The comprehensive guide to the Kittel Principle

The Kittel principle is a powerful legal instrument that HM Revenue & Customs (HMRC) increasingly relies upon to deny VAT input tax claims – even where the taxpayer has not been directly involved in fraud.

In this article, we’ve tried to provide a technical overview of how the Kittel principle is applied, the evidential burden it places on taxpayers, and the red flags you should monitor to protect yourself and your clients from unexpected VAT assessments and penalties.

We have also included information on due diligence and how to appeal a VAT investigation.

If you require help from a tax investigations specialist, please get in touch with our experts.

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Contents:

1. What is the Kittel Principle?
2. How does HMRC use the Kittel Principle?
3. What does “Should have known” mean in practice?
4. What are the consequences of a Kittel Notice?
5. Key risk indicators and red flags for the Kittel Principle
6. Due diligence: Your frontline defence
7. How to challenge a Kittel or VAT assessment

What is the Kittel principle?

The Kittel principle originates from the Court of Justice of the European Union (CJEU) case of Axel Kittel v Belgian State (Joined Cases C-439/04 and C-440/04).

The court held that a taxable person who knew or should have known that they were participating in a transaction connected with VAT fraud can be denied the right to deduct input tax.

This principle has been absorbed into UK law and remains enforceable post-Brexit.

HMRC has incorporated it into its VAT fraud strategy, particularly in missing trader intra-community (MTIC) and carousel fraud investigations.

We have increasingly seen Kittel used in both construction and mini-umbrella companies of late, and it is important to be aware that HMRC does consider this in VAT enquiries.

How HMRC uses the Kittel Principle

HMRC can disallow a VAT reclaim if it believes that:

1. VAT fraud occurred somewhere in the transaction chain
2. The transaction was connected to that fraud
3. The taxpayer knew, or should have known, of the connection

These three tests — fraud, connection and knowledge — form the basis of HMRC’s challenge. It does not need to prove dishonesty, only that a reasonable businessperson should have known of the link to fraud.

In practice, HMRC applies the Kittel principle during VAT investigations to trace fraudulent supply chains. It reviews transactions, contacts associated businesses and may instruct them to cease trading with suspected parties. Where it finds knowledge or negligence, HMRC issues a Kittel Notice, denying input VAT recovery and raising assessments to reclaim previous claims. Continued trading despite warnings can even lead to VAT deregistration.

HMRC also carries out on-site VAT visits to verify invoices, ensure active trading and confirm the legitimacy of repayment claims — particularly for new or high-risk traders. VAT checks are more rigid than direct tax enquiries, focusing on supplier VAT registration and compliance with legislative invoice requirements. For example, handwritten receipts acceptable for direct tax would not meet VAT standards, and margin scheme users must maintain full, compliant records.

Additionally, HMRC now issues ‘nudge letters’ based on third-party data (such as online selling platforms), prompting businesses to correct discrepancies through an error correction notice or in their next return.

Collectively, these measures aim to remove businesses that knowingly or negligently enable VAT fraud and to strengthen overall supply chain compliance.

What does “should have known” mean in practice?

The “should have known” test is an objective standard.

HMRC will argue that a prudent businessperson, armed with appropriate due diligence and commercial awareness, would have recognised the warning signs of a suspect transaction.

The Courts have consistently supported this approach.

In Mobilx Ltd v HMRC [2010] EWCA Civ 517, the Court of Appeal confirmed that knowledge includes both actual knowledge and wilful blindness – that is, deliberately ignoring clear risks.

What are the consequences of a Kittel Notice?

Receiving a Kittel Notice can have severe consequences for a business and the people involved.

In addition to being denied the right to reclaim VAT, the business will be required to repay the VAT that it has previously claimed from the trader which HMRC asserts is committing VAT fraud.

This is usually such a significant sum that it can damage a company’s ability to operate.

In addition, HMRC will usually seek to apply a 30 per cent penalty for any input VAT claimed from the deemed fraudulent trader.

If this is not paid by the company, then they will make an officer of the business attributable for the failing (usually a director or owner) jointly and severally liable for the error.

As an example:

A company has incurred accumulative costs of £6 million over the last five years from a company HMRC asserts has committed VAT fraud.

The contract was agreed by a director of the company and related to the purchase of labour.

If HMRC pursued the matter under the Kittel principle, the company would be required to repay £1 million of input VAT, plus interest and £300,000 of penalties.

Should the company be unable to repay the £300,000 of penalties, any outstanding amount may be transferred to the director responsible for this on a personal basis.

As such it is not the case that the debt would die with the company (if liquidation is forced), as the individuals involved are likely to face significant personal financial exposure.

Therefore, it is extremely important to ensure that advice is taken at an early stage within the process.

Key risk indicators and red flags for the Kittel principle

You must be proactive in identifying transactions that might attract HMRC scrutiny under the Kittel principle.

The following are common risk indicators HMRC associates with high-risk transactions:

• Unusual trading patterns, such as large or rapid transactions with little economic rationale
• Lack of commercial substance, e.g. deals with no real control over goods
• Unverifiable suppliers or recently incorporated companies with no trading history
• Prices too good to be true, often below market rate
• Lack of proper due diligence, such as failing to verify VAT registration, physical premises, or trading history
• Use of offshore bank accounts or complex payment arrangements
• High-risk sectors, such as mobile phones, computer chips, carbon credits, or labour provision in construction

Where any of these red flags arise, you should be highly cautious moving forward and speak to a tax investigations specialist as soon as possible.

Due diligence: Your frontline defence

To prevent or appeal a VAT assessment under the Kittel principle, you must demonstrate thorough and documented due diligence. HMRC’s Notice 726 outlines what is expected, including:

• Verifying suppliers’ VAT numbers via the VIES system
• Checking Companies House records and trading history
• Visiting trading premises where appropriate
• Retaining contracts, purchase orders and delivery documentation
• Documenting checks on payment terms and bank accounts

HMRC will assess your intentions, controls and commercial awareness, so due diligence must be consistent and repeatable, not a one-off task.

You should maintain a clear audit trail, verify the legitimacy of suppliers and customers, keep accurate records, and ensure internal procedures are strong enough to detect and prevent VAT fraud.

How to challenge a Kittel or VAT assessment

If HMRC denies a VAT reclaim or issues a decision under the Kittel principle, you can request an internal review or appeal to the First-tier Tax Tribunal. Appeals cannot be made directly to HMRC, and strict time limits apply, so prompt action is essential.

When appealing a VAT assessment, the disputed tax must normally be paid before the case is heard, although a hardship application may allow the appeal to proceed with no or partial payment.

Under the Kittel principle, the burden of proof lies with the taxpayer, who must show they did not know, and could not reasonably have known, of any link to fraud.

A strong defence would usually include:

• Evidence of robust due diligence
• A clear commercial rationale for the transaction
• Proof of the economic reality of the supply (that goods or services actually changed hands)
• Consistent and traceable invoices, delivery notes and payments

Early engagement with tax dispute specialists is vital. Seeking expert advice as soon as HMRC begins enquiries can often prevent matters from escalating to a formal assessment.

The Kittel Principle: Best practices for accountants

To help your clients avoid Kittel-related VAT disputes, you should:

• Conduct VAT health checks for clients in high-risk industries
• Build due diligence templates and advise on supplier onboarding processes
• Encourage contractual clauses that allow for the suspension of supply pending VAT checks
• Provide written advice when concerns arise – and retain these records
• Work with clients to develop a fraud risk policy for supply chain integrity

The Kittel principle is not going away.

HMRC continues to refine its data analysis capabilities and supply chain tracing.

It is now more important than ever for accountants to act as the first line of defence in preventing clients from getting caught up in supply chain fraud.

If you require help challenging a VAT enquiry, understanding Kittel or dealing with tax investigations, please speak with one of our experts. 

You can get in touch with our friendly and experienced team on: 0203 675 8122 or email jeremy.johnson@intaxltd.com.

inTAX is a specialist tax disputes firm. We deal with disclosures, investigations, and tax enquiries of all descriptions, including COP9, fraud investigations, VAT fraud, tax avoidance, let property disclosures and tribunal appeals. However, we don’t just deal with the serious end of tax investigations; we are also happy to handle smaller enquiries, disputes and problems that can be equally as worrying for our clients.