30/04/24

Supply Chain VAT Fraud | The Kittel Principle

Supply Chain VAT Fraud | The Kittel Principle
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HMRC faces the ongoing challenge of tackling ‘Supply Chain VAT Fraud’ and recovering unpaid VAT. VAT fraud is a common occurrence, particularly within sectors like the building industry and in a recent article titled ‘Umbrella Company Fraud,’ we detailed how this type of fraud is operated by the creation of fictitious supply chain companies in the Payroll Management Industry.

Whilst HMRC is required to prove fraudulent conduct, it is assisted by the Kittel Principle which establishes that if a taxable trader, at the point of purchase, either knew, or should have known, that he was taking part in a transaction connected with the fraudulent evasion of VAT, and that taxable trader must be regarded as a participant in that fraud. It is irrelevant whether the taxable trader made a profit on the resale of the goods.

In this situation, the taxable trader is aiding the perpetrators of the VAT fraud, effectively becoming an accomplice. KANGS has defended many clients who, unsuspectingly, became part of trading chains considered fraudulent and received VAT Assessment Notices under the Kittel principle.

Tim Thompson of KANGS considers the requirement of HMRC to prove the trader ‘knew or should have known’ of the fraudulent activity.

VAT Fraud | HMRC Reliance Upon Kittel

When denying tax, HMRC must consider:

  • was there fraudulent evasion of VAT?
  • was the transaction in question ‘connected with’ that fraudulent evasion,
  • did the trader know, or should have known, that the transaction related to the fraudulent evasion of VAT?

It is generally the case that HMRC concludes that the transaction(s) in question can be identified as fraudulent and connected to the tax loss. The trader is entitled to put HMRC to strict proof of the loss.

Knew or Should Have Known

Under Kittel, the European Court of Justice (ECJ) did not define ‘knew or should have known’ but it was confirmed to be an objective test.

HMRC will consider all trading factors considered ‘suspicious or dubious’ leading to the only reasonable explanation for the nature of the transactions that they were connected with fraudulent evasion of VAT.

Factors would include:

  • knowledge of fraud of the taxable person generally at the time,
  • existence of features relating to the transactions which should have led to questioning the presence of fraud,
  • the nature and level of any due diligence conducted,
  • ignoring suspicious indicators arising from due diligence,
  • the obvious contrived nature of the alleged trading,
  • involvement of new companies without any trading history,
  • third party or offshore requests.

Who Can I Contact for Help?

HMRC commits enormous resources in the pursuit of payment of VAT which it considers is being fraudulently evaded. It is constantly alert to any indications that fraud is being conducted such as:

  • Press coverage,
  • Reports in trade magazines emphasising the need to be aware, implying that it is a current problem,
  • Frequency of Warning Notices relating to a trader involved in suspect trading chains,
  • Personnel involved with a company with a history of involvement in suspect chains.

If you involved in, or anticipate, a dispute with HMRC, it is essential you seek expert advice and guidance. KANGS provides a wealth of experience gained from assisting clients involved with tax issues of every nature and will be pleased to hear from you.

Our Team will support you throughout the entirety of any HMRC investigation or proceedings, seeking to achieve the most satisfactory outcome available as quickly and economically as possible.

If we can be of assistance, please do not hesitate to contact our Team using the details below:

Tel:       0333 370 4333

Email: info@kangssolicitors.co.uk

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
Partner

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John Veale

John Veale
Partner

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