VAT & Fraud Knowledge

The First-tier Tribunal's decision in Transwaste Recycling and Aggregates Ltd illustrates both the scope and the limits of HMRC's ability to deny input tax recovery under the Kittel principle. The outcome was split - most of the disputed transactions were decided in the taxpayer's favour, but two sets of dealings resulted in denial of input VAT, upheld penalties for deliberate inaccuracy, and a personal liability assessment against a named director.

HMRC's case rested on the contention that Transwaste knew, or should have known, that its transactions were connected to VAT fraud in the supply chain. The tribunal considered each set of transactions on its own evidence. For the majority, it found that whilst the company's due diligence procedures were imperfect, procedural shortcomings alone were insufficient to establish constructive knowledge. Imperfect due diligence does not, of itself, satisfy the Kittel threshold - HMRC must still demonstrate that the taxpayer knew or should have known of the fraud connection, and that burden remained with HMRC throughout.

The position was different for transactions with two specific suppliers - Tees Valley and Hydro GRP - after certain dates. For those dealings, the tribunal was satisfied that the evidence supported a finding of actual or constructive knowledge. Input VAT recovery was denied, and the associated penalties for deliberate inaccuracy were upheld. The tribunal declined to reduce those penalties, noting an absence of good faith and a failure to cooperate during the investigation.

The director liability aspect of the decision warrants particular attention. Mr Hornshaw was held personally liable by way of an officer liability penalty in respect of the transactions where the appeal failed. Personal liability in VAT fraud-connected cases is not a theoretical risk - this decision is a further example of tribunals being willing to attach it where the evidence supports doing so.

For businesses operating in supply chains where fraud risk exists, the case reinforces several established principles. Kittel is not a strict liability test - procedural imperfection does not automatically result in denial - but the line between imperfect due diligence and constructive knowledge can be fact-specific and difficult to predict in advance. Robust, contemporaneous records of supplier checks remain the most effective protection. Where penalties are in issue, cooperation with HMRC is not optional if mitigation is to have any prospect of success.

If you have concerns about input tax recovery, supply chain due diligence, or officer liability exposure, contact VITA.

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