Date
03 Oct 2022Category
VAT & Indirect TaxCompany directors who appear to have committed VAT fraud or fail to demonstrate procedures to prevent VAT fraud in the supply chain are susceptible to HMRC’s ongoing campaign shaped by the Kittel Principle.
As a result, company directors need to be aware of the Principle and the possible penalties they could face if the rules are breached.
The Kittel Principle, which was set in UK law in 2017, is being actively implemented by HMRC as the framework against which suspected VAT fraud is assessed.
The Court, and subsequently HMRC, took the view that a taxable person who knew or should have known that, by his purchase, he was taking part in a transaction connected with fraudulent evasion of VAT must, for the purposes of the Sixth Directive, be regarded as a participant in that fraud, irrespective of whether he profited by the resale of the goods. That is because in such a situation the taxable person is considered to aid the perpetrators of the fraud and becomes their accomplice. It is important to note that HMRC are now applying this Principle to the supply of services too.
HMRC’s internal guidance states: “Rarely will direct and explicit evidence be available that the taxable person knew he was involved in a transaction connected with fraudulent evasion of VAT. However, actual knowledge may be inferred from a range of circumstantial evidence about the way in which the transactions have taken place that the taxable person ‘must have known’ that his transactions were connected with fraudulent evasion of VAT”.
For corporate entities, the responsibility is on the directors to ensure their business and its employees are carrying out sufficient checks on suppliers to identify any fraud risk. Businesses must also demonstrate that clear policies are in place, are fully documented and being actively implemented. That knowledge of actual or suspected fraud extends to employees and suppliers, but the potential penalties rest with the company. In some circumstances, however, a penalty charged on a company may be attributed to the responsible company officers, who become jointly liable, with the company to pay it.
The maximum rate of penalty under the VAT Act is 30% of the VAT at stake. The penalty needs to be assessed by HMRC, and it is appealable by the trader. However, if HMRC choose to prosecute under the Criminal Finances Act then the penalty is unlimited.
The burden of proof and proactivity is now squarely on directors; it is not incumbent on HMRC to give specific guidance and they have, in our experience, so far declined to do so. Case law has demonstrated that the Courts expect to see evidence of proactive checks and a degree of healthy scrutiny of the information received from suppliers.
The Kittel principle can be broken down into three ‘limbs’, as follows:
Company directors do not need to have been the fraudulent person to elicit an investigation from HMRC; they may be part of a supply chain where a fraud has been identified further down that chain, but are still potentially liable to penalties or loss of input tax under bullet 3.
Ensure you have implemented policies such as:
It may also be advisable that you seek advice from your legal advisors to discuss the possible inclusion of provisions within your contracts with your suppliers, which would allow you to break the contracts with them if you are notified by HMRC that they have been the source of the tax loss and involved in fraudulent activity.
We would encourage directors concerned about their procedures for checking their supply chain to seek advice as soon as possible. The risk to your business or organisation is not just financial; it is also reputational.
If you have any questions in relation to the Kittel Principle and protecting your business, please get in touch with your usual Azets advisor or a member of our specialist VAT team.
