© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
B4. Kittel relevant factors
DUE DILIGENCE
- Indication of fraud leading to expectation of heightened due diligence
"[49] Although it is true that where there are indications of VAT fraud, such a taxable person may be expected to exercise greater diligence, it is nevertheless for the referring court to verify that the requirements imposed by the tax authority do not have the effect of requiring taxable persons to carry out complex and far-reaching checks as to their suppliers, thereby de facto transferring to the taxable person the investigative tasks which are the responsibility of the tax authority, as referred to in the case-law cited in paragraphs 39 and 44 of the present judgment." (Global Ink Trade C-537/22)
"[52] ...Accordingly, where there are indications of fraud, the taxable person may be expected to exercise greater diligence. However, the taxable person cannot be required to carry out complex and far-reaching checks, such as those which the tax authority has the means to carry out." (Aquila Part Prod C-512/21)
- Heightened awareness of fraud leading to expectation of heightened due diligence
"[97] We have dealt above with our conclusion that the Bairds were fully aware that by trading scrap metal, they were more likely to be involved in fraudulent supply chains than was the case when they were trading batteries.
[98] This brings with it a commensurate duty to carry out more and detailed due diligence (and to deploy means of knowledge) and to consider the results of that due diligence." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
- T cannot be expected to carry out complex and far-reaching checks
"[39] Accordingly, where there are indications of fraud, the taxable person may be expected to exercise greater diligence. However, the taxable person cannot be required to carry out complex and far-reaching checks, such as those which the tax authority has the means to carry out (judgment of 1 December 2022, Aquila Part Prod Com, C‑512/21, EU:C:2022:950, paragraph 52, and order of 9 January 2023, A.T.S. 2003, C‑289/22, EU:C:2023:26, paragraph 70).
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[44] Consequently, where the tax authority relies in particular on infringements committed in the sphere of the issuer of an invoice, the assessment of the evidence cannot have the effect of indirectly requiring that taxable person, recipient of the invoice, to carry out checks of the other party to the contract which are not, in principle, the responsibility of that taxable person (see, to that effect, order of 16 May 2013, Hardimpex, C‑444/12, not published, EU:C:2013:318, paragraph 27 and the case-law cited)." (Global Ink Trade C-537/22)
"[50] However, the tax authority may not oblige a taxable person to undertake complex and far-reaching checks as to that person’s supplier, thereby de facto transferring their own investigative tasks to that person (judgment of 19 October 2017, Paper Consult, C‑101/16, EU:C:2017:775, paragraph 51)." (Aquila Part Prod C-512/21)
- Cannot, as a general rule, require taxable person to verify that supplier has fulfilled its VAT obligations
"[50] In particular, it should be recalled that that tax authority may not, as a general rule, require a taxable person wishing to exercise the right to deduct VAT to verify that the issuer of the invoice relating to the goods and services in respect of which the exercise of that right is requested has fulfilled his or her obligations to declare and pay VAT (see, to that effect, order in Vikingo Fővállalkozó, paragraph 56 and the case-law cited)." (Global Ink Trade C-537/22)
"[51] In particular, the Court has already held that the tax authority cannot, as a general rule, require the taxable person wishing to exercise the right to deduct VAT, first, to ensure that the issuer of the invoice relating to the goods and services in respect of which the exercise of that right to deduct is sought has the capacity of a taxable person, that he or she was in possession of the goods at issue and was in a position to supply them and that he or she has satisfied his or her obligations as regards declaration and payment of VAT, in order to be satisfied that there are no irregularities or fraud at the level of the traders operating at an earlier stage of the transaction or, second, to be in possession of documents in that regard (judgments of 21 June 2012, Mahagében and Dávid, C‑80/11 and C‑142/11, EU:C:2012:373, paragraph 61, and of 4 June 2020, C.F. (Tax inspection), C‑430/19, EU:C:2020:429, paragraph 47)." (Aquila Part Prod C-512/21)
- Circular published by tax authority does not undermine obligation to prove knowledge/means of knowledge
"[43] Accordingly, the measure may not undermine the obligation on the tax authorities, referred to in paragraph 37 of the present judgment, to establish to the requisite legal standard the objective evidence from which it may be concluded that a taxable person has committed VAT fraud, or knew or should have known that the transaction concerned was connected with VAT fraud. Similarly, according to the case-law referred to in paragraph 39 of the present judgment, the measure may not have the effect of requiring taxable persons to undertake complex and far-reaching checks on their suppliers." (Global Ink Trade C-537/22)
- Did circular comply with legal certainty?
"[51] Lastly, it is also for the referring court to determine whether the tax authority complied with the principle of legal certainty in the exercise of the powers conferred on it. That court is responsible for determining whether the circular aimed at taxable persons published by the tax authority and applicable to the facts at issue in the main proceedings was worded unequivocally, whether its application was foreseeable by those subject to it, within the meaning of the case-law referred to in paragraphs 45 and 46 above, and whether the requirements imposed by the authority conflicted with the circular." (Global Ink Trade C-537/22)
Knowledge
- Failure to do/consider due diligence because of desire to get on with deals not demonstrating blind-eye knowledge
"[155] The Bairds clearly took a deliberate decision not to ask for comprehensive due diligence information, or as Miss Rao put it "ask awkward questions" either in the first place or as a follow-up to the responses they got to that very limited due diligence.
[156] But this was not because they had good reason to believe there was fraud in the supply chains. They did this because they could not be bothered with due diligence and simply wanted to carry on trading as they had done before they had been notified by HMRC of the danger of fraud when trading in scrap metal. As far as they were concerned, undertaking proper due diligence was something which would have got in the way of closing out a deal. It would have taken time to consider the information that they received, and to ask further questions if it was not satisfactory. On their evidence, this would have meant that a potential deal would have fallen through as the supplier would have gone elsewhere.
[157] Whilst HMRC might consider this to be reprehensible, we do not think that it means that the Bairds deliberately shied away from seeking confirmation that there was fraud in their supply chains. And given that blind eye knowledge is a form of actual knowledge, it is their position that matters and not that of the objective trader." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
Means of knowledge
- What would T have discovered if it had carried out the due diligence?
"[69] It is clear to us from the evidence given by the Bairds, as set out above, that they considered that the obligation to undertake due diligence was a considerable chore and cut across their ability to undertake trades in a timely fashion which in turn meant that they would lose business and thus would either lose money, or be unable to make sufficient money to continue in business, paying their employees and their creditors.
[70] It is unsurprising, therefore, that they paid lip service to their obligation to conduct due diligence, and never considered that failure to do it might have profound ramifications. We have come to the conclusion that as far as they were concerned, it was simply a box ticking exercise, and in essence, provided they had a VAT registration number for a supplier, they were prepared to trade with that supplier.
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[80] But of course, the focus of the enquiry is not whether the appellants have carried out adequate due diligence, but whether the company had means of knowledge.
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[127] What matters is whether the deployment of means of knowledge would have led to the conclusion that their suppliers were fraudsters. And it is no answer to say that a tick box exercise against the questions in Notice 726 demonstrates that the company was in "good shape…", and the logical conclusion must, therefore, be, that the appellant could not have discovered that fraud.
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[161] Essentially this reflects the sentiments expressed at [61] of Mobilx: "… If he has the means of knowledge available and chooses not to deploy it he knows that, if found out, he will not be entitled to deduct…"." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
- Not inevitable that because there was fraud, it could have been discovered through checks
"[177] We can see no logical reason for this. Simply because there was a fraud does not mean that it is inevitable that it would be discovered provided the right questions were asked and any information received suitably interrogated. As we say later, no matter what questions might have been asked, it is perfectly feasible that a trader would have inadequate knowledge of the fraud. It is only with the benefit of hindsight that HMRC knew that a fraud had been perpetrated. The issue is whether the Bairds would have been able to know about that fraud at the time that it conducted its trades during the periods in question.
[178] It is no defence for the Bairds to say that in the circumstances they would have lost trade as the deal would have gone off (they could clearly have traded, it is just that they were risking their right to recover their input VAT on those trades). But it is a defence that whatever time and effort that was in their gift to employ to check whether the circumstances of the purchases were connected to fraud would not have revealed that connection." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
- Consider whether T could have the means of knowing of fraud before any fraud had happened
"[182] In Mobilx, which also dealt with the appeal by Blue Sphere Global ("BSG"), the Chancellor in the High Court had said (essentially and as reported in Mobilx at [11]) that if a contra trader from whom BSG had purchased goods, did not know of the fraud, "how could BSG have known of any fraud before it happened?..."." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
- Enquiries might have provided innocent answers
"[191] We use these examples to demonstrate that there may have been a reasonably innocent explanation for the inconsistencies. And to illustrate the flaw in HMRC's position that, as night follows day, simply because a fraud has been perpetrated, this would have been apparent to the company if only it had conducted the appropriate enquiry. We think that it is equally feasible that further enquiries might have thrown up answers which were not indicative of fraud." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
HMRC supplied information re potential checks
- Not a box ticking exercise - consider all the circumstances
"[126] Firstly, as he accepts, means of knowledge goes beyond due diligence. And answering the questions in Notice 726 is not intended to be a box ticking exercise which enables a trader to say that having undertaken those checks, he has demonstrated deployment of means of knowledge. It is simply asking a trader to consider various matters which might put a trader on notice that there is something suspicious about its trades. That suspicion is not restricted to those matters which were identified in Notice 726, but, as we have already mentioned above, can arise from any of the circumstances associated with the relevant trades."(GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
HMRC AWARENESS OF THE FRAUD
- Relevant that HMRC did not know of fraud at the time, despite better information
"[180] One of these is the fact that HMRC did not know of the frauds during the period in question. Their own due diligence had not permitted them to conclude that there was fraud in the purchase chains before the company dealt in the relevant goods. Indeed, it is difficult to see how, when in some cases the fraud was non-payment of the VAT on the supplies to the company, this would have been possible for HMRC to ascertain in real time.
[181] This is something that the tribunal considered relevant in PTGI-ICS [2022] UKFTT 20 at [61]." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
"[61]...It is telling, though far from conclusive, that despite the Respondents carrying out regular monitoring visits and seeking (and obtaining) large amounts of information from IKB and Indigo, neither were deregistered for VAT for abusive behaviour or had input VAT claims denied during the relevant VAT periods. It is difficult to see how the means of knowing available to the Appellant can be said to be better than those available to the Respondents. It is fair to say that the Appellant could have asked more questions and been more thorough in the due diligence it carried out or had carried out on its behalf. However, even if the due diligence carried out was materially better (but not perfect) it is unlikely that this would have given the Appellant the means of knowing that the transactions were connected with fraud." (PTGI-ICS Limited v. HMRC [2022] UKFTT 20 (TC), Judge Malek)
- But still possible that only reasonable explanation for T's transaction(s) was connection to fraud
"[183] The same can be said for HMRC in this case. If HMRC did not know of the fraud at or before the time that the company was purchasing the goods, how could the company be expected to know of that fraud.
[184] The answer of course is that the circumstances of the purchases was so suspicious that the only reasonable explanation for them was that they were connected with fraud." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
GOODS
Existence of goods
- Highly relevant that real goods bought, processed and sold to a variety of customers
"[197] Although, as we have said at [169] above, that it is no defence to a charge of conducting inadequate due diligence, that the traded commodity was real and was physically delivered to their yard. However, it is a highly relevant circumstance when considering means of knowledge. These were real goods which accorded with the descriptions and amounts provided by the suppliers, and which were processed and sold to a variety of customers. There was no back to back trading. Although in the vast majority of cases it was the supplier who contacted Mr Baird, the prices were negotiated and agreed. Furthermore, in many cases Mr Baird knew the individual behind the supplying company." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
COMPANY INFORMATION
- Recent incorporation
Not of itself suspicious
"A number of the suppliers had been incorporated relatively recently before the relevant trades. This was apparent from the documents received from certain suppliers (for example GB's certificate of incorporation indicated that it had been incorporated on 11 December 2019 and Alpine had been incorporated in August 2017). We do not think that, in and of itself, is something which should have made the appellants suspicious. Nor do we think it would have been suspicious to the objective trader." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
Business description
- Transaction not within description of core business relevant to ability to do large transactions
"[113] We accept Mr Baird's evidence that scrap metal can come from many sources, and simply because a supplier's trading activities do not include the trading of scrap metal is not per se suspicious. But it is relevant to the amount of scrap metal which that supplier is able to trade.
[114] As Miss Rao submitted, the information which was available to Mrs Baird from Companies House regarding FSUK might have caused her to wonder why that company was able to supply the company with nearly £200,000 worth of scrap in August 2020.
[115] Whilst trading with a supplier whose activities do not ostensibly fall slap bang within the activities with which they are trading is not generally something which should put a trader on notice of fraud, the situation is different where the trader is fully aware that the commodity in which they are dealing is one in which there is recognised fraudulent activity in the supply chain. This is the case with scrap metal, and we have found as a fact that the Bairds were fully aware of this." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
- Apparent inconsistency might have been explained
"[189] HMRC have posed a number of questions that might have been asked both of themselves and of their suppliers. But we can also consider what those answers might have been. So, even though there were inconsistencies, for example, between the trade descriptions of some of their suppliers, it is also true that, as reported by Officer Lucas, the Bairds might have discovered that the trade descriptions of MB and Alpine (if the available trade description reflected that on their respective VAT 1's) involved demolition waste and recycling aggregates. A question about the inconsistencies between the paperwork might have resulted in an answer that the VAT number was a typographical error. The question about the identity of the recipient of the purchase monies might have resulted in an answer that the recipient was a connected company." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
Address/premises
- Lack of physical premises calls into question ability to supply large quantities of scrap
"[118] We certainly think that the appellants should have conducted an enquiry into the capability of its suppliers to physically store scrap. This would have either generated an answer which would satisfy them that there was that physical space. Alternatively, it might have generated an answer that they were simply broking the scrap and arranging for it to be supplied from a yard, building site, or some other source, elsewhere. If it was the latter, then this might have put the Bairds on notice that someone who they thought was a substantive scrap metal dealer was in fact broking, or back to backing, a transaction. It would have given the objective trader pause for thought." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
TURNOVER CHANGES
Turnover increasing
- Facts not bearing out a considerable increase
"[85] Firstly, a considerable increase in turnover during the period in question.
[86] Having considered the figures, we cannot see this. For the periods in question the net outputs were (in round figures); £1 million, £1.7 million, £980,000 and £1.1 million. Yet for the immediately preceding five earlier periods, the turnover was; £1.1 million, £1.4 million, £2.5 million, £3.1 million and £2 million.
[87] This does not demonstrate to us that the turnover had markedly increased and was thus an indicator of involvement with fraud." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
CONTRACTUAL TERMS
- Expert evidence to determine what is common contractual practice
"[96] In our view the same is true with HMRC's assertion that the company was not trading on comprehensive contractual terms. We received no expert evidence about what is common contractual practice in the scrap trade, but it seems pretty likely to us that paperwork is minimal. And the fact that this was a case in both bona fide and fraudulent trades suggest to us there was nothing to put the company on notice that it was trading with fraudsters when it dealt on minimal written terms and conditions." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
TRANSACTION PAPERWORK
- Inconsistencies and errors putting T on notice something not quite right
"[119] In the case of MB, the VAT registration number provided in the body of a note on MB headed notepaper as part of the due diligence, is incorrect. It is a 10 digit number. The correct nine digit VAT number is set out at the bottom of the letter. Mrs Baird said that she would have used the correct VAT number to check that MB was still registered at the time of the trade yet also said that she had not noticed the correct VAT number at the bottom of the letter.
[120] Leaving aside the evidential difficulty faced by Mrs Baird (how could she have conducted a VAT check when she didn't know the correct VAT number) this is an example of information which was provided to the appellants and which, if it had been properly examined (which should have been in light of their heightened awareness of fraud in scrap metal trading) should have put the appellants on notice that something was not quite right. This might have started a chain of enquiry to check why there was this discrepancy and the reason for it." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
Invoices
- Lack of detail on invoices compared to those from other suppliers
"[107] Similar invoice formats were used by GB, Paradigm, SEE and FSUK. These invoices in any event contained minimal information when compared to invoices used by a bona fide supplier, Calderbanks.
What this demonstrates to us is that the appellants were in a position to compare the invoices used by their suppliers. Whilst there might not be a common format in the industry, it might have caused them to think why some suppliers provided substantial information (for example, weights and measures), whilst others didn't." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
- Several suppliers using common form invoice might be suspicious
"[109] But more importantly, the fact that several suppliers were using common form invoices is something which we think is relatively suspicious, and should have put Mrs Baird, who was responsible for the paperwork, on notice that something might not have been wholly satisfactory.
[110] Our criticism here is largely with the fact that with her heightened awareness of fraud in scrap metal chains, it was incumbent on Mrs Baird to review the documents that she was provided with by her suppliers. This included these invoices. Her evidence was that she had no idea that these invoices were in a substantially common format as she had not examined them. And that is the main point. She should have done. That would not have taken long and by dint of that examination she might have paused to consider why these traders were using common form invoices. She undertook no such consideration.
[111] It might, as Mr Ahmed has submitted, have led to the conclusion that using common form invoices, in this day and age, when they can be readily downloaded from the Internet, is not of itself suspicious. But Mrs Baird did not undertake that exercise and did not come to that conclusion." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
PAYMENT
- Non-supplier bank account for payment should have been queried
"[121] The information provided by WHU showed a bank account for a company called Wealth International Ltd. Whilst this might not of itself have been sinister, it seems to us that paying money to the bank account of a different company from the supplier is something which should have been queried. We accept that if there was no association between fraud and trading in scrap this is likely to be of marginal relevance. But where there was heightened awareness, it is just another detail which should have been clarified. Something which we think the objective trader would have done." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
SUPPLIERS
Change of supplier
- Pattern of defaulting suppliers stepping into previous supplier's shoes may be relevant
"[200] If there was an overall scheme to defraud, the Bairds were not aware of it. Nor were they aware of a pattern of defaulting suppliers "stepping in previous supplier's shoes"." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)
EXAMPLES
Scrap metal
- Issues with invoices, trade description, lack of physical premises warranted further enquiry but did not give means of knowledge despite woeful due diligence
"[201] Such red flags as there were, are set out above, and were limited to common invoices, trade descriptions, suppliers lacking physical premises and inconsistent details in certain of the paperwork provided by their suppliers.
[202] However, whilst, as we have said above, these warranted further enquiry, we do not think that they are sufficient to fix the appellants with means of knowledge. Whilst it is clear that they took little heed of such red flags as there were, we do not think that they were so suspicious that, in and of themselves, the only reasonable conclusion that the Bairds could have reached was that the supplies were connected with fraud. In our view the circumstances surrounding the trades were not sufficiently suspicious as to put the Bairds on notice that the only reasonable explanation for the circumstances of those purchases was that they were connected with the fraudulent evasion of VAT.
[203] This is the case notwithstanding the woeful due diligence undertaken by the Bairds, their wholly unjustifiable belief that possession of a valid VAT number was evidence of a suppliers bona fides, and their heightened awareness of the likelihood of participating in fraud by dint of trading in scrap metal." (GMP Baird Limited v. HMRC [2025] UKFTT 1540 (TC), Judge Popplewell)