Recent Kittel Victories Against HMRC: Taxpayers Continue to Succeed in Major VAT Fraud Appeals

Recent Tribunal decisions continue to demonstrate that HMRC’s reliance upon the Kittel principle is far from unassailable. Although HMRC has devoted enormous compliance resources to alleged VAT fraud and “means of knowledge” cases over the past decade, several substantial taxpayer victories illustrate the highly fact-sensitive nature of modern Kittel litigation and the importance of detailed evidential analysis.

For businesses facing denied input tax recovery, frozen VAT repayments, or allegations of participation in fraudulent supply chains, these decisions are a reminder that HMRC’s conclusions can be challenged successfully. The ability to secure representation on a conditional fee arrangement has on occasion supported businesses that face a cash-flow crisis because of such refused, or frozen, VAT input tax repayment claims. 

The Kittel principle derives from the decisions of the Court of Justice of the European Union in Kittel and Recolta Recycling SPRL (C-439/04 and C-440/040). Broadly stated, the principle permits HMRC to deny input tax recovery where it establishes that the taxpayer knew, or should have known, that its transactions were connected with fraudulent evasion of VAT. In practice, these disputes frequently involve complex supply chains, extensive disclosure exercises, labour supply or telecoms trading, and detailed forensic analysis of commercial knowledge and due diligence. which permit HMRC to deny input tax recovery where a taxpayer knew, or should have known, that its transactions were connected with VAT fraud. In practice, these disputes frequently involve complex supply chains, extensive disclosure exercises, mobile phone or labour supply trading, and detailed forensic analysis of commercial knowledge and due diligence.

The financial consequences can be severe. HMRC assessments in Kittel cases routinely reach into the millions of pounds and are often accompanied by allegations of deliberate conduct and substantial penalties.

Importantly, however, the legal threshold which HMRC must satisfy in Kittel litigation is a high one. It is not sufficient for HMRC merely to demonstrate that fraud existed somewhere within a supply chain or commercial sector. Rather, HMRC must establish, on the evidence, that the taxpayer knew or should have known that its own transactions were connected with fraudulent evasion of VAT. In practice, this frequently gives rise to detailed disputes concerning commercial knowledge, due diligence, transaction tracing, market behaviour, and the objective credibility of HMRC’s inferences.

Recent taxpayer successes demonstrate the Tribunal’s continuing willingness to scrutinise carefully whether HMRC has genuinely satisfied that high evidential threshold on the facts of the individual case.

One notable example is Redrose Payroll v HMRC [2025] UKFTT 878 (TC) in which the taxpayer successfully appealed against approximately £7 million of denied input VAT together with a Schedule 24 penalty reportedly exceeding £2 million. The case arose in the labour supply context, an area that has attracted sustained HMRC attention in recent years. The decision is a significant example of the Tribunal rejecting HMRC’s attempt to establish the necessary knowledge connection required under the Kittel jurisprudence, and holding that inadequate due diligence – without more – is notsufficient to satisfy the Kittel test. The Tribunal held that: 

“74.         This means that the only factor indicative of knowledge or tending to show that the Appellant ought to have known that the transactions were connected with fraud is the lack of proper due diligence highlighted above. However, as this tribunal held in PTGI International Carrier Service Limited v  HMRC[2022] UKFTT 20 (TC) at [61]:

 "The proper question for us to ask ourselves is not "Did the Appellant carry out proper due diligence?"; but "Did the Appellant have the means at its disposal of knowing that by its purchases it is participating in transactions connected with fraudulent evasion of VAT?" Proper due diligence might be part of the means available to the Appellant. It is not the only means and that is why Moses LJ in Moblix encouraged the courts not to unduly focus on the question of whether the Appellant has acted with due diligence."   

75.         The point about due diligence and the context referred to in Moblix is that "tick box" due diligence is not enough. So, it will not be open to a trader to carry out superficial due diligence and expect that to, necessarily, be sufficient. The corollary of that is that inadequate due diligence, on its own, will not be enough to establish that the trader ought to have known but had, in effect, turned a blind eye to the connection with fraud. It may be a starting point (and often a good one), but it will rarely be all that is required. As that is all HMRC has been able to establish in this case, we have come to the inevitable conclusion that the Respondents have failed to establish the burden upon them to show that the Appellant's transactions with WM were connected with VAT fraud or that the Appellant ought to have known that they were so connected”. 

Another substantial taxpayer success arose in Lynton Exports (Alsager) Ltd v HMRC [2022] UKFTT 224 (TC), where HMRC issued assessments reportedly approaching £10 million, denying both input tax recovery under Kittel principles and zero-rating treatment under the Mecsek-Gabona line of authorities. The taxpayer ultimately succeeded in full. The Tribunal held that (at paragraph 24(3)): “in defending the assessments HMRC must go beyond concerns and suspicions, and must advance probative evidence of the issue in question. It is possible to infer relevant facts from circumstantial evidence, but that circumstantial evidence must exist and be presented in a credible and persuasive form”. 

Cases of this nature illustrate the extent to which Kittel disputes frequently involve not only allegations of fraudulent connection, but also broader disputes concerning the commercial and evidential legitimacy of transactions themselves. Moreover, it remains essential for taxpayers to ensure that scare tactics based upon the inevitable less-than-perfect machinations of business and trading do not prevent them from standing firm against unreasonable or unjustified suspicion from HMRC. 

Similarly significant was PTGI v HMRC‍ ‍[2022] UKFTT 00020 (TC), a telecoms trading case in which HMRC denied approximately £19 million of input tax recovery on Kittel grounds. The appeal succeeded. HMRC’s relied to some extent on a broad-brush submission that the taxpayer had sufficient information to enable it to establish at least the basics of the operation of the fraud and had been on notice that the wholesale airtime sector was particularly affected through its contact with HMRC. The Tribunal accepted that due diligence was “lacking” in certain areas, accepted that the taxpayer should have been on “heightened alert” of the possibility of fraud in the supply chain, the Tribunal reiterated the correct legal test in Kittle cases, which is not reasonable suspicion on part of HMRC, or poor due diligence on part of the taxpayer: “What must be established, on the balance of probabilities, is that the Appellant should have known or should have known that the only reasonable explanation for the circumstances in which the relevant purchases took placewas that they were transactions connected with such fraudulent evasion” (paragraph 57). Cases of this scale thus demonstrate the extraordinary financial stakes often involved in VAT fraud litigation and the continuing willingness of the Tribunal to examine critically HMRC’s factual analysis of alleged fraudulent chains.

Of particular interest in the Northern Ireland context is Ulster Metal Refiners v HMRC [2021] UKFTT 0286 (TC), a case that had a lengthy prior appellate history having reached Court of Appeal of Northern Ireland. As many of us with Northern Irish roots in the business community in Ulster and the Republic will appreciate, the complexities of cross-border trade and business life in general have a certain uniqueness. In Ulster Metal Refiners the Tribunal held that HMRC had failed properly to trace the relevant transaction chains and had therefore failed to establish the necessary connection with fraudulent evasion. While bad faith was not suggested by the Tribunal, it was relevant that: “There are endemic and incurable problems with HMRC's case in relation to the Irwin Deals. That part of HMRC's case is affected by a collection of factors which, taken together, seriously undermine the integrity of the whole case in that regard… Mistakes crept in, and, over the course of time, became embedded in the analysis and increasingly difficult to disentangle. Even after several days of evidence and submissions before us, and despite the assistance of experienced counsel for HMRC, they remain near impossible to disentangle” (para 72). 

The decision is important because it highlights a recurring feature of Kittel litigation: HMRC must establish the evidential chain properly and cannot rely merely upon broad suspicion or generalised allegations of sector-wide fraud.

Another striking example is CD v HMRC [2023] UKFTTwhere HMRC reportedly withdrew Kittel and Fini assessments amounting to approximately £15 million during the hearing itself after the taxpayer opened its case. The Tribunal subsequently ordered HMRC to pay costs. This demonstrates the extent to which careful preparation and forensic challenge can materially alter the course of litigation even after proceedings have commenced.

Collectively, these decisions demonstrate several important themes emerging in modern Kittel litigation.

First, these cases remain intensely fact sensitive. Tribunal outcomes frequently turn upon detailed evidence concerning due diligence, commercial credibility, transaction tracing, market knowledge, and the practical realities of the relevant sector.

Second, while HMRC possesses extensive investigatory powers and sophisticated fraud-analysis capabilities, the burden resting upon HMRC in Kittel litigation remains substantial. The Tribunal continues to require rigorous scrutiny of whether HMRC has genuinely established the taxpayer’s actual or constructive knowledge of fraudulent evasion.

Third, these disputes are often existential commercial cases capable of threatening businesses, directors, trading relationships, and professional reputations.

For that reason, early strategic advice in VAT fraud and denied repayment disputes can be critically important. Decisions taken at the outset of HMRC enquiries — including disclosure strategy, witness evidence, due diligence analysis, and responses to HMRC allegations — may materially affect the eventual trajectory of the litigation.

As HMRC continues to pursue increasingly sophisticated VAT fraud investigations, Kittel litigation is likely to remain one of the most commercially significant areas of modern indirect tax disputes, both in England & Wales and Northern Ireland. Recent taxpayer victories demonstrate that these cases are very much capable of successful challenge where the underlying factual and evidential analysis does not support HMRC’s conclusions.