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HMRC internal manual

VAT Fraud

The Kittel principle intervention: Kittel in more detail: What is meant by ‘knew or should have known’: The only reasonable explanation

The Court of Appeal in the joined cases of Mobilx Ltd (in administration) and others ([2010] EWCA Civ 517) stated:

  1. If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact.

The only reasonable explanation does not mean that there is no other explanation, but that it is the only reasonable one. If the taxable person suggests other explanations you need to consider whether they are reasonable and credible in light of all the particular circumstances and evidence.


Indictors that would have suggested to the taxable person that the only reasonable explanation was that the transaction was connected with fraudulent evasion of VAT include:

  • unsolicited approaches from or to organisations with little or no history in the market offering a guaranteed profit on high-value deals;
  • repeat deals at the same or a lower price and consistent profit;
  • unsecured loans with unrealistic rates of interest;
  • instructions to make payments to third parties or off-shore, normally for less than the full price (and often less than the VAT invoiced).

The above list is not exhaustive.

A combination of the above, as well as other features (VATF60000), could lead to a conclusion that the transaction was ‘too good to be true’.