HMRC failed to prove company directors had deliberately underpaid tax

HMRC challenged the zero rating of mobile telephone supplies made by Aircall International Ltd (AIL) in 2013 on the basis that they were part of a fraudulent supply chain and the company directors should have known this was the case.

AIL treated the phone sales as zero-rated shipments to the EU. The company went into liquidation so HMRC issued personal liability notices (PLNs) to the two directors (the taxpayers) in relation to dishonest behaviour penalties. This power applies when a company goes into liquidation and therefore cannot pay tax and penalties it has incurred. The PLN relates to penalties only.

The taxpayers appealed against the decision on the basis that they did not know there was a fraudulent supply chain and that they had carried out sufficient due diligence checks to ensure there was no fraud taking place. HMRC they claimed had failed...