Concrete pourer boss faces £160k tax penalty

Concrete pourer boss faces £160k tax penalty
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Peninsula Team, Peninsula Team

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A construction employment agency run by a sole director has lost a case at the First Tier Tribunal after it failed to check whether suppliers were involved in tax fraud.

Southall based Konstruct Recruitment Limited, which went into liquidation in July 2023 nine months after the tribunal hearing, had a sole director Rajanbir Singh, who provided general labour supplies to construction companies and was first registered for VAT in July 2013.

The company and the taxpayer were both found liable for tax penalties for a total of £160,000 as the tribunal was ‘satisfied that Konstruct had knowledge not only of tax fraud in the construction labour supply market but of specific tax losses in its own supply chains’.

In December 2019, HMRC rejected Konstruct’s claim for an input VAT reclaim of £264,124.40 incurred on the purchase of labour supplies from two companies, Combat Construction Limited and Sandhar Consultancy Limited, and also issued a penalty for £79,237.20 under section 69C of the Value Added Tax Act 1994 (VATA). A further three suppliers he dealt with on a regular basis were also flagged for tax fraud over the same two-year period.

As the sole company director responsible for due diligence, Singh was given a personal liability penalty notice of £79,237.20, under s69D, as it was his responsibility to carry out due diligence on suppliers.

The company went into compulsory liquidation in July this year and at the time was six months’ late filing annual accounts for YE March 2022 which were due on 31 March 2023. The tribunal hearing was held last October.

HMRC rejected Konstruct’s credit for input tax incurred on transactions with Combat and Sandhar carried out from December 2017 to June 2019. Both companies were involved in missing trader VAT fraud and on various visits to Konstruct’s offices the director was told ‘that its suppliers were involved in chains connected to a fraudulent tax loss’.

On a site visit in February 2018 HMRC noted that ‘extensive analysis of the workers stated on the timesheets however reveals large discrepancies involving either partial PAYE declarations being made or no records at all found for around 20 workers named on the timesheets’.

HMRC told the tribunal that ‘Konstruct’s transactions took place as part of an orchestrated fraud, this is an important factor in determining whether Konstruct knew or should have known that its transactions were connected with the fraudulent evasion of VAT’.

When HMRC officers visited Konstruct offices in November 2017 they asked for proof of timesheets for the up to 40 to 50 workers being placed in contracts every week, but Singh said that once the invoices were completed the timesheets were discarded and he was unable to locate any current timesheets.

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Singh was also questioned about his due diligence of companies, including CIS verifications and VAT registration notices. He said he checked CIS, but did not know about VRN requirements. However, HMRC had written to him advising him that a number of his clients had been deregistered for VAT.

When identifying fraudulent tax activity, HMRC told the tribunal that Worcester-based Combat, which is now in liquidation, had received net payments of £446,103 but had only declared a total of £128,605 to HMRC. Combat had not submitted a monthly report of PAYE payments, or a report identifying the subcontractors it had paid and detailing payments and deductions under the construction industry scheme (CIS). A net figure of £317,498 was unaccounted for and of this sum £267,655 was one large payment from Konstruct.

The second company was Sandhar, which was first identified by HMRC in 2017 due its labour supply chain links to several businesses, including Combat Construction Ltd. It was trading at a loss and received large payments as a subcontractor but did not appear to have a sufficient workforce to serve that work.

In addition, there were no contracts between Konstruct and any of its suppliers, and on several occasions Singh said he received cold calls from potential suppliers offering services, which he subsequently used. This was particularly risky as he did not know the full names of the people running his suppliers. The tribunal was also given no evidence of any negotiations between the company and its suppliers, even records of phone calls.

The tribunal also questioned the business structure and Singh’s role, stating: ‘His evidence was that that he rarely attended the office and worked on sites as a concrete pourer. It is unclear how he was able to properly run a labour supply company with a turnover of £500,000 to £1 million per quarter, responsible for hundreds of workers a year.’

Singh’s lawyer argued that ‘HMRC has failed to prove that Konstruct knew or should have known that any of its transactions were connected to a fraudulent tax loss’. He also said that if ‘HMRC rely upon RS’s [Singh] role it will have to establish that there is some disconnect between his skills and experience and Konstruct’s business’.

The tribunal said that they ‘found that RS was an unconvincing and unreliable witness’ and were satisfied that that HMRC had established fraudulent tax losses.

HMRC won the case based on the Kittel principle which states that companies should not trade knowingly with a business which is involved in tax evasion. The Kettel decision from 2006 confirmed that taxable persons who ‘knew or should have known’ that the purchases in which input tax was incurred were connected with the fraudulent evasion of VAT will not be entitled to deduct that input tax in certain circumstances.

The appeal was dismissed and the penalties stood.

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