The Kittel Principle - Sweet Sixteen

24 June 2022
Author: JHA
David Bedenham

The following is an article written by David Bedenham about HMRC’s wide-ranging application of the ‘Kittel principle’. The current focus appears to very much be on the labour supply industry and the allegation of ‘Mini Umbrella Company Fraud’ (or ‘MUC Fraud’).  This article highlights the need for taxpayers to get specialist advice at an early stage when faced with a Kittel decision. If you have any queries about Kittel-related issues or similar denials of input VAT or assessments to VAT, please contact Iain MacWhannell (

On July 6, 2006, the Court of Justice of the European Union (CJEU) handed down the decision in Axel Kittel v Belgium; Belgium v Recolta Recycling SPRL (Kittel).

Few could have predicted just how extensively HMRC would come to use the Kittel power to deny input VAT to taxpayers operating in a variety of sectors (mobile phones, CPUs, computer software platinum, airtime/VOIP, alcohol and, more recently, labour supply and the payroll sector).

Shortly after the CJEU’s decision, I was seconded from Chambers to the fledgling Kittel team at HMRC’s Solicitor’s Office. There I worked on some of the very first Kittel cases (which at that time largely related to mobile phones, CPUs, and computer software). Once I returned to Chambers, I began to appear regularly for HMRC in Kittel cases. Since 2012, I have acted exclusively for taxpayers in a variety of indirect tax appeals including some of the most significant Kittel cases to date (e.g. the very recent case of PTGI v HMRC [2022] UKFTT 20 (TC) where the appeal against a £19m denial of input tax was allowed in full).

Based on those 16 years of experience of litigating cases involving the Kittel principle (and other associated principles such as those in Mecsek-Gabona, Fini, Ablessio and Facet), I set out below 16 pointers that I hope will be of use to those conducting Kittel appeals. These are not meant to be an exhaustive guide on how to conduct a Kittel case. Rather, they are some of the things that you might want to think about and, where appropriate, take advice on:

  1. The decision letter: Ideally, you will have taken specialist advice as to how to best engage with HMRC during the investigation stage (i.e. before the decision letter arrives). Sometimes a stitch in time really can save nine. However, once HMRC has taken the decision to issue a Kittel decision, it is a rare case that they do not then see through to the end.

Once the decision letter arrives, review it carefully. Is it only Kittel that is being relied on? Or have HMRC also relied on other grounds to deny input tax (e.g. Mecsek, Fini or inadequate evidence for zero-rating)? What VAT periods does the denial relate to? Are HMRC out of time?

  1. Grounds of Appeal: In some Kittel cases, it may be sufficient to state, in relatively simple terms, that the Appellant disputes the connection with fraud and denies that it knew or should have known of that connection. However, if there are other grounds for challenging the Kittel decision (such as HMRC being out of time or a challenge to whether knowledge of a given individual can be attributed to the Appellant), these should be articulated at this early stage. If they are not, the Appellant runs the risk of being shut out from arguing them (or at the very least of having to apply to amend with all of the costs and delay that goes with that). Also, if there are other bases for the decision (Mecsek, Fini etc), it is important that the Appellant sets out its grounds for challenging those as well.
  1. HMRC’s Statement of Case – is dishonesty alleged against the Appellant?: The Court of Appeal in HMRC v Citibank; HMRC v E Buyer UK Ltd [2017] EWCA 1416 (Civ) held that an allegation that an appellant knew or should have known of a connection with a third party’s fraud does not require HMRC to allege fraud or dishonesty against the appellant. However, where HMRC do choose to make an allegation of dishonesty or fraud against an appellant, it must be “pleaded, particularised and proved in the same way as it would have to be in civil proceedings in the High Court”.
  1. HMRC’s Statement of Case – is there an allegation of an “overall scheme to defraud”? – HMRC often allege that the transactions on which input tax have been denied were part of a wider “scheme to defraud” and that the existence of such an overall scheme is relevant to the Appellant’s state of knowledge. If such an allegation is made it will be important to not only assess whether there is evidence of the existence of such a “scheme” but also whether the scheme as alleged is actually capable of being probative of the Appellant’s knowledge (i.e. HMRC sometimes assert that the presence of such a scheme means that the Appellant “must have been told who to buy from and who to sell to” – but is there any evidence of that?).
  1. HMRC’s Statement of Case – are there any other bases for the decision? – Even if Kittel was the only basis given in the decision letter, HMRC sometimes include alternative bases (such as Fini or inadequate evidence of zero-rating) in the Statement of Case. If HMRC do adopt this approach, the Appellant may need to seek to make a corresponding amendment to the grounds of appeal.  If HMRC raised alternative bases in the decision letter but have not addressed these in the Statement of Case, it may be advisable to flush this issue out in correspondence so that the Appellant knows what case it is facing.
  1. HMRC’s evidence: This should be carefully reviewed as soon as possible after receipt. Leaving detailed review until shortly before the hearing is a recipe for disaster. Does the evidence support the allegations made in the Statement of Case? By way of example, where HMRC have alleged that someone further up the chain has fraudulently defaulted, does the evidence show that (1) there has been a default; (2) that default is in relation to the Appellant’s supply chain; and (3) the default was the result of fraud (rather than, for example, ordinary business failure).

Also check whether the evidence raises any new issues that have not been set out in the Statement of Case. It may be that HMRC will need to seek to amend their Statement of Case to raise these new issues (and the Appellant will need to consider whether it will object to that amendment)

  1. Requesting Further and Better Particulars of HMRC’s case: sometimes the Statement of Case (even when read with HMRC’s evidence) leaves the Appellant in the position of not knowing what exactly HMRC’s case is. On some occasions, the Appellant might be best advised to simply let HMRC proceed with the vague allegation and raise the argument in due course that HMRC ought to be held to their pleaded case. On other occasions, the Appellant would be best advised to ask HMRC to provide details (“Further and Better Particulars”) of exactly what HMRC are alleging. This will be a very important and fact-sensitive decision so it is sensible for advice to be obtained before making such a request.
  1. Disclosure: Under the Tribunal rules, HMRC (and the Appellant) need only disclose the documents upon which they intend to rely. However, where there is reason to believe that HMRC hold other documentation that may assist the Appellant’s case or undermine HMRC’s case, an application for specific disclosure can be made to the Tribunal. Before applying to the Tribunal, the Appellant should ask HMRC to voluntarily provide the additional material and explain why it is relevant (e.g. there may be reports of visits to the alleged defaulters that may be relevant to the issue of whether they were behaving fraudulently or not). Again, whether to seek specific disclosure is an important and fact-sensitive decision so it is sensible for advice to be obtained before requesting disclosure.
  1. The Appellant’s evidence – witness statements: witness statements should not include legal submissions (which is often forgotten by both sides), and should focus on the facts (albeit the legal position obviously demarcates what facts are relevant). As well as setting out the Appellant’s positive case, the Appellant’s evidence should also respond fully to the factual aspects of HMRC’s case (to the extent that what is said by HMRC is within that witness’s knowledge). By way of example, if HMRC allege in the Statement of Case or in evidence that there was “no price negotiation”, this (assuming it is incorrect) needs to be specifically addressed and evidenced (by a witness statement making clear that there was price negotiation and explaining how that negotiation was conducted, and exhibiting any documents in support).
  1. The Appellant’s evidence – industry knowledge: HMRC (and the Tribunal) may have limited experience of your industry. Explain it. Explain the opportunities and why they exist. Explain the market and the different sorts of market participants (and where the Appellant fits in). In short, explain how it all works. Circumstances that might look suspicious or questionable can take on a different slant when the industry and its norms are properly understood.
  1. The Appellant’s evidence – the Appellant’s documents: If an Appellant wants to rely on a document, it needs to be exhibited to a witness statement (and/or, depending on the directions made in the appeal, included on a List of Documents). It is no good for an Appellant’s witness, when cross-examined on the absence of documentation, to reply “I’ve got that at the office/on my computer”.
  1. The Appellant’s evidence – HMRC’s documents: If HMRC have exhibited documents such as letters or visit reports that set out a certain version of events (e.g. at a meeting the Appellant’s director said “x”) and the Appellant disagrees with that version of events, this disagreement should be specifically set out in the Appellant’s witness evidence. Similarly, if HMRC exhibits documents addressed to the Appellant and the Appellant disputes having received them, this dispute should be specifically set out in the Appellant’s witness evidence.
  1. The Appellant’s evidence – the circumstances of the transactions: In Mobilx, the Court of Appeal made clear that it is not enough for HMRC to prove simply that someone in the position of the Appellant should have known that it might be taking part in a transaction connected with fraudulent evasion of VAT. Rather, the “should have known” limb will only be satisfied if the Appellant should have concluded that “the only reasonable explanation for the transaction…was that it was connected with fraud.” In AC (Wholesale) Ltd v HMRC [2017] UKUT 191 (TCC), the Upper Tribunal stated that HMRC are not required to rule out every possible explanation (even where not raised by the Appellant) but also said:

“Of course, we accept (as, we understand, does HMRC) that where the appellant asserts that there is an explanation (or several explanations) for the circumstances of a transaction other than a connection with fraud then it may be necessary for HMRC to show that the only reasonable explanation was fraud…”

Accordingly, if the circumstances relied on by HMRC to demonstrate that the Appellant (knew or) should have known of the connection with fraud can be explained, that explanation should be raised in the Appellant’s witness statement (and supported by documentation where possible). By way of example, in a recent case in which I acted for the Appellant, HMRC referred to the fact that the Appellant’s sales and purchases were “back-to-back” (that is, the same volume of goods were bought and sold such as to mean that there was never a need to “hold” stock). However, the Appellant was able to adduce evidence that in its industry back-to-back trading is part of normal, legitimate trading such that it could not be said that fraud was the “only reasonable explanation”.

  1. Notices of Issues (Fairford direction): Even though the burden of proof in a Kittel case is on HMRC, the Appellant can be required by the Tribunal to set out what is in issue in the appeal (often referred to as the Tribunal giving a Fairford direction). Where such a direction is given, it is important that it is properly complied with. An Appellant is ill advised to simply say “everything is in issue” as a Tribunal may well hold that such an approach is a breach of the direction.
  2. Penalties and personal liability: HMRC have various powers to not only issue penalties to the Appellant but also to seek to make those involved in the management of the company personally liable for those penalties. Depending on the dates of the transactions, HMRC may, for example, use the power under Schedule 24 of the Finance Act 2007 or the powers under s69C and s69D of the Value Added Tax Act 1994. It is important to identify the power used (and to ascertain whether HMRC are permitted to use that power on the given facts), not least because different time limits apply depending on the power used. Penalties can sometimes be issued years after the initial Kittel decision – so it is not safe to assume that because no penalty has been issued at the same time as the Kittel decision, one will not follow at a future date. This makes it very important to think carefully (and take appropriate advice) before taking any steps to, for example, put a company that has received a Kittel decision into liquidation rather than appealing that decision. In certain circumstances, a failure to appeal a Kittel decision (or a penalty decision) on behalf of a company can restrict the arguments that can be raised on a later appeal against a personal penalty (although the Court of Appeal has recently confirmed that whether there can restraints imposed on the arguments that can be raised is fact sensitive – HMRC v Kishore [2022] EWCA Civ 1565).
  3. Misfeasance and breach of directors’ duties: Even if HMRC do not pursue personal liability directly, a liquidator of a company that is indebted to HMRC can look to bring claims against individuals in the civil courts to recover amounts equivalent to the sums owed by the company to HMRC. That is what happened in one of my early cases (Abbey Forwarding (in Liquidation) v Hone and Others [2010] EWHC 2029 (Ch) albeit in that case the High Court judge found that HMRC had not established fraud less still any breach of duty leading to personal liability. Accordingly, before making any decision not to pursue an appeal against a Kittel decision, or to put the taxpayer company into liquidation, thought should be given to the potential ramifications.

Kindly reprinted with the permission of David Bedenham.

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