TC09590 - [2025] UKFTT 00878 (TC)

The relevant legal framework is well established and there is no dispute between the parties in relation to the applicable law.

The legal basis for the right to deduct input tax is set out in Article 17 of the Sixth Council Directive and Articles 167–168 of Directive 2006/112/EC, and is implemented domestically through sections 24-26 of the VATA. These provisions establish that a taxable person is entitled to deduct input tax incurred on goods or services used for the purposes of their taxable business activities. The entitlement arises when the tax becomes chargeable and may be set against output tax due. If the input tax exceeds the output tax, the taxpayer is entitled to a repayment.

However, the European Court of Justice in Axel Kittel v Belgium and Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] STC 1537 (“Kittel”), established that a taxable person who knew or should have known that their purchase was connected with the fraudulent evasion of VAT must be treated as a participant in that fraud and is thereby denied the right to deduct input tax.

The rationale, as articulated at [57]–[58] of Kittel, is that such a person aids the fraud and becomes its accomplice, and that denying the right to deduct serves a preventative function. The ECJ confirmed at [59] and [61] that national courts must refuse the right to deduct where, having regard to objective factors, the taxable person knew or should have known of the connection to fraud.

This principle has been adopted in domestic law by the Court of Appeal in Mobilx Ltd (in liquidation) v HMRC [2010] EWCA Civ 517; [2010] STC 1436 (“Mobilx”).At[52], Moses LJ held that a trader who fails to deploy available means of knowledge does not meet the objective criteria for deduction. At [59], he emphasised that the test includes those who “should have known” from the surrounding circumstances that their transactions were connected with fraud. At [64], he stated that such a trader is to be treated as knowingly involved in the fraud. He further cautioned Tribunals not to focus unduly on whether a trader acted with due diligence [82]. Even if appropriate questions were asked, the trader cannot ignore the broader context if the only reasonable explanation is fraud. At [72] and [83], the Court endorsed a series of indicative questions to assess whether a trader should have known of the fraud.

The parties accept that the burden of proving that the Appellant knew or should have known that it’s transactions were connected with fraud is on Respondents and that the standard of proof is the balance of probabilities.