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HMRC internal manual

VAT Fraud

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HM Revenue & Customs
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The Kittel principle intervention: Overview: The right to deduct and when that right can be denied

The entitlement to the right to deduct input tax, and hence the entitlement to the right to repayment where input tax exceeds output tax, is fundamental to the operation of the VAT system, and is set out in Articles 167 and 168 of Council Directive 2006/112/EC of 28 November 2006 on the common system of VAT. These articles have been enacted into UK law through the VAT Act 1994, sections 24, 25 and 26 and Regulation 29 of The VAT Regulations (SI 1995/2518).

If a taxable person has incurred input tax that is properly allowable, he is entitled (subject to certain rules) to set it against his output tax liability and, if the input tax credit due to him exceeds the output tax liability, claim a repayment. However, 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 Community law entitlement to the right to claim that input tax. This principle is set out in the European Court of Justice (ECJ) judgment in the case of Axel Kittel & Recolta Recycling SPRL (Kittel) (VATF52200).

VIT30000 of the Input Tax guidance manual will assist in explaining when a trader can correctly reclaim input tax.