The case of Axel Kittel

Axel Kittel

Following the decision by the European Court of Justice in the cases of Axel Kittel v Belgian State and Belgian State v Recolta Recycling SPRL (C-439/04 and C-440/04), HMRC are able to deny a business the right to recover input VAT if it can be shown that the taxpayer knew or should have known that its transactions were connected to VAT fraud.

The Kittel decision is being used by HMRC in numerous business sectors including both construction and mini-umbrella company cases where deemed appropriate.

How HMRC applies the Kittel principle

HMRC has been using the Kittel case increasingly in its VAT investigations where they believe that VAT fraud has taken place within the supply chain.

When conducting an investigation, HMRC will scrutinise a business’s transactions, along with other companies that they work with, to identify any connections to fraudulent activity.

A few of the key indicators that may alert HMRC to potential VAT fraud include:

Failure to conduct sufficient due diligence on suppliers and customers
Unusual transaction patterns or pricing
Lack of proper documentation or records

If HMRC determines that there has been VAT fraud in the supply chain they will usually write to all the associated businesses informing them that they should no longer trade with the company that they suspect is fraudulent.

HMRC may conduct checks into associated businesses to determine whether they knew or should have known about the fraudulent nature of its transactions.

If they determine that the business knew or should have known about the fraud, they will seek to deny the business the right to reclaim input VAT on those transactions.

This is usually followed by assessments to collect the previously claimed input VAT.

Additionally, should the company continue to trade, HMRC may impose VAT registration cancellation, which will usually remove its ability to trade altogether.

A point that should not be overlooked is the fact that in Kittel VAT investigations HMRC does not have to prove that the business knew of any VAT fraud instead, it simply has to evidence that the business “should have known” that fraud was taking place.

Whilst the burden of proof, on the balance of probabilities, is on HMRC to evidence that the business knew or should have known there was a VAT fraud taking place, HMRC are often reluctant to share all the information that leads them to this conclusion.

This can lead to a position where HMRC has omitted key information on why they believe a business should have known of a VAT fraud, causing clients to be unable to comprehensively defend their position prior to VAT assessments and penalties being issued.

Whilst we have been able to successfully displace Kittel VAT investigations before they have reached Tribunal, from our experience it is likely that HMRC will try to push for this outcome.

Consequences of a Kittel Notice

Receiving an Axel Kittel Notice can have severe consequences for a business and the people involved.

In addition to being denied the right to reclaim VAT, the business will be required to repay the VAT that it has previously claimed from the trader which HMRC asserts has committed the VAT fraud.

This is usually such a significant sum that it can damage a company’s ability to operate.

In addition, HMRC will usually seek to apply a penalty of up to 100%  for any input VAT claimed from the deemed fraudulent trader. If this is not paid by the company, then they will make an officer of the business attributable for the failing (usually a director or owner) jointly and severally liable for the error. Should the company be unable to repay the penalties, any outstanding amount may be transferred to the director responsible for this on a personal basis by issuing a personal liability notice.

As such it is not the case that the debt would die with the company should liquidation is forced as the individuals involved are likely to face significant personal financial exposure.

Therefore, it is extremely important to ensure that advice is taken at an early stage within the process.

Kittel due diligence and risk assessment

To avoid falling foul of the Kittel principle or being subject to VAT investigations, businesses must conduct thorough due diligence and risk assessments, including maintaining a detailed audit trail of any checks undertaken. This includes verifying the legitimacy of suppliers and customers, maintaining accurate records, and being vigilant for any signs of suspicious activity.

Businesses should also ensure that their internal controls and procedures are robust enough to detect and prevent VAT fraud.

How we can help with Kittel Notices

We can help you gather evidence and present your case that either you did not know, nor that you ‘should have known’ that a party in a supply chain was committing VAT fraud.

We are also specialists with extensive experience of the Tax Tribunals and can also assist you with navigating the complexities of this process if it is required.

Contact

If you need guidance dealing with an Axel Kittel Notice please speak to our VAT experts.

You can get in touch with the Solve VAT experienced team on 0161 883 2120.