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HMRC internal manual

VAT Fraud

HM Revenue & Customs
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The Kittel principle intervention: Kittel in more detail: What is meant by 'fraudulent evasion of VAT': Demonstrating fraudulent evasion of VAT

The first limb (VATF52300) of the Kittel principle (VATF52200) means that if, having traced the taxable person’s transactions back to their fullest extent (VATF33500), you have found a tax loss you must determine whether that tax loss is fraudulent or not. The tax loss must be shown to have been due to fraudulent reasons and not a result of a reasonable business failure.

Demonstrating fraudulent evasion of VAT is dealt with in MTOG5000 of the Missing Trader Intra-Community Fraud Specialist Investigations Operational Guidance.

If there is no evidence of fraudulent evasion of VAT in the supply chain (up or down) in the UK or overseas (VATF53115) then the Kittel principle cannot be applied. This does not mean that other interventions cannot be applied instead (VATF40000).

The question of with whom the default lies is looked at in VATF53110.

Demonstrating fraudulent evasion for a contra trader

There should be no difference in the way you demonstrate a fraudulent tax loss for a contra trader (VATF23550) to that used for other taxable persons.

Defaulting contra traders

It is not usual for the contra trader to default on its tax liabilities, but some do. In such cases the contra trader is not treated as the ‘defaulter’ but is still treated as a ‘contra’, albeit one that has failed to render a VAT return and/or pay its tax liabilities and part of the fraudulent tax loss within the overall scheme.

All of the defaulting contra trader’s transaction chains should continue to be traced to their fullest extent (VATF33500). Where this is not possible you should read VATF53200.