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HMRC internal manual

VAT Fraud

The Kittel principle intervention: Kittel in more detail: What is meant by ‘connected with’: How transactions are ‘connected with’ fraudulent evasion of VAT

The second limb (VATF52300) of the Kittel principle (VATF52200) is the need to show that the transaction is in a direct or linked supply chain in which there are one or more incidences of fraudulent evasion of VAT (which may include fraudulent input tax claims), irrespective of the position of that transaction within the supply chain (it includes contra trading (VATF23550)). This is established through the supply chain (extended) verification exercise (VATF33500 and MTOG3900 of the Missing Trader Intra-Community Fraud Specialist Investigations Operational Guidance).

With regard to contra trading, the High Court in the case of Mobilx Ltd (in administration) and others (paragraph 44 of the Judgement ([2010] EWCA Civ 517), quoted below) confirmed that a transaction can be connected with fraudulent evasion even where the tax loss arises in a different chain.

The process of off-setting inputs against outputs in a particular period and accounting for the difference to the relevant revenue authority can connect two or more transactions or chains of transactions in which there is one common party whether or not the commodity sold is the same. If there is a connection in that sense it matters not which transaction or chain came first.

It is essential, therefore, that the transaction chains are fully traced and any and all defaulters identified. If it is not possible to fully trace the transaction chains but you have suspicion of fraud you should see VATF53200 and MTOG5000 of the Missing Trader Intra-Community Fraud Specialist Investigations Operational Guidance or contact the VAT Fraud Team.