had been withdrawn because the liquidator did not have the funds to peruse it. It said that the officers should not be allowed to argue that the input tax was recoverable: the company had had the opportunity to do that, but by withdrawing its appeal must be taken to have conceded the matter. The FTT did not agree and held that it was in the interests of justice that the individuals should be allowed to appeal.
It then went on to consider the substantive point: whether the company, through its officers, should have known that its transactions related to the fraudulent evasion of VAT. This is where the burden of proof point comes in. There is no doubt that the supply chain was questionable, mainly involving transactions in Poland, but HMRC had not provided compelling evidence, as supposed to supposition, of this particular company’s involvement in the supply chain. The FTT identified several problems with HMRC’s evidence in this case, not least that much of it focused on the position of another UK company in the supply chain. Much of HMRC’s evidential approach was to produce large volumes of information describing a general web of VAT fraud, rather than evidence directly linked to the taxpayer.
The FTT was highly critical of the appellants at various points in the decision but nonetheless concluded that HMRC’s evidence was insufficient, and it had not met the necessary burden of proof and so discharged the penalties against the individuals.
Why it matters: This is an important case which demonstrates yet again how crucial questions of burden of proof are in tax appeals. The decision revisits well-trodden principles relating to missing trader VAT fraud and provides a useful summary of the procedural elements. The decision is also helpful in setting out precisely what a ‘deliberate inaccuracy’ means in the context of VAT returns.
