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Last orders for drinks wholesaler in VAT fraud case

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An alcohol wholesaler’s appeal failed because his transactions with suppliers were deemed ‘too good to be true’ and so he should have known they were connected with VAT fraud.

10th Jul 2024
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A director in the alcohol wholesale business found his VAT appeal on the rocks when the first tier tribunal (FTT) scrutinised his company’s supply chain in Powar vs HMRC [2024] UKFTT 00415. 

Anandpreet Singh Powar was the director of Drinks 4 Less Ltd, an alcohol wholesaler and distributor. By his own admission, he was responsible for everything the company did. 

The company recovered £186,694.46 of VAT in its VAT return periods ending November 2012 to May 2016 on the wholesale purchase of alcohol. HMRC denied the company’s recovery of that VAT on Kittel grounds: it took the view that the company knew or ought to have known that the only reasonable explanation for the transactions in which it had incurred the VAT was that they were connected with fraud. 

HMRC alleged that the company’s attempt to recover the VAT amounted to a deliberate inaccuracy because Powar knew about the fraud. Paragraph 19, schedule 24 of Finance Act 2007 gives HMRC power to levy a penalty against a company officer for deliberate inaccuracies in VAT returns that are attributable to that officer. Using that power, HMRC issued Powar with a personal liability notice (PLN) for £83,019.70. Powar appealed to the FTT against the PLN.

Saucing suppliers

During the appeal, the FTT heard that many of Drinks 4 Less’s transactions were one-time deals in which Drinks 4 Less would buy and resell alcohol in the space of a single day. Drinks 4 Less did not negotiate prices with its suppliers but would instead accept the terms of the deal if it could find a customer for onward sale. Powar would collect the goods from his suppliers at their premises or elsewhere (including in car parks) and deliver them to his customers on the same day. 

HMRC had prepared evidence for the FTT showing that none of the alcohol purchased could be traced back to the manufacturer or distributor, that Drinks 4 Less was nearly always able to find a customer for the alcohol it had purchased, and that the profit margins in all the transactions were the same, irrespective of how much alcohol was sold or the time of the sale. There was no commercial documentation accompanying any of the deals.

HMRC also produced evidence showing that many of the parties in the supply chains in which Drinks 4 Less participated were simultaneously engaged in a £34.2m VAT fraud involving sales of smuggled alcohol and which led to 10 criminal convictions in 2019. That evidence included spreadsheets taken from the convicted defendants’ devices that they had used to produce false invoices and price the fraudulent transactions. Those spreadsheets expressly referred to Drinks 4 Less (as well as other entities). Powar was unable to explain why his company’s name was included in the spreadsheets.  

A failure of brew diligence

The FTT did not accept Powar’s evidence that he had conducted reasonable due diligence on his suppliers. It instead found that Powar probably knew or ought to have known that Drinks 4 Less’s transactions with the suppliers, which the FTT considered had no commercial rationale and which were “too good to be true”, took place as part of a supply chain connected with VAT fraud.

Powar relied on due diligence reports he had commissioned from a third party. However, there was no evidence that Drinks 4 Less had commissioned any reports before July 2015 (whereas HMRC’s assessment was for the period November 2012 to May 2016). Powar’s evidence appears to have been that before that date Drinks 4 Less relied on the fact that its suppliers had VAT numbers and its verification of each supplier’s directors’ identity documents as sufficient evidence of that supplier’s legitimacy. 

The reports seen by the FTT flagged various issues. Some disclosed that the trading description of the supplier’s trading activities on Companies House wasn’t related to alcohol at all (in one case it was “wholesale radio/TV goods and household electric”). One report flagged that the supplier had not filed any trading accounts since 2011. Another alerted Powar to the fact that the supplier had not yet signed a routine indemnity in favour of Drinks 4 Less for losses arising out of the supplier’s lack of compliance with its regulatory and tax obligations. 

The FTT found that Powar failed to engage with the issues raised in the reports and that in various cases had either commenced trade before the report had been completed or simply traded with the suppliers anyway. Powar admitted that he only briefly looked at them and instead relied on brief discussions with their author on whether it was acceptable to proceed. 

Wined and fined

Given the unusual circumstances in which Drinks 4 Less did business and the evidence that had been compiled by HMRC, the FTT had no difficulty finding on balance that Drinks 4 Less – and Powar – knew or ought to have known that the only reasonable explanation for the transactions was that they were connected with fraud. 

The inaccurate recovery of input VAT by Drinks 4 Less was, therefore, deliberate and attributable to Powar. The FTT made a small reduction to the input VAT restricted by HMRC (and therefore the amount of the PLN) on the basis of figures produced by HMRC in the hearing and dismissed the appeal.

Replies (8)

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By adjadj
10th Jul 2024 11:21

A slam-dunk for HMRC and quite rightly so

Thanks (3)
Replying to adjadj:
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By Brend201
10th Jul 2024 16:08

Slam-drunk?

Thanks (6)
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By Paul Crowley
10th Jul 2024 11:32

It was clearly not a business.
At last, HMRC winning a case.

Thanks (2)
Replying to Paul Crowley:
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By richard thomas
10th Jul 2024 12:48

Hardly "at last". HMRC have won c 99% of all MTIC cases going back 15 years or so.

Thanks (2)
Replying to Paul Crowley:
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By abcom
15th Jul 2024 10:07

Take a look at the company's Statement of Affairs. HMRC may have won the case but lost a lot.

Thanks (0)
Replying to abcom:
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By Brend201
15th Jul 2024 10:52

Not quite. The point of the case was that HMRC succeeded in getting a PLN (personal liability notice) against the director, i.e. looking behind the veil of incorporation and limited liability.

Thanks (1)
Replying to Brend201:
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By abcom
15th Jul 2024 14:11

"HMRC issued Powar with a personal liability notice (PLN) for £83,019.70"

Estimated liability to HMRC according to statement of affairs £928,914

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VAT
By Jason Croke
15th Jul 2024 09:34

The ability to levy a penalty on the Director personally is something many of these fraudsters don't often appreciate, they can't hide behind their limited liability company if they are failing in their basic duties as a Director of the business.

HMRC should be doing much more of this - personal liabilities - because that would then send a much clearer message to the dodgy Directors out there.

Thanks (11)