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Fairford Directions | An Overview of the Kittel Principle

Fairford Directions | An Overview of the Kittel Principle

We conduct many VAT Appeal cases on behalf of Taxpayers in the First-tier Tax Tribunal (FTT) arising from the fact that HMRC has denied a trader the right to deduct input tax claimed on some of its supplier invoices. The usual basis for this as far as HMRC is concerned is that the trader either knew, or had the means to know, that such transactions were associated with fraud. This is known as the Kittel Principle.

In the FTT, the Fairford Directions are significant in relation to cases involving allegations of Missing Trader, Defaulting Trader and MTIC. They are case management directions deriving their name from the Upper Tax Tribunal case of The Commissioners for HM Revenue and Customs v Fairford Group plc (in liquidation) and Fairford Partnership in liquidation) [2014] UKUT 0329 (TCC) (‘the Fairford case’).

A prime objective of the Fairford Directions is to exercise strict case management to ensure, amongst other things, that each case is restricted to the relevant issues. The final Hearing is listed for a duration sufficient to accommodate the number of necessary witnesses required to attend and give evidence, while avoiding excessive expenditure of Taxpayers’ money.

As part of this objective, the Fairford Directions require the Taxpayer to inform HMRC ahead of the final Hearing whether the alleged VAT loss is disputed or not.

Hamraj Kang, Senior Partner of KANGS outlines the nature of the Fairford Directions.

The Fairford Case

The Fairford case, which, on Appeal, came before the Upper Tax Tribunal, involved a number of highly technical issues relating to matters within the case being:

  • the VAT appeal: where the Taxpayers were disputing HMRC’s decision to deny input tax deduction on the basis that they knew, or should have known, that their transactions were connected with the fraudulent evasion of VAT in accordance with the Kittel Principle,
  • application to strike out part of the Appellants’ case,
  • evidential issues: Appellant Taxpayers requiring HMRC to prove its case but advancing no positive case themselves.

One issue was whether the Tax Tribunal had the power to strike out such part of each Taxpayer’s contentions which dealt with:

  • whether there was a VAT loss; and
  • if so, whether the loss resulted from a fraudulent evasion.

HMRC’s argument was that, in the light of the evidence with which they had been served, there was no real issue on either of these points in relation to any of the sixteen traders.

Pertinent procedural events included:

  • HMRC served witness statements and exhibits upon numerous traders alleged to be either fraudulent, defaulting traders or traders whose VAT registration numbers had been hi-jacked by fraudsters to occasion fraudulent VAT defaults.
  • All HMRC’s witnesses were requested to attend the Hearing for cross examination, which had been fixed for early 2015 with an estimated Hearing of five weeks.
  • HMRC requested details of which tax losses were not accepted and questioned why a quarter of a day would be required to examine each witness. HMRC provided a summary of the tax losses and requested details of those which were not accepted.
  • HMRC pointed out that, several years earlier, detailed questions had been asked seeking relevant information but they remained unanswered and yet fourteen of its employees had been called to prove matters in respect of which there was no identified issue.
  • HMRC put the Taxpayers on notice that ‘if you do not respond constructively and substantively to this invitation and in the fullness of time it transpires that [you] do agree the tax loss/connection evidence, then [we] will seek indemnity costs for the time we and counsel are forced to spend preparing these issues for trial.’

Case Management Powers of First-tier Tribunal

The overriding objective and parties’ obligation is to co-operate with the Tribunal and enable it to deal with cases fairly and justly.

This includes:

  • dealing with the case in ways proportionate to the importance and complexity of the issues of the case, the anticipated costs and resources of the parties whilst,
  • avoiding unnecessary formality and seeking flexibility in the proceedings.

The Fairford Directions

The detailed Judgment of the court addressing all issues, included guidance which has become known as the Fairford Directions.

The Court highlighted that HMRC had, in writing, requested:

  • details of the issues considered to be in dispute
  • details of the required witnesses
  • time estimate, for the Hearing.

The Court noted that the response was to the effect that all issues were disputed, all witnesses were required and that the time estimate was twenty -five days and commented:

“…we do not consider such an approach to hearings in the FTT to be consonant with the parties’ obligations…” to assist the court in pursuit of the overriding objective referred to above.

The Court stated that a typical example of the form of directions used by the FTT in this type of case is as follows:

The Appellant shall notify the Respondent and the Tribunal of the issues in dispute and, in particular, shall confirm whether:

  • the Appellant accepts the transaction chains as set out in the deal sheets produced by HMRC in relation to the Appellant’s purchases on which HMRC have denied input tax recovery accurately reflect the trading history of the goods bought and sold by the Appellant. If the Appellant does not accept the accuracy of the deal sheets, the Appellant should specify which chains it considers incorrect and why;
  • the Appellant accepts (without making any admission of knowledge or means of knowledge) that the Appellant’s transactions were part of an orchestrated fraud;
  • in respect of chains alleged to be directly connected with a defaulter, the Appellant accepts that there has been a fraudulent VAT default at the start of the chain;
  • in respect of chains, where the alleged connection to an alleged default is via an alleged contra-trader, the Appellant accepts its transactions were connected to fraudulent tax loss.

The Court also stated:

  • ‘In our view the appellant should additionally be required to provide reasons if the answer to any of the second, third and fourth of those questions is no.
  • If there is a real challenge to HMRC’s evidence it should be identified; if there is not, the evidence should be accepted.
  • We see no reason why an Appellant who does not present a positive case should be entitled to require HMRC to present witnesses for cross-examination when their evidence is not seriously disputed.
  • Such a course is wasteful not only of HMRC’s resources but also resources of the FTT, since it increases the length of hearings and adds to the delays experienced by other tribunal users.’

How Can We Assist?

In explaining the nature of the Fairford Directions, we have only partially touched upon the extent of the complex issues which came before the Tax Tribunal for its consideration.

Evidential matters which attach to the operation of the Kittel Principle invariably involve thousands of pages of evidence served by HMRC in the FTT. Such evidence requires detailed, patient and expert examination on behalf of the Taxpayer. Our team is very experienced in such matters before the Tax Tribunal.

It frequently happens that an ‘innocent trader’ becomes drawn into a VAT fraud and establishing such innocence in a criminal court is by no means an easy matter. KANGS has defended clients involved in a considerable number of high -profile prosecutions involving VAT and MTIC fraud, including those where the Prosecution case has been dismissed for failure to properly comply with the disclosure of documents process.

Our Team offers great experience in VAT litigation gained from defending clients facing criminal allegations of VAT fraud and from representing clients challenging VAT Assessments in the Tax Tribunal.

We are here to assist and provide advice and guidance to all Taxpayers who find themselves in dispute with HMRC. We appreciate that the procedure in VAT dispute matters is often complex and protracted. We can assist and our Team welcomes you getting in touch on the contact details provided below.

Tel:       0333 370 4333


We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through live conferencing or telephone.

Hamraj Kang

Hamraj Kang
Senior Partner

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Tim Thompson

Tim Thompson

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John Veale

John Veale

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