Northside Fleet Limited v The Commissioners for HMRC

For the Kittel principle, a trader may have constructive knowledge of a transaction’s connection with VAT fraud through a cumulative assessment of circumstances. Individual facts may indicate only risk or suspicion. Taken together, however, they may show that fraud is the only reasonable explanation.

Where a specialist tribunal has correctly directed itself on the law, an appellate tribunal should presume that it applied that law unless its reasons clearly show otherwise. A confusing or imprecise passage does not establish legal error when the decision read as a whole applies the correct objective test. An appellate tribunal may not revisit evaluative factual conclusions merely because it might have decided differently; intervention for perversity requires a conclusion no reasonable tribunal could have reached.

Northside Fleet Limited, a used-car dealer, claimed input VAT on vehicles bought from four suppliers. HMRC refused credit on the basis that the purchases were connected with fraudulent VAT evasion.

The First-tier Tribunal upheld the refusal. It found no actual knowledge, but concluded that Northside should have known of the fraudulent connection. It also decided a separate zero-rating issue in Northside’s favour; that issue was not challenged.

Northside appealed only against the denial of input tax. It contended that the First-tier Tribunal had misstated or misapplied the constructive-knowledge test, focused excessively on due diligence, relied on an irrelevant absence of records, and reached a perverse conclusion.

1. Appeal dismissed. The First-tier Tribunal correctly applied the Kittel constructive-knowledge test. The relevant question was whether Northside should have known that the purchases were connected with fraudulent VAT evasion. In the way the parties had put the case, HMRC had to establish that fraud was the only reasonable explanation.

2. The First-tier Tribunal was entitled to assess the cumulative effect of the circumstances. It did not err by identifying matters which individually raised suspicion or indicated a risk. There need not be a single decisive fact. A combination of matters may give a reasonable trader means of knowledge of an actual connection with fraud.

3. The First-tier Tribunal had correctly directed itself and its reasons did not clearly show application of a different test. Its express conclusion that fraud was the only reasonable explanation confirmed that it had applied the required standard. The Upper Tribunal applied the appellate restraint explained in DPP Law Ltd v Greenberg [2021] EWCA Civ 672.

4. The First-tier Tribunal had considered the commercially normal features of the transactions as well as the adverse indicators. It was not required to repeat every favourable factor during its later balancing exercise. The unclear observation about the absence of written records was unnecessary and imprecise, but did not displace the correct objective inquiry when the decision was read as a whole.

5. The conclusion was not perverse. Reasonable due diligence, including checks of company records and suppliers’ premises, would have disclosed matters capable of showing connections with a trader named in HMRC’s warning, implausible business premises, and a person apparently acting without authority for one supplier. The First-tier Tribunal could evaluate those matters with the countervailing commercial features. The high threshold in Edwards v Bairstow [1956] AC 14 was not met.

• Upper Tribunal (Tax and Chancery Chamber): dismissed Northside’s appeal against the denial of input VAT credit.
• First-tier Tribunal (Tax Chamber): by a decision released on 11 August 2021, upheld HMRC’s refusal of input VAT credit for the disputed purchases. It allowed Northside’s separate appeal concerning the zero-rating of sales; that conclusion was not challenged in the Upper Tribunal.