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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’: Reliance of a taxable person on a 'third party'

The attribution of the knowledge of a third party (e.g. an employee or an agent) to a taxable person (e.g. a limited company) for the purpose of applying the Kittel principle was discussed in the decision of the Upper Tier Tribunal (UTT) in the case of Greener Solutions Ltd (([2012] UKUT 18 (TCC)).


Greener Solutions Ltd (GSL) entered into an informal arrangement with Mr Ollie Murray (the sole director of a company called MBG Associates Ltd), whereby Mr Murray would undertake a ‘trial transaction’, receiving between 25% or 30% of the profits. If the transaction was successful it was expected that GSL would enter into a permanent arrangement with Mr Murray.

According to GSL Mr Murray was neither an employee nor an agent but a ‘deal consultant’, whose purpose was to ‘introduce a legitimate new mobile telephone transaction to GSL’. There was no contract of employment and GSL had no employer control or sanction over Mr Murray. GSL, so it stated, kept overall control of the trial transaction.

The trial transaction proceeded with Mr Murray doing all the detailed work and keeping GSL informed of progress.

Following an extended verification the trial transaction was found to be connected with fraudulent evasion of VAT and HMRC concluded that GSL either knew or should have known of that fact. The related input tax was therefore denied. GSL appealed, stating that it neither knew nor should have known as the transaction was conducted by Mr Murray and not by GSL, GSL being kept in the dark about any connection with fraud.

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The Upper Tier Tribunal decision

Although HMRC lost the appeal in the First Tier Tribunal on the attribution of knowledge point (i.e. the FTT found that Mr Murray’s knowledge should not be attributed to the company), this was overturned on appeal to the UTT. In his detailed decision Mr Justice Warren found that Mr Murray’s knowledge was to be attributed to GSL. Thus, whatever Mr Murray knew or should have known, GSL knew or should have known also. The Court’s reasoning was essentially that the purpose of the Kittel principle is to combat fraud, and that this would be undermined if a company could escape liability in these circumstances ‘notwithstanding that it was able to profit considerably from the transactions concluded on its behalf’ (para 47 of the UTT judgement).

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Application of the GSL decision

As stated in VATF53410 when determining who ‘knew or should have known’ you should take into consideration the knowledge of the officials of the taxable person (director(s), partners, company secretary etc) as well as employees (in any capacity) and third parties (agents, advisors, consultants etc) who conducted or assisted in the transaction(s). Under the rule of attribution established by the GSL decision, this knowledge can then be attributed to the taxable person (i.e. in most cases a limited company).