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June's round up of the latest tax investigation news and cases:
Lancer Scott Limited, a Bristol-based construction company, sought a £551,695 reduction in input tax for VAT periods between September 2006 and December 2009. This claim was denied by HMRC. The company's tax advisers, Francis Clark, requested a review in February 2018, but HMRC upheld their decision, leading the company to appeal to the First Tier Tribunal (FTT) in June 2018.
On 25 September 2019, HMRC issued a £126,186 penalty to Lancer Scott, which the company also appealed. Both the VAT deduction and penalty appeals were heard at the tribunal in Bristol.
Lancer Scott claimed input tax for the supply of goods and services, specifically building supplies and equipment hire, from Wilfred Folwell. Over 41 months, the company paid Folwell £3.9 million. Folwell, described as a "professional adviser" to Lancer Scott, had been convicted of money laundering linked to Lancer Scott and two other companies. He was found to have created false invoices to fabricate expenses, thereby providing false records of input tax to offset output tax.
HMRC's primary argument was that Folwell never supplied any goods or services to Lancer Scott. They accused the company's directors of knowingly claiming input tax on Folwell's false invoices. Folwell presented himself as a tax accountant with a focus on property, using company accounts set up under third-party names without their knowledge. These third parties were Folwell's tax service clients who trusted him with their details, not knowing he was opening and controlling bank accounts in their names.
Terence Hosier, a director of Lancer Scott, told police he met Folwell in a bar in the early 2000s and referred to him as a friend. He described Folwell as a "man of many trades" including bookkeeping, supplying building materials, and handling tax issues.
Folwell was arrested in 2010 and prosecuted for fraud and money laundering through his own and associate business accounts, receiving over £14 million from another company, Solaglass. He was sentenced to eight years in prison. During his incarceration, Hosier and another Lancer Scott director, Morian Cooke, visited him. Both were initially involved in the police investigation but were later acquitted of any involvement.
At the tribunal, HMRC solicitor Stuart Biggs argued that no invoices from Folwell were checked by Lancer Scott staff, and there was no confirmation of services being supplied. There was also no evidence that Lancer Scott staff had any contact with companies linked to Folwell.
Tribunal judge Alastair J. Rankin stated, "In essence, he [Folwell] was a professional money launderer who washed the proceeds of a range of crimes including organized crime in the Bristol area. A forensic analysis of his [Folwell’s] bank accounts shows that there were extensive payments from the appellant as well as some of the directors into his accounts. On balance it is probable that directors of the appellant and Micra were rewarded and/or that they were promised future reward."
The tribunal noted that only two construction companies, Lancer Scott and Micra, paid money into Folwell's accounts, which was significant due to the common involvement of individuals. It was deemed essential for any money laundering scheme to have sources of bank transfers that appeared legitimate.
The tribunal concluded that there was enough evidence to prove the items listed in the invoices were not supplied, deeming the tax loss as "deliberate fraud by the appellant." They found sufficient evidence that Hosier knew the VAT loss was deliberate, as most invoices in question were signed off by Bagley or Hosier.
The appeals against the VAT assessment and penalty were dismissed.
In a prolonged tax dispute, the Upper Tribunal has dismissed TV presenter Adrian Chiles’ IR35 case, remitting it back to the First Tier Tribunal (FTT).
HMRC has secured the latest stage in the case concerning whether Chiles’ personal service company, Basic Broadcasting Ltd, was used to reduce tax liabilities. However, the case now returns to the FTT following the Upper Tribunal's decision.
HMRC contends that Chiles should have been classified as an employee, thus subject to income tax and national insurance contributions (NICs) during his work for the BBC and ITV from 2012 to 2017. Consequently, HMRC issued demands for income tax and NICs for this period, asserting that the contracts in question fell within the IR35 intermediaries legislation. As a result, Basic Broadcasting Ltd faced liabilities of £1,249,433 in income tax and £460,739 in NICs.
During this time, Chiles worked on various programs, including "The One Show," "Match of the Day 2," and "The Apprentice: You’re Fired" for the BBC, and later moved to ITV to present "Daybreak" and cover football, including Champions League matches.
Two prior FTT hearings concluded that the hypothetical contracts with the BBC and ITV were not contracts of employment, rejecting HMRC’s appeals. However, the Upper Tribunal found legal errors in Judge Cannan's handling of the case and remitted it back to the FTT for a fourth hearing.
At the Upper Tribunal, Adam Tolley KC, representing HMRC, argued that the FTT erred in law by failing to consider whether relevant matters were known or reasonably available to the BBC and/or ITV, referred to as the "knowledge issue." James Rivett KC, representing Chiles, countered that this issue was not raised during the FTT hearings, making it procedurally unfair to introduce it at this stage.
The decision to remit the case was influenced by the Court of Appeal ruling in the Atholl House case involving Kaye Adams, which she won after a lengthy legal battle over her IR35 status.
Mr Justice Meade and Judge Thomas Scott, in their ruling, acknowledged the toll the prolonged appeal process had taken on Chiles. They expressed concern about procedural fairness and instructed the FTT to reconsider its decision, taking into account the guidance provided in the Atholl House case and the knowledge issue.
The tribunal noted that the FTT's previous assessment had been approached incorrectly, requiring a multifactorial evaluation of all relevant terms and circumstances of the hypothetical contracts. They emphasized the need for the FTT to reframe its question and conduct the assessment through the correct prism.
The tribunal also indicated that the issues of mutuality of obligation and control stages, as decided in RMC, would remain as the basis for the FTT’s findings. The FTT will determine whether further factual findings or evidence are necessary.
The tribunal suggested that, if practicable, the remitted hearing should be heard by the same panel, Judge Cannan and Mr. Woodman, due to their familiarity with the case. Despite Judge Cannan’s recent appointment as a salaried judge of the Upper Tribunal, he can still sit in the FTT.
TV presenter Kaye Adams expressed her dismay via ContractorCalculator, criticizing HMRC's actions: “I am appalled that HMRC has once again decided to twist the knife into a fellow freelancer. It seems we are now in a situation whereby HMRC will routinely challenge judgments on the basis of 'errors in law,' forcing the taxpayer to foot the bill. Despite two rulings in my favor, HMRC took me to the Court of Appeal, apparently to 'get clarification' on the law, and the upshot was that I won my case again. How many times and how many of us have to go through this for HMRC and the tribunal system to get their heads around fair and consistent application of IR35 legislation? My cynical self says HMRC does not want clarification. It prefers to perpetuate confusion so it can continue to wage war on freelancers.”
A personal liability notice (PLN) for £75,000 has been issued to Anandpreet Singh Powar, the director of a company selling alcohol to cash and carry outlets, for deliberately avoiding VAT.
The case, heard at the First Tier Tribunal, involved 179 transactions between Drinks 4 Less Limited and suppliers linked to an organized crime group. In 2019, eight members of this group were convicted of missing trader fraud and sentenced to between six and nine years in prison.
Powar was the sole director of Drinks 4 Less when it went into liquidation on 16 November 2023. Before the liquidation, HMRC had rejected a claim from the company for a deduction in input tax amounting to £186,694.46 on 3 March 2017. Subsequently, on 17 July 2017, HMRC issued an assessment for £182,455 against the company.
Additionally, a penalty notice of £83,019.70 was issued on the grounds that the 179 transactions were connected to fraudulent VAT losses, and the company knew or should have known of this connection.
Drinks 4 Less initially appealed both assessments in 2017 but withdrew the appeals on 12 January 2024.
Anticipating the company's insolvency, HMRC issued a PLN to Powar on 22 June 2017, holding him personally responsible for VAT issues due to his position as the sole director. The PLN was later reduced to £74,823.63 after HMRC conceded that 45 of the transaction chains could not be definitively traced back to fraudulent tax losses.
At the tribunal hearing, Powar, representing himself, was described as "not a wholly reliable witness" by tribunal judge Kerrie Brooks. Jennifer Howse, the HMRC officer who investigated the company from 2018 to 2023, also testified.
Judge Brooks noted inconsistencies in Powar's testimony, pointing out that he selectively remembered facts that benefited his case while claiming no recollection of other relevant events.
Drinks 4 Less was incorporated in 2011 with two other directors, but Powar testified that he was solely responsible for all trading activities. He claimed his knowledge of the alcohol industry came from his previous employment at Great Western Cash and Carry, where he learned about fast-moving products and the importance of having a VAT number.
Many of Powar's suppliers were linked to a criminal missing trader intra-community (MTIC) fraud scheme that cost HMRC £34.2 million in VAT. This led to two criminal trials at Southwark Crown Court, resulting in the conviction of ten gang members in 2019, while four were acquitted.
The organized crime group controlled at least 19 purported UK alcohol buffer traders and operated a "paperwork factory" to legitimize smuggled alcohol stock. HMRC's investigation uncovered spreadsheets detailing the criminal transactions, including 179 involving Powar and his company, which he could not explain to the tribunal.
HMRC argued that Powar failed to perform due diligence on his suppliers, a necessary step to avoid fraudulent transactions. Powar admitted he kept no records of his trades.
The tribunal applied the Kittel test, which states that a trader is liable not only if they knew but also if they should have known of the connection to fraud. Judge Brooks concluded that Powar likely knew the transactions were connected to fraud, making the company's VAT returns inaccurate and fraudulent.
As Powar controlled the company's trading activities, the inaccuracies were attributed to him, and the reduced PLN of £74,823.63 was upheld. The appeal was dismissed.
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