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July's round up of the latest tax investigation news and cases:
A London construction company has lost an appeal over recovery of nearly £1m in input tax as transactions were linked to fraudulent invoices and Kittel fraud.
At the First Tier Tribunal (FTT), the owner of Harry Construction Limited (HCL), based in north London, accepted that "the VAT losses arose through dishonesty on the part of the defaulting traders" but attempted to blame HMRC for failing to alert him about the risks.
HCL, a commercial construction business, appealed against several HMRC decisions on input tax issued on 1 February 2019, relating to three separate notifications. In total, the input tax in dispute was £927,987, which HCL claimed should have been repayable by HMRC.
Two instances related to HMRC's decisions to deny the company the right to deduct input tax totalling £705,741 over VAT periods 10/15-07/18 on the basis that the company "knew or should have known that its transactions upon which the input tax reclaim was based were connected with VAT fraud."
HCL also disputed a third refusal decision by HMRC amounting to a further £222,246 across VAT periods 10/15, 01/16, 04/16, 07/16, 10/16, 01/17, 04/17, 07/17, 10/17, 01/18 and 07/18, where HMRC asserted that the invoices from UP Construct Ltd upon which the input tax reclaim was based were invalid.
Under law, a taxable person has a right to deduct input tax, which includes VAT on supplies under the Principal VAT Directive (PVD). However, under the Kittel principle, this right can be lost where the taxable person knew or should have known that the purchases were connected with the fraudulent evasion of VAT.
At the eight-day tribunal, HMRC presented evidence of 12 companies involved in the HCL supply chain that were connected with fraudulent invoices, some of which were "buffer traders" positioned between the arm's length fraudulent trader and HCL. All 12 companies had been deregistered over time as HMRC discovered they were evading VAT.
HMRC officers presented evidence of communications with HCL's director, Singh, warning of the fraud. On 3 July 2012, HMRC sent HCL a "veto letter" regarding its use of a business called Call Premier. The letter informed HCL that Call Premier had been deregistered for VAT purposes, adding: "Please note that any input tax claimed in relation to transactions involving this company may be subject to verification." The letter also directed the company to information on due diligence.
The following day, on 4 July 2012, HMRC began investigating HCL because it had made payments totalling £466,199 to Call Premier. An onsite meeting was held at HCL's accountants' premises where HMRC discussed the labour issues. HCL explained that until a year previously, the company employed staff directly but switched to external providers "because the staff/workers were not being reliable."
The company, represented by Tim Brown of counsel, accepted that there had been "a VAT loss in each of these transaction chains and that there was a connection between that default and HCL's purchases," and that "the VAT losses arose through dishonesty on the part of the defaulting traders."
However, Singh testified that he only became aware of the practice of subcontracting labour in the construction industry around 2011/12 and only became aware of VAT fraud problems in the construction industry when he received HMRC officer Hammouda's letter in October 2017, despite various HMRC veto letters sent to him.
Singh emphasized that he had contacted his accountants about all letters regarding due diligence as "the business was relying on them for advice and support related to its tax affairs."
Singh criticized HMRC for its failure to stop VAT fraud prevalent across the construction industry, telling the tribunal: "We only can do so much, we can do so much checks on them by getting verifications on VAT and tax and all that. The rest is all down to the HMRC. If they know that – they're doing the checks on the companies, why don't they make us aware at that time?"
Tribunal Judge Mark Baldwin noted that HCL's co-owner and director, Harvinder Singh, "had a tendency to resort to stock answers, along the lines of 'HCL had done all the due diligence it could' and the current situation is largely/entirely of HMRC's making for not telling HCL what to do."
On the Kittel appeal, Brown argued that "HMRC have not produced any evidence that there was an 'overall scheme to defraud the Revenue' perpetrated through supply chain VAT fraud. Even if there was an overall scheme, HCL denies either knowing of it or being knowingly involved in it."
Beyond the due diligence failures, the invoices supporting VAT recovery were also found to be invalid. Judge Baldwin stated: "We do not consider that an invoice which simply refers to 'valuation total' comes anywhere near providing sufficient information to enable an independent observer to be satisfied as to the identification and quantification of the services supplied.
"Someone seeking to find out the nature and quantity of what was supplied would not even be able to begin to answer that question from the invoice or any other document it referred to, let alone reach a conclusion. The invoices clearly do not meet the requirement in regulation 14(g)."
The tribunal dismissed the appeal on all grounds and rejected the appellant's claim that HMRC was being "unreasonable."
A company director with little business knowledge has been described as a "passenger" in a missing trader fraud which involved a company "in the control of a fraudster."
Retail seller Zed-UK Ltd, run by Zishan Choudry, 37, from Leeds, and a director of the business since 2011, appealed to the First Tier Tribunal (FTT) against two HMRC decisions to refuse input tax and impose a VAT penalty, both issued applying the Kittel principle.
At the tribunal, Zed-UK, represented by solicitor Nigel Gibbon, was claiming against two denials of input tax totalling £194,651 and a penalty of £58,395, totalling £253,046, issued under section 69C VATA 1994.
A personal liability notice (PLN) was also issued to Choudry, attempting to make him wholly liable for the company's VAT bill under section 69D VAT Act 1994, but this was withdrawn by HMRC.
Choudry bought Apple airpods and other IT gadgets from a company called Digi C Associates Limited, now dissolved, and then sold them on to various companies in Europe. Prior to this, Choudry was selling fishing hooks and thermal paste for computer repairs on eBay and Amazon from his parents' garage.
Between February and March 2021, Zed-UK bought and sold £973,255 worth of stock from Digi C Associates Limited, before selling them on for the same price with neither business making a profit.
The denial of input tax related to transactions between Zed-UK and Digi, both based in the UK, and two companies located in the EU, specifically Pantheon Distribution GmbH in Vienna, Austria, and Ourea Baltic SIA in Latvia.
At the tribunal, Choudry acknowledged and understood that it was important for a business to protect itself from VAT fraud, but he could not explain, beyond "doing general research into it," any details of what a trader would have done to check up about VAT fraud in the market.
Judge Christopher McNall described Choudry as an "ambitious, but naive young man" with "some technical IT skills," but not enough skills to run a business efficiently. As a result, the FTT questioned who actually had overall control of Zed-UK.
Judge McNall said: "This leads us to express scepticism as to whether the true governing 'business mind' of Zed-UK was not Zishan Choudry at all but was someone else.
"Who that someone else was - whether his brother, or his father (both of whom were directors at the time of the denied deals, and until 14 September 2021, but neither of whom provided any witness statements), or someone else - we are simply unable to say."
HMRC first visited the business in 2013 with a warning about missing trader fraud. In 2015, HMRC conducted a desk-based audit of Zed-UK, specifically examining the company's VAT returns for 07/13 and 04/14.
In 2016, the German tax authorities informed HMRC about the sale of computer servers to Pantheon GmbH by Zed-UK. Choudry admitted to trading with the company since 2012.
In a meeting with HMRC in 2020, Choudry claimed the director of Digi C Associates, Roger Green, had "out of the blue" proposed doing business with the company via WhatsApp. Choudry claimed to have spoken to the director of Digi once after this, but never face to face.
Zed-UK then bought £235,000, plus £48,000 VAT, worth of Apple airpods from Digi in February 2021. The following month, on 5 March 2021, HMRC cancelled Digi's VAT registration so input tax deductions were not permitted.
Despite this, Zed-UK continued to purchase stock from Digi throughout March 2021, spending a total of £750,000 plus £150,000 in VAT. On 12 April 2021, HMRC requested documents relating to these transactions.
Digi was wound up by May 2022, but Zed-UK continued to claim the business was legitimate. However, Digi was assessed by HMRC in 2021 and owed £2.9m in VAT.
Judge McNall revealed: "It is notable that, perhaps as early as 2019, HMRC was in possession of some information which raised the possibility that Mr Green was not in fact a director at all (namely, a complaint by the real Mr Green that he had received a corporation tax bill for Digi) but was someone whose identity had been stolen.
"It is now clear that Digi was in the control of a fraudster."
HMRC argued that Zed-UK and Choudry should have done more due diligence on Digi, as a basic Companies House check would have shown the company had changed names several times and had almost been struck off in 2017.
Additionally, the company's turnover grew rapidly since its incorporation. As Judge McNall noted: "It was a legitimate inquiry for Zed-UK to have asked itself and Digi how a new business with no established presence in the industry could have accomplished this; especially since it was in a similar business to Zed-UK, which had not been able to experience such as increase in turnover."
After Zed-UK bought the airpods, they were sold immediately to the two overseas wholesalers that it had never dealt with before, without any of the stock getting damaged or going missing, and without making any profit.
Judge McNall described this as "striking" as neither Zed-UK, nor anyone from the company, ever saw the product, adding that Choudry was a "passenger in the deals."
"Looked at objectively, Digi had appeared from nowhere; with goods to sell; that Zed-UK had found a receptive market abroad; which sales, within weeks, accounted for almost the entirety of Zed-UK's total outputs," the Judge added.
Suspicion was raised as Zed-UK was not making any profit on the sales, with Judge McNall stating: "This gives rise to a strong inference that the driver of the denied deals was the incidence and recoverability of VAT.
"We reject the company's position, set out in its grounds of appeal, that Zed 'was completely unaware of any such fraudulent activity'. We are satisfied that Zed ought to have been aware of such fraudulent activity."
The Zed-UK appeal was dismissed and the personal liability notice was cancelled.
Her Majesty's Revenue and Customs (HMRC) has introduced stringent new regulations that will grant tax authorities unprecedented access to detailed cryptocurrency transaction data from trading platforms, effective from January 2026.
The comprehensive regulations form part of the OECD Cryptoasset Reporting Framework (CARF) and mandate that cryptocurrency platforms share extensive client transaction information with tax authorities to combat tax evasion.
Starting 1 January 2026, UK cryptocurrency holders must provide personal details to crypto service providers or face penalties of up to £300 from HMRC. This regulatory change represents a significant shift in how cryptocurrency transactions are monitored and taxed.
HMRC has already implemented full disclosure requirements on self-assessment forms for the 2024-25 tax year. Taxpayers who own cryptocurrencies such as Bitcoin, Ethereum, or Dogecoin must now include any crypto gains or income in their tax returns through a new dedicated section in the capital gains pages.
Cryptocurrency holders should be aware that capital gains tax (CGT) may be due when selling or exchanging crypto assets if a gain is realised. Additionally, income tax and national insurance could apply to cryptocurrency received from employment, mining, staking, or lending activities.
HMRC stated that the "new rules will help unmask anyone evading tax due on their crypto profits. Those who don't comply risk a £300 fine from HMRC."
Once data is received from service providers, HMRC will be able to identify individuals who have not been correctly paying tax on their cryptocurrency profits.
The Treasury estimates that these measures will raise up to £315 million in unpaid tax by April 2030—an amount equivalent to funding more than 10,000 newly-qualified nurses for a year.
Cryptocurrency values have experienced significant growth since the election of President Donald Trump, who has expressed strong support for the sector, marking a departure from earlier US policy positions.
Bitcoin holders have witnessed substantial value increases over the past year, with prices rising from £38,000 in August 2024 to £86,000 in January 2025, with the latest price standing at £80,000.
Recent figures from the Financial Conduct Authority (FCA) reveal that seven million people—12% of the UK population—own some form of digital currency, representing an increase from 10% in 2023.
Service providers will begin collecting user activity data from January 2026 and will face fines of £300 per user for failure to disclose information or for submitting inaccurate or incomplete reports.
Danielle Ford, partner and head of tax disputes at HaysMac, commented: "HMRC has always maintained a strong interest in cryptoassets, not least because of their opacity for users. Whilst HMRC first published their view of the tax treatment of crypto in December 2018, it has previously not had the information available to police this, however the CARF will be a game-changer in this regard. These new measures will mean that rather than just having details of disposals in limited circumstances, HMRC will have full details of UK users of crypto including all transactions and details of their held assets."
From 1 January, crypto service providers, platforms, and trading exchanges must collect and report to HMRC:
The CARF is being adopted by 52 countries, with the UK among the first to implement these new regulations. The EU, Jersey, Guernsey, Isle of Man, South Africa, and Uganda are set to implement by 2027, while the US, Bahamas, British Virgin Islands, St Vincent, Seychelles, Singapore, Thailand, Turkey, Hong Kong, and UAE are scheduled to begin information exchange by 2028.
Notable absences include Australia, Argentina, El Salvador, India, Panama, and Vietnam, which have been identified by the OECD as crypto hubs but have not yet signed up to CARF.
Jonathan Athow, HMRC's director general for customer strategy, stated: "These new reporting requirements will give us the information to help people get their tax affairs right. I urge all cryptoasset users to check the details you will need to give your provider."
While HMRC offers a cryptoasset disclosure service for voluntary disclosures, tax experts recommend that cryptocurrency investors potentially affected by CARF should seek professional advice before deciding to use the CDS.
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