TC09659 - [2025] UKFTT 01211 (TC)

The right to credit for input VAT may be restricted is made in accordance with the decision of the European Court of Justice (the “CJEU”) in Kittel v Belgium and Belgium v Recolta Recycling (joined Cases C-439/04 and C-440/04 ) (“Kittel”). The CJEU set out the principles applicable to recovery of input tax in cases of fraud.

At [51] the court stated:

“Traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input VAT”.

But the court then went on to hold that where a tax authority finds that the right to deduct input tax has been exercised fraudulently, they are permitted to deny a claim for repayment of the deducted sums. This was expressed (at [56]) as follows:

“a taxable person who knew or should have known that, by their purchase, they were 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 or not they profited by the resale of the goods”.

The rationale was put as follows:

“That is because in such a situation, the taxable person aids the perpetrators of the fraud and becomes their accomplice [at 57] … In addition, such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them” [at 58].

The court went on at [59-61]

“Therefore, it is for the referring court to refuse entitlement to the right to deduct where it is ascertained, having regard to objective factors, that the taxable person knew or should have known that, by [their] (Footnote: ²) purchase, [they were] participating in a transaction connected with fraudulent evasion of VAT, and to do so even where the transaction in question meets the objective criteria which form the basis of the concepts of 'supply of goods effected by a taxable person acting as such' and 'economic activity'. It follows from the foregoing that the answer to the questions must be that where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the seller, Article 17 of the Sixth Directive must be interpreted as meaning that it precludes a rule of national law [which] …. causes that taxable person to lose the right to deduct the VAT [they have] paid…. By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by [their] purchase, [they were] participating in a transaction connected with fraudulent evasion of VAT, it is for the national court to refuse that taxable person entitlement to the right to deduct.”