The Kittel Principle
In an article previously posted to this website entitled ‘Kittel Principle in HMRC Cases’ we explained in detail the following:
- ‘The Three Limbs of the Kittel Principle’ and
- The objective test when deciding whether or not the ‘taxable person knew about fraud in general at the time the transactions in general took place’.
The European Court of Justice Cases, of Axel Kittel v Belgian State and Belgian State v Recolta Recycling SPRL (C-439/04 and C440/04) (Kittel Case) stated that where a taxpayer knew or should have known that they were participating in a transaction connected with the fraudulent evasion of VAT, that taxpayer’s right to deduct input tax should be refused.
HMRC regularly implements the Kittel Principle when seeking to recover unpaid VAT from those suspected of participating in VAT fraud, particularly, at the present time, supply chain VAT fraud committed by subcontractors involved in the building industry.
Although the reverse charge was introduced in the building industry on 1 March 2021, HMRC will still in certain circumstances use the Kittel Principle to make Assessments on historical VAT returns where there has been fraudulent evasion of VAT within the trading chain.
John Veale comments on how the current level of HMRC activity places company directors under ever increasing pressure to ensure that companies for which they are responsible can evidence appropriate levels of due diligence.
Circumstances Which May Alert HMRC
Activity which may lead to an extended verification by HMRC when considering a Repayment VAT Return includes:
- employment of a previously used but now VAT de-registered subcontractor, one which is not registered for VAT or one which is using another company’s VAT registration number,
- the engagement of subcontractors over a period of time with a record of VAT Return defaults,
- requests for the payment of invoices to one or more third parties,
- concerns as to the standard of due diligence being conducted, such as failure to conduct VAT validity checks.
Consequences for Breach
In the event of default HMRC may:
- issue VAT Assessments for the amounts of VAT required to be paid,
- issue Penalty Notices in support of such VAT Assessments,
- serve the company officers with a Personal Liability Notice,
- deregister the company for VAT,
- remove Gross Payment Status,
- order removal from the CIS system.
Directors Duties
Exercising the Kittel Principle, HMRC seeks to establish whether or not a director has been fraudulent, knew about perpetration of a fraud or should have been aware.
HMRC states: ‘…actual knowledge [of fraud] may be inferred from a range of circumstantial evidence about the way in which the transactions have taken place that the taxable person ‘’must have known’’ that his transactions were connected with fraudulent evasion of VAT’.
As shown above, the consequences for breach are severe and in order to protect both themselves and their companies, directors should be fully aware of their obligations under the Kittel Principle and are well advised to, inter alia ensure that they can demonstrate:
- their VAT Returns are accurate and honest,
- all of those within a particular supply chain, in which they participate, deal similarly and provide appropriate and accurate VAT details with regard to all charges etc.,
- clear policies are in place to identify potential avenues of fraud,
- such fraud prevention policies are actively exercised.
Who Can I Contact for Advice & Help?
If you, your business, or both, are, or become, subject to any form of investigation by HMRC, including one involving the exercise of the Kittel Principle, it is essential that you seek immediate expert advice as strict time limits may govern your time for submitting a detailed response.
Our experienced Team will be pleased to assist and provide detailed guidance regarding all aspects of HMRC investigations from the outset to Tax Tribunal or potential criminal proceedings.
Please do not hesitate to contact the Team at KANGS using the contact details below and they will be pleased to speak to you:
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 video conferencing or telephone.
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