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October 2023 Tax Investigation Round Up

October's round up of the latest tax investigation news and cases:

  • £160k penalty for construction company boss
  • Failed building firm's £145k tax debt
  • Director of a software business loses £385k tax case

£160k penalty for construction company boss

Konstruct Recruitment Limited, a construction employment agency with a sole director, Rajanbir Singh, lost a case at the First Tier Tribunal for failing to check suppliers involved in tax fraud. The company, which went into liquidation in July 2023, was found liable for tax penalties totaling £160,000. Singh, responsible for due diligence, received a personal liability penalty of £79,237.20.

In December 2019, HMRC rejected Konstruct's claim for an input VAT reclaim of £264,124.40 incurred on labor supplies from two companies, Combat Construction Limited and Sandhar Consultancy Limited, also issuing a penalty of £79,237.20. Three additional suppliers associated with tax fraud were flagged. HMRC noted discrepancies in timesheets and raised concerns about Konstruct's transactions, suggesting an orchestrated fraud.

Singh claimed he checked CIS but was unaware of VRN requirements. HMRC had previously informed him of clients' VAT deregistrations. Combat, now in liquidation, received significant payments but declared far less to HMRC. Sandhar, connected to Combat, operated at a loss and lacked a sufficient workforce for its work volume.

Konstruct had no contracts with its suppliers, often engaging with unknown entities offering services via cold calls. The tribunal questioned Singh's ability to manage a company responsible for hundreds of workers annually while rarely attending the office.

Singh's lawyer argued that HMRC failed to prove Konstruct's knowledge of fraudulent tax losses and the disconnect between Singh's skills and the company's business. However, the tribunal deemed Singh an unreliable witness and ruled in favor of HMRC.

HMRC prevailed based on the Kittel principle, preventing companies from knowingly trading with businesses involved in tax evasion. The appeal was dismissed, and the penalties were upheld.

Failed building firm's £145k tax debt

Walid Wasfi Wasif Musmar, a director of Construkkt Limited, has failed to settle a tax bill of £145,000, leading to the company's liquidation seven years after he received a director disqualification related to unpaid taxes following a HMRC tax investigation.

Construkkt Limited was established in July 2019, three years after Musmar's Insolvency Service director ban had expired. This earlier ban was imposed due to an unpaid tax bill of £500,000.

The annual report of the liquidator, Valentine & Co, filed at Companies House, revealed that Construkkt went into liquidation in June 2022, carrying debts of £556,539. The primary creditor was HMRC, with Musmar owing them £145,103, which included unpaid VAT, PAYE, employee national insurance contributions, student loan payments, and construction industry scheme deductions.

Following a review, HMRC issued a proof of debt notice revising the overdue tax figure to £143,120, but it was unlikely to be paid in full.

An outstanding intercompany loan of £100,000 remained unpaid at the time of the company's collapse. In addition, there were claims from unsecured creditors totaling £244,871, but these had "no prospect" of being paid, as confirmed by Valentine & Co.

Musmar was also a director of Springfield Propvest Limited, which went into liquidation in September 2022. He had been appointed as a director in December 2016.

In 2012, Musmar was banned from acting as a director for four years due to his involvement with Oberon Properties Ltd, a business that developed properties in Camden, north London. Oberon Properties Ltd had failed to pay a tax bill of £500,000 related to the sale of a property for £3,583,302 in May 2007, which was due for payment in August 2008.

Director of a software business loses £385k tax case

The UK's Supreme Court has delivered a verdict in favor of HMRC in a lengthy dispute with Vermilion Holdings (Scotland) Limited, a software company. The case revolved around a tax bill dispute involving PAYE and National Insurance contributions, totaling £385,850, owed by Marcus Noble, a co-founder and director of Vermilion Software, who received a share option following a rescue funding package.

HMRC argued that the share option was an employment-related securities option, subject to income tax. The dispute had already gone through the First Tier Tribunal in 2019, the Upper Tribunal in 2020, and the Court of Session in Scotland. This Supreme Court ruling marked the final chance for Vermilion Holdings to resolve the matter.

The case hinged on the interpretation of section 471 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA), which outlines when an option to acquire securities or shares should be considered "by reason of employment" and, therefore, subject to income tax rather than capital gains tax.

In 2006, Vermilion Holdings Ltd granted an option to Quest Advantage Ltd to acquire shares in Vermilion. Due to Vermilion's underperformance, an amended option was agreed upon as part of a rescue funding package in 2007. In that year, Quest transferred the 2007 option to Noble.

Vermilion and Noble sought HMRC's confirmation that the gain from exercising the 2007 option was liable to capital gains tax. However, HMRC disagreed, maintaining that the option was subject to income tax because it had been granted to Noble due to his directorial role in Quest.

The Supreme Court, in a unanimous decision, ruled in favor of HMRC, stating that section 471(3) of ITEPA creates a clear rule: if an employer or a person connected to the employer provides an employee the right to acquire a securities option, that right is conclusively considered to have been made available because of the employee's role. The Court found that this rule applied in this case, as Vermilion conferred a new option over a different class of shares on Quest, falling within the deeming provision.

The judgment also cited the principle that section 471(3) should not be applied to produce absurd or unjust results unless compelled by clear language, and the Court found that it did not result in such anomalies in this case.

In conclusion, the Supreme Court ruled that, under section 471(3) of ITEPA 2003, Noble was deemed to have acquired the securities option due to his role as a director of Quest, making it subject to income tax. An HMRC spokesperson welcomed the verdict, stating that it protected £385,000 in tax and confirmed their position regarding the nature of the 2007 option.

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