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HMRC internal manual

VAT Fraud

Basic interventions: matters to consider when determining whether to use a civil intervention: assessments and penalties: raising penalties in particular circumstances: application of penalties when using the Kittel principle


When you decide to deny entitlement to the right to deduct input tax using the Kittel principle (VATF50000) you should consider applying a penalty at the same time. You should always attach or embed a copy of the Penalties Decision and Actions Check List (PDAC) to your submission. If you are not considering raising a penalty at this time you should provide an explanation of this with your submission.

If the PDAC is not attached or embedded then the submission will be returned.

What type of penalty should be raised?

When determining what type of penalty is to be raised each case must be looked at individually and judged on its own merits.

For the purposes of denying input tax under the Kittel principle, it is not essential, at least at the decision-making stage, to distinguish between whether the taxable person ‘knew’ of the connection with fraud or whether they merely ‘should have known’. This reflects the way in which the European Court of Justice articulated the test, as the Court did not suggest there was a need for any such distinction to be made.

However, the level of penalty for VAT return inaccuracies is dependent on whether the taxable person’s conduct was ‘deliberate’ or ‘careless’, so a distinction has to be made for penalty purposes. The Decision Making Officer should consider all of the evidence objectively and decide whether it indicates that the taxable person ‘knew’ of the connection with fraud, in which case a ‘deliberate’ penalty will be appropriate, or whether the evidence indicates that they merely ‘should have known’, which will equate to ‘carelessness’ for penalty purposes. If you have difficulty in making a decision on this, you should contact the VAT Fraud team to discuss the case.

Making this distinction for penalty purposes will not normally affect the basis on which the Kittel principle is applied to deny input tax, i.e. the underlying decision will still be on the grounds that the taxable person ‘knew or should have known’ that its transactions were connected with fraudulent evasion of VAT. If the input tax denial decision (or related assessment decision) is appealed it may ultimately be necessary to distinguish between ‘knew’ and ‘should have known’ in our pleadings before the tribunal, but this will need to be considered in light of advice from our lawyers, counsel and the VAT Fraud team.