Suspected fraud does not reverse burden of proof in VAT best judgement

In Awards Drinks Limited (in liquidation) v HMRC [2021] EWCA Civ 1235, an appeal against a VAT best judgement failed due to a lack of credible evidence from the company and its director. Although HMRC suspected that the company was involved in tax fraud and money laundering, this did not displace the fact that the burden of proof lay on the company to explain its income.

• The Company, ‘Awards’, was a wholesaler of beers, wines and spirits, most of its business was carried on through bonded warehouses in France.
• It went into Members’ voluntary liquidation in 2013.
• During VAT enquiries, HMRC found 1,311 separate deposits of cash totalling £32,650,305.89 into UK bank accounts, most being paid into three branches in East London.
• HMRC suspected that there was ‘inward diversion’ fraud, to avoid duty, however, its enquiries also extended to anti-money laundering.
• Enquiries by HMRC and the French tax authorities revealed that both bodies had difficulty in tracking down many of Awards’ customers in France. Bookkeeping was unreliable, entries showed that some customer bank deposits were by different customers than shown in the records.
• HMRC issued Best judgement assessments for VAT due in the 11 quarterly periods from December 2010 to June 2013 for £6,573,391.

On Appeal to the First Tier Tribunal, the burden of proof lay on Awards to provide a credible alternative explanation for the very substantial cash payments into its bank account in the UK.

• Its director, Mr Judd, changed his evidence during cross-examination:
  • He initially said that customers were cash and carry retailers who accepted cash in sterling from their 'booze cruise' customers and describing how he had seen couriers collecting cash which was then taken back to the UK to avoid French bank charges.
  • He subsequently said that they were wholesalers supplying the cash and carry outlets but being unable to name the managers or operators of these businesses or the cash and carry operators they supplied.
• The FTT found that Mr Judd was not a credible witness.

Awards appealed to the Upper Tribunal on procedural points. Essentially that if there was a fraud allegation this shifted the burden of proof to HMRC. This failed to advance its case.

It appealed to the Court of Appeal, claiming that there was a misunderstanding by the Upper Tribunal of HMRC's pleaded case which resulted in procedural unfairness and it appointed a new legal team.

All Awards arguments were rejected by the Court of Appeal who found that although fraud may have been alleged there was no reversal of the burden of proof. As the company had failed to show the source of the cash deposits the assessments were valid.

Useful guides on this topic

Assessments: Best judgement
What is a 'best judgement' assessment for VAT? When can HMRC raise one? What are your rights of appeal? How do you displace a best judgement assessment?

How to appeal an HMRC decision
Disagree with a HMRC decision? How to appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Ceasing trading: What are your options?
What are your options if you are going to cease trading? What processes must be followed if you want to close down a company? What are the tax, company and insolvency law requirements?

Exit strategies: What are your options?
What are the available exit routes for a company owner who wishes to sell up and move on?

External links

Awards Drinks Limited (in liquidation) v HMRC [2021] EWCA Civ 1235