Cheema Construction Services Limited v HMRC

Judgement was issued on 28th January 2025 in the case of Cheema Construction Services Ltd (“Cheema”) and Kulminder Cheema v HMRC. See the full case here. 

The case concerns a VAT assessment, and penalty assessments against both the company (“Cheema”) and its director, Mr Kulminder Cheema, which were raised on the Kittel principle that there was fraud in the company’s supply chain and it either knew or should have known about the fraud.  

Whilst the Appellants did not dispute that a VAT loss had occurred nor that it was attributable to fraud, they did not agree that their own transactions were connected that fraud. 

 There were five fraudulent defaulters in the supply chain but they were at a tier below Cheema’s own supplier and so, had no direct contractual arrangement with Cheema.  The supplies made by Woodside were proved, by comparison between its CIS and VAT records, not to be sourced solely from the five fraudulent defaulters.  It was concluded that Woodside also made supply of labour sourced from self employed individuals or supplies outside of CIS (which excluded the five fraudulent defaulters’ supplies).

HMRC denied the input tax claims of Woodside in relation to its transactions with the defaulters and so, Woodside was a defaulter too, but HMRC did not plead that the fraud was perpetuated by Woodside, instead presenting the case that the fraudulent entities in the supply chain were the five suppliers to Woodside.  

That being the case, HMRC needed to prove unequivocally that the supply from those defaulters passed via their client (Woodside) on to Cheema to meet its burden of proof.  Because the supplies could potentially have been from other sources the First Tier Tax Tribunal (“FTT”) found that HMRC had failed to prove that the transactions between Cheema and Woodside were connected to the fraud.   

For completeness the FTT went on to consider the knowledge principle as to whether Cheema knew or should have known about the fraud.  The Tribunal considered the information provided to Cheema by HMRC (both written and at meetings) and the information that it obtained via its own due diligence process.  Notably, although HMRC had previously issued VAT deregistration notifications regarding supplier companies to Cheema on 12 occasions, only one of the letters referenced fraud.  The letters had been issued sporadically over the previous 10-year period.  The Respondents alleged that the due diligence conducted was inadequate, but the FTT held that there is no legal requirement to conduct due diligence and no requirement to conduct each and every check detailed in HMRC’s due diligence guidance.  HMRC made no representation that the checks detailed in its guidance are commonly undertaken by legitimate labour supply entities.  The Appellant considered that he carried out reasonable due diligence and HMRC failed to demonstrate that, had he undertaken additional measures, the only reasonable explanation for Woodside’s supplies would have been a connection to fraud.  

Aspire Comment
Proving a case under the Kittel principle is a detailed process and, on this occasion, despite a hearing over 4 days, HMRC failed to meet the burden of proof in demonstrating the provenance of the supply of labour and the knowledge of the Appellant in regard to the transactions.