The Kittel Principle - Sweet Sixteen

• Published date: 20 July 2022
• Subject Matter: Tax, Criminal Law, Sales Taxes: VAT, GST, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Joseph Hage Aaronson
• Author: Joseph Hage Aaronson LLP

The following is an article written by David Bedenham about HMRC's wide-ranging application of the 'Kittel principle'. The current focus appears to very much be on the labour supply industry and the allegation of 'Mini Umbrella Company Fraud' (or 'MUC Fraud'). This article highlights the need for taxpayers to get specialist advice at an early stage when faced with a Kittel decision.

On July 6, 2006, the Court of Justice of the European Union (CJEU) handed down the decision in Axel Kittel v Belgium; Belgium v Recolta Recycling SPRL (Kittel).

Few could have predicted just how extensively HMRC would come to use the Kittel power to deny input VAT to taxpayers operating in a variety of sectors (mobile phones, CPUs, computer software platinum, airtime/VOIP, alcohol and, more recently, labour supply and the payroll sector).

Shortly after the CJEU's decision, I was seconded from Chambers to the fledgling Kittel team at HMRC's Solicitor's Office. There I worked on some of the very first Kittel cases (which at that time largely related to mobile phones, CPUs, and computer software). Once I returned to Chambers, I began to appear regularly for HMRC in Kittel cases. Since 2012, I have acted exclusively for taxpayers in a variety of indirect tax appeals including some of the most significant Kittel cases to date (e.g. the very recent case of PTGI v HMRC [2022] UKFTT 20 (TC) where the appeal against a '19m denial of input tax was allowed in full).

Based on those 16 years of experience of litigating cases involving the Kittel principle (and other associated principles such as those in Mecsek-Gabona, Fini, Ablessio and Facet), I set out below 16 pointers that I hope will be of use to those conducting Kittel appeals. These are not meant to be an exhaustive guide on how to conduct a Kittel case. Rather, they are some of the things that you might want to think about and, where appropriate, take advice on:

1. The decision letter: Ideally, you will have taken specialist advice as to how to best engage with HMRC during the investigation stage (i.e. before the decision letter arrives). Sometimes a stitch in time really can save nine. However, once HMRC has taken the decision to issue a Kittel decision, it is a rare case that they do not then see through to the end.

Once the decision letter arrives, review it carefully. Is it only Kittel that is being relied on? Or have HMRC also relied on other grounds to deny input tax (e.g. Mecsek, Fini or inadequate evidence for zero-rating)? What VAT periods does the denial relate to? Are HMRC out of time?

2. Grounds of Appeal: In some Kittel cases, it may be sufficient to state, in relatively simple terms, that the Appellant disputes the connection with fraud and denies that it knew or should have known of that connection. However, if there are other grounds for challenging the Kittel decision (such as HMRC being out of time or a challenge to whether knowledge of a given individual can be attributed to the Appellant), these should be articulated at this early stage. If they are not, the Appellant runs the risk of being shut out from arguing them (or at the very least of having to...