VAT Fraud - What is the Kittel Principle?

The Kittel Principle derives from the European Court of Justice judgement in the case of Axel Kittel & Recolta Recycling SPRL.

HMRC may deny the taxpayer the right to deduct input VAT :

• where the transaction on which the tax is claimed relates to fraud
• for which the taxpayer knew or should have known of the VAT fraud

However, there is a burden of proof for the HMRC to establish that a tax loss has occurred and that it was the result of the above. Should the HMRC be able to do so, then the directors of the company may be held personally liable for the tax loss assessed and the company may be removed from the VAT register.

The HMRC are not permitted to adopt a generalised and somewhat subjective opinion on a company’s transactions but should be required to look at each transaction. Furthermore, inadequate due diligence procedures of the company should not be the only evidence used to show that the company knew or should have known that they were involved in the fraudulent evasion of VAT.

Common characteristics of VAT fraud:

• the lack of due diligence
• ignoring intelligence uncovered from due diligence
• contrived nature of the trading such as fixed suppliers / profit margins
• inadequate insurance for products being traded
• new companies with a lack of trading history
• unsolicited approaches from unknown entities
• third party or off-shore payment requests

Steps to take to protect your business:

• know exactly who is in your supply chain
• carry out regular extensive due diligence on your supply chain
• document your due diligence
• act on intelligence that has been uncovered from the due diligence
• don’t rely on credit checks as they are no great helper of evidencing VAT fraud
• remain up to date with employment and tax law
• avoid high risk schemes offered by potential fraudster payroll schemes such as ‘co-employment’ or ‘mini-umbrella companies’

If not dealt with as a matter of urgency, a Kittel Notice could cause significant harm to your business and potentially you personally if HMRC issue penalties. Please contact Davidsons Forensic Accountants at info@davidsonsforensic.co.uk should you require any assistance.