As HMRC continue to apply the Kittel principle to increasing numbers of industries and businesses, this decision reinforces that:
- Kittel cases can be won by taxpayers, but the provision of detailed taxpayer evidence (including as to market opportunities and market characteristics) can be crucial.
- The Tribunal will not simply accept HMRC's "suspicions" or "concerns" as proof, and instead will require HMRC to adduce cogent evidence (such as industry comparators) to demonstrate that the circumstances of particular trading were so different to that present in legitimate trading as to lead to the objective conclusion that the taxpayer knew or should have known of a connection with fraud.
HMRC denied input tax on the basis that the relevant transactions were connected with a scheme to defraud the Revenue and that the company knew, or should have known, that this was the case. In other words, HMRC applied what is known as "the Kittel Principle".
In addition, the Appellant was assessed by HMRC to output tax, and the company's claim to zero rating of the relevant transactions was denied on the basis that the relevant transactions were connected with a scheme to defraud the Revenue, and the company knew, or should have known, that this was the case. In other words, HMRC applied what is known as "the Mecsek Principle".
Both sets of assessments were considered and upheld on Review by HMRC. The company appealed to the First-tier Tribunal.
The First-tier Tribunal allowed the taxpayer's appeal in full. The Tribunal found that HMRC had simply raised various issues in support of the Kittel assessments and then invited the Tribunal to agree with those issues without "advancing sufficient cogent evidence" to discharge the burden of proof. Importantly, the Tribunal stated:
"We acknowledge that most of the issues listed by HMRC were matters that raised concerns and suspicions for Mr Mills and his predecessors as case officers, but in defending the assessments HMRC must go beyond concerns and suspicions, and must advance probative evidence of the issue in question. It is possible to infer relevant facts from circumstantial evidence, but that circumstantial evidence must exist and be presented in a credible and persuasive form."
One of the "issues" relied on by HMRC was that the taxpayer had received payment for goods from a third party (rather than the company to whom the good had been supplied). The Tribunal rejected HMRC's suggestion that this was indicative of knowledge or means of knowledge of fraud, stating:
"This is, we consider, another example of a mobile phone trade warning flag being applied without adequate explanation of why it should also apply to wholesale grocery transactions. We accept the evidence of [the taxpayer] that customers abroad paying Sterling invoices via FX bureaux was something the Company was familiar with for several customers over a period of time, and so this did not raise any suspicions when it occurred on a few of the deals covered by the Disputed Assessments."
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