VAT Assessments

We are experienced in conducting cases where HMRC has issued a VAT Notice of Assessment to an individual or company under the Kittel Principle.

If you have received a VAT Notice of Assessment, HMRC will usually confirm in correspondence to you if the decision has been based on the Kittel Principle.

The Kittel Principle derives from a European Court of Justice (‘ECJ’) judgement in the case of Axel Kittel & Recolta Recycling SPRL in 2006.

The case sets out the Kittel Principle that a taxpayer who claims input tax on transactions which:

• he knew or
• should have known,
• were connected with fraudulent evasion of VAT,
• is to be denied his entitlement to the right to claim that input tax.

In general terms in order for the Kittel Principle to apply, three things need to exist:

1. Was there fraudulent evasion of VAT?
2. Was the transaction ‘connected with’ that fraudulent evasion of VAT?
3. Did the taxable person, when he entered into the transaction, know or should have known that it was ‘connected with fraudulent evasion of VAT’?

HMRC are usually capable of demonstrating points 1 & 2 above by producing evidence of the tax loss caused by another trader in the trading chain and producing evidence of the trading chain which demonstrates that the taxpayer was ‘connected with’ that trading chain.

In most cases the contentious issue is point 3 above as the issue of whether a taxable person ‘knew’ or ‘ought to have known’ is often based on HMRC inviting certain inferences to be drawn from the existence of certain facts and/or documents.

We are familiar with the ‘hallmarks’ of fraud that HMRC will usually claim are present in such transactions and have substantial experience successfully presenting the counter-argument to such assertions.

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The reasoning behind this is explained by the ECJ as follows:

‘…a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must….be regarded as a participant in that fraud, irrespective of whether he profited by the resale of the goods.

That is because in such a situation the taxable person aids the perpetrators of the fraud and becomes their accomplice.’

We have represented many clients who have been ‘caught up’ in such a scenario and accused of being participants in the fraud when in fact they have had an unblemished record of trading up to that point.

MTIC and Missing Trader fraud come in many guises and can involve complex trading chains and contra-trading chains which are often designed to avoid scrutiny by HMRC.

A simple form of the fraud is for a taxable trader to ‘go missing’ after having collected VAT on its sales and fails to account for that VAT to HMRC.

MTIC fraud involves taxable traders exploiting the laws relating to cross border transactions within the EU due to zero rated supplies on export and the ability to seek VAT repayment claims from HMRC.

Carousel frauds involve the same product or commodity being passed around a number of traders with the goods (at least in part) often returning to the original taxable supplier. Evidence of such transactions is often adduced by HMRC to demonstrate the alleged ‘artificiality’ of the trading.

Usually, the ‘missing’ or ‘defaulting’ trader in the trading chain has disappeared by the time the MTIC/carousel fraud is uncovered by HMRC and the VAT loss has been both identified and quantified.

As the defaulting trader can longer be traced by HMRC, its attention turns to other taxable traders in the trading chain. These are usually the ‘innocent’ traders who have not been directly responsible for the VAT loss in the trading chain.

Such companies are targeted by HMRC under the Kittel Principle on the basis that the taxable trader, when he entered into the transaction, knew or ought to have known that it was connected to fraudulent evasion of VAT.

The innocent companies caught up in such trading chains are often served with a Notice of VAT Assessment & Penalty Notice by HMRC.

We can assist companies challenge the VAT Assessment & Penalty Notice by way of pursuing the Review procedure available via HMRC (Informal Review and Formal Internal Review) as well as by way of an Appeal to the First-tier Tax Tribunal.

HMRC target the remaining companies in the trading chain on the basis that the trader knew or ought to have known the transaction was connected to fraud and therefore the trader was not entitled to the right to deduct its input tax.

The effect is to encourage legitimate traders to conduct appropriate due diligence checks before entering into a trading arrangement with another company. The trader is encouraged to check both the legitimacy of its new trading partner and the legitimacy of the transaction being proposed.

We can assist corporate and individual clients prepare a defence to such VAT allegations by HMRC.

What is usually required is evidence that the trader has taken all precautions reasonably required of the trader to ensure that the transaction is not connected with fraud.

However, the courts have ruled that even where a trader has taken all reasonable precautions to guard against the transaction being connected to fraud, the trader could still be liable on the basis that the circumstances of the transaction should have alerted the trader to the fact that it could be fraudulent.

Many VAT Penalties apply to late filings, a failure to do something which have been done (such as registering for VAT) or meeting a deadline.

The penalty points system allows HMRC to apply penalty points when a VAT return is filed late. You collect points based on the method and lateness of filing and, when you reach five points, you receive a £200 fine.

Aside from penalty points, HMRC can also issue penalties for late payments. Penalties are calculated as an amount the VAT due, had it been paid on time:

• Where 15 days have passed, the penalty is calculated as 2% on the VAT you owe at day 15
• Where 31 days have passed, the penalty is calculated as 2% of what was outstanding at day 15, plus 2% of what is still outstanding at day 30, plus a daily rate of 4% per year on the money owed until it is repaid.

HMRC can also issue more serious penalties where it finds there has been fraudulent evasion of VAT. These are also referred to as section 69C penalties. These types of penalties often accompany a VAT Assessment and officers of the company can be made personally liable to pay them if the company does not.

The amount of the section 69C penalty is calculated at 30% of the potential lost VAT. However, HMRC will still attempt to recover the full amount of that VAT debt through it VAT Assessment procedure. HMRC will seek recovery of the full penalty in addition to the Assessment.

VAT disputes arise from disagreements between a taxpayer and HMRC regarding VAT liabilities or their interpretations of the VAT rules. VAT Assessments often form part of VAT disputes because they are HMRC’s way of requesting the unpaid money from the taxpayer.

Disputes can also arise from decisions by HMRC to deregister a company from VAT (Ablessio cases) or deny its input tax (Kittel cases). These can have a big impact on businesses and require immediate communication with HMRC to allow both parties to understand each other’s views on the matters.

Where communication has not led to a change in either parties’ positions, the taxpayer can seek independent reviews of HMRC’s decision or appeal the case to the tax tribunals. Professional legal advice is almost always required, due to the nature of the points which must be raised with HMRC, the evidence which must be collected and the detail of the representations which must be put forward.

The KANGS Tax Team is able to advise on a wide range of VAT disputes. If you disagree with an HMRC decision or Assessment, there are strict time limits to respond so do not delay getting in touch with us. We will be happy to give you advice, seek an Independent Review of the decision and, if you require, assist you with appealing your case to the First-tier Tribunal.