Importance of undertaking due diligence checks

The taxpayer was the sole director of a scrap metal trader Loy Commodities Ltd and made all commercial decisions about suppliers and pricing. HMRC visited the trading premises on five separate occasions and warned the taxpayer that many suppliers were involved in VAT fraud and that he should carry out proper due diligence checks to verify their status. One of the suppliers had been assessed by HMRC for £1.13m.

HMRC raised an assessment on Loy Commodities to disallow input tax under the Kittel principle. This means that HMRC has the power to disallow input tax claimed by a business if the directors or business owners ‘knew or should have known’ that the transactions were fraudulent. The department also imposed a penalty based on 30% of the tax assessed. This was transferred to the taxpayer when the company was dissolved in August 2022.

The taxpayer appealed.

At the First-tier Tribunal the...