How the Kittel principle affects VAT recovery: A guide for accountants

The Kittel principle is a powerful legal doctrine 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.

For accountants advising clients in sectors vulnerable to supply chain fraud (such as electronics, construction, or wholesale trade), understanding the Kittel principle is essential.

In this article, I’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 accountants should monitor to protect clients from unexpected VAT assessments and penalties.

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.

How HMRC applies the Kittel principle

Under the Kittel principle, HMRC has the power to disallow a VAT reclaim where they believe:

1. There was a VAT fraud somewhere in the transaction chain;
2. The transaction in question was connected to that fraud; and
3. The taxpayer knew or should have known of the connection.

These three conditions – fraud, connection, and knowledge – form the basis of HMRC’s challenge.

Importantly, HMRC does not need to prove the taxpayer was dishonest.

It is enough that a reasonable person in the taxpayer’s position should have known the transaction was linked to fraudulent activity.

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.

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.

Key risk indicators and red flags for the Kittel principle

Accountants advising clients 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, accountants should document the advice they give and ensure clients take appropriate action.

Due diligence: Your frontline defence

To prevent or appeal against a VAT assessment based on the Kittel principle, taxpayers must demonstrate adequate due diligence.

HMRC’s Notice 726 sets out their expectations, which include:

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

HMRC will scrutinise the taxpayer’s intention, controls, and commercial awareness.

Accountants should therefore advise clients to treat due diligence as a documented, repeatable process – not a one-off exercise.

Challenging a Kittel assessment

If HMRC issues a decision to deny VAT input tax based on the Kittel principle, the taxpayer has the right to request a review or appeal to the First-tier Tax Tribunal.

The burden of proof in such cases is effectively reversed – the taxpayer must prove they did not know and could not reasonably have known of any connection to fraud.

In practice, this requires:

• Providing evidence of robust due diligence
• Explaining the commercial rationale for the transaction
• Demonstrating the economic reality of the supply (i.e. goods actually changed hands)
• Showing that invoices, delivery notes, and payments all align

Early engagement with tax dispute specialists is crucial. Accountants should not wait until an assessment is issued – intervention during HMRC enquiries can often prevent escalation.

Protecting your clients from Kittel: Best practices for accountants

To help clients avoid Kittel-related VAT disputes, accountants 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.

Our final thoughts

The Kittel principle has reshaped how VAT fraud is tackled in the UK.

While it was developed to combat deliberate fraud, it has significant implications for innocent traders who fail to exercise adequate caution.

As an accountant, your role in ensuring your clients have robust due diligence processes cannot be overstated.

Failure to advise appropriately could leave your clients out of pocket – and you potentially facing questions over professional negligence.

If HMRC alleges transactions are ‘connected with fraudulent evasion of VAT’ or if your client has received a VAT assessment – speak to our VAT specialists today for expert support.

You can get in touch with our friendly and experienced team on: 0203 675 8122 or email joe.mcdermott@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