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HMRC internal manual

VAT Fraud

HM Revenue & Customs
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What to consider prior to determining whether to use an intervention: matters to consider when looking at particular types of taxable person or activity: labour providers: application of the Kittel principle to labour providers

Where you have established that your trader did receive the taxable supply against which it has claimed input VAT and the trader does hold a valid tax invoice (or satisfactory alternative evidence), it may also be appropriate to consider whether the Kittel principle applies to their claim for input tax.

This principle, derived from the ECJ’s judgement in the case of Axel Kittel (see VATF50000), requires that input tax entitlement should be denied where a trader knew or should have known that its transaction was connected with fraudulent evasion of VAT.

Following the guidance set by the Court of Appeal in its judgement in Mobilx and Others, this means that HMRC must prove that the trader knew or should have known that the only reasonable explanation for the transaction offered to them was that it was connected with fraudulent evasion of VAT.

Clearly, this requires us to prove that a fraudulent tax loss occurred elsewhere in the chain of supply, in addition to proving that the trader knew or should have known.

A full explanation of the legal background to this test and its application is set out in the VAT Fraud Manual. You must consult this guidance before taking any action to raise a case for denial of input tax based on the Kittel principle. All decisions to deny input tax on this basis are subject to a strict governance process. This entails a detailed submission of the facts of the case, which must then be approved by (a) the SI Technical Team (for all cases initiated by SI officers) and (b) the VAT Fraud Team (see VATF80000).

Help and advice on applying the principle can also be obtained from the SI Technical Team and VAT Fraud Team.