Transwaste Recycling and Aggregates Ltd & Anor v The Commissioners for HMRC

Introduction

1. The First Appellant, Transwaste Recycling and Aggregates Limited (“Transwaste”) is, as the name suggests, a company trading in the provision of waste management services and waste recycling. In essence, it receives waste from a variety of sources, processes the waste, and recycles as much as it can. The waste that cannot be recycled is sent to a variety of disposal sites. This includes sending the waste to energy plants or to other waste transfer stations. As a last resort if it cannot be recycled or disposed of in any other way, a small proportion (about 3% to 5%) of the waste is sent to landfill.

2. Transwaste has its own arrangements with waste disposal sites. However, when Transwaste is unable to (or otherwise does not) fulfil its waste disposal requirements directly, it engages what is termed a “waste broker” to arrange the disposal of excess waste through the waste broker’s own sources. Similarly, whilst Transwaste primarily uses the transport services of its own connected company, Transwaste Services Limited, it will sometimes use other hauliers.

3. The Second Appellant, Mr Paul Hornshaw, is a director of Transwaste. Mr Paul Hornshaw’s brother, Mr Mark Hornshaw, is also a director of Transwaste. Given his greater involvement in these proceedings, we will refer to Mr Paul Hornshaw as “Mr Hornshaw” and Mr Mark Hornshaw as “Mr Mark Hornshaw”.

4. These appeals arise out of five decisions (together “the Decisions”) by HMRC relating to input tax on waste disposal services, all of which are apparently supplies by waste brokers or a haulier. (1) By a decision issued on 29 June 2018 and upheld on review on 5 November 2018, HMRC denied Transwaste’s claimed input tax in the sum of £242,311 for the periods 06/16 to 06/17 (“Decision 1”). In the course of these proceedings, HMRC have withdrawn the element of Decision 1 which relates to period 06/16. As such, HMRC has reduced the amount of the assessment to £229,761. (2) By a decision issued on 23 October 2019 and upheld on review on 13 February 2020, HMRC imposed a penalty assessment on Transwaste in the sum of £131,453.69 upon the basis of deliberate inaccuracies in returns for the periods 06/16 to 06/17 pursuant to Schedule 24 of the Finance Act 2007 (“ FA 2007 ”) (“Decision 2”). In view of the reduction to Decision 1, HMRC has reduced this penalty assessment to £124,645.32. (3) By a decision notified to Transwaste in a letter dated 5 June 2020 and upheld on review on 19 November 2020, HMRC denied Transwaste’s claimed input tax in the sum of £200,990 for the periods 12/17, 09/18, and 03/19 to 12/19 (“Decision 3”) (although inaccurately referred to in the decision letter as £200,994, the schedule attached to the letter is accurate and the review letter correctly refers to the total being £200,990). (4) By a decision notified to Transwaste in a letter dated 5 June 2020 and upheld on review on 19 November 2020, HMRC imposed a penalty assessment on Transwaste in the sum of £60,297 pursuant to section 69 C of the Value Added Tax Act 1994 (“ VATA 1994 ”) (“Decision 4”). (5) By a decision notified to Mr Hornshaw in a letter dated 5 June 2020 and upheld on review on 29 January 2021, HMRC imposed a penalty assessment on Mr Hornshaw in the sum of £60,297 pursuant to section 69 D of VATA 1994 (“Decision 5”).

5. The denials of input tax in Decision 1 and Decision 3 were made upon the basis that (on HMRC’s case) Transwaste knew or should have known that its transactions were connected with the fraudulent evasion of VAT. Decision 2 was made upon the basis that (on HMRC’s case) Transwaste acted deliberately in providing VAT returns which contained inaccuracies amounting to a false or inflated claim to repayment of tax or an understatement of a liability to tax. Decision 4 was made upon the basis that (on HMRC’s case) input tax had been denied pursuant to Decision 3. Decision 5 was made upon the basis that (on HMRC’s case) the actions of Transwaste which gave rise to its liability to a penalty under Decision 4 were attributable to Mr Hornshaw. Transwaste and Mr Hornshaw appeal against each of these decisions and dispute their basis.

6. Before leaving these introductory remarks, we make a brief comment about the constitution of the Tribunal. The appeals had originally been listed to be heard before Miss Stott and another Judge and (after a day allotted to judicial reading on 2 May 2025) started as planned on 6 May 2025 with oral opening submissions. In the course of those opening submissions, the original Judge learnt for the first time of circumstances that could give rise to a potential professional conflict and (having raised the point with the parties) reached the view that it would be inappropriate to continue to hear the case. With the agreement of the parties and Miss Stott, Judge Chapman KC replaced the original Judge. The original Judge has, of course, had no further involvement. Again, with the agreement of the parties, and after time for judicial reading, the hearing was restarted on 8 May 2025 before Judge Chapman KC and Miss Stott as if this were the first day (albeit that, as sensibly proposed by the parties, written opening submissions were relied upon instead of oral opening submissions in order to ensure that all evidence could be heard within the available time). Anything that had been heard by Miss Stott before then was disregarded and plays no part in this decision. We are grateful to the parties and their representatives for their accommodation and cooperation in this regard. The Background

7. The general background is not in dispute, either because it is common ground or is the subject of unchallenged evidence.

8. Transwaste was incorporated on 21 October 1999, originally under the name Blueprint Restoration Ltd. Its name was changed to City Stone and Recycling Company Ltd on 27 June 2000, and then to Transwaste on 8 January 2002. Transwaste’s current directors are Mr Paul Hornshaw (appointed on 8 July 2002), Mr Mark Hornshaw (also appointed on 8 July 2002), and Mr Michael Kemish (appointed on 1 February 2020).

9. Mr Hornshaw has day to day involvement in the business and its commercial decisions. In particular, he had responsibility for the transactions which are in issue in these proceedings (although, insofar as is relevant, there is a dispute as to whether this was sole responsibility). Mr Mark Hornshaw is also involved in Transwaste’s business and took part in a number of the meetings but HMRC has not made any decisions treating the transactions as attributable to him. From 1 January 2019 until becoming a director, Mr Kemish was Transwaste’s financial controller. His role then became that of finance director.

10. Transwaste carries on business from premises at Melton Waste Park, Gibson Lane, Melton (“Melton”). Transwaste moved to Melton in about February 2008. Mr Hornshaw explained in his witness statement that Melton is a purpose-built waste transfer station, covers 23 acres, and is licensed to process 750,000 tonnes of waste per year (although the actual amount processed is less than this licensed maximum). This is a large-scale operation, with long term contracts providing services to local authorities and well-known national and international waste management companies. During the periods of the relevant transactions between 2016 and 2019, Transwaste’s turnover rose from about £17,000,000 to about £29,000,000.

11. Melton has three processing areas, which Transwaste refers to as “sheds”. One shed processes waste from commercial construction and demolition sources. This is sorted on picking lines. 350,000 tonnes of this type of waste per year is processed, all of which is recycled or re-used. By way of example, bricks become hardcore, plastics are ground to become other plastic products, and soil is sold to builders’ merchants as topsoil. Two other sheds process waste from domestic black bins to produce refuse derived fuel (“RDF”). The resultant RDF is packaged in one tonne bales and used by third parties in energy production. Approximately 200,000 tonnes of waste per year are processed in this way. Domestic recyclable waste and green waste are processed elsewhere on the site and resold.

12. Metals are extracted from the various forms of waste on picking lines or using strong magnets. This scrap metal is then sold to third parties in the sum of approximately £150,000 per year. Transwaste was historically also involved in metal trading, purchasing metal for resale over and above that reclaimed from waste for resale. Transwaste ceased metal trading (as distinct from the sale of metal reclaimed from waste) before the transactions which are the subject of these appeals.

13. There were a number of visits by HMRC to Transwaste, and correspondence between HMRC and Transwaste, referred to in the evidence. The fact and nature of these are common ground, albeit that the parties have differing stances as to their significance. We have considered all the visit reports and correspondence to which we have been referred. For the purposes of providing this background, we do not set these out in full but instead note that the following are of particular relevance: (1) HMRC visited Transwaste on 4 July 2012. Notice 726 was provided, together with a leaflet on how to spot Missing Trader Intra-Community (“MTIC”) fraud. The importance of due diligence was also explained. (2) By a letter dated 6 July 2012, HMRC warned Transwaste of the general risk of MTIC fraud. (3) By letters dated 18 October 2012, 7 November 2012, 7 December 2012, 14 January 2013, and 21 March 2013, HMRC notified Transwaste of tax losses in its transactions for the supplies of metal in the periods 06/12 and 09/12 from Matlock Recycling Limited (“Matlock”) and AM Trading (NE) Limited. (4) By a letter dated 23 January 2013, HMRC again warned Transwaste of the risks of MTIC fraud. This letter also informed Transwaste about the VAT verification service. (5) HMRC visited Transwaste on 13 February 2013 to discuss metal trading. (6) HMRC visited Transwaste on 22 July 2013 to discuss the importance of due diligence. Mr Hornshaw informed HMRC at that meeting that Transwaste’s last metal supply had been in March 2013 and that he did not intend to do any more metal trading other than buying scrap from the general public. (7) By a letter dated 14 October 2013, HMRC set out the risks of MTIC fraud in the metals sector. (8) By letters dated 7 November 2013, 18 February 2014, 1 October 2014, and 2 October 2014, HMRC notified Transwaste of tax losses in its transactions for the supplies of metal in the periods 09/12 and 03/14 from Matlock and Barkers Distribution (UK) Limited (“Barkers”) (9) By a letter dated 8 February 2016, HMRC notified Transwaste of a denial of input tax on metal supplies by Barkers and Matlock. (10) By a letter dated 31 January 2017, HMRC informed Transwaste that it had cancelled the VAT registration of Transwaste’s supplier, Biotech Soils Limited (“Biotech”) with effect from 10 January 2017. (11) By letters dated 21 March 2017, 30 March 2017, and 5 April 2017, HMRC and Transwaste corresponded about HMRC’s requests for any due diligence documentation Transwaste held on Biotech. In their letter dated 5 April 2017, HMRC also notified Transwaste that there were tax losses resulting from twelve of Transwaste’s supplies from Biotech. (12) By a letter dated 13 April 2017, HMRC informed Transwaste that they strongly suspected tax losses in its transactions in the periods 12/16, 03/17 and 06/17 in supplies from Biotech and Tees Valley Estates Limited (“Tees Valley”). HMRC also advised Transwaste that due diligence checks should be made if they continued to deal with Tees Valley. (13) By a letter dated 25 April 2017, HMRC notified Transwaste that four supplies in 06/16 from Biotech had been traced to tax losses. (14) By letters dated 25 May 2017 and 30 May 2017, HMRC sent Transwaste further advice about due diligence checks, MTIC awareness, and that MTIC was present in the supply of services. (15) By a letter dated 18 July 2017, HMRC informed Transwaste that invoices supplied by Atkins Recycling Limited (“Atkins”) were not valid. (16) By a letter dated 2 November 2017, HMRC notified Transwaste that its supplies by Tees Valley had been traced to tax losses. (17) HMRC visited Transwaste on 12 September 2018, 17 January 2019, 4 April 2019, 25 June 2019, and 24 September 2019. (18) By letters dated 24 September 2019, HMRC notified Transwaste that various of its supplies by Hydro Plant Group Limited (“Hydro”) and Bull Freight Services Limited (“Bull Freight”) had been traced to tax losses. (19) By a letter dated 10 October 2019, HMRC informed Transwaste that Hydro’s VAT registration had been cancelled with effect from 3 August 2019 and that Bull Freight’s VAT registration had been cancelled with effect from 8 August 2019. (20) HMRC visited Transwaste on 4 December 2019. (21) By a letter dated 23 January 2020, HMRC notified Transwaste that further supplies by Hydro, Hydro GRP Limited (“Hydro GRP”), and Bull Freight had been traced to tax losses. (22) By a letter dated 21 April 2020, HMRC notified Transwaste that further supplies by Hydro GRP had been traced to tax losses. (23) Throughout the relevant periods, HMRC and Transwaste corresponded about requests made by HMRC for information and documentation relating to due diligence.

14. The Decisions are set out in paragraph 4 above. The relevant supplies of waste broker services were by Biotech, Tees Valley, Hydro, and Hydro GRP. The relevant supplies of haulage were by Bull Freight.

15. The table below sets out the suppliers, periods, number of invoices, and (where relevant) VAT denied in Decision 1 and Decision 3. This includes the transactions invoiced in 06/16 which were originally denied, notwithstanding the reductions in Decision 1 and Decision 2, as the circumstances of the supplies are still of relevance. We note that an additional two invoices from Biotech (being an invoice dated 1 September 2016 with VAT of £2,925 and an invoice dated 22 September 2016 with VAT of £6,200) appear in HMRC’s Amended Statement of Case and skeleton argument but which were not included in Decision 1 or in Decision 2. We have included these in the table below for completeness. Supplier: Period: Number of invoices: VAT denied grouped by supplier and period: VAT denied grouped by supplier: Biotech 06/16 4 £12,550 £93,900 09/16 12 £81,350 12/16 2 - Tees Valley 12/16 8 £83,650 £148,411 03/17 8 £47,379 06/17 9 £17,382 Hydro 12/17 23 £31,687 £89,056 09/18 4 £2,799 03/19 1 £1,000 06/19 21 £30,809 09/19 22 £22,761 Bull Freight 03/19 3 £6,478 £13,039 06/19 3 £6,561 Hydro GRP 09/19 44 £51,830 £98,895 12/19 29 £47,065 TOTAL 193 £443,301 The Issues

16. As regards the denial of input tax for the purposes of Decision 1 and Decision 3, it was common ground that the burden of proof is upon HMRC to establish each of the following: first, that there was a tax loss; secondly, that this loss resulted from a fraudulent evasion; thirdly, that, if there was a fraudulent evasion, Transwaste’s transactions which are the subject of these decisions were connected with that evasion; and finally, that Transwaste knew or should have known that its transactions were connected with a fraudulent evasion of VAT. Transwaste does not dispute the first three of these but does dispute the last.

17. Transwaste also argues that the assessment issued pursuant to Decision 3 was out of time. This turns upon when facts sufficient in the opinion of HMRC to justify the making of the assessment came to their knowledge.

18. The penalty assessments are all in dispute as to liability, quantification, and mitigation. HMRC rightly accept that to the extent that the appeal against the denial of input tax succeeds then any penalty assessment cannot stand either. As such, if Decision 1 is allowed, then Decision 2 ought also to be allowed. Similarly, if Decision 3 is allowed, then Decision 4 and Decision 5 ought also to be allowed.

19. It follows that the key issues are as follows: (1) The legal framework. (2) Whether the assessment arising from Decision 3 was in time. (3) Our findings of fact as to the circumstances of the denied transactions. (4) Whether Transwaste knew or should have known that the denied transactions were connected with a fraudulent evasion of VAT. (5) To the extent that Decisions 1 and 3 are upheld: (a) Whether Transwaste acted deliberately for the purposes of Decision 2 and, if so, whether the penalty should be reduced for mitigation. (b) Whether the penalty imposed by Decision 4 should be reduced to take into account mitigation. (c) Whether Transwaste’s conduct was attributable to Mr Hornshaw for the purposes of Decision 5 and, if so, whether it should be reduced to take into account mitigation. The Legal Framework

20. There was no substantial dispute as to the legal framework. The Kittel denials Legislation

21. Sections 24 to 26 of VATA 1994 and regulation 29 of the Value Added Tax Regulations 1995 provide for the right to deduct input tax. In particular, section 24 provides for a definition of input tax, section 25 requires the payment of output tax and allows for credit for input tax against that output tax, section 26 provides for the amount of input tax that is allowable, and regulation 29 provides for VAT returns and the holding of invoices or such other documentary evidence as HMRC shall direct. These provisions implemented Article 17 of the Sixth Council Directive, now replaced by Articles 167 and 168 of Council Directive 2006/112/EC. Kittel

22. The right to deduct input tax can be lost where it is exercised fraudulently. This arises where a taxable person knew or should have known that by his/her purchase he/she was taking part in a transaction which was connected with the fraudulent evasion of VAT. This is because, by acting in this way, the taxable person is treated as a participant in the fraud. These principles were established by the European Court of Justice in Axel Kittel v Belgium & Belgium v Recolta Recycling SPRL (Joined cases C-439/04 and C-440/04) [2008] STC 1537 (“ Kittel ”) at [54] to [61] as follows: “[54] As the court has already observed, preventing tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive (see Gemeente Leusden v Staatssecretaris van Financien (Cases C-487/01 and C-7/02) [2007] STC 776 , [2004] ECR 1-5337, para 76). Community law Cannot be relied on for abusive or fraudulent ends (see, inter alia, Kefalas v Greece and OAE ( Case C-367/96 ) [1998] ECR 1-2843, para 20; Case Diamantis v Greece ( Case C-373/97 ) [2000] ECR 1-1705, para 33; and IIS Fini H v Skatteministeriet ( Case C-32/03 ) [2005] STC 903,[2005] ECR 1-1599, para 32). [55] Where the tax authorities find that the right to deduct has been exercised fraudulently, they are permitted to claim repayment of the deducted sums retroactively (see, inter alia, Rompelman v Minister van Financien (Case 268/83) [1985] ECR 655, para 24 ; Intercornmunale voor Zeewaterontzilting (in liquidation) v Belgium ( Case C-110/94 ) [1996] STC 569 , [1996] ECR 1-857, para 24; and Gabalfrisa (para 46)). It is a matter for the national court to refuse to allow the right to deduct where it is established, on the basis of objective evidence, that that right is being relied on for fraudulent ends (see Fini H (para 34)). [56] In the same way, a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether or not he profited by the resale of the goods. [57] That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice. [58] In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them. [59] Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of 'supply of goods effected by a taxable person acting as such' and 'economic activity'. [60] It follows from the foregoing that the answer to the questions must be that where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, art 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national• law under which the fact that the contract of sale is void—by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller—causes that taxable person to lose the right to deduct the VAT he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of VAT or to other fraud. [61] By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.” “Knew”

23. A plea of actual knowledge for the purposes of the first limb of the Kittel principle does not require a plea of dishonesty. In E Buyer UK Ltd v HMRC [2017] EWCA 1416 (Civ), [2018] 1 WLR 1524 , the Chancellor stated as follows at [90] and [98]: “[90] Finally, if a summary of the applicable law is required along the lines of paragraphs 86 and 87 of the UT’s decision, I would simply summarise the principles as follows:- i) The test promulgated by the CJEU in Kittel was whether the taxpayer knew or should have known that he was taking part in a transaction connected with fraudulent evasion of VAT. ii) Ultimately the question in every Kittel case is whether HMRC has established that the test has been met. The test is to be applied in accordance with the guidance given by the Court of Appeal in Mobilx and Fonecomp . iii) It is not relevant for the FTT to determine whether the conduct alleged by HMRC might amount to dishonesty or fraud by the taxpayer, unless dishonesty or fraud is expressly alleged by HMRC against the taxpayer. If it is, then that dishonesty or fraud must be pleaded, particularised and proved in the same way as it would have to be in civil proceedings in the High Court. iv) In all Kittel cases, HMRC must give properly informative particulars of the allegations of both actual and constructive knowledge by the taxpayer. ... [98] The main point in this case was not, as the taxpayers suggested a simple pleading question. The UT failed, I think, to identify the basic error that Judge Mosedale had made in the Citibank case, where she said, in effect, that making a first limb Kittel allegation required a plea of dishonesty. It does not; even if in some cases, the findings of knowledge made by the FTT could have led the FTT to uphold a plea of dishonesty had it been made. HMRC is entitled to stop short of alleging dishonesty and content itself with pleading, particularising and proving first limb Kittel knowledge. If, however, HMRC do expressly allege dishonesty, they will be required to comply with the normal rules of pleading and disclosure applicable to such cases. In future, it might be helpful in these cases for HMRC to say expressly in their Statements of Case whether or not they set out to prove the dishonesty of the appellant taxpayer.” “Should have known”

24. The meaning of “should have known” was considered by the Court of Appeal in Mobilx Limited (In Liquidation) v HMRC [2010] EWCA Civ 517 , [2010] STC 1436 (“ Mobilx ”). In essence, the “should have known” limb of Kittel applies if a trader should have known that the only reasonable explanation for a transaction is that it was connected to fraud. Moses LJ stated as follows at [50] to [52], [58] to [60], [65] and [81] to [85]: “Meaning of ‘should have known’ [50] The traders contend that mere failure to take reasonable care should not lead to the conclusion that a trader is a participant in the fraud. In particular, counsel on behalf of Mobilx contends that Floyd J and the tribunal misconstrue para 51 of Kittel . Whilst traders who take every precaution reasonably required of them to ensure that their transactions are not connected with fraud cannot be deprived of their right to deduct input tax, it is contended that the converse does not follow. It does not follow, they argue, that a trader who does not take every reasonable precaution must be regarded as a participant in fraud. [51] Once it is appreciated how closely Kittel follows the approach the court had taken six months before in Optigen , it is not difficult to understand what it meant when it said that a taxable person 'knew or should have known' that by his purchase he was participating in a transaction connected with fraudulent evasion of VAT. In Optigen the court ruled that despite the fact that another prior or subsequent transaction was vitiated by VAT fraud in the chain of supply, of which the impugned transaction formed part, the objective criteria, which determined the scope of VAT and of the right to deduct, were met. But they limited that principle to circumstances where the taxable person had 'no knowledge and no means of knowledge'(para 55). The court must have intended Kittel to be a development of the principle in Optigen . Kittel is the obverse of Optigen . The court must have intended the phrase 'knew or should have known' which it employs in paras 59 and 61 in Kittel to have the same meaning as the phrase 'knowing or having any means of knowing which it used in Optigen (para 55). [52] If a taxpayer has the means at his disposal of knowing that by his purchase, he is participating in a transaction connected with fraudulent evasion of VAT he loses his right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met. It profits nothing to contend that, in domestic law, complicity in fraud denotes a more culpable state of mind than carelessness, in the light of the principle in Kittel. A trader who fails to deploy means of knowledge available to him does not satisfy the objective criteria which must be met before his right to deduct arises. Extent of Knowledge … [58] As I have endeavoured to emphasise, the essence of the approach of the court in Kittel was to provide a means of depriving those who participate in a transaction connected with fraudulent evasion of VAT by extending the category of participants and, thus, of those whose transactions do not meet the objective criteria which determine the scope of the right to deduct. The court preserved the principle of legal certainty; it did not trump it. [59] The test in Kittel is simple and should not be over-refined. It embraces not only those who know of the connection but those who 'should have known'. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel . [60] The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion.”

25. The knowledge for these circumstances need not be of how the fraud took place and so it is no bar to liability that there were no inquires which could have revealed the specific details of the fraud. In Fonecomp Ltd v Revenue and Customs Commissioners [2015] STC 2254 , Arden LJ stated as follows at [50] to [51]: “[50] Mr Lasok further relies on the holding of Moses LJ in Mobilx that the words ‘should have known’ (referring to the deemed knowledge of the trader) meant ‘has any means of knowing’: per Moses LJ ( [2010] STC 1436 at [51]). Mr Lasok further argues that Fonecomp could not have found out about the fraud even if it made inquiries because the fraud did not relate to the chain of transactions with which it was concerned. [51] However, in my judgment, the holding of Moses LJ does not mean that the trader has to have the means of knowing how the fraud that actually took place occurred. He has simply to know, or have the means of knowing, that fraud has occurred, or will occur, at some point in some transaction to which his transaction is connected. The participant does not need to know how the fraud was carried out in order to have this knowledge. This is apparent from paras 56 and 61 of Kittel cited above. Paragraph 61 of Kittel formulates the requirement of knowledge as knowledge on the part of the trader that ‘by his purchase he was participating in a transaction connected with fraudulent evasion of VAT’. It follows that the trader does not need to know the specific details of the fraud.”

26. The “only reasonable explanation” test is one way of showing a person should have known of the connection to fraud. In AC Wholesale v HMRC [2017] UKUT 19 (TCC) , the Upper Tribunal (Proudman J and Judge Greg Sinfield) stated as follows at [27, [29] and [30]: “[27] Mr Brown submitted that the FTT were wrong to conclude, in [97], that it could be inferred from [19] of the decision in GSM Export that the Upper Tribunal had rejected the view that HMRC must eliminate all other reasonable explanations and show the only reasonable explanation for the transaction was fraud. We agree. The passage in GSM Export does not address the precise point that arises in this appeal. The paragraph simply confirmed that, after Mobilx , the test remains: did the taxable person know or should he have known that the transaction was connected with fraud? The paragraph did no more than clarify that, as we have already stated in [19] above, the ‘only reasonable explanation’ test is simply one way of showing that a person should have known that transactions were connected to fraud. ... [29] In our view, Mr Brown’s submissions place a weight on the words used by Moses LJ in Mobilx that they cannot bear. Moses LJ was clear that the test in Kittel was a simple one that should not be over refined. It is, to us, inconceivable that Moses LJ’s example of an application of part of that test, the ‘no other reasonable explanation’, would lead to the test becoming more complicated and more difficult to apply in practice. That, in our view, would be the consequence of applying the interpretation urged upon us by Mr Brown. In effect, HMRC would be required to devote time and resources to considering what possible reasonable explanations, other than a connection with fraud, might be put forward by an appellant and then adduce evidence and argument to counter them even where the appellant has not sought to rely on such explanations. That would be an unreasonable and unjustified evidential burden on HMRC. Accordingly, we do not consider that HMRC are required to eliminate all possible reasonable explanations other than fraud before the FTT is entitled to conclude that the appellant should have known that the transactions were connected to fraud. [30] Of course, we accept (as, we understand, does HMRC) that where the appellant asserts that there is an explanation (or several explanations) for the circumstances of a transaction other than a connection with fraud then it may be necessary for HMRC to show that the only reasonable explanation was fraud. As is clear from Davis & Dann , the FTT’s task in such a case is to have regard to all the circumstances, both individually and cumulatively, and then decide whether HMRC have proved that the appellant should have known of the connection with fraud. In assessing the overall picture, the FTT may consider whether the only reasonable conclusion was that the purchases were connected with fraud. Whether the circumstances of the transactions can reasonably be regarded as having an explanation other than a connection with fraud or the existence of such a connection is the only reasonable explanation is a question of fact and evaluation that must be decided on the evidence in the particular case. It does not make the elimination of all possible explanations the test which remains, simply, did the person claiming the right to deduct input tax know that, by his purchase, he was participating in a transaction connected with fraudulent evasion of VAT or should he have known of such a connection.” Proof from surrounding circumstances

27. As noted above, and as was agreed between the parties, the burden of proof as to a taxable person’s knowledge is upon HMRC. However, the surrounding circumstances can, in appropriate cases, be sufficient to establish knowledge. Moses LJ stated as follows in Mobilx at [81] to [85]: “Questions of Proof [81] HMRC raised in writing the question as to where the burden of proof lies. It is plain that if HMRC wishes to assert that a trader's state of knowledge was such that his purchase is outwith the scope of the right to deduct it must prove that assertion. No sensible argument was advanced to the contrary. [82] But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. As I indicated in relation to the BSG appeal, tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, he is not entitled to ignore the circumstances in which his transactions take place if the only reasonable explanation for them is that his transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a tribunal from asking the essential question posed in Kittel , namely, whether the trader should have known that by his purchase he was taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that he was. [83] The questions posed in BSG (quoted above at para [72]) by the tribunal were important questions which may often need to be asked in relation to the issue of the trader's state of knowledge. I can do no better than repeat the words of Christopher Clarke J in Red 12 Trading Ltd v Revenue and Customs Comrs [2009] EWHC 2563(Ch) at [109]-[111], [2010] STC 589 at [109]-[111]: ‘[109] Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature eg that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and "similar fact" evidence. That is not to alter its character by reference to earlier or later transactions but to discern it. [110] To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile telephones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have -identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands. [111] Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.' [84] Such circumstantial evidence, of a type which compels me to reach a more definite conclusion than that which was reached by the tribunal in Mobilx , will often indicate that a trader has chosen to ignore the obvious explanation as to why he was presented with the opportunity to reap a large and predictable reward over a short space of time. In Mobilx , Floyd J concluded that it was not open to the tribunal to rely upon such large rewards because the issue had not been properly put to the witnesses. It is to be hoped that no such failure on the part of HMRC will occur in the future. [85] In so saying, I am doing no more than echoing the warning given in HMRC's VAT. Notice 726 in relation to the introduction of joint and several liability. In that Notice traders were warned that the imposition of joint and several liability was aimed at businesses who know who is carrying out the frauds, or choose to turn a blind eye (para 2.3). They were warned to take heed of any indications that VAT may go unpaid (pare 4.9). A trader who chooses to ignore circumstances which can only reasonably be explained by virtue of the connection between his transactions and fraudulent evasion of VAT, participates in that fraud and, by his own choice, deprives himself of the right to deduct input tax.” Due diligence

28. As Moses LJ noted in Mobilx at [82] “tribunals should not unduly focus on the question whether a trader has acted with due diligence”. Moses LJ also stated as follows at [75]: “[75] The ultimate question is not whether the trader exercised due diligence but rather whether he should have known that the only reasonable explanation for the circumstances in which his transaction took place was that it was connected to fraudulent evasion of VAT. The tribunal might have concluded that Mr Peters should have known that the transactions into which he entered were connected with fraud, by reference to the unconventional nature of those circumstances (a finding it came close to making at para 228). But it was not the only decision within the bounds of reasonable conclusion.”

29. Similarly, in Mahagében kft v Nemzeti Adó-és Vámhivatal De´l-dunántúli Regionális Adó Főigazgatósága; Dávid v Nemzeti Adó- e´s Vámhivatal Észak-alföldi Regionális Adó Főigazgatósága (Joined cases C-80/11 and C-142/11) [2012] STC 1934 (“ Mahagében ”), the CJEU stated as follows as regards due diligence at [60] to [65]: “[60] It is true that, when there are indications pointing to an infringement or fraud, a reasonable trader could, depending on the circumstances of the case, be obliged to make enquiries about another trader from whom he intends to purchase goods or services in order to ascertain the latter’s trustworthiness. [61] However, 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 was in possession of the goods at issue and was in a position to supply them and that he has satisfied his 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. [62] It is, in principle, for the tax authorities to carry out the necessary inspections of taxable persons in order to detect VAT irregularities and fraud as well as to impose penalties on the taxable person who has committed those irregularities or fraud. [63] According to the case law of the court, member states are required to check taxable persons’ returns, accounts and other relevant documents (see EC Commission v Italy ( Case C-132/06 ) [2008] ECR I-5457, para 37, and Dyrektor Izby Skarbowej w Biaymstoku v Profaktor Kulesza, Frankowski, Jówiak, Orowski ( Case C-188/09 ) [2010] ECR I-7639, para 21). [64] To that end, Directive 2006/112 imposes, in particular in art 242, an obligation on every taxable person to keep accounts in sufficient detail for VAT to be applied and its application checked by the tax authorities. In order to facilitate the performance of that task, arts 245 and 249 of that directive provide for the right of the competent authorities to access the invoices which the taxable person is obliged to store under art 244 of that directive. [65] It follows that, by imposing on taxable persons, in view of the risk that the right to deduct may be refused, the measures listed in para 61 of the present judgment, the tax authority would, contrary to those provisions, be transferring its own investigative tasks to taxable persons.”

30. In closing submissions Mr Kerr and Miss Monahan noted that whilst there should not be undue focus on due diligence, the standard of due diligence is still relevant to whether Transwaste knew or should have known of the connection to the fraudulent evasion of VAT in two respects: first, as evidence that Transwaste was (on HMRC’s case) turning a blind eye to what it had found or would find; and, secondly, Transwaste would have discovered from proper enquires facts from which it should have known of the connection to fraud. Whilst Miss Brown unsurprisingly disagreed with Mr Kerr’s submissions as to how these two alternatives are said by HMRC to apply to Transwaste, she did not dispute that, in principle, due diligence can be treated as relevant in these two ways. We return to these submissions in our consideration of whether HMRC has made out its case on knowledge or means of knowledge below. However, we note at this stage that we agree that, whilst there should not be undue focus on due diligence, this is not to say that inadequacies in due diligence (if made out) are of no relevance. Neither the existence nor absence of proper due diligence are in themselves determinative on their own. Instead, the touchstone remains (as Moses LJ stated in Mobilx at [72]) whether the trader “should have known that the only reasonable explanation for the circumstance in which his transaction took place was that it was connected to fraudulent evasion of VAT.” Approach

31. Whilst individual transactions need to be considered, the proper approach is to also to consider the circumstances and context of the transactions in their totality and what the taxpayer did, did not do, or could have done in respect of them. In Red 12 Trading Ltd v Revenue and Customs Comrs [2009] EWHC 2563 (Ch) , [2010] STC 589 , Christopher Clarke J stated as follows at [108] to [111]: “[108] In Optigen Ltd v Customs and Excise Comrs the assumed facts were, as Lewison J recorded in Revenue and Customs Comrs v Livewire Telecom Ltd, that the trader was ‘an innocent buyer of the goods who had no knowledge of a defaulter at an earlier link in the chain’. HMRC had sought to argue that the transactions in a chain involving MTIC fraud were not genuine economic activities at all because their purpose was to misappropriate VAT. The ECJ rejected that and held that a taxpayer who supplied goods and accounted for the output tax to HMRC was not to be denied the right to deduct the input tax because someone else in the chain had a fraudulent intent of which it had neither knowledge nor the means of knowledge. It is in that context that the court spoke of the need to examine each transaction on its own merits. [109] Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature eg that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and ‘similar fact’ evidence. That is not to alter its character by reference to earlier or later transactions but to discern it. [110] To look only at the purchase in respect of which input tax was sought to be deducted would be wholly artificial. A sale of 1,000 mobile telephones may be entirely regular, or entirely regular so far as the taxpayer is (or ought to be) aware. If so, the fact that there is fraud somewhere else in the chain cannot disentitle the taxpayer to a return of input tax. The same transaction may be viewed differently if it is the fourth in line of a chain of transactions all of which have identical percentage mark ups, made by a trader who has practically no capital as part of a huge and unexplained turnover with no left over stock, and mirrored by over 40 other similar chains in all of which the taxpayer has participated and in each of which there has been a defaulting trader. A tribunal could legitimately think it unlikely that the fact that all 46 of the transactions in issue can be traced to tax losses to HMRC is a result of innocent coincidence. Similarly, three suspicious involvements may pale into insignificance if the trader has been obviously honest in thousands. [111] Further in determining what it was that the taxpayer knew or ought to have known the tribunal is entitled to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them.”

32. The importance of considering the totality of the evidence and not over compartmentalising the relevant factors was also emphasised in Davis & Dann Limited v HMRC [2016] EWCA Civ 142 , [2016] STC 1236 per Arden LJ at [60] as follows (see also CCA Distribution Ltd v HMRC [2017] EWCA Civ 1899 per David Richards LJ at [31] and [46]). “[60] I accept the substance of Mr Kinnear’s submission. In my judgment, the UT’s treatment of the respondents’ repayment position provides a clear example of over compartmentalisation of the factors rather than a consideration of the totality of the evidence. The UT accepted Mr Scorey’s submission, also made to us on this appeal, that the respondents’ abnormally large repayment position was just a consequence of the Transactions ( [2014] STC 39 at [50]). But that is to leave out of consideration the role of this factor as a factor which is capable of supporting knowledge to the no other reasonable explanation standard. The UT did not consider its relevance in this way and its failure to do so was an error of law. When a factor is considered in that way it may be that there is an explanation which means that the knowledge does not meet the required standard. At that stage, the factor, while relevant, ceases to be probative. The example which I have given is repeated in relation to the other factors which the UT considered. Moreover, although, in para [55] of its decision, the UT stated that the no other reasonable explanation standard was not met ‘whether the factors were looked at individually or as a whole’, it did not elucidate why that was so. I give that statement little weight in the light of the general tenor of the decision, which was to look at factors in isolation.” The Penalties

33. For the purposes of Decision 2, the relevant paragraphs of Schedule 24 of the FA 2007 provide as follows “1. (1) A penalty is payable by a person (P) where— (a) P gives HMRC a document of a kind listed in the Table below, and (b) Conditions 1 and 2 are satisfied. (2) Condition 1 is that the document contains an inaccuracy which amounts to, or leads to— (a) an understatement of a liability to tax, (b) a false or inflated statement of a loss ..., or (c) a false or inflated claim to repayment of tax. (3) Condition 2 is that the inaccuracy was careless (within the meaning of paragraph 3) or deliberate on P’s part. (4) Where a document contains more than one inaccuracy, a penalty is payable for each inaccuracy. ...

3. (1) For the purposes of a penalty under paragraph 1, inaccuracy in] a document given by P to HMRC is— (a) “careless” if the inaccuracy is due to failure by P to take reasonable care, (b) “deliberate but not concealed” if the inaccuracy is deliberate on P's part but P does not make arrangements to conceal it, and (c) “deliberate and concealed” if the inaccuracy is deliberate on P's part and P makes arrangements to conceal it (for example, by submitting false evidence in support of an inaccurate figure). (2) An inaccuracy in a document given by P to HMRC, which was neither careless nor deliberate on P's part when the document was given, is to be treated as careless if P— (a) discovered the inaccuracy at some later time, and (b) did not take reasonable steps to inform HMRC. ...

4. (1) This paragraph sets out the penalty payable under paragraph 1. (2) If the inaccuracy is in category 1, the penalty is— (a) for careless action, 30% of the potential lost revenue, (b) for deliberate but not concealed action, 70% of the potential lost revenue, and (c) for deliberate and concealed action, 100% of the potential lost revenue. ...

15. Appeal (1) A person may appeal against a decision of HMRC that a penalty is payable by the person. (2) A person may appeal against a decision of HMRC as to the amount of a penalty payable by the person. ... 17(1) On an appeal under paragraph 15(1) the tribunal may affirm or cancel HMRC’s decision. (2) On an appeal under paragraph 15(2) the tribunal may (a) affirm HMRC’s decision, or (b) substitute for HMRC’s decision another decision that HMRC had power to make.”

34. For the purposes of Decision 4, section 69 C of VATA 1994 provided as follows as at 16 November 2017. “69C Transactions connected with VAT fraud (1) A person (T) is liable to a penalty where— (a) T has entered into a transaction involving the making of a supply by or to T (“the transaction”), and (b) conditions A to C are satisfied. (2) Condition A is that the transaction was connected with the fraudulent evasion of VAT by another person (whether occurring before or after T entered into the transaction). (3) Condition B is that T knew or should have known that the transaction was connected with the fraudulent evasion of VAT by another person. (4) Condition C is that HMRC have issued a decision (“the denial decision”) in relation to the supply which— (a) prevents T from exercising or relying on a VAT right in relation to the supply, (b) is based on the facts which satisfy conditions A and B in relation to the transaction, and (c) applies a relevant principle of EU case law (whether or not in circumstances that are the same as the circumstances in which any relevant case was decided by the European Court of Justice). (5) In this section “VAT right” includes the right to deduct input tax, the right to apply a zero rate to international supplies and any other right connected with VAT in relation to a supply. (6) The relevant principles of EU case law for the purposes of this section are the principles established by the European Court of Justice in the following cases— (a) joined Cases C-439/04 and C-440/04 Axel Kittel v. Belgian State; Belgium v. Recolta Recycling (denial of right to deduct input tax), and (b) Case C-273/ 11 (b)Mecsek-Gabona Kft v Nemzeti Adó- és Vámhivatal Déldunántúli Regionális Adó Főigazgatósága (denial of right to zero rate), as developed or extended by that Court (whether before or after the coming into force of this section) in other cases relating to the denial or refusal of a VAT right in order to prevent abuses of the VAT system. (7) The penalty payable under this section is 30% of the potential lost VAT. (8) The potential lost VAT is— (a) the additional VAT which becomes payable by T as a result of the denial decision, (b) the VAT which is not repaid to T as a result of that decision, or (c) in a case where as a result of that decision VAT is not repaid to T and additional VAT becomes payable by T, the aggregate of the VAT that is not repaid and the additional VAT. (9) Where T is liable to a penalty under this section the Commissioners may assess the amount of the penalty and notify it to T accordingly. (10) No assessment of a penalty under this section may be made more than two years after the denial decision is issued. (11) The assessment of a penalty under this section may be made immediately after the denial decision is made (and notice of the assessment may be given to T in the same document as the notice of the decision). (12) Where by reason of actions involved in making a claim to exercise or rely on a VAT right in relation to a supply T— (a) is liable to a penalty for an inaccuracy under paragraph 1 of Schedule 24 to the Finance Act 2007 for which T has been assessed (and the assessment has not been successfully appealed against by T or withdrawn), or (b) is convicted of an offence (whether under this Act or otherwise), those actions do not give rise to liability to a penalty under this section.”

35. In Anthony Clynes v HMRC [2016] UKFTT 369 (TC) (“ Clynes ”), the First-tier Tribunal held that the normal meaning of “deliberate inaccuracy” can include acting with a conscious or intentional decision not to find out the correct position. Judge Harriet Morgan and Mr Philip Jolly stated as follows at [86]: “[86] However, we consider that the term “deliberate inaccuracy on a person’s part” can extend beyond this. Our view is that, depending on the precise circumstances, an inaccuracy may also be held to be deliberate where it is found that the person consciously or intentionally chose not to find out the correct position, in particular, where the circumstances are such that the person knew that he should do so. A person cannot simply escape liability by claiming complete ignorance where the person clearly knew that he should have taken steps to ascertain the position. We view the case where a person makes such a conscious choice not to take such steps with the result that an inaccuracy occurs, as no less of a ‘deliberate inaccuracy’ on that person’s part than making the inaccuracy with full knowledge of the inaccuracy.”

36. We note that Clynes is a decision of the First-tier Tribunal and so we are not bound by it. However, we find that this is a correct analysis and so adopt it accordingly. Indeed, we note that Miss Brown did not argue that Clynes was incorrect.

37. Section 69 C VATA 1994 was amended with effect from 31 December 2020. The modest amendment was to the final lines of subsection (6) to read as follows: “(6) ... as developed or extended by that Court in any other cases relating to the denial or refusal of a VAT right in order to prevent abuses of the VAT system which were decided before the coming into force of section 42 of TCTA 2018.”

38. Section 70 of the VATA 1994 provides for the mitigation of penalties as follows. “70. Mitigation of penalties under sections 60, 63, 64, 67, 69A and 69C. (1) Where a person is liable to a penalty under section 60, 63, 64, 67, 69A or 69C or under paragraph 10 of Schedule 11A, the Commissioners or, on appeal, a tribunal may reduce the penalty to such amount (including nil) as they think proper. (2) In the case of a penalty reduced by the Commissioners under subsection (1) above, a tribunal, on an appeal relating to the penalty, may cancel the whole or any part of the reduction made by the Commissioners. (3) None of the matters specified in subsection (4) below shall be matters which the Commissioners or any tribunal shall be entitled to take into account in exercising their powers under this section. (4) Those matters are— (a) the insufficiency of the funds available to any person for paying any VAT due or for paying the amount of the penalty; (b) the fact that there has, in the case in question or in that case taken with any other cases, been no or no significant loss of VAT; (c) the fact that the person liable to the penalty or a person acting on his behalf has acted in good faith. (5) In the application of subsections (3) and (4) in relation to a penalty under section 69 C, subsection (4) has effect with the omission of paragraphs (b) and (c).”

39. For the purposes of Decision 5, section 69 D of VATA 1994 provides as follows. “69D Penalties under section 69 C: officer’s liability (1) Where (a) a company is liable to a penalty under section 69 C, and (b) the actions of the company which give rise to that liability were attributable to an officer of the company (“the officer”), the officer is liable to pay such portion of the penalty (which may be equal to or less than 100%) as HMRC may specify in a notice given to the officer (a “decision notice”). (2) Before giving the officer a decision notice HMRC must— (a) inform the officer that they are considering doing so, and (b) afford the officer the opportunity to make representations about whether a decision notice should be given or the portion that should be specified. (3) A decision notice— (a) may not be given before the amount of the penalty due from the company has been assessed (but it may be given immediately after that has happened), and (b) may not be given more than two years after the denial decision relevant to that penalty was issued. (4) Where the Commissioners have specified a portion of the penalty in a decision notice given to the officer— (a) section 70 applies to the specified portion as to a penalty under section 69 C, (b) the officer must pay the specified portion before the end of the period of 30 days beginning with the day on which the notice is given, (c) section 76(9) applies as if the decision notice were an assessment notified under section 76, and (d) a further decision notice may be given in respect of a portion of any additional amount assessed in an additional assessment. (5) HMRC may not recover more than 100% of the penalty through issuing decision notices in relation to two or more persons. (6) A person is not liable to pay an amount by virtue of this section if the actions of the company concerned are attributable to the person by reference to conduct for which the person has been convicted of an offence. In this subsection “conduct” includes omissions. (7) In this section “company” means a body corporate or unincorporated association but does not include a partnership, a local authority or a local authority association. (8) In its application to a body corporate other than a limited liability partnership “ means— (a) a director (including a shadow director within the meaning of section 251 of the Companies Act 2006 ), (b) a manager, or (c) a secretary. (9) In in its application to a limited liability partnership “officer” means a member. (10) In its application in any other case, “officer” means— (a) a director, (b) a manager, (c) a secretary, or (d) any other person managing or purporting to manage any of the company's affairs.” Timing

40. A discrete issue arises as to the timing of Decision 3 and whether the assessment was made in time, with a consequential impact upon Decision 4 and Decision 5.

41. The parties agreed that the relevant time limit is two years from the end of the prescribed accounting period or alternatively one year after evidence of facts sufficient in the opinion of HMRC to justify the making of the assessment comes to their knowledge. Section 73(6) of the VAT 1994 provides as follows. “73(6) An assessment under subsection (1), (2) or (3) above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided for in section 77 and shall not be made after the later of the following— (a) 2 years after the end of the prescribed accounting period; or (b) one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge, but (subject to that section) where further such evidence comes to the Commissioners’ knowledge after the making of an assessment under subsection (1), (2) or (3) above, another assessment may be made under that subsection, in addition to any earlier assessment.” Submissions

42. Miss Brown submitted that, in response to Transwaste putting HMRC to proof that a valid VAT assessment had been made, HMRC relied upon an assertion by Officer Stuart Knowles that the assessment was issued on 16 June 2020. However, Miss Brown submits that this must be wrong, as a hard copy version of the VAT 655 sent to Transwaste is date stamped 25 June 2020. Miss Brown invited the Tribunal not to accept Officer Knowles’ assertion that he received the final piece of evidence to justify an assessment on 4 December 2019. Miss Brown said that Officer Knowles’ explanation in his oral evidence was, to use her wording, “an incredibly vague response”. He had said that every facet of the transactions had been discussed at the meeting.

43. Mr Kerr and Miss Monahan relied upon the principles set out by the Upper Tribunal (Judge Timothy Herrington and Judge Kevin Poole) in Shahzada Rasul v HMRC [2017] UKUT 357 (TCC) . Given its significance to this issue, we set out paragraphs [9] to [16] in full as follows: “[9] The parties were in broad agreement as to the legal principles to be applied in interpreting s 73(6) (b), as derived from the authorities. These were comprehensively set out by Dyson J in Pegasus Birds Ltd v CCE [1999] STC 95 at pages 101g to 102c as follows: ‘1. The commissioners' opinion referred to in s 73(6) (b) is an opinion as to whether they have evidence of facts sufficient to justify making the assessment. Evidence is the means by which the facts are proved.

2. The evidence in question must be sufficient to justify the making of the assessment in question (see Customs and Excise Comrs v Post Office [1995] STC 749 at 754 per Potts J).

3. The knowledge referred to in s 73(6) (b) is actual, and not constructive knowledge (see Customs and Excise Comrs v Post Office [1995] STC 749 at 755). In this context, I understand constructive knowledge to mean knowledge of evidence which the commissioners do not in fact have, but which they could and would have if they had taken the necessary steps to acquire it.

4. The correct approach for a tribunal to adopt is (i) to decide what were the facts which, in the opinion of the officer making the assessment on behalf of the commissioners, justified the making of the assessment, and (ii) to determine when the last piece of evidence of these facts of sufficient weight to justify making the assessment was communicated to the commissioners. The period of one year runs from the date in (ii) (see Heyfordian Travel Ltd v Customs and Excise Comrs [1979] VATTR 139 at 151, and Classicmoor Ltd v Customs and Excise Comrs [1995] V&DR 1 at 10).

5. An officer's decision that the evidence of which he has knowledge is insufficient to justify making an assessment, and accordingly, his failure to make an earlier assessment, can only be challenged on Wednesbury principles, or principles analogous to Wednesbury (see Associated Provincial Picture Houses Ltd v Wednesbury Corp [1948] 1 KB 223 ) (see Classicmoor Ltd v Customs and Excise Comrs [1995] V&DR 1 at 10–11, and more generally John Dee Ltd v Customs and Excise Comrs [1995] STC 941 at 952 per Neill LJ).

6. The burden is on the taxpayer to show that the assessment was made outside the time limit specified in s 73(6) (b) of the 1994 Act .’ [10] In relation to principles 4 and 5 Dyson J held that the test is a subjective rather than an objective one. The person whose opinion is to be imputed to HMRC is the person who decided to make the assessment, regardless of which person within HMRC acquired the knowledge of the facts in question: see page 102f of the judgment. [11] Dyson J observed at page 102h in forming their opinion HMRC “must have regard to their obligations to act to the best of their judgment” in making an assessment. [12] In the light of the principles set out at [9] above Dyson J in Pegasus Birds formulated the test to be applied at page 104d to e as follows: ‘The question for the tribunal on an appeal, therefore, is whether the commissioners' failure to make an earlier assessment was perverse or wholly unreasonable. In some cases, the position will be clear. Suppose that evidence of all the facts which in the opinion of the commissioners justified the making of the assessment was known to the commissioners at the beginning of year one, and the assessment was not made until the beginning of year three. Suppose further that the reason for the two-year delay is that the file was lost, or there was a change of staff with the result that the officer who had acquired the evidence did not pass it on to his successor. In those circumstances, the delay in making the assessment would be wholly unreasonable, and an appeal would succeed on the time-limits point.’ [13] The Court of Appeal approved the test formulated by Dyson J. The case is reported at [2000] STC 91 . The Court of Appeal made it clear that it is the task of the tribunal to assess whether as a matter of fact the officer held the opinion in question. Aldous LJ said at page 97j to 98a: ‘An opinion as to what evidence justifies an assessment requires judgment and in that sense is subjective; but the existence of the opinion is a fact. From that it is possible to ascertain what was the evidence of facts which was thought to justify the making of the assessment. Once that evidence has been ascertained, then the date when the last piece of the puzzle fell into place can be ascertained. In most cases, the date will have been known to the taxpayer, as he will be the person who supplied the information.’ [14] The Court of Appeal in a later appeal involving the same taxpayer clarified the test to be applied in determining whether an assessment was to best judgment. In CCE v Pegasus Birds Ltd [2004] EWCA Civ 1015 it held it was not to be established by reference to Wednesbury principles. The correct test is whether there has been an honest and genuine attempt to make a reasoned assessment: see Carnwath LJ at [22]. [15] That is not to say that whether an assessment could be said to be “wholly unreasonable” is wholly irrelevant to determining that question. This follows from the following passage from [77] of the judgment, per Chadwick LJ: ‘It is important to keep in mind that it does not follow, necessarily, that an assessment which is "wholly unreasonable, being outside the parameters of the reasonable" is not, nevertheless, the result of an honest and genuine attempt to assess the amount of VAT properly due from the taxpayer. All that can be said is that an assessment may be so far outside the bounds of what would have been reasonable that it calls into question whether there was, indeed, an honest and genuine attempt to assess the amount properly due. It is open to a tribunal to find that it is so unlikely that an experienced officer of Customs and Excise, seeking to make a proper assessment of the VAT properly due, would have made an assessment in the amount that he did that the proper inference to draw is that, in making that assessment, he could not have been doing his honest best. But that is an evidential inference from the facts; it is not a finding that because (although doing his honest best) his assessment fell below an objective standard of reasonableness, he failed to exercise the power to assess to the best of his judgment as a matter of law.’ [16] The threshold for making a “best judgment” assessment is therefore comparatively low. But that is not the same as saying that the twelve month time limit in s 73(6) (b) starts to run as soon as there is sufficient evidence before HMRC to enable an officer to reach the view that he is entitled to issue a “best judgment” assessment. If the officer decides that further enquiries need to be made and/or further information obtained before making an assessment, the time limit will not start to run against him unless that decision is perverse or wholly unreasonable.”

44. Mr Kerr and Miss Monahan submitted that Officer Knowles’ evidence was that the final information which justified making an assessment was provided to him at a meeting on 4 December 2019. They said that Officer Knowles’ evidence was to be accepted and was not perverse or wholly unreasonable. Discussion

45. Officer Knowles said in his witness statement that the VAT 655 letter of assessment was issued on 16 June 2020, outlining the tax due as a result of the Kittel decision of 5 June 2020. He said that the evidence provided to him during his visit to Transwaste on 4 December 2019 (“the December 2019 Visit”) was (in his view) the final piece of evidence required to justify making the assessment. He set out further details as to what evidence was provided to him at the December 2019 Visit: the change of supplier from Hydro to Hydro GRP in consecutive days, the continuation of trade with Hydro GRP despite HMRC having raised concerns and issuing tax loss letters, the absence of evidence of due diligence on Hydro and Hydro GRP, and the absence of due diligence on West Midlands Skip Hire Limited (“WMSH”). In the course of cross-examination, Officer Knowles said that there was a full discussion about the switching of trade between Hydro and Hydro GRP, which had not been discussed previously. He said that this was the point at which he had enough evidence to issue the assessments. Officer Knowles also addressed the apparent inconsistency in dates, noting that the VAT 655 letter was issued on 16 June 2020 and uploaded onto HMRC’s system on the same day. He said that he had not previously seen the copy apparently stamped by HMRC with 25 June 2020, noting that the version uploaded to HMRC’s system did not have such a date stamp.

46. We accept Officer Knowles’ evidence as set out above (insofar as it represents his own views at the time of Decision 3 rather than us passing any comment at this stage upon whether those views were correct) and make findings of fact accordingly. This is because there was no contrary documentary or witness evidence as to what was discussed at the December 2019 Visit. Indeed, HMRC’s report of the visit (the accuracy of which was not challenged by Transwaste) is consistent with Officer Knowles’ evidence. The visit report includes the following: “SK wanted to understand Transwaste business relationship with Hydro Plant. SK said his understanding was Hydro Plant move waste from Transwaste site to a site in Birmingham and gives PH an all in one price. PH said he did not know if Hydro Plant used their own transport or used sub-contractors. PH said he could provide the vehicle registration if needed. SK said he has been given this information. PH said the site in Birmingham was a transfer station. SK asked what West Midlands Skip Hire involvement in the transaction was. PH said they raised the invoice and the Birmingham site was their disposal site. ... SK said that the tax loss letter SK gave to PH regarding Hydro Plant was to make PH aware that there was a fraudulent transactions in this supply chain and HMRC has not received the tax due. SK said The Hydro Plant Group was de-registered for VAT on 02 August 2019 and a new company Hydro GRP appeared to take over the trading relationship. SK said the same premises; person and bank details were used for this company. SK asked PH if he thought this was suspicious, MK said he understood that there was no legality why the same bank account could not be used and it could be a factoring company. SK said it did not appear to be a factoring company. RA said he did not think there was any legal case to answer therefore the changes SK described would not raise a red flag. PH said that he has completed checks on Hydro Plant, RA said he was happy with the due diligence checks undertaken by Transwaste. SK said he has not seen any of the financial reports (Experian) and has only been provided with the company’s house reports. MK said he would provide SK with the information.”

47. We find that Decision 3 was made within time for the purposes of section 73(6) (b) of VATA 1994 . This is for the following reasons.

48. First, Transwaste’s trading relationships with Hydro and Hydro GRP are clearly relevant to Decision 3. Whilst we note that Officer Knowles’ witness statement raises matters in respect of other traders, we take from Officer Knowles’ answers in cross-examination that the discussion about Hydro and Hydro GRP was the key to the decision to make the assessment.

49. Secondly, there is no evidence that HMRC already had sufficient knowledge about Transwaste’s trading relationships with Hydro and Hydro GRP. The matters set out in the visit report were not discussed previously and Transwaste had not volunteered them before.

50. Thirdly, it was not perverse or wholly unreasonable for Officer Knowles to require this information. Indeed, we find that it was reasonable for Officer Knowles to understand Transwaste’s position in this regard.

51. Fourthly, we accept that the VAT 655 letter was issued on 16 June 2020 and not 25 June 2020. This is because it appears from Officer Knowles’ evidence that it was uploaded to HMRC’s systems on 16 June 2020 and, given that it was not date stamped at all, the uploaded document cannot have been the one date stamped with 25 June 2020. In any event, given that HMRC had the relevant knowledge on 4 December 2019, the assessment would still be in time even if the later date of 25 June 2020 is taken. Findings of Fact

52. We make the following findings of fact. In doing so, we bear in mind that (as is common ground) the burden of proof is upon HMRC and the standard of proof is that of the balance of probabilities.

53. For the avoidance of doubt, we have in this section grouped certain of our findings of fact according to key themes which emerged from the evidence and the submissions. This is in order to marshal the evidence that was before us and to reach our findings of fact on the detail of the relevant matters. As set out below, we nevertheless keep in mind our need to consider the totality of the evidence.

54. For the further avoidance of doubt, we also adopt as findings of fact the common ground set out in the background above. The Evidence The Witnesses

55. We heard oral evidence on behalf of HMRC from Officer Freddie Priestley and Officer Knowles. We found both officers to be credible and that they were seeking to be helpful to the Tribunal when giving their answers. Miss Brown submitted that Officer Priestley’s evidence did not add anything as it was simply a vehicle for exhibiting visit reports and correspondence. We agree with this assessment but note that HMRC were not seeking to rely upon Officer Priestley’s evidence for anything more than what can be described as administrative evidence providing the relevant documentation. Miss Brown also submitted that Officer Knowles was not a satisfactory witness because he was seeking to give irrelevant opinion evidence outside HMRC’s pleaded case. We do not agree with this assessment of Officer Knowles’ evidence. His witness statements explain why he reached the decisions that he did. This is not in itself objectionable, and we note that Transwaste did not apply to strike out any part of the witness statements. However, as this Tribunal has a full appellate rather than supervisory jurisdiction on this matter, Mr Knowles’ evidence of his views or his commentary on other evidence only operates by way of background and explanation for various of HMRC’s submissions rather than those views or commentaries being matters that we need to make findings of fact about. Indeed, the parties agree (as do we) that Officer Knowles’ opinions are not relevant to our decision. Insofar as Officer Knowles’ oral evidence crossed the divide into opinion evidence or irrelevance, this was a feature of what was a long cross-examination exploring those issues. We therefore find that Officer Knowles was a credible witness who was doing his best to assist the Tribunal.

56. We heard oral evidence on behalf of Transwaste from Mr Hornshaw and Mr Kemish. We found both of these witnesses to be credible and, again, that they were doing their best to assist the Tribunal. Whether we accept their evidence on any particular issue is set out below.

57. We note that Miss Brown submitted that Mr Kerr’s cross-examination of Mr Hornshaw (and, to a lesser extent, Mr Kemish) went beyond the parameters of HMRC’s pleaded case. This was particularly in relation to Companies House information about GBS Recycling Ltd (“GBS”), HMRC’s allegations about connections between defaulting traders, and various matters of detail in relation to the suppliers’ activities. We do not agree with this criticism. It was clear from HMRC’s statement of case (both in its original and amended form) that HMRC did not accept that Transwaste’s due diligence in respect of its suppliers was sufficient. Each of the matters criticised by Miss Brown go to that central issue. It was therefore fair and appropriate for HMRC to test those matters in cross-examination. This is, of course, a different question as to whether HMRC’s criticisms of Transwaste’s due diligence are made out and as to the consequences if they are, which we deal with below. Adverse Inferences

58. We did not hear any evidence (or receive any witness statement from) Mr Christopher Tute or Mr Mark Hornshaw. It was HMRC’s position that we should make adverse inferences from Transwaste’s failure to call these witnesses. It was Transwaste’s position that no such adverse inferences should be made. Submissions

59. Mr Kerr and Miss Monahan relied upon (and we have considered) Prest v Prest [2013] 2 AC 415 per Lord Sumption at [44], Wisniewski v Central Manchester Health Authority [1998] PIQR P324 per Brooke LJ at P340, and British Airways plc v Airways Pension Scheme Trustee Ltd [2017] EWHC 1191 (Ch) (“ British Airways ”) (although the Court of Appeal allowed an appeal of British Airways reported at [2018] EWCA Civ 1533 , this did not deal with the issue of adverse inferences). Morgan J summarised the principles in British Airways as follows at [141] to [143]. “[141] The consideration which a court should give to the fact that a potentially relevant witness has not been called is well established. I can take the principles from the judgment of Brooke LJ in Wisniewski v Central Manchester Health Authority [1998] PIQR P324 at P340 where, having reviewed the authorities, he said: ‘From this line of authority I derive the following principles in the context of the present case: (1) In certain circumstances a court may be entitled to draw adverse inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action. (2) If a court is willing to draw such inferences, they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness. (3) There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue. (4) If the reason for the witness's absence or silence satisfies the court, then no such adverse inference may be drawn. If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence or silence may be reduced or nullified.’ [142] This statement of principle is in accordance with the earlier decisions of the House of Lords in R v IRC ex p. T C Coombs & Co [1991] 2 AC 283 and Murray v DPP [1994] 1 WLR 1 and the comments of Lord Sumption in the Supreme Court in Prest v Prest [2013] 2 AC 415 at [44]. [143] These principles mean that before I draw an inference and made a finding of fact adverse to a witness who was not called, I need to ask myself: (1) is there some evidence, however weak, to support the suggested inference or finding on the matter in issue? (2) has the Defendant given a reason for the witness’s absence from the hearing? (3) if a reason for the absence is given but is not wholly satisfactory, is that reason ‘some credible explanation’ so that the potentially detrimental effect of the absence of the witness is reduced or nullified? (4) am I willing to draw an adverse inference in relation to the absent witness? (5) what inference should I draw?”

60. Mr Kerr and Miss Monahan submitted that an adverse inference should be drawn from Mr Tute not being called. The inference which we were invited to draw was that he was not called to give evidence because of a fear that, if called, his evidence would have been unfavourable to Transwaste. This was for the following reasons: (1) Transwaste’s evidence was that Mr Tute conducted the site visits, looked at site permits, checked the site, and conducted environmental site inspections. Transwaste’s evidence was also that there were full due diligence packs but that these were destroyed. (2) There was no suggestion that Mr Tute was unavailable as he was said to be at his office at Melton. (3) The explanation for Mr Tute not being called was because the appeal was not dealing with environmental matters. This was not (on HMRC’s case) a credible explanation, as Mr Tute’s evidence would have had a bearing on knowledge and means of knowledge. (4) A key feature of HMRC’s case is that the lack of contemporaneous documentary evidence of due diligence on the defaulting suppliers indicates that Transwaste was deliberately turning a blind eye to what it knew it would find out.

61. Further, Mr Kerr and Miss Monahan submitted that an adverse inference should be drawn from Mr Mark Hornshaw not being called. Again, this was to the effect that this was because, if called, his evidence would have been unfavourable to Transwaste. This was because Mr Hornshaw said that Mr Mark Hornshaw had shared responsibility for the deals in issue and yet no good reason had been advanced as to why he had not been called.

62. Miss Brown submitted that the evidence of Mr Tute would not be material because the evidence was already available from Mr Hornshaw that the checks took place. To insist on Mr Tute giving evidence would shift the burden of proof; it is not for Transwaste to prove that it did not have the requisite knowledge. Miss Brown further submitted that it was not for Transwaste to call Mr Tute as there was already sufficient evidence put forward and if HMRC wanted to do so they could have witness summonsed him themselves. Further, she submitted that Mr Mark Hornshaw would add nothing to the evidence of Mr Hornshaw. Discussion

63. We do agree that, on the face of it, Mr Tute would have been able to deal with matters of relevance to the environmental checks carried out and the records of such checks. We also agree that there is no good reason for him not to have given evidence. However, we find that it goes too far to infer that this was because his evidence would have been adverse to Transwaste’s case. HMRC is not adducing positive evidence that Mr Tute did not carry out the checks said to have been carried out and instead point to surrounding evidence to infer that they were not carried out. It follows that HMRC are not presenting any evidence of their own which can be strengthened by an inference from Mr Tute not giving evidence. In principle, his absence may go towards weakening Transwaste’s evidence as to what Mr Tute is said to have done. However, as was accepted by Mr Kerr and Miss Monahan in their oral closing submissions, this adds nothing to bringing into our consideration of the evidence that Transwaste has not provided any direct evidence of what (if anything) Mr Tute did or as to the impact of any gaps in the evidence that this may create. However, we do bear in mind in this regard HMRC’s inability to cross-examine Mr Tute.

64. For the same reasons, we take the same approach to the absence of a witness statement or oral evidence from Mr Mark Hornshaw. Awareness of the Risk of Fraud

65. Transwaste was given warnings about the general risk of fraud and was informed of the need to check the legitimacy of its suppliers. We have already set out above the most significant of HMRC’s visits and correspondence. We find that the effect of these visits and correspondence is that Transwaste had a general awareness of the risk of fraud. We note that Miss Brown submitted that that the warnings between July 2012 and 8 February 2016 were all in the context of HMRC’s concerns about wholesale metals transactions and so were not in respect of other services such as waste brokerage and haulage. We do not agree with the distinction which Miss Brown seeks to draw. Whilst it is correct that the warnings were initially given in the course of HMRC’s investigations into Transwaste’s metals trading, that is different to saying that the warnings were restricted to metals trading or excluded, for example, waste brokers and hauliers. Similarly, the fact that warnings were later given in the context of investigations into waste brokers is again different to saying that that those warnings were restricted to waste brokers or excluded hauliers. Crucially, we find that at the time of each of the transactions which are relevant to these appeals Transwaste was aware of the nature of MTIC fraud and that it could extend beyond the specific investigations that HMRC were carrying out at any particular time.

66. We reach these findings as to Transwaste’s general awareness of fraud as a result, in particular, of the following documents and evidence. (1) HMRC’s report of the visit on 4 July 2012 focussed upon the risk of fraud in metals trading. However, HMRC’s letter dated 6 July 2012 stated that, “MTIC fraud may involve all types of VAT standard rated goods and services including high value, low volume, electrical goods.” This letter also enclosed a “How to spot MTIC fraud” leaflet, which had also been issued at the visit on 4 July 2012, together with VAT Notice 726. Neither the leaflet nor VAT Notice 726 were restricted to fraud in the metals sector. (2) By a letter dated 23 January 2013, HMRC again informed Transwaste that “MTIC fraud may involve any goods or services on which VAT is chargeable – not just high value, low volume electrical goods.” The letter directed Transwaste to HMRC’s website and the notice “How to spot VAT missing trader fraud”, which was not restricted to metals trading. (3) We do note that HMRC’s report of a visit to Transwaste on 22 July 2013 noted that “SL confirmed to PH that the risk was with wholesaling metals, not selling scrap generated from the recycling process.” This does not detract from the fact that HMRC had already informed Transwaste (and so Transwaste was aware) that the risk of fraud could be within any goods or services, but we do accept that wholesale metals trading was the focus of investigations at that point. (4) We also note that, by a letter dated 14 October 2013, HMRC sent Transwaste information about fraud in the wholesales metals market. However, whilst this shows a specific warning about the wholesale metals market, this does not detract from the earlier warnings about fraud more generally. (5) We assume that Miss Brown refers to the date of 8 February 2016 because this was the last denial of input tax which focused solely on the sales of metals. However, even in that letter, HMRC referred to previous more general information given about MTIC fraud as a whole. (6) The denial of Transwaste’s input tax in respect of metals trades means that Transwaste was aware of the consequences of fraud in its supply chains. The fact that this involved metals trades rather than services is a feature which provides the context for those denials rather than a feature which precludes Transwaste from being aware of the risk of fraud more generally. (7) In any event, it is clear that from 5 April 2017 Transwaste was aware that the risk of fraud was not restricted to trading in metals. This is because, by a letter dated 5 April 2017, HMRC informed Transwaste that they had found tax losses in the supplies from Biotech, who were of course waste brokers and so not metals traders. This was reinforced by a letter dated 13 April 2017 in which HMRC raised concerns about fraud in respect of supplies by Tees Valley. Further, in a letter dated 17 January 2019 (and so before the relevant transactions with Bull Freight) HMRC informed Transwaste of the need for due diligence on hauliers.

67. Mr Hornshaw’s oral evidence was that HMRC’s discussions with HMRC prior to April 2017 were specific to risks about metals and the need to carry out checks on anybody dealing in metals. He did not suggest that HMRC said that there was no need to carry out checks on any other suppliers and so this is consistent with (and reinforces) our findings that, whilst wholesale metals trading was the focus of the risk of fraud, this does not detract from an awareness that fraud could occur more generally. Mr Kerr took Mr Hornshaw to HMRC’s letter dated 6 July 2012 (referred to above) and asked Mr Hornshaw whether he had read it at the time. His answer was that the accountant probably read it as it was addressed to Transwaste. We therefore find that Transwaste was aware of the contents of this letter. Mr Kerr then asked Mr Hornshaw whether, if he had read it, he would have realised that fraud could involve all types of services. He agreed with this, although noting that he was only doing what HMRC had advised him to do. Mr Hornshaw’s evidence of what he would have thought if he had read it is of no assistance to what Transwaste was aware of at the time. However, we do note that this is consistent with our own reading of that letter and reinforces our view that that this is what Transwaste (at least through its accountant even on Mr Hornshaw’s own evidence) would therefore have been aware of.

68. Mr Hornshaw and Mr Mark Hornshaw were arrested for a suspected fraud in respect of landfill tax on 23 September 2015. However, these criminal proceedings were, to use Officer Knowles’ term, subsequently “dropped”. Indeed, it is not clear that they were even charged. Further, we have heard no evidence as to the circumstances of these allegations or whether they had any bearing upon VAT fraud at all. Contrary to Mr Kerr and Miss Monahan’s submissions, we therefore find that their arrest is of no assistance at all in considering whether Transwaste was aware of the risk of fraud. Indeed, given that the criminal proceedings were not pursued, we do not take their arrest into account within these appeals at all. Environmental Audits and Audit Trails

69. Mr Hornshaw’s evidence was that Transwaste visited disposal sites in order to ensure that those sites were compliant with the requirements of the Environment Agency, and still does so. This is to ensure that Transwaste has an audit trail for its waste and how it is processed. Transwaste also wishes to have confidence that the waste is transported from Transwaste, is the correct type of waste, and that it is going to the correct destination.

70. It follows from the focus on disposal sites that Mr Hornshaw accepted that waste brokers and hauliers were not themselves the subject of environmental audits if they did not themselves operate the disposal sites.

71. Mr Hornshaw explained during cross-examination that environmental audits of all disposal sites were carried out by Transwaste’s employee, Mr Tute. This involved a report setting out that the permit had been checked, that health and safety policies were in place, providing photographs of the site, and making sure that everything was in place to allow the waste to be taken to the site. He further explained that the environmental audits are destroyed after twelve months. We do note that there was an inconsistency between this evidence and some of the visit reports and passages in the witness statements in which it appears that Mr Hornshaw was suggesting that he had carried out some of these visits himself. As set out above, we also keep in mind that Transwaste has not adduced any direct evidence from Mr Tute and so HMRC have not had the opportunity to cross-examine him.

72. Mr Hornshaw explained that these environmental audits were part of Transwaste’s “duty of care” obligations pursuant to environmental legislation. This requires a record of the site that waste goes to, details of the site licence and permit for that receiving site, and Transwaste’s own details. The duty of care record can be valid for waste going to the same receiving site for a full year, or alternatively a new duty of care record can be generated for each load of waste. Neither the environmental audit nor the duty of care records involved any financial checks on the operators or owners of the disposal sites.

73. In any event, Transwaste must also keep a weighbridge ticket for each load of waste that leaves Transwaste’s site and a document proving that it has reached the receiving site. Transwaste’s site at Melton has a weighbridge which has CCTV that automatically records all vehicles on entry and exit. The system is connected to an automated computerised system, which logs the registration number of the vehicle, the vehicle weight on entry and the vehicle weight on exit. When the vehicle enters the site, it is directed to the appropriate section and waste is loaded onto it in accordance with the documented waste codes on the relevant permit. The driver is then given a ticket setting out the weight of the load, the type of waste, and the destination point. The ticket is a duty of care record. When the vehicle arrives at the disposal site, the driver provides the disposal site operator with the ticket. The site operator will check that the load matches the permit and the load is weighed. Transwaste does not keep copies of the weighbridge tickets as this would not be practical given the number of documents this would involve. Transwaste satisfies itself from the computerised system that the waste has left its site and this is then checked off against the invoice from the receiving disposal site.

74. We were provided with various contemporaneous examples of printouts from Transwaste’s computerised system which record, amongst other things, the ticket number, the customer details, the delivery address, the vehicle, the load received, the load class, and the relevant weights.

75. Weighbridge tickets would not display the waste brokers’ names as they were neither the haulier nor the disposal site operator.

76. Mr Hornshaw’s evidence was that Transwaste makes a report to the Environmental Agency every three months which details the waste received and removed from site. A waste report for the period 1 July 2018 to 30 September 2019 was exhibited to Mr Hornshaw’s witness statement. This report included a schedule of waste removed from site which in turn included a column headed “Destination”. The entries in the destination column referred to the area which the waste was sent to but not the name of the particular site. Another column set out the amount in tonnes sent to the relevant destination. Mr Hornshaw also said that there were regular environmental agency checks and that the Environment Agency was happy with what Transwaste was doing.

77. We accept Mr Hornshaw’s evidence as set out above that Mr Tute carried out an environmental audit and as setting out Transwaste’s routine approach to carrying out environmental audits. This is for the following reasons.

78. First, there was no positive evidence that this does not represent Transwaste’s routine approach. It was also not put to Mr Hornshaw that this was not the routine approach (as distinct from the routine approach not being followed in respect of these particular transactions). In particular, it was not suggested that Transwaste did not operate the computerised system described by Mr Hornshaw in his witness evidence.

79. Secondly, there was no evidence to contradict the assertion that the environment agency were content with Transwaste’s procedures.

80. Thirdly, the invoices relating to various of the transactions are included within the bundle. These do include weights and details of the waste involved and so do provide the ability for these to be checked against weighbridge tickets.

81. Fourthly, we note that there are no contemporaneous examples of the environmental audits. We accept Mr Hornshaw’s evidence that this is because these were routinely destroyed. The hearing bundle included a sample report. Although this was dated 2022 (and so some years after the transactions in question and, indeed, after the decisions under appeal) and was carried out by Mr Tute’s colleague, Mr Graham Wildridge. Mr Hornshaw’s evidence was that this was in the same format as the audits carried out at the time of (and prior to) the transactions relevant to this appeal. We accept this evidence as it was credible and there was no evidence to the contrary. However, without any contemporaneous environmental audits being available to us (particularly in respect of the transactions which are the subject of this appeal) we cannot consider what any of these audits showed about the disposal sites being audited.

82. Finally, Mr Hornshaw’s evidence is consistent with what he told HMRC at their visit to Transwaste on 12 September 2018. HMRC’s report of this visit (“the September 2018 Visit Report”) states that Mr Hornshaw explained the environmental audits to the visiting officers (Officer Stefan Tosta and Officer Jayne Wood) as follows. “PH stated that different companies are used all the time to remove the waste. Wood is currently going to a new biomass plant in Hull built by Solar 21. Main companies for providing service of disposal of RDF is Ferrybridge Power Station and Eon although brokers are used all the time, mostly in summer as the power stations and Electric companies don’t want or need the RDF at this time of year. PH state [sic] that Transwaste Recycling check the site licence, visit/audit a site, checking the Health & safety procedures to ensure the destination of the RDF is known and the company accepting the waste are equipped to take it. These audits are part of the Environment Agency’s regulations and the company’s due diligence. PH stated these procedures have been in place for the last to [sic] 4 years. PH stated the industry is highly regulated and the Environment Agency carry out an inspection at Transwaste Recycling on a monthly basis. ... PH stated Transwaste Recycling would have visited the disposal site in Wales but would not have visited Biotech Soils premises as the company was a broker. Transwaste Recycling would have obtained the waste carriers licence from Biotech as part of the Environment agency checks. PH Stated no credit checks would have been carried out on Biotech because they were a supplier not a customer. PH stated Biotech Soils would have contacted Transwaste Recycling.”

83. The existence of a routine approach of carrying out environmental audits, visits, and reports is different to whether this was followed in respect of the relevant transactions. We make our findings in this regard when considering the individual suppliers below. Features of Transwaste’s Use of Waste Brokers The Waste Brokers’ Premises

84. Mr Hornshaw’s evidence (which we accept because it was credible) was that his experience was that waste brokers were often very mobile and, because they were arranging the disposal of waste on other trading partners’ disposal sites, they did not need to have premises which were themselves capable of storing or disposing of waste. Further, Mr Hornshaw’s experience was that waste brokers operated on low margins, sought to keep overheads low, and often operated through an individual with a mobile telephone. We also accept Mr Hornshaw’s evidence that Transwaste would not have visited waste brokers’ offices (although this is a different point as to whether Transwaste should have visited the waste brokers’ offices, which we deal with below). The Location of Disposal Sites

85. We accept that, for many of the transactions which are the subject of this appeal, there would have been a large number of disposal sites closer to Melton than the disposal sites used by the waste brokers. This was demonstrated by Mr Kerr by reference to an Environment Agency database and in any event was accepted in principle by Mr Hornshaw during cross-examination. Commerciality

86. However, we find that this does not make the transport of the waste to a distant disposal site uncommercial. Waste brokers would negotiate arrangements with a variety of disposal sites across the country. Further, waste brokers who arranged transport would make use of “backloads” which involve a haulier who is delivering (for example) to Hull picking up waste from Hull and then taking that to a disposal site on its return journey. Mr Hornshaw’s evidence (which we accept because it was credible) was that, whilst he preferred disposal sites which were closer to Melton, this was out of his hands and depended upon which sites had capacity for the particular type of waste and which sites the waste broker had connections with. This is credible because the very context of Transwaste’s need for waste brokers was that there was excess waste which Transwaste could not dispose of directly through its own connections with disposal sites. The Transactions with Biotech Biotech

87. Biotech was incorporated on 3 February 2016. Its original name was A&A Transport Solutions Limited, changing its name to Biotech on 10 May 2016. Biotech’s directors were: Mr Adam Fenny from incorporation until 2 July 2016; Ms Amy Jones from incorporation until 1 June 2016; Ms Elizabeth Fenny from 1 July 2016 until 2 July 2016; Mr Joshua Fenny from 2 July 2016 until 3 October 2016; Mr Peter Guest from 3 October 2016 until 17 January 2017; Ms Kerri Ball from 3 October 2016 until 17 January 2017; and Mr Malcolm Kirk from 1 February 2017 until Biotech’s compulsory strike off and dissolution on 17 November 2020.

88. Biotech’s registered address was repeatedly changed. It was originally an address in Worksop. This was changed to an address in Newark on 13 June 2016, an address in Middlesborough on 22 August 2016, a different address in Middlesborough on 3 October 2016, an address in Newton Aycliffe also on 3 October 2016, and an address in Preston on 1 February 2017. However, the principal place of business remained the Worksop address. Biotech’s invoices for the relevant transactions were from an address in Walesby.

89. Mr Ian Fenny worked for Biotech. Mr Fenny had been a director of Alab Environmental Services Ltd (“Alab”), which operated a disposal site. Mr Fenny also worked for Able UK Ltd (which was a decommissioning and demolition contractor) (“Able”). In November 2007, Alab and its customer Able were fined £22,000 in respect of the disposal of asbestos. Mr Fenny was subsequently prosecuted and convicted for involvement in a waste facility without an environmental permit and, on 25 June 2013, sentenced to a 12-month community order. Connection to Fraudulent Tax Losses

90. We find that Biotech was a fraudulent trader by virtue of the following unchallenged evidence, particularly as set out in the witness statement of Officer Jonathan Hall: (1) Biotech was registered for VAT on 22 February 2016 with effect from 1 April 2016. It declared its business activities as transport services. (2) Biotech submitted nil returns for the VAT periods 04/16 and 07/16. As such, it did not declare or pay the output tax on Biotech’s transactions with Transwaste. (3) HMRC visited Biotech at its Worksop address (being the principal place of business) on 10 May 2017 and met with Ms Ball. Ms Ball said that she had no involvement with Biotech and the only reason that she had heard of the company was because post had arrived there addressed to Biotech. This was notwithstanding that Ms Ball had previously been registered as a director of Biotech. (4) HMRC sent letters to Biotech at various addresses but received no responses other than the return of a letter marked “addressee unknown”. (5) On 9 August 2017, HMRC wrote to Biotech at its registered office notifying Biotech of HMRC’s intention to deny input tax. There was no response. (6) Between 1 May 2018 and 27 June 2018, HMRC issued assessments against Biotech in the total sum of £303,394.30. These have not been paid or appealed (albeit that we note that the assessments were issued after Biotech was dissolved).

91. The assessments issued to Biotech include all of its transactions with Transwaste from 1 June 2016 to 22 September 2016. All of these transactions are included within Decision 1 and so are included within the present appeals. In any event, as set out above, Transwaste admits (and so we find as a fact) that Transwaste’s transactions with Biotech were connected to Biotech’s fraud. Transwaste’s Due Diligence and Environmental Checks

92. Mr Hornshaw had dealt with Mr Fenny (when Mr Fenny was acting on behalf of Able). They had been introduced by Mr Hornshaw’s friend. Mr Hornshaw said that he had never had any problems with Mr Fenny before and there is no evidence to cause us to disbelieve this.

93. Transwaste did not visit Biotech’s premises.

94. We accept Mr Hornshaw’s evidence that Mr Tute would have visited and carried out the environmental audit at the disposal transfer station which Biotech would be using in Worksop (and operated by Trent Valley Recycling Limited (“Trent Valley”)) and find that it was more likely than not that he did so. We note that financial checks on the disposal site were not part of the environmental audit.

95. This is because Mr Hornshaw was clearly focused on the need to comply with his understanding of the Environment Agency’s requirements, he had delegated the environmental audits to Mr Tute who was qualified to do so, and we found that his evidence that it would have been done was credible. The rider to this, however, is that because there was no evidence from Mr Tute and no documentary evidence of the environmental audit reports, we are not able to make any findings as to what was seen or considered during the site visit or as to any evaluation of the results of the visit or report.

96. We accept that it is more likely than not that there was an audit trail for the movement of waste in each of the transactions. This is because the system is automated and there is no reason to suggest that this automated system was disengaged for any of the transactions involving Biotech.

97. Mr Hornshaw accepts that Transwaste did not carry out a VAT check on Biotech.

98. We find that Transwaste did not conduct any credit checks. Although Mr Hornshaw’s witness statement suggests that credit checks were done, this is inconsistent with his oral evidence. In particular, he said that he did not need any credit checks on Biotech as it was a supplier not a customer. Mr Hornshaw’s oral evidence was also consistent with the comment to the same effect in the September 2018 Visit Report. Further, Mr Hornshaw’s oral evidence was that financial checks did not start until about March 2017 as these had been requested by Officer Chris Williams. This post-dated the end of the transactions with Biotech.

99. Mr Hornshaw accepted during cross-examination that he did not know that Biotech was incorporated in February 2016 under a different name, that Biotech’s registered address was different to the transfer station being used, that a director had resigned on the day Transwaste started dealing with Biotech, and that there were various changes of directors and registered offices during the period of trading. He also accepted that he could have found this out by checking Companies House.

100. Mr Hornshaw was aware prior to Transwaste’s transactions with Biotech that Mr Fenny had had difficulties with the environment agency. Mr Hornshaw accepted that he had done no research on Mr Fenny prior to Transwaste trading with Biotech. Transwaste’s Dealings

101. Mr Hornshaw’s only contact with Biotech was through Mr Fenny. Although Mr Fenny already knew Mr Hornshaw, the first contact with Mr Fenny in his role as an employee of Biotech was when Mr Fenny approached Mr Mark Hornshaw through a third party that Mr Mark Hornshaw had dealt with in the past. There were then initial discussions between Mr Hornshaw and Mr Fenny on the telephone. Mr Fenny then visited Transwaste and met Mr Mark Hornshaw to discuss and agree details such as pricing. Mr Hornshaw did not have any contact with Mr Adam Fenny or Ms Amy Jones and did not know that they were directors.

102. Transwaste’s transactions with Biotech were all for the movement of RDF and were from 1 June 2016 to 22 September 2016. On some occasions the transport was arranged by Biotech and on others it was provided by Transwaste. In the course of those transactions, Mr Hornshaw (or alternatively one of the other directors or the yard supervisor Mr Stuart Carter) and Mr Fenny spoke weekly in order to agree the loads and price. Sixteen invoices were issued, all of which are in the hearing bundle. The rates shown in the invoices vary according to whether transport was included. There is no evidence that the RDF waste was not disposed of in accordance with the details on those invoices. The rider to this is that HMRC’s visit report dated 12 September 2019 suggests that the waste was taken to Wales. We find that this was incorrect. This is because the weighbridge data relates to Trent Valley and the Worksop disposal site. Transwaste paid the invoices promptly within a day or two of receipt of the invoice.

103. The supplies from Biotech stopped on 22 September 2016 because a reduction in the amount of excess RDF meant that there was no further need for Biotech’s services. The Transactions with Tees Valley Tees Valley

104. Tees Valley was incorporated on 31 July 2014. Its original name was Tees Valley Builders Ltd, changing its name to Tees Valley on 11 December 2015 and then to Yorkshire Waste Services Ltd on 4 March 2017. Tees Valley’s directors were: Mr Fenny from incorporation until 28 February 2017; Mrs Elizabeth Fenny from incorporation until 28 February 2017; and Mr Stuart Sexton from 28 February 2017 until Tees Valley’s dissolution on 20 August 2021 following liquidation by virtue of a winding up order made on 11 July 2018. The sole shareholder of Tees Valley was initially Mr Fenny and subsequently Mrs Elizabeth Fenny.

105. Tees Valley’s registered address was originally an address in Middlesborough and was changed to an address in Worksop on 28 February 2017. Tees Valley’s invoices for the relevant transactions were from an address in Newton Aycliffe.

106. As set out above, Mr Fenny was Transwaste’s only contact with Tees Valley. There is nothing to suggest that anybody else was conducting Tees Valley’s business at the relevant times. Connection to Fraudulent Tax Losses

107. We find that Tees Valley was a fraudulent trader by virtue of the following unchallenged evidence, particularly as set out in the witness statement of Officer Dean Foster: (1) Tees Valley was registered for VAT with effect from 1 February 2016. It declared its main business activities as management consultancy. (2) Officer Foster attended at Tees Valley’s address in Middlesborough and also its address in Newton Aycliffe on 2 May 2017. This was because HMRC had become aware that Tees Valley was trading with Transwaste and with Woldwaste Ltd. Officer Foster states in his visit report that the property at the address in Newton Aycliffe was an unoccupied unit, that the owner was Mr Wilkes who had recently purchased the units through an agent, and that the agent said that the sale had been from Mr Saunders. Mr Saunders was later contacted and he said that he had not heard of Tees Valley or Mr and Mrs Fenny. Officer Foster also stated in his visit report that the address in Middlesborough had been notified as Tees Valley’s principal place of business, there was a sign at the warehouse building at the property saying “Tees Valley Recycling Ltd”, and that the person at the property had no connection to Tees Valley and had been renting the property for about a month. The following day, Officer Foster spoke to the landlord of the property at the address in Middlesborough, and was told that he had previously rented the property to Tees Valley Recycling Ltd whose directors were Mr and Mrs Fenny, about a year ago the tenant had changed its name to Trent Valley Recycling Ltd, this company had gone into administration in November 2016, that the tenant was not now contactable, and that he was pursuing the administrator for sums owed. (3) HMRC deregistered Tees Valley for VAT with effect from 3 May 2017. (4) After various attempts to contact Mr Sexton (including through a firm of accountants that had previously been connected to Tees Valley and to Mr Sexton), Officer Foster and Mr Sexton spoke by telephone on 6 June 2017. Mr Sexton said that he had been approached by Mr Fenny to be a director of Tees Valley because Mr Fenny had a lease on a site in Worksop but did not want to be seen to be the leaseholder. Mr Sexton said that he agreed to act as director in return for payment of £500, he had supervised the delivery of two loads of waste, and the local authority had then closed down the site. (5) On 6 September 2017, HMRC issued an assessment against Tees Valley for the 09/16 period in the sum of £2,436, a further assessment in the sum of £83,750 for the 12/16 period, and a further assessment in the sum of £57,398 for the period between 1 January 2017 to 4 May 2017. On 7 December 2017, HMRC issued a further assessment against Tees Valley for the 12/16 period in the sum of £5,475. On 10 July, HMRC issued a further assessment against Tees Valley for the 09/16 period in the sum of £421 and for the 12/16 period in the sum of £1,684. These assessments have not been paid or appealed.

108. The assessments issued to Tees Valley include all the transactions with Transwaste from 21 October 2016 to 12 April 2017 save for two invoices. We are satisfied that these led to fraudulent tax losses notwithstanding that they were not the subject of assessments as Tees Valley ought to have declared and paid output tax on them but failed to do so and, for the same reasons as set out above, we are satisfied that this was fraudulent. All of Transwaste’s transactions with Tees Valley are included within Decision 1 and so are included within the present appeals. In any event, as set out above, Transwaste admits (and so we find as a matter of fact) that Transwaste’s transactions with Tees Valley were connected to Tees Valley’s fraud. Transwaste’s Due Diligence and Environmental Checks

109. Mr Hornshaw’s first contact with Tees Valley was through Mr Fenny. Mr Hornshaw had become aware that Mr Fenny had set up a new company which was taking fines (being a type of waste with less than 10% loss on ignition and which qualifies for a lower rate of landfill tax than other waste) and RDF for tipping at disposal sites. Mr Mark Hornshaw was also friendly with a business partner of Mr Fenny (Mr Owen Hill) and so Mr Hill introduced Transwaste to Tees Valley.

110. Mr Hornshaw accepted that Tees Valley was essentially the same business (or “outfit” as was put to him by Mr Kerr in cross-examination) as Biotech and that Mr Fenny was connected to both companies.

111. Transwaste did not visit Tees Valley’s premises.

112. For the same reasons as set out above in respect of Biotech, we accept Mr Hornshaw’s evidence that Mr Tute would have carried out an environmental audit on the sites that Transwaste’s waste was to be delivered to (although subject to the same riders as set out in respect of Biotech). These sites were Potters Landfill Resources Management Ltd in Haverford, Southwest Wales (“Potters”) in respect of landfill and GBS in respect of RDF.

113. Again, we add the rider that we are not able to make any findings as to what was seen or considered during this site visit or as to any conclusions said to be drawn from the results of the visits or the reports.

114. For the same reasons as set out above in respect of Biotech, we accept that it is more likely than not there was an audit trail for the movement of waste in each of the transactions in order to have a duty of care record. We note that Mr Kerr put it to Mr Hornshaw during cross-examination that the waste said to have been destined for Potters did not in fact go to Wales and instead was dumped elsewhere. Mr Hornshaw did not accept this and said that it all went to Wales. We accept Mr Hornshaw’s evidence. We say this because his evidence was credible, was consistent with our findings as to the importance of the audit trail for the Environment Agency’s purposes, the fact that Potters was being used instead of other closer landfill sites is reasonably explicable (as referred to above in the context of our findings as to the features of the use of waste brokers) and because nothing was put to him as to where the waste went instead.

115. We accept that Transwaste verified Tees Valley’s VAT number. This is because Ms Nikki Taylor of Transwaste stated as follows in a letter to Officer Williams about Tees Valley that, “At the commencement of trading with this supplier we carried out checks on the company by way of VAT number validation using the European Commission website.” Mr Hornshaw’s evidence was consistent with this.

116. We do not accept that credit checks were carried out on Tees Valley. As set out above in respect of Biotech, financial checks did not start until about March 2017. Transwaste had already started trading with Tees Valley in September 2016 and so even if checks had been made later this would have been after the commencement of the trading relationship. In any event, Ms Taylor’s letter does not say that a credit check had actually been carried out on Tees Valley. Instead, she states that “We also carry out a credit search using Experian to verify that the company registration number matches that of the supplier we plan to trade with and also its directors’ details”. We take the reference to “plan to deal with” to refer to checks before starting to trade and so, again, would not apply to Tees Valley if this process only started after about March 2017. Further, we note that Ms Taylor’s focus on the credit checks was not the commercial question of credit ratings but instead was upon company registration numbers and directors’ details.

117. We note that Transwaste continued to deal with Tees Valley (through Mr Fenny) after receipt of HMRC’s letter dated 5 April 2017 informing Transwaste of tax losses in Biotech’s supply chains. There was no evidence of any further due diligence or questions of Mr Fenny by Mr Hornshaw after this letter. Mr Hornshaw’s evidence was that he had telephoned Mr Fenny whilst Officer Williams was at a meeting at Transwaste and that Mr Fenny was adamant that he had filed the VAT returns correctly. We accept this evidence as credible and note that there was no evidence from Mr Williams to say that this did not happen. However, Mr Hornshaw did not say when this took place. The only documentary evidence referring to a meeting between Officer Williams and Mr Hornshaw is in an email from Officer Williams to Ms Taylor dated 25 May 2017 which says “Please see attached suggested checks document which I promised last Thursday” and response from Ms Taylor on the same day saying, “Thank you for the information, and thanks again for coming to see us.” It follows from this that, on the balance of probabilities, this visit was in May 2017 and so was after Transwaste had ceased dealing with Tees Valley (and, indeed, Biotech). Transwaste’s Dealings

118. Mr Hornshaw’s dealings with Tees Valley were all through Mr Fenny.

119. Transwaste’s transactions with Tees Valley were all for the collection of waste, the delivery of fines to Potters, and the delivery of RDF to GBS.

120. Transport was generally sub-contracted to companies Mr Hornshaw referred to by shorthand as Stobarts, Dents, and Jenkinson. The hauliers’ names were not included on the weighbridge tickets but the vehicle registrations were recorded.

121. Transwaste’s transactions with Tees Valley which were the subject of Decision 1 were all between 21 October 2016 and 12 April 2017.

122. Mr Hornshaw said (and we accept his evidence in this regard as credible) that Transwaste stopped trading with Tees Valley when he received a tax loss letter from Officer Williams dated 13 April 2017 informing him that there was strong evidence of tax losses in Transwaste’s supply chains in respect of its transactions with Tees Valley. The Transactions with Hydro Hydro

123. Hydro was incorporated on 17 January 2014. Its original name was LJR Consultancy Ltd, changing its name to Hydro on 15 August 2016. Hydro’s directors were: Ms Laura Jean Rea from incorporation until 1 November 2017 and Mr Jon Connolly from 1 November 2017 until Hydro’s strike off and dissolution on 28 January 2020.

124. Hydro’s registered address was repeatedly changed. It was originally care of RES Associates Ltd at an address in Glasgow. This was changed to an address care of Peter Mooney Associates in Hamilton on 19 March 2015, another address in Hamilton on 25 May 2017, another address in Glasgow on 4 February 2019, and another address in Glasgow on 14 May 2019.

125. Hydro’s main points of contact were Mr Mario Rea or Ms Laura Rea. Mr Rea was not a de jure director of Hydro and had been disqualified from being a director until December 2018. Mr Rea is said in various online articles to have been connected to organised crime. We were shown various online articles referring to Mr Rea being arrested for money laundering and to him being disqualified as a director. Connection to Fraudulent Tax Losses

126. We find that Hydro was a fraudulent trader by virtue of the following unchallenged evidence, particularly as set out in the witness statements of Officer Angela Mearns: (1) Hydro was registered for VAT with effect from 20 January 2014. (2) Hydro declared its activities as consultancy services in relation to plant hire and property management. (3) Hydro submitted nil returns until the 01/18 VAT quarter, after which Hydro did not submit any returns at all. (4) HMRC made an unannounced visit to Hydro at its principal place of business on 1 August 2019. There was no sign of Hydro being present and so HMRC left a de-registration warning letter. On the same day, a similar letter was sent to Hydro’s registered address. HMRC received no response to either letter. (5) HMRC also made an unannounced visit to Hydro’s accountant’s office on 1 August 2019 but were told that they no longer acted for Hydro. (6) HMRC de-registered Hydro on 12 August 2019 with effect from 2 August 2019. Officer Mearns issued an advice of VAT de-registration to Hydro at its principal place of business and its registered office and did not receive any response. (7) Between 31 January 2020 and 14 February 2020, HMRC issued assessments against Hydro in the total sum of £79,101. These have not been paid or appealed (albeit that Hydro was dissolved on 28 January 2020).

127. The assessments issued to Hydro included all of its transactions with Transwaste from 9 November 2017 to 1 August 2019. All of these transactions are included in Decision 3 and so are included within the present appeals. In any event, as set out above, Transwaste admits (and so we find as a fact) that Transwaste’s transactions with Hydro were connected to Hydro’s fraud. Transwaste’s Due Diligence and Environmental Checks

128. Transwaste’s first contact with Hydro was through Mr Rea. Mr Hornshaw said that he knew he was not a director of Hydro but thought that he was a salesman employed by Hydro. He gave Mr Hornshaw a business card in Hydro’s name. Mr Hornshaw and Mr Rea met on a few occasions at Transwaste’s premises at Melton. Mr Rea had been introduced to Mr Hornshaw through another waste broker known to Mr Hornshaw called Mark Etherington.

129. Transwaste did not visit Hydro’s premises.

130. For the same reasons as set out above in respect of Biotech, we accept Mr Hornshaw’s evidence that Mr Tute would have carried out an environmental audit on the sites that Transwaste’s waste was to be delivered to (although subject to the same riders as set out in respect of Biotech) and find that on the balance of probabilities he did so. Again, however, this is subject to the rider that we are not able to make any findings as to what was seen or considered during this site visit or as to any conclusions said to be drawn from the results of the visits or the reports. This site was in Birmingham (“the Birmingham Site”) and Transwaste understood that it was operated by Master Construction Products Ltd (“MCP”).

131. Transwaste received waste transfer notes which referred to the site operator being WMSH. Mr Hornshaw’s evidence (which we accept as credible) was that he noted that the address of the waste disposal site was the Birmingham Site and so was the same as for MCP and presumed that both MCP and WMSH operated from the same site. It appears from Mr Hornshaw’s evidence that it was the site itself, the licensing of the site, and the amount of waste permitted at the site, which were of relevance to him. For the avoidance of doubt, we do not accept Mr Hornshaw’s assertion during his evidence that an environmental audit would have been carried out on WMSH (as distinct from an environmental audit on the Birmingham Site itself) as prior to the transactions Transwaste had thought that the relevant operator was MCP.

132. For the same reasons as set out above in respect of Biotech, we accept that it is more likely than not that there was an audit trail for the movement of waste in each of the transactions in order to have a duty of care record.

133. The dealings with Hydro began at a time when a company referred to by Mr Hornshaw as Attero was carrying out financial due diligence. This was connected to Attero having taken over part of Transwaste’s business at the time of the first transactions with Hydro. Although both Mr Hornshaw and Mr Kemish say that financial checks would have been done in November 2017, in Mr Hornshaw’s case this was an assumption and in Mr Kemish’s case this was based on what he had been told when he joined Transwaste in January 2018 although he had not seen it and there was no evidence as to who told him that it had been carried out. We therefore find that there is insufficient evidence for us to be satisfied on the balance of probabilities that any financial checks (and in particular any VAT checks or credit checks) were made on Hydro prior to Transwaste commencing dealing with Hydro.

134. Further checks were carried out in July 2019 in response to Officer Knowles’ request for copies or due diligence, copies of which were sent to Officer Knowles and are included within the hearing bundle. These comprise an online VIES VAT number validation (which confirmed that, at the time of the check, Hydro’s VAT number was valid) and an Experian credit check (which set out the company details and, as at 8 July 2019, reduced the credit risk from above average risk to below average risk).

135. Mr Hornshaw’s evidence was that it would have been noticed that the registered office was a correspondence address and that this would not have raised any concern as a waste broker would not be expected to operate from a waste disposal site or specific business premises. Given that there is no positive evidence as to whether this was in fact noticed, we cannot make any findings in this regard. However, for the reasons set out above when considering relevant features of Transwaste’s use of waste brokers, we do accept that it was Transwaste’s (and Mr Hornshaw’s) general understanding that waste brokers did not need to operate from a site capable of receiving waste.

136. Mr Hornshaw said in cross-examination that Transwaste did not notice that Hydro changed its name to Hydro GRP (and we accept his evidence in this regard). We also accept his evidence that the change of name and the change in VAT number would not have been obvious because of the very large number of invoices and suppliers which Transwaste was dealing with. This was first identified to Mr Hornshaw in a meeting with Officer Knowles on 24 September 2019.

137. By an email dated 25 September 2019, Ms Claire Hannan (an accounts administrator working for Transwaste) emailed somebody named Kate at Hydro and stated as follows: “We have noticed on your invoices that you are using a new VAT number, we have been advised your VAT number/company details deregistered from the 2 nd August so the invoices from that date which I have attached need the correct VAT number on them. Please can you re-send these as a matter of urgency.”

138. By an email dated 4 October 2019, Mr Kemish wrote to Officer Knowles and told him that he had rechecked Hydro’s VAT number after his visit and found it to be invalid. Mr Kemish also informed Officer Knowles that Transwaste had spoken to Hydro who confirmed that they had deregistered for VAT for this company and that this was the reason why they now invoiced Transwaste as Hydro GRP with a different VAT number. He noted that he had checked that this number was valid and that it was. He further stated that “I deemed my checks as sufficient, and as far as I can see they have transferred they [sic] business from one VAT legal entity to another.”

139. Further, by a letter dated 10 October 2019, HMRC informed Transwaste that Hydro’s VAT registration number had been cancelled. Transwaste’s Dealings

140. Mr Hornshaw’s only contact with Hydro was through Mr Rea. Mr Rea would ring Mr Hornshaw weekly to ask if Transwaste had any excess waste and would also visit Transwaste on a regular basis.

141. Transwaste’s transactions with Hydro were all for waste to be taken to the Birmingham Site and were from 9 November 2017 to 1 August 2019. All transport was arranged by Hydro, with advance payments for transport costs (often in the round sum of £12,000 plus VAT) being made and then credited later. Various of the delivery notes state that the vehicle is a “curtain” which means a curtain sided trailer. On the face of it, this is inconsistent with the waste type recorded on those delivery notes as 19 12 12 (which is the European Waste Code for “Other wastes specifically hardcore minerals from mechanical treatment of wastes”) as these cannot be transported in a curtain sided trailer. We accept as credible Mr Hornshaw’s explanation that the wrong waste code had been used and that the correct code was 19 12 10 (included on MCP’s permit for the Birmingham Site, with this code being – according to the permit - “combustible waste (refuse derived fuel)”). This is because of the absence of any other explanation, and this not being sufficient evidence on its own to infer that the load was not taken at all.

142. By a letter dated 24 September 2019, Transwaste was informed that its purchase invoices from Hydro had been traced in transactions chains commencing with a VAT loss. The Transactions with Hydro GRP Hydro GRP

143. Hydro GRP was incorporated on 2 December 2016. Hydro GRP’s directors were: Mr Tavis McCabe from incorporation until 13 June 2017; Mr Neil Duncan from 13 June 2017 until 1 December 2017; and Mr Martin Shaw from 1 January 2018 onwards; and Mr Paul McGarvey from 1 November 2018 onwards.

144. Hydro GRP’s registered address from incorporation was an address in Central London. Connection to Fraudulent Tax Losses

145. We find that Hydro GRP was a fraudulent trader by virtue of the following unchallenged evidence, particularly as set out in the witness statement of Officer Angela Mearns: (1) Hydro GRP was registered for VAT with effect from 31 January 2017. It declared its business activities as construction and demolition waste management. (2) Hydro GRP did not submit any VAT returns and did not make any payments to HMRC. (3) HMRC visited Hydro GRP’s principal place of business, which had been declared as an address in Coatbridge, on 27 November 2019. The premises looked empty and there was no sign that anybody was present. There was a sign for Hydro GRP within a fenced area. On the same day, HMRC also visited addresses said to be residential addresses for Mr McGarvey and Mr McCabe. HMRC were told at one address for Mr McGarvey that he did not live there, and another was a butcher’s shop. HMRC were told at the address for Mr McCabe that Mr McCabe was not known, although HMRC subsequently carried out a Land Registry search which established that Mr McCabe was a registered owner. (4) Further, HMRC sent correspondence to Hydro GRP at Mr McCabe’s address but received no response. (5) On 31 January 2020, HMRC issued assessments against Hydro GRP in the total sum of £83,574. These were sent to Hydro GRP’s principal place of business, Hydro GRP’s registered address, and to Mr McCabe’s home address. No response was received and these assessments have not been paid or appealed.

146. The assessments issued to Hydro GRP include all the transactions with Transwaste from 2 August 2019 to 11 November 2019 save for invoices 250, 151, 253, and 255 (due to an oversight by Officer Mearns) 261, 262, 263, and 264 (as these were not available to Officer Mearns at the time of making the assessments). We are satisfied that these led to fraudulent tax losses notwithstanding that they were not the subject of assessments as Hydro GRP ought to have declared and paid output tax on them but failed to do so and, for the same reasons as set out above, we are satisfied that this was fraudulent. All of Transwaste’s transactions with Hydro GRP are included within Decision 3 and so are included within the present appeals. In any event, as set out above, Transwaste admits (and so we find as a matter of fact) that Transwaste’s transactions with Hydro GRP were connected to Hydro GRP’s fraud. Transwaste’s Due Diligence and Environmental Checks

147. We have set out above the context in which Transwaste first appreciated that it was dealing with Hydro GRP. It follows that Transwaste did not carry out any VAT verifications or credit checks on Hydro GRP before beginning the supplies of services from them as Transwaste was not aware it was dealing with Hydro GRP as distinct from Hydro. A VAT verification was obtained in respect of Hydro GRP following Officer Knowles’ visit on 24 September 2019. There is no evidence of any credit check.

148. For the same reason, there were no environmental audits on Hydro GRP prior to the beginning of supplies of services as, again, Transwaste did not appreciate that it was dealing with Hydro GRP. That said, the disposal site used by Hydro GRP was the same as Hydro and so it is more likely than not that there was still a visit to the relevant disposal site as set out above.

149. For the same reasons as set out above in respect of Biotech, we accept that it is more likely than not there was an audit trail for the movement of waste in each of the transactions in order to have a duty of care record. Transwaste’s Dealings

150. Transwaste’s dealings with Hydro GRP took place in the same way as for Hydro, particularly given that Mr Hornshaw thought he was only dealing with Hydro prior to 24 September 2019. All Mr Hornshaw’s dealings were with Mr Rea. The Transactions with Bull Freight Bull Freight

151. Bull Freight was incorporated on 21 April 2017. Its directors were: from incorporation until 24 April 2017, Mr Timothy Bulle; Mr Timothy Bulleyment from 24 April 2017 until 28 March 2019 (although we infer from the similarity of name and short period of time that this was the same person as Mr Timothy Bulle); Mr Darren Wright from 2 January 2019 to 3 April 2019; Mr Darren Wright again from 24 May 2019 until 25 May 2019; and Mr Rocco Montirri from 16 April 2019 until Bull Freight was dissolved on 26 October 2021.

152. Bull Freight’s registered office on incorporation was an address in Central London. It was changed to an address in Gateshead on 23 October 2019. Connection to Fraudulent Tax Losses

153. We find that Bull Freight was a fraudulent trader by virtue of the following unchallenged evidence, particularly as set out in the witness statement of Officer Michael Tattersall: (1) Bull Freight was registered for VAT on 11 May 2017. It declared its business activities as a road transport/haulage contractor. (2) Bull Freight only submitted one VAT return; namely for the 01/19 period. This was notwithstanding trading after the 01/19 period, including in particular with Transwaste. (3) On 16 July 2019, HMRC wrote to Bull Freight to give notification of an intended visit. Bull Freight did not respond. (4) HMRC visited Bull Freight’s principal place of business (being an address notified to HMRC on a VAT variation from dated 15 January 2019) on 25 July 2019. This was a terraced property, there was no response, and there was no sign of Bull Freight or of any business activity. (5) Bull Freight did not respond to further correspondence from HMRC. (6) HMRC issued assessments to Bull Freight in the total sum (including central assessments) of £28,545. These were notified to Bull Freight on 7 October 2019. These assessments have not been paid or appealed.

154. The assessments issued to Bull Freight include all of its transactions with Transwaste from 8 March 2019 to 21 July 2019. All of these transactions are included within Decision 3 and so are included within the present appeals. In any event, as set out above, Transwaste admits (and so we find as a fact) that Transwaste’s transactions with Bull Freight were connected to Bull Freight’s fraud. Transwaste’s Due Diligence and Environmental Checks

155. Bull Freight had been providing transport to a company trading as Eco Power, which was owned by Attero. As set out above, Attero had taken over some of the running of Transwaste’s business. Transwaste then carried on using Bull Freight for a short time when they took back the business.

156. Both Mr Hornshaw and Mr Kemish say that financial due diligence would have been carried out by Attero. However, there is no further detail about these checks at all. We therefore find that there is insufficient evidence for us to be satisfied on the balance of probabilities that any financial checks (and in particular any VAT checks or credit checks) were made on Bull Freight prior to Transwaste commencing dealing with Bull Freight.

157. Although Mr Hornshaw refers to a VAT verification and an Experian check on Bull Freight that was sent to Mr Knowles, this is dated 24 September 2019 and so was after the relevant transactions.

158. There was no environmental audit on Bull Freight as it was a haulier rather than a disposal site.

159. For the same reasons as set out above in respect of Biotech, we accept that there was an audit trail for the movement of waste in each of the transactions in order to have a duty of care record. However, as regards Bull Freight, this would be limited to weighbridge information. Transwaste’s Dealings

160. Mr Hornshaw’s evidence (which we accept) was that he did not have any contact of his own with Bull Freight. Mr Mark Hornshaw dealt with Bull Freight as he dealt with the transport side of the business.

161. Bull Freight’s transport services were used on a short-term basis at a time when there was excess capacity. Bull Freight was one of a number of small-scale hauliers used by Transwaste.

162. Transwaste paid Bull Freight on a weekly basis. Other Relevant Entities Atkins

163. Transwaste dealt with Atkins from 16 February 2017 to 15 March 2017. As set out above, HMRC informed Transwaste on 18 July 2017 that these invoices were not valid because Atkins did not have a valid VAT number.

164. We find that (in accordance with the only evidence available) Atkins was not registered for VAT and that the VAT number appearing on Transwaste’s invoices was registered to another company. However, input tax was not denied to Transwaste on its transactions with Atkins.

165. Mr Hornshaw was asked whether Transwaste had carried out a VAT registration check on Atkins, to which he said that he did not know. We find that Transwaste did not carry out a VAT registration check on Atkins. This is because any such check would have revealed that the VAT registration number did not belong to Atkins and because Transwaste had not adduced any evidence (or even asserted) to the contrary. WMSH

166. As set out above, WMSH was named on waste transfer notes as the operator of the Birmingham Site in respect of Transwaste’s transactions with Hydro and with Hydro GRP which took place between 9 November 2017 and 1 August 2019 (for Hydro) and 2 Augst 2019 to 11 November 2019 (for Hydro GRP).

167. WMSH was deregistered for VAT on 31 March 2019. Transwaste did not carry out any commercial checks on WMSH. We note (and accept as a fact) that Transwaste’s reasoning for not carrying out any commercial checks (as distinct from environmental audits) on WMSH or other operators of disposal sites sourced from waste brokers was because Transwaste was not dealing with such companies directly. GBS

168. As set out above, GBS operated the disposal site used to dispose of RDF in Transwaste’s transactions with Tees Valley.

169. GBS was incorporated on 30 October 2013. GBS’ directors were: Mr Tavis McCabe from incorporation until 11 October 2017; Mrs Fiona McCabe from 25 November 2014 until 27 November 2014; and Mr Francis O’Connor until 1 October 2018. As set out above, Mr McCabe was also a director of Hydro GRP. Further, GBS and Hydro GRP shared a common address in Glasgow.

170. Mr Hornshaw’s evidence was that he was not aware of this connection between Mr McCabe, GBS, and Hydro GRP at the time of the transactions relevant to these appeals. We accept this evidence. This is because this is credible in the circumstances and because there is no evidence to the contrary.

171. There is no evidence that Transwaste carried out any commercial checks on GBS. Again, we accept that this is because Transwaste did not see the need to carry out any such commercial checks (as opposed to environmental checks) given that it was not dealing directly with GBS. Knowledge And Means of Knowledge (Decisions 1 and 3)

172. In this section, we apply the law to our findings of fact (as well as making any further necessary findings of fact) in considering whether Transwaste knew or should have known that its transactions were connected to fraud. Overview Findings as to Due Diligence Submissions HMRC

173. Mr Kerr and Miss Monahan submitted that the standard of due diligence is relevant to knowledge and means of knowledge for (in summary) the following reasons: (1) As regards knowledge: (a) The standard of due diligence was so poor that it was evidence of Transwaste turning a blind eye as to what it knew it would find from that due diligence. In particular: (i) Transwaste focussed upon Mr Hornshaw’s experience and knowledge of traders but this was not applied sufficiently to Mr Fenny or Mr Rea. (ii) Atkins was an example of even a VAT number check not being carried out. (iii) Transwaste’s focus was upon what would save Transwaste money and would protect Transwaste’s own interests rather than protecting the public revenue. The explanation for not doing checks on hauliers was that it would be too costly to implement and credit was not an issue as Transwaste was not granting credit. (b) It was also submitted that evidence of due diligence was destroyed because of what it showed, giving rise to the conclusion that this was because Transwaste knew that it was unhelpful and so knew of the connection to fraud. In particular, business records should be kept for six years, the paper records could have been scanned, previous evidence of tax losses should have reinforced the need to keep due diligence, and HMRC specifically warned Transwaste of the need to keep evidence of due diligence (including at a visit on 24 September 2019 and yet further transactions were entered into without evidence of due diligence). (2) As regards means of knowledge, if due diligence had been carried out properly then Transwaste would have discovered facts from which it should have known that its transactions were connected to fraud. (3) Deficiencies in due diligence could not be justified by the contention that Transwaste was not aware of the risk of fraud. They should have been aware of the risk of fraud as a result of HMRC information provided to them, repeated explanations by HMRC of the need for due diligence, and previous tax losses (which included warnings on 17 January 2019 about the need to check on hauliers). Transwaste

174. Miss Brown submitted (in summary) as follows: (1) Transwaste’s due diligence was by way of environmental due diligence from the outset. When HMRC made it clear that additional financial due diligence was required, it was carried out. (2) Transwaste does not accept that due diligence is a business record which must be kept for six years. The purpose of due diligence is to ensure that the trader is satisfied that the transactions are legitimate and that there was no risk of fraud to the trader’s knowledge or that the trader should have known about. (3) Previous warnings were in the context of metals trading rather than waste brokerage or haulage. Commercial checks on waste brokers were only raised by HMRC with the tax loss letter in relation to Biotech on 5 April 2017 and only raised in respect of hauliers at the visits on 17 June 2019 and 25 June 2019. (4) Prior assessments in respect of metals trading, transactions in respect of Atkins, and Mr Hornshaw and Mr Mark Hornshaw’s arrest are not relevant to these transactions. (5) The significance of due diligence is as to whether traders are satisfied that their transactions are legitimate. Due diligence must be reasonable and proportionate. (6) Transwaste’s due diligence was reasonable and proportionate and satisfied Transwaste of the legitimacy of its traders. Environmental due diligence and audit trails meant that Transwaste knew that its suppliers were undertaking the supplies, were experienced in the waste industry and that the transaction was commercially viable. Discussion

175. We find that Transwaste’s due diligence on each of the relevant suppliers was inadequate.

176. Transwaste did not carry out a VAT registration check on Biotech at all, on Hydro until the end of the period of trading, on Hydro GRP until well into the period of trading, and on Bull Freight until after the relevant transactions. A VAT registration check was carried on Tees Valley prior to the transactions. We do keep in mind that if VAT registration checks had been made on these suppliers prior to trading, all VAT registrations would have been positively verified. Atkins was an example where Transwaste had not verified the supplier’s VAT registration and, had it done so, it would have found that number was not valid. However, the only significance of this is to reinforce the point that VAT registration numbers were not routinely obtained as the input tax on the transactions involving Atkins were not denied.

177. Transwaste did not carry out any meaningful commercial checks on any of the suppliers. The high point was that an Experian check was carried out on Hydro about a month before the end of the trading relationship and there is no evidence that this was interrogated or acted upon. An Experian check was carried out on Bull Freight but, as with the VAT registration check, this was after the relevant transactions. Transwaste did not consider any Companies House records in respect of the suppliers.

178. Transwaste did not carry out any visits to any of the suppliers. However, we do not see that this was necessary in respect of waste brokers as the nature of their role is that they use other traders’ disposal sites rather than needing any particular type of premises themselves. A visit to Bull Freight might in principle have been useful as it was a haulier rather than a waste broker, although this would still leave open the possibility that vehicles were stored other than at Bull Freight’s own premises.

179. We do not agree that the environmental checks were evidence of sufficient commercial due diligence. By their very nature these checks were not on Transwaste’s own suppliers, as the audits were on the disposal sites. In any event, we are not in a position to make any findings as to the detail of any of the audits on the disposal sites involved in the relevant transactions or as to what those audits showed as there was no documentary evidence of the audits themselves or any witness evidence as to what those audits disclosed.

180. We agree with HMRC that Transwaste’s focus on Mr Hornshaw’s experience of knowledge and traders was not sufficient of itself as it did not reveal the full details of Mr Fenny’s or Mr Rea’s backgrounds.

181. As set out above, we find that Transwaste was aware of the general risk of fraud. As such, we do not accept that there was any lack of awareness to justify the deficiencies in due diligence

182. However, we find that this inadequate due diligence does not of itself mean that Transwaste knew that its transactions were connected to fraud or that it turned a blind eye to that fact. Crucially, this is because Transwaste’s key focus was upon ensuring that the transactions were compliant with Transwaste’s obligations to the Environment Agency. As set out above, this is different to commercial due diligence. However, Transwaste’s environmental audits and audit trails meant that Transwaste was satisfied that the supplies of services were genuinely carried out, which was its primary focus. We therefore find that Transwaste neglected commercial due diligence because (notwithstanding HMRC’s warnings and advice) it saw environmental compliance as the touchstone of legitimacy. This is not to say that Transwaste could not have done more or need not have done more by way of commercial due diligence. Similarly, the failure to carry out commercial due diligence might in appropriate circumstances lead to Transwaste having the requisite means of knowledge if they could have discovered the fraud if they had carried out adequate commercial due diligence (which we deal with in respect of each of the suppliers below). However, this is different to saying that the reason for the failure was knowledge of fraud or turning a blind eye to fraud. We find that poor due diligence is not, in the present case and when considering all the evidence, sufficient to establish such knowledge on the balance of probabilities. Indeed, this would be tantamount to saying that the absence of adequate due diligence is determinative of actual knowledge or “blind eye knowledge”, which would be inconsistent with the approach taken in Mobilx of not unduly focusing on due diligence.

183. We note Mr Kerr and Miss Monahan submitted that Transwaste was protecting its own interests rather than the public revenue by, for example, not checking hauliers because of cost and not carrying out credit checks on suppliers because Transwaste was not granting credit. We do not agree that this leads to a conclusion of actual knowledge or “blind eye” knowledge. Indeed, it provides cost cutting as a further reason for the failure to carry out commercial due diligence. We also bear in mind paragraph 65 of the CJEU’s judgment in Mahagében (as set out above) to the effect that tax authorities should not transfer their own investigative tasks to taxable persons.

184. We do not agree with HMRC’s assertion that due diligence was destroyed because Transwaste knew that it was unhelpful. In short, we have already found that Transwaste did not carry out any meaningful commercial due diligence, with the effect that there was nothing of substance to destroy. Further, there is no evidence that the environmental audits or audit trials would reveal any fraud by the suppliers given that we have found that the waste disposal and haulage was genuine. We find that Transwaste’s reason for destroying the environmental checks on the grounds of lack of capacity to hold the paperwork is unsatisfactory (particularly given that it could have been scanned or, if computer generated, retained in electronic form) we do not find that there is sufficient evidence to infer that this was because those environmental checks revealed any fraud. Blind Eye Knowledge

185. It was clear from the parties’ submissions that by “blind eye knowledge” or “turning a blind eye”, both parties were referring to a situation in which a person suspects facts may exist and deliberately does not take steps to confirm those facts. Although not referred to by the parties, we note Lord Scott’s definition of “blind eye knowledge” in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd [2003] 1 AC 469 at [112] and [113]: “[112] Did the assured have blind-eye knowledge of the unseaworthiness of the Star Sea ? It is as well to return to the language of the sub-section. What is required is “privity” on the assured’s part of the unseaworthiness. “Privity” in its ordinary meaning connotes knowledge. “Blind-eye” knowledge approximates to knowledge. Nelson at the battle of Copenhagen made a deliberate decision to place the telescope to his blind eye in order to avoid seeing what he knew he would see if he placed it to his good eye. It is, I think, common ground - and if it is not, it should be - that an imputation of blind-eye knowledge requires an amalgam of suspicion that certain facts may exist and a decision to refrain from taking any step to confirm their existence. Lord Blackburn in Jones v Gordon (1877) 2 App Cas 616 , 629 distinguished a person who was “honestly blundering and careless” from a person who ‘refrained from asking questions, not because he was an honest blunderer or a stupid man, but because he thought in his own secret mind - I suspect there is something wrong, and if I ask questions and make farther inquiry, it will no longer be my suspecting it, but my knowing it, and then I shall not be able to recover.’ Lord Blackburn added “I think that is dishonesty.” [113] In The Eurysthenes [1977] 1 QB 49 , 68 Lord Denning MR gave the following description of “blind-eye” knowledge: ‘If a man, suspicious of the truth, turns a blind eye to it, and refrains from inquiry - so that he should not know it for certain - then he is to be regarded as knowing the truth.’”

186. In the context of a Kittel denial, the question is whether the person “knew or should have known” of the connection to fraud. We were not addressed as to whether “blind eye knowledge” is to be treated as meaning that Transwaste “knew” of the connection to fraud or instead that Transwaste “should have known” of the connection to fraud.

187. However, Kittel does not require a distinction to be drawn as to which limb a person’s state of knowledge fulfils providing it fulfils one or the other. It does not matter whether “blind eye knowledge” fulfils this because it is to be treated as if a person had actual knowledge or because it means that a person should have known.

188. Other First-tier Tribunals have dealt with this issue (see for example SK Metals Ltd v HMRC [2025] UKFTT 01211 (TC) and GMP Baird Ltd v HMRC [2025] UKFTT 01540 (TC) ). However, in the absence of argument and submissions by the parties as to which limb “blind eye knowledge” fulfils, and in the absence of a need to decide which limb it fulfils, we do not propose to do so. Our approach is therefore to decide in respect of the groups of transactions whether Transwaste “knew or should have known” that those transactions were connected to fraud. In doing so, we make it clear whether this is because of actual knowledge, “blind eye knowledge” or whether Transwaste should have known of the connection. Biotech Submissions HMRC

189. Mr Kerr and Miss Monahan submitted that Transwaste knew or should have known that its transactions with Biotech were connected to fraud for (in summary) the following reasons: (1) It would have been clear from documentation available at Companies House that Biotech was not under stable control at the time of its transactions with Transwaste and that Mr Fenny was not a director of Biotech. (2) Mr Hornshaw was aware that Mr Fenny had had difficulties with the Environment Agency in the past. Further checks would have explained the basis of those difficulties, which involved the improper disposal of waste in 2007 and also a waste site permit offence in 2013. (3) The weighbridge tickets referred to Trent Valley rather than Biotech. (4) It was implausible that Biotech would be taking waste to Potters when there were are so many sites nearer to Transwaste and not commercially viable to sub-contract to Stobarts to do so. (5) There is no evidence of any checks on Biotech. Had checks been carried out then enquiries as to the above irregularities ought to have been made, with the conclusion being that the transactions were connected to fraud. Transwaste

190. Miss Brown submitted (in summary) as follows: (1) Instability of control of Biotech was not indicative of fraud. Mr Fenny was in regular contact with Transwaste, there was no need for him to be a director, and Mr Hornshaw found him to be intelligent and knowledgeable. Mr Hornshaw understood Mr Fenny’s difficulties with the Environmental Agency to have stemmed from his time with Abel and were not his fault. There is no reason why Transwaste would have been expected to find the articles relied upon by HMRC in respect of Mr Fenny. (2) Transwaste had no need to visit brokers’ offices as the important matter for Transwaste was whether the disposal site had the appropriate licences and permits. (3) There was no uncertainty as to where the waste was going to. It was appropriate for the weighbridge tickets to refer to Trent Valley (rather than Biotech) because it was the operator of the disposal site. Discussion

191. We do not accept that Transwaste knew or should have known that its transactions with Biotech were connected to fraud.

192. As set out above, we agree that Transwaste’s commercial due diligence was inadequate. We also agree that by carrying out adequate commercial due diligence, including checking Companies House records, Transwaste could have found that Biotech had a series of directors with the potential for instability as a result and that Mr Fenny was not a director. We also agree that Mr Hornshaw could relatively easily have found out more about the difficulties which Mr Fenny had faced in 2007 and 2013. For the reasons set out above when considering our overview findings as to due diligence, the failure to find out these matters does not mean that Transwaste knew about Biotech’s fraud. It follows that we find that Transwaste did not have actual knowledge of the connection to fraud.

193. We do not accept that Transwaste had blind eye knowledge. For the same reasons as set out in respect of actual knowledge, there is no evidence that Transwaste suspected a connection to fraud regarding Biotech and yet failed to take any steps to confirm such a connection.

194. Further, we do not find that Transwaste should have known of the connection to fraud. This is for the following reasons.

195. Transwaste would not have been able to know from these matters (together with what it already knew) that the only reasonable explanation for the transactions was fraud. Instability is not of itself an indicator of fraud. Mr Hornshaw said (and we accept his evidence as credible in this regard) that it was not unusual for him to deal with people acting on behalf of a company who were not directors. Further, whilst Mr Fenny’s past convictions would be of concern, these related to improper disposal of asbestos and operating waste facilities without a permit rather than VAT fraud or even fraud more generally.

196. For the reasons set out above, it is unsurprising that the weighbridge tickets referred to Trent Valley Recycling Ltd as this was the operator of the disposal site. As Biotech was a waste broker it would not be named on the weighbridge ticket.

197. For the reasons set out above, there are commercial reasons for waste being disposed of at sites which are a long distance away from Melton. It is therefore not implausible for Biotech to take waste to Potters. Further we do not accept that it was not commercially viable for Stobarts to be contracted to do so. Tees Valley Submissions HMRC

198. Mr Kerr and Miss Monahan submitted that Transwaste knew or should have known that its transactions with Tees Valley were connected to fraud for (in summary) the following reasons: (1) The registered office was in Middlesborough but the address on the invoices was in Newton Aycliffe. In any event, Tees Valley had disappeared from the registered office at around the time Transwaste began dealing with Tees Valley, and the Newton Aycliffe address had no connection to Tees Valley. (2) As with Bioetch, it was not commercially viable to take the waste to Potters and to sub-contract the transport to Stobarts. (3) As with Biotech, Mr Fenny had had previous difficulties with the Environment Agency. (4) By a notice to produce documents dated 31 January 2017, HMRC informed Transwaste that Biotech’s VAT registration had been cancelled and yet, despite the connections between Biotech and Tees Valley, Transwaste continued to deal with Tees Valley. Further, on 5 April 2017, HMRC informed Transwaste of evidence of tax losses connected to its transactions with Biotech. (5) HMRC informed Transwaste on 13 April 2017 of evidence of tax losses connected to its transactions with Tees Valley. Although Transwaste did not trade further with Tees Valley, Transwaste still claimed input tax on its transactions in its VAT return submitted on 3 May 2017. (6) There is no evidence of any checks on Tees Valley. Had checks been carried out then enquiries as to the above irregularities ought to have been made, with the conclusion being that the transactions were connected to fraud. Transwaste

199. Miss Brown submitted (in summary) as follows: (1) The availability of closer sites does not mean that these transactions were not commercially viable. Stobarts were looking for return loads and in any event the waste was fines and so qualified for a lower rate of landfill tax. (2) Transwaste stopped trading with Tees Valley once they were notified of strong evidence of losses by a letter dated 13 April 2017. (3) It was not unusual for an address on an invoice (which it took to be a trading address) to be different to a registered address. Transwaste would not have been aware of Tees Valley’s lack of presence at any of these addresses. (4) The same submissions set out above as to Mr Fenny are applicable to Tees Valley in the same way as for Biotech. (5) There is nothing wrong with a broker setting up more than one company. Transwaste understood that Mr Fenny had done so to take different types of waste and to tip on different sites. It was therefore not unusual for waste traders to operate through more than one company. (6) Tees Valley had a valid VAT registration number and Mr Hornshaw had checked with Mr Fenny as to whether there were any issues with VAT (and had been told there were not) during a meeting with Officer Knowles. (7) Although Transwaste was told on 31 January 2017 that Biotech’s VAT registration number had been cancelled, this notification did not make mention of any fraud. Discussion Transactions On or Before 5 April 2017

200. We do not accept that Transwaste knew or should have known that its transactions with Tees Valley on or prior to 5 April 2017 were connected to fraud.

201. As set out above, we agree that Transwaste’s commercial due diligence was inadequate. We also agree that by carrying out adequate commercial due diligence, including checking Companies House records, Transwaste could have found that there was a difference between Tees Valley’s registered office and invoice address. Again, Transwaste could have found out further information about Mr Fenny’s history and his convictions. Again, for the reasons set out above when considering our overview findings as to due diligence, the failure to find out these matters does not mean that Transwaste actually knew about Tees Valley’s fraud.

202. We do not accept that Transwaste had blind eye knowledge. For the same reasons as set out in respect of actual knowledge, there is no evidence that Transwaste suspected a connection to fraud regarding Tees Valley prior to 5 April 2017 and yet failed to take any steps to confirm such a connection.

203. Further we do not find that Transwaste should have known of the connection to fraud. This is for the following reasons.

204. We find that Transwaste would not have been able to know from these matters (together with what it already knew) that the only reasonable explanation for the transactions was fraud. A difference between a registered office and a trading address is not itself an indicator of fraud. Again, Mr Fenny’s previous convictions were not for fraud.

205. We find that it was reasonable for Transwaste not to visit Tees Valley’s offices given that it was a waste broker and so there would be no disposal site to see. It follows that we do not accept that Transwaste would have found that Tees Valley had disappeared.

206. Again, for the reasons set out above, we do not accept that delivery of waste to Potters or the use of Stobarts was uncommercial.

207. Although HMRC informed Transwaste on 31 January 2017 that Biotech’s VAT registration had been cancelled, HMRC did not explain why this was the case. This did not of itself indicate that Biotech had been involved in fraud and so this did not itself reflect upon Tees Valley. At that stage, this was also consistent with Mr Hornshaw’s understanding that Mr Fenny had set up a new company. Transactions After 5 April 2017

208. However, we do find that Transwaste knew or should have known that its transactions with Tees Valley after 5 April 2017 were connected to fraud. This is for the following reasons.

209. Crucially, HMRC informed Transwaste on 5 April 2017 of tax losses in its transactions with Biotech. Mr Hornshaw knew that Biotech and Tees Valley were connected through Mr Fenny. Indeed, Mr Fenny was Mr Hornshaw’s only contact with both of these companies. We accept that Transwaste did not have actual knowledge that transactions with Tees Valley would also be connected to fraud. This is because on each of the occasions when Transwaste was told by HMRC of tax losses with a company it ceased dealing with that company. We therefore find that had Transwaste actually known of Tees Valley’s connection to fraud, it would also have stopped trading with Tees Valley at that point.

210. However, we find that Transwaste did turn a blind eye to whether Tees Valley’s transactions were connected to fraud. As set out above, we find that on receiving the letter of 5 April 2017, Mr Hornshaw did not ask Mr Fenny about the tax losses in Biotech and did not seek to satisfy himself that Tees Valley was legitimate before continuing to trade. This is reinforced by the fact that Mr Hornshaw says that he did raise the matter with Mr Fenny (therefore recognising the need to do so) but, as we have already found, this was in fact after the end of Transwaste’s trading relationship with Tees Valley. On the balance of probabilities, Mr Hornshaw must have suspected Tees Valley of fraud because: HMRC had (by the letter dated 5 April 2017) already informed Mr Hornshaw about fraud involving Biotech; Mr Hornshaw knew this would involve Mr Fenny as he was the only person he was dealing with at Biotech; Mr Hornshaw knew that Mr Fenny was also the only person he was dealing with at Tees Valley; and Mr Hornshaw must have recognised the need to ask Mr Fenny about it, albeit that he did not do so until after the relevant transactions. The same matters drive us to the conclusion that Mr Hornshaw did not ask Mr Fenny about the tax losses in Biotech whilst Transwaste was still trading with Tees Valley because he did not want an answer which signified fraud in respect of Tees Valley.

211. In any event, insofar as it is different to blind eye knowledge, we find that Transwaste should have known that the only reasonable explanation for its transactions with Tees Valley after 5 April 2017 was that they were connected to fraud. Again, this is because Transwaste had been told of fraud in connection with its transactions with Biotech and because of the close connection between Biotech and Tees Valley through Mr Fenny.

212. Further, we find that on the balance of probabilities Mr Fenny would not have said anything which would have dispelled concerns. This is because when Mr Hornshaw did later ask Mr Fenny about the matter there is no evidence of a convincing response (Mr Fenny simply being adamant that he had filed his VAT returns correctly). Hydro and Hydro GRP

213. Both HMRC and Transwaste made their submissions in respect of Hydro and Hydro GRP together and so we consider these suppliers in the same way. Submissions HMRC

214. Mr Kerr and Miss Monahan submitted that Transwaste knew or should have known that its transactions with Hydro and Hydro GRP were connected to fraud for (in summary) the following reasons: (1) Mr Jon Connolly had been the director of six companies between 2010 and 2017. Each of these companies were dissolved within three years of Mr Connolly being appointed. (2) Hydro’s invoice address was different to the registered address. (3) Neither Hydro nor Hydro GRP could be traced at their various addresses. (4) Hydro GRP was given notice by Companies House on 3 April 2018 of an intention to strike Hydro GRP off the Companies Register. (5) The invoices for Hydro and the Hydro GRP are all consecutive, highlighting the link between the companies and suggesting that there were no other customers. In any event, there are various other anomalies with the invoicing as the VAT and addresses change. (6) It was not commercially viable for the waste to be transferred to Birmingham. Further various of the invoices show journeys from Hull to Birmingham and then back to Hull for a further delivery to Birmingham. (7) The waste transfer notices named MCP rather than WMSH. There were also irregularities with the site licence (which had been suspended from 6 May 2019 and then revoked on 2 September 2019) and inconsistencies in respect of the waste transfer codes and use of curtain sided lorries. WMSH was itself given notice by Companies House on 5 March 2019 of an intention to strike WMSH off the Companies Register. (8) The only due diligence checks on Hydro or Hydro GRP were a VAT number check and credit check on Hydro in July 2019 and a VAT number check on Hydro in September 2019. These should have highlighted anomalies including differences between invoice addresses and registered addresses and, as regards the credit check on Hydro, an under-capitalised company carrying on business as a “business and management consultancy” which was subject to a county court judgment in May 2019 in the sum of £750. (9) Transwaste’s dealings with Hydro and Hydro GRP were all through Mr Rea. He was not a director of either company and basic research on him would have revealed criminality (including offences relating to drugs, violence, money laundering, and tax fraud) and the fact that he was disqualified from being a director in 2011 and 2017. (10) HMRC informed Transwaste on 10 October 2019 that Hydro’s and Bull Freight’s VAT numbers had been cancelled. However, notwithstanding the links between Hydro and Hydro GRP, Transwaste continued to trade with Hydro GRP. Transwaste

215. Miss Brown submitted (in summary) as follows: (1) Transwaste carried out an environmental audit, a weighbridge audit trail, a VAT registration number check, a credit check, and a Companies House check. (2) Mr Kemish explained that Transwaste had contacted Mr Rea, his explanation for the different VAT numbers was that one company had closed and another had been opened, and this was accepted. (3) HMRC did not tell Transwaste that there was an issue with Hydro GRP. Had HMRC done so, Transwaste would have ceased dealing with Hydro GRP in the same way that it did with Hydro. (4) Anomalies in respect of Hydro and Hydro GRP’s invoices ought to be seen in the context of Transwaste’s large business which includes the processing of a large number of invoices from a large number of suppliers. (5) There was no difficulty in hauliers travelling from Hull to Birmingham to Hull. (6) The incorrect waste transfer notes are as a result of a code being used in error rather than being indicative of fraud. (7) Transwaste cannot reasonably be expected to carry out commercial checks on MCP or WMSH, which are its supplier’s suppliers. (8) The audit trail shows the waste codes and destinations as correct. Any absence of such disposals on the Environment Agency database does not impact upon Transwaste’s knowledge or means of knowledge at the time of the transactions. (9) Transwaste was not aware of the different addresses for Hydro and Hydro GRP. (10) Transwaste was not aware of Mr Rea’s criminal links. In any event, this goes beyond what it was reasonable for Transwaste to check. Discussion Transactions On or Before 24 September 2019

216. We do not accept that Transwaste knew or should have known that its transactions with Hydro were connected to fraud. Further, we do not accept that Transwaste knew or should have known that its transactions with Hydro GRP on or prior to 24 September 2019 were connected to fraud.

217. As set out above, we agree that Transwaste’s commercial due diligence was inadequate. We also agree that by carrying out adequate commercial due diligence, including checking Companies House records, Transwaste could have found out about the number of dissolved companies Mr Connolly had been a director of and would have seen the Companies House notice of an intention to strike off Hydro GRP from the Companies Register. Again, for the reasons set out above when considering our overview findings as to due diligence, the failure to find out these matters does not mean that Transwaste actually knew about Hydro or Hydro GRP’s fraud.

218. We do not accept that Transwaste had blind eye knowledge. For the same reasons as set out in respect of actual knowledge, there is no evidence that Transwaste suspected a connection to fraud regarding Hydro or Hydro GRP prior to 24 September 2019 and yet failed to take any steps to confirm such a connection.

219. Further, we do not find that Transwaste should have known of the connection to fraud. This is for the following reasons.

220. We find that Transwaste would not have been able to know from these matters (together with what it already knew) that the only reasonable explanation for the transactions was fraud. Being a director of a number of dissolved companies is not an indicator of fraud. Similarly, a notice of intention to strike off the Companies Register may mean a failure to file required documentation and so is not itself an indicator of fraud.

221. We find that it was reasonable for Transwaste not to visit Hydro or Hydro GRP’s offices given that they were waste brokers and so there would be no disposal site to see. It follows that we do not accept that Transwaste would have found that Hydro and Hydro GRP could not be traced at their offices.

222. We do not accept that the consecutive nature of Hydro and Hydro GRP’s invoice numbers together with anomalies with the invoices, VAT numbers and addresses mean that Transwaste knew or should have known about the connection to fraud. These invoices represented a relatively small number of transactions in a substantially sized company and so we find that it is unrealistic to consider that these anomalies would have been enough to mean that Transwaste knew or should have known of fraud at the time.

223. As set out above, we find that the location of the disposal site and the journey to and from it was commercially viable.

224. We do agree that the naming of MCP rather than WMSH on the waste transfer notices ought to have raised some concern with Transwaste. However, we accept Mr Hornshaw’s evidence that Transwaste thought that this was because there were two site operators and that Transwaste treated the disposal site itself as having primary importance. In any event, this irregularity is not indicative of fraud.

225. We do not agree that Transwaste ought to have carried out commercial diligence on its supplier’s supplier as Transwaste was not dealing with them directly and was carrying out environmental checks. As such, the fact that WMSH was given a notice of intention to strike off the Companies House register is not something that was reasonable for Transwaste to find out.

226. The irregularities with the site licence were towards the end of the period of dealing with Hydro and Hydro GRP and so any earlier checks would not have revealed this.

227. We do accept that relatively straightforward internet research upon Mr Rea would have revealed a history of criminality and disqualification as a director. The articles relied upon by HMRC were obtained from the internet and appear to pre-date the relevant transactions. This ought to have raised concerns. However, we find that this would not have revealed that the only reasonable explanation for the transactions was that it was connected to fraud. The references to arrests and charges in 2008 in respect of money laundering and drugs offences are superseded by articles stating that the Crown Prosecution Service discontinued or withdrew the criminal proceedings in March 2012 as a result of insufficient evidence. Other references to criminality relate to violence rather than fraud and, in some cases, prosecutions were not pursued. The articles also show that Mr Rea’s director’s disqualification proceedings related to failures to account for company assets and funds and so did not on the face of it involve VAT fraud. Indeed, the period of disqualification was until 26 December 2018 and so was only current for the transactions with Hydro in the periods 12/17 and 09/18 (and so had expired by the time of the transactions in 03/19, 06/19, and 09/19) and had expired prior to any of the transactions with Hydro GRP. Further, the information in the articles does not mean that every business Mr Rea was involved in was a fraud. Transactions After 24 September 2019

228. We do find that Transwaste knew or should have known that its transactions with Hydro GRP after 24 September 2019 were connected to fraud. This is for the following reasons.

229. Crucially, by a letter to Mr Hornshaw dated 24 September 2019, HMRC informed Transwaste about tax losses in its transactions with Hydro. Given that Mr Hornshaw had treated Hydro and Hydro GRP as if they were the same company, it is striking that Transwaste continued to deal with Hydro GRP regardless. Transwaste did contact Hydro regarding the use of a new VAT number on 25 September 2019 but at that point thought they were still dealing with Hydro rather than Hydro GRP. On being asked in cross-examination whether he asked Mr Rea about this at the time, Mr Hornshaw said, “I probably did. I can’t recall and I have no record. I will have asked him about it.” We reject this evidence as it is vague, unspecific and is inconsistent with the fact that emails were being sent to Hydro which made no mention of the tax losses. We find that Mr Hornshaw did not ask Mr Rea about this.

230. On the balance of probabilities, Transwaste did have actual knowledge of the connection to fraud after 24 September 2019. This is because Mr Hornshaw had been told of the tax losses in previous transactions with Hydro and yet continued to trade with Hydro GRP notwithstanding that he thought Hydro and Hydro GRP were the same business (or at least treated them as the same business).

231. Alternatively, Transwaste had blind eye knowledge. We find that on the balance of probabilities Mr Hornshaw suspected a connection to fraud. Again, Mr Hornshaw knew of tax losses in transactions with Hydro, thought he was still dealing with Hydro, and yet carried on regardless. In any event, even if not the same business it must have been clear to Mr Hornshaw that they were closely associated as Mr Rea was his only contact with each company. The same reasons also lead us to the conclusion that Mr Hornshaw did not ask Mr Rea about the tax losses in Hydro because he did not want an answer which signified fraud in respect of Hydro GRP.

232. In any event, insofar as it is different to blind eye knowledge, we find that Transwaste should have known that the only reasonable explanation for its transactions with Hydro GRP after 24 September 2019 was that they were connected to fraud. Again, this is because Transwaste had been told of fraud in connection with its transactions with Hydro and because Hydro GRP had been treated as if it was the same company as Hydro.

233. Further, we note that there is no evidence that Mr Rea would have said anything which would have dispelled concerns if Mr Hornshaw had asked him prior to these transactions about HMRC’s tax loss letter. Bull Freight Submissions HMRC

234. Mr Kerr and Miss Monahan submitted that Transwaste knew or should have known that its transactions with Bull Freight were connected to fraud for (in summary) the following reasons: (1) It would have been clear from documentation available at Companies House that Bull Freight was not under stable control at the time of its transactions with Transwaste. (2) There was no trace of Bull Freight at its principal place of business as notified to HMRC in July 2019. (3) Bull Freight’s accounts showed that it was under-capitalised. (4) There were links between Hydro and Bull Freight as the address of Bull Freight’s agent in its VAT application was the same as the address on Hydro’s invoices. (5) The only due diligence was in September 2019 and so post-dated the transactions. In any event, this showed irregularities as the credit report dated 6 January 2019 showed maximum risk and as at 22 March 2019 referred to serious adverse information. Further, Bull Freight’s accounts were late as at 4 February 2019 and it was given notice by Companies House on 22 March 2019 of an intention to strike Bull Freight off the Companies Register. Transwaste

235. Miss Brown submitted (in summary) as follows: (1) Due diligence would have been carried out by Attero. In any event, Transwaste was unaware of the need to carry out commercial due diligence on hauliers until 25 June 2019. (2) Any alleged instability is speculative and in any event is not an indicator of fraud. (3) The principal place of business on the VAT registration form is different to the address HMRC appears to have visited Bull Freight at. (4) Bull Freight’s accounts provided for assets of £14,000. This would not have raised any concerns. (5) Transwaste would not have had any knowledge of Bull Freight’s VAT registration form. In any event, it is not unusual for agents to represent numerous clients. (6) Transwaste had no concerns about where the waste was being disposed of as the weighbridge data and audit trail was consistent with Transwaste’s understanding. Discussion

236. We do not accept that Transwaste knew or should have known that its transactions with Bull Freight were connected to fraud. This is for the following reasons.

237. As set out above, we agree that Transwaste’s commercial due diligence was inadequate. We also agree that by carrying out adequate commercial due diligence, including checking Companies House records, Transwaste could have found that Bull Freight had had a series of changes of director, and that there was a proposal to strike it off the register in March 2019. A credit check would also have shown credit risks. For the reasons set out above when considering our overview findings as to due diligence, the failure to find out these matters does not mean that Transwaste actually knew about Bull Freight’s fraud.

238. We do not accept that Transwaste had blind eye knowledge. For the same reasons as set out in respect of actual knowledge, there is no evidence that Transwaste suspected a connection to fraud regarding Bull Freight and yet failed to take any steps to confirm such a connection.

239. Further, we do not find that Transwaste should have known of the connection to fraud. This is for the following reasons.

240. We find that Transwaste would not have been able to know from the matters that could have been found out from proper commercial due diligence (together with what it already knew) that the only reasonable explanation for the transactions was fraud, as, at its height, it would have revealed concerns as to the strength and profitability of the business. Further, it is not clear that Bull Freight was under-capitalised as it had assets of approaching £14,000.

241. Neither the fact that Bull Freight could not be traced at its principal place of business on 25 July 2019 nor the fact that it was an apparently unsuitable terraced house mean that Transwaste knew or should have known of the fraud. This was after the transactions with Bull Freight and Transwaste would not have known the principal place of business notified to HMRC. Whilst it is correct to say that Transwaste did not visit the address for Bull Freight that it did have (namely, the registered address in Central London which was the same as the address on Bull Freight’s invoices) there is no evidence as to what such a visit would have revealed. In any event, a company need not itself be present at its registered address, particularly if it has a different trading address. Further, Transwaste would not have had access to Bull Freight’s VAT application form and so would not have been able to link the address to Hydro’s invoices. Totality

242. We keep in mind the need to consider the totality of the evidence. As such, we have considered whether our findings that Transwaste knew or should have known that its transactions with Tees Valley after 5 April 2017 and its transactions with Hydro GRP after 24 September 2019 affect our findings in respect of any other transactions. Nevertheless, we find that this does not affect our views as already set out above in respect of the other transactions. This is because those findings are based upon specific knowledge of tax losses in closely connected companies, which is not present in the other dealings. The First Penalty Assessment Against Transwaste (Decision 2) Submissions HMRC

243. Mr Kerr and Miss Monahan submitted (in summary) as follows: (1) If the antecedent decision fails, then the penalty assessment cannot stand. (2) The inaccuracy in Transwaste’s returns was deliberate. This includes consciously and intentionally choosing not to find out the correct position despite knowing of the need to do so. (3) HMRC do not have to prove actual knowledge that the transactions relevant to Decision 1 were connected to fraud. Instead, the question is whether the submission of the return was deliberate. For the 09/16 and 12/16 returns this will depend upon whether Transwaste knew that the transactions were connected with fraud at the time of those transactions. For the 03/17 and 06/17 returns, Transwaste had already been told about tax losses in their transactions prior to the filing of the returns and so it would be deliberate behaviour nevertheless to file those returns having consciously or intentionally chosen not to investigate whether they were connected to fraud before filing those returns. (4) Transwaste did not cooperate fully. HMRC requested documents on 13 December 2016 and had to ask again on 31 January 2017 (by an information notice), 9 March 2017, 21 March 2017, and 5 April 2017. (5) Officer Knowles asked for evidence of due diligence checks but these were not provided. Transwaste

244. Miss Brown submitted (in summary) as follows: (1) It puts the cart before the horse to say that VAT returns were deliberately inaccurate because Transwaste claimed input tax to which it was not entitled. This is not possible simply because of tax losses connected to suppliers as the input tax is still recoverable unless at the time of the transactions Transwaste knew or should have known that those transactions were connected to fraud. (2) Only 45% mitigation has been applied notwithstanding that Transwaste cooperated with HMRC throughout. (3) Insofar as the mitigation was reduced because of the need for two information notices, these notices were premature. The first was issued on 21 January 2017 in respect of documents requested on 13 December 2016, which did not give long enough given the Christmas period. The second was issued on 9 March 2017 and relates to a request made on 14 February 2017, which again gave too little time to respond. Discussion

245. It follows from our decision above that the penalty can only apply to the transactions which we found to have been properly disallowed, being those with Tees Valley after 5 April 2017 (“the Disallowed Tees Valley Transactions”).

246. We find that the inaccuracy in Transwaste’s return was deliberate in respect of the Disallowed Tees Valley Transactions. This is because, for the reasons set out above, Transwaste did turn a blind eye to whether Tees Valley’s transactions were connected to fraud. We bear in mind that, as set out in Clynes , an inaccuracy can be deliberate where a person consciously or intentionally chooses not to find out the correct position.

247. We do not reduce the mitigation applicable to those transactions any further than has currently been applied by HMRC. This is because by acting deliberately in this way and not informing HMRC of this, Transwaste was not cooperating sufficiently to merit a greater reduction than has already been applied.

248. In any event, we do not agree that the information notices were premature. Transwaste had had sufficient time either to provide the required documents to HMRC or to engage with HMRC to explain why these were not available and when they would be provided. We therefore find that the correct level of mitigation was applied.

249. We do not accept that the failure to provide due diligence was itself a lack of cooperatioon because, as set out above, the commercial due diligence sought did not exist. The Second Penalty Assessment Against Transwaste (Decision 4) Submissions HMRC

250. Mr Kerr and Miss Monahan submitted (in summary) as follows: (1) Again, if the antecedent decision fails, then the penalty assessment cannot stand. (2) The tribunal should not exercise its discretion to reduce the penalty. Transwaste

251. Miss Brown submitted (in summary) as follows: (1) To the extent that Decision 3 is upheld, it is accepted that section 69 C of VATA 1994 will apply. (2) No mitigation has been applied at all. (3) The Tribunal should reduce the penalty in order to take into account Transwaste’s cooperation and disclosure. Further, mitigation should be applied because Transwaste has acted in good faith, which should be construed in accordance with its ordinary meaning of acting honestly. Discussion

252. Again, it follows from our decision above that the penalty can only apply to the transactions which we found to have been properly disallowed, being those with Hydro GRP after 24 September 2019 (“the Disallowed Hydro GRP Transactions”).

253. We find that no reduction for mitigation should be applied. This is for the following reasons.

254. We do not accept that Transwaste has acted in good faith in respect of the Disallowed Hydro GRP Transactions. This is because, as we found above, Transwaste continued to deal with Hydro GRP after being told of tax losses connected to Hydro in circumstances in which Mr Hornshaw had previously treated Hydro and Hydro GRP as the same business, (as found above) Mr Hornshaw did not ask Mr Rea about the matter until after the transactions, and (as found above) Mr Hornshaw either actually knew or turned a blind eye to what he might find.

255. We also do not accept that Transwaste has fully cooperated with HMRC in respect of the Disallowed Hydro GRP Transactions (as distinct from cooperation in respect of the transactions for which we have allowed the appeals in part). Crucially, Mr Hornshaw did not explain to HMRC that he thought that Hydro and Hydro GRP were the same business and did not explain that he had not asked Mr Rea about the tax losses or otherwise satisfied himself as to Hydro GRP’s legitimacy. The December 2019 Visit was an opportunity to provide this information but the visit report reveals that this did not happen. Indeed, the visit report states that Mr Hornshaw informed Officer Knowles that “Hydro Plant was made up of 2 different companies, one was consultancy and one as a waste broker.” Penalty Assessment Against Mr Hornshaw (Decision 5) Submissions HMRC

256. Mr Kerr and Miss Monahan submitted (in summary) as follows: (1) Mr Mark Hornshaw has not been called to give evidence and so there is no evidence of him sharing responsibility for the relevant transactions. (2) Section 69 D VATA 1994 does not require sole attribution. Transwaste

257. Miss Brown submitted (in summary) as follows: (1) Miss Brown submitted that any mitigation applicable to Decision 4 would apply to Decision 5. (2) Mr Hornshaw was one of three directors and so the reason for the section 69 C penalty was not solely attributable to him. The penalty should therefore be reduced accordingly. Discussion

258. Again, it follows from our decision above that the penalty can only apply to the transactions which we found to have been properly disallowed, being those with Hydro GRP after 24 September 2019 (“the Disallowed Hydro GRP Transactions”).

259. We agree with Mr Kerr and Miss Monahan that section 69 C of VATA 1994 does not require sole attribution. However, we do have the power to reduce the penalty where appropriate, which can in principle include where we are of the view that conduct is attributable to more than one person.

260. We agree with Miss Brown that any mitigation appropriate to Decision 4 would also be appropriate for Decision 5. In any event, this is simply a feature of first ascertaining the correct penalty (if any) upon Transwaste before then applying the penalty (as reduced for mitigation or otherwise) to Mr Hornshaw pursuant to Decision 5.

261. We do not agree that the penalty should be reduced. Mr Hornshaw accepted during cross-examination that he was responsible for the transactions with Hydro, which we treat as including the transactions with Hydro GRP. Further, the 24 September 2019 letter informing Transwaste about Hydro’s tax losses was addressed to Mr Hornshaw. Mr Hornshaw’s evidence during cross-examination was that he had discussed this with Mr Rea. Although (as set out above) we find that this was after the Disallowed Hydro GRP Transactions, this still constitutes an acceptance that it was for him to speak to Mr Rea about this. Finally, there is no evidence of anybody else (including Mr Mark Hornshaw or Mr Kemish as directors) being involved with the Disallowed Hydro GRP Transactions. Disposition

262. It follows from the above that the appeals are allowed. In respect of Decision 1 and Decision 2, the appeals are allowed other than in respect of the Disallowed Tees Valley Transactions. In respect of Decision 3, Decision 4, and Decision 5, the appeals are allowed other than in respect of the Disallowed Hydro GRP Transactions.

263. We will leave it to the parties to agree, if possible, the consequential revisions to the Decisions. If agreement cannot be reached, we will make further directions in order to determine any matters remaining in dispute.

264. We are very grateful to all Counsel in the case for their helpful and constructive approach to the hearing and for the quality of their written and oral submissions. Right to apply for permission to appeal

265. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: 18 March 2026