TC09659 - [2025] UKFTT 01211 (TC)

Kittel was considered by the Court of Appeal in Mobilx Limited (in Liquidation) v HMRC [2010] EWCA Civ 517 (“Mobilx”).The court in Mobilx held as follows:

At [43]:

“A person who has no intention of undertaking an economic activity but pretends to do so in order to make off with the tax [they have] received on making a supply, either by disappearing or hijacking a taxable person's VAT identity, does not meet the objective criteria which form the basis of those concepts which limit the scope of VAT and the right to deduct (see Halifax para 59 and Kittel para 53). A taxable person who knows or should have known that the transaction which [they are] undertaking is connected with fraudulent evasion of VAT is to be regarded as a participant and, equally, fails to meet the objective criteria which determine the scope of the right to deduct.”

At [52], expanding on the “should have known” part of the Kittel test:

“If a taxpayer has the means at [their] disposal of knowing that by [their] purchase [they are] participating in a transaction connected with fraudulent evasion of VAT [they] lose [their] right to deduct, not as a penalty for negligence, but because the objective criteria for the scope of that right are not met…. A trader who fails to deploy means of knowledge available to [them] does not satisfy the objective criteria which must be met before [their] right to deduct arises.”

At [55-56], when considering whether the right to deduct may be denied if the trader merely knew or should have known that it was more likely than not that by a purchase the trader was participating in transaction connected with fraud, the court stated:

“… A trader who knows or could have known no more than that there was a risk of fraud will find it difficult to gauge the extent of the risk; nor will [they] be able to foresee whether the circumstances are such that it will be asserted against [them] that the risk of fraud was so great that [they] should not have entered into the transaction. In short, [they] will not be in a position to know before [they] enter into the transaction that, if [they] do so, [they] will not be entitled to deduct input VAT. The principle of legal certainty will be infringed.

It must be remembered that the approach of the court in Kittel was to enlarge the category of participants. A trader who should have known that [they were] running the risk that by [their] purchase [they] might be taking part in a transaction connected with fraudulent evasion of VAT, cannot be regarded as a participant in that fraud. The highest it could be put is that [they were] running the risk that [they] might be a participant. That is not the approach of the court in Kittel, nor is it the language it used. In those circumstances, I am of the view that it must be established that the trader knew or should have known that by [their] purchase [they were] taking part in such a transaction …”

At [59-60] the court stated that:

“The test in Kittel is simple and should not be over-refined, it embraces not only those who know of the connection but those who “should have known”. Thus it includes those who should have known from the circumstances which surround their transactions that they were connected to fraudulent evasion. If a trader should have known that the only reasonable explanation for the transaction in which [they were] involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT, then [they] should have known of that fact. [They] may properly be regarded as a participant for the reasons explained in Kittel.

The true principle to be derived from Kittel does not extend to circumstances in which a taxable person should have known that by [their] purchase it was more likely than not that [their] transaction was connected with fraudulent evasion. But a trader may be regarded as a participant where [they] should have known that the only reasonable explanation for the circumstances in which [their] purchase took place was that it was a transaction connected with such fraudulent evasion.”

At [61] Moses LJ added the following about legal certainty:

“A trader who decides to participate in a transaction connected to fraudulent evasion, despite knowledge of that connection, is making an informed choice; [they] know where [they] stand and know before [they] enter into the transaction that if found out, [they] will not be entitled to deduct input tax. The extension of that principle to a taxable person who has the means of knowledge but chooses not to deploy it, similarly, does not infringe that principle. If [they have] the means of knowledge available and choose not to deploy it, [they] know that, if found out, [they] will not be entitled to deduct. If [they] choose to ignore obvious inferences from the facts and circumstances in which [they have] been trading, [they] will not be entitled to deduct.”

At [64];

“If it is established that a trader should have known that by [their] purchase there was no reasonable explanation for the circumstances in which the transaction was undertaken other than that it was connected with fraud then such a trader was directly and knowingly involved in fraudulent evasion of VAT. The principle in Kittel, properly understood, is, as one would expect, compliant with the rights of traders to freedom from interference with their property enshrined in art I of the First Protocol of the European Convention of Human Rights. The principle in Kittel does no more than to remove from the scope of the right to deduct, a person who, by reason of [their] degree of knowledge, is properly regarded as one who has aided fraudulent evasion of VAT.”

At [74-75], the court considered the question of due diligence and whether the lower court had focused on the correct question or had had an undue focus on whether a company director had “exercised due diligence or done enough to protect [themselves]”. The court stated:

“That is not the only question. The ultimate question is not whether the trader exercised due diligence but rather whether [they] should have known that the only reasonable explanation for the circumstances in which [their] transaction took place was that it was connected to fraudulent evasion of VAT.”

At [81] and [82] in relation to the burden of proof, the court noted that the burden in such cases is on HMRC but went on:

“But that is far from saying that the surrounding circumstances cannot establish sufficient knowledge to treat the trader as a participant. As I indicated in relation to the BSG appeal, tribunals should not unduly focus on the question whether a trader has acted with due diligence. Even if a trader has asked appropriate questions, [they are] not entitled to ignore the circumstances in which [their] transactions take place if the only reasonable explanation for them is that [their] transactions have been or will be connected to fraud. The danger in focussing on the question of due diligence is that it may deflect a tribunal from asking the essential question posed in Kittel, namely, whether the trader should have known that by [their] purchase [they were] taking part in a transaction connected with fraudulent evasion of VAT. The circumstances may well establish that [they were].” (emphasis added).

At [83] the Court stated in relation to circumstantial evidence:

“I can do no better than repeat the words of Christopher Clarke J in Red12 v HMRC [2009] EWHC 2563 (Ch), [2010] STC 589,

‘109. Examining individual transactions on their merits does not, however, require them to be regarded in isolation without regard to their attendant circumstances and context. Nor does it require the tribunal to ignore compelling similarities between one transaction and another or preclude the drawing of inferences, where appropriate, from a pattern of transactions of which the individual transaction in question forms part, as to its true nature e.g. that it is part of a fraudulent scheme. The character of an individual transaction may be discerned from material other than the bare facts of the transaction itself, including circumstantial and 'similar fact' evidence. That is not to alter its character by reference to earlier or later transactions but to discern it.

At [84 and 85]:

“Such circumstantial evidence, of a type which compels me to reach a more definite conclusion than that which was reached by the tribunal in Mobilx, will often indicate that a trader has chosen to ignore the obvious explanation as to why [they were] was presented with the opportunity to reap a large and predictable reward over a short space of time. In Mobilx, Floyd J concluded that it was not open to the tribunal to rely upon such large rewards because the issue had not been properly put to the witnesses. It is to be hoped that no such failure on the part of HMRC will occur in the future.

In so saying, I am doing no more than echoing the warning given in HMRC's Public Notice 726 in relation to the introduction of joint and several liability. In that Notice traders were warned that the imposition of joint and several liability was aimed at businesses who "know who is carrying out the frauds, or choose to turn a blind eye" (3.3). They were warned to take heed of any indications that VAT may go unpaid (4.9). A trader who chooses to ignore circumstances which can only reasonably be explained by virtue of the connection between [their] transactions and fraudulent evasion of VAT, participates in that fraud and, by [their] own choice, deprives [themselves] of the right to deduct input tax.”

In relation to the “should have known test”, the Court of Appeal (Arden LJ) in Davis & Dann Ltd & Anor v HMRC [2016] EWCA Civ 142 (“Davis & Dann”) found that the FTT must guard against over compartmentalisation of the factors, rather than the consideration of the totality of the evidence and, at [65]

“In my judgment … in assessing whether the respondents’ knowledge met the no other reasonable explanation standard, the FTT still had to go on to consider all the circumstances. The question is whether or not a reasonable person mindful of those circumstances ought to have concluded that the Transactions were connected with fraud. What matters is the perspective of the person alleged to have such knowledge.(emphasis added)”

In Promeridian Services v HMRC [2025] UKFTT 296 (“Promeradian”) at [24] and [25]:

“In considering circumstantial evidence, the Tribunal should take care not to restrict itself to considering each piece of evidence alone and in isolation from the others. This is because circumstantial evidence is not a chain, where a break in one link breaks the chain, but is a cord: one strand of the cord might be insufficient to sustain the weight, but three strands together might be sufficient: see R v Exall (1866) 4 F&F 922, per Pollock CB, cited with approval by the Upper Tribunal CCA Distribution at [91]. Accordingly, the whole can end up stronger than the individual parts: see the decision of Judge Christopher McNall in Wholesale Distribution Ltd v HMRC [2024] UKFTT 00514 (TC) at [49].

Further, it is necessary to consider individual transactions in their context, including drawing inferences from a pattern of transactions, and to look at the totality of the deals effected by the taxpayer (and their characteristics), and at what the taxpayer did or omitted to do, and what it could have done, together with the surrounding circumstances in respect of all of them: see Red 12 at [109] to [111]. In effect, as a facet of the guidance given in Red 12, it is necessary to guard against over-compartmentalisation of relevant factors, and to stand back and consider the totality of the evidence: Davis & Dann and CCA Distribution.”