HMRC Denial of Recovery of VAT Input Tax and the Personal Liability of Company Officers & Directors

8th February 2021
Glen Henry headshot

Glen Henry

Solicitor Advocate

In Brief

Denial of recovery of VAT input tax

Companies carrying out lawful business often find themselves the subject of intense HMRC monitoring, resulting in a HMRC notification to refuse to deduct input tax. This decision is often financially disastrous for a company. In arriving at their decision, HMRC will rely on principles set out in the case of Kittel v Belgium, in that they are satisfied that you knew or should have known that your transactions related to the fraudulent evasion of VAT. This is very often alleged without any criminal investigation and based on HMRC’s opinion that the transactions can be “traced back to fraudulent tax losses” in your transaction chain. 

Writing tax forms

Your options

If you do not agree with HMRC’s decision, then you can challenge it by requesting an independent review which should be done within 30 days of the HMRC notification. There is also a right of appeal. 

The principle in Kittel must be correctly applied by HMRC (rather than just asserted). HMRC must prove the following: 

  • a tax loss
  • that the tax loss is as a result of fraudulent evasion of VAT
  • a connection between the fraudulent evasion of VAT and the transactions on which input tax is denied

HMRC must be required to produce evidence for each of these three steps. Even if there has been a tax loss, that loss may be due to commercial reasons or a by reason of a failing company in the transaction chain, rather than a fraudulent evasion of VAT. 

Once a fraudulent evasion has been shown, HMRC must then prove a connection with you and that fraud as a participant. The Court of Appeal in the case has stated that “a trader may be regarded as a participant where he should have known that the only reasonable explanation for the circumstances in which his purchase took place was that it was a transaction connected with such fraudulent evasion“. 

In our experience HMRC prefer to adopt a generalized and somewhat subjective opinion on a company’s transactions, of which there may be hundreds, and they should be challenged to apply the principles as laid out by the Court of Appeal to look at each transaction. 

HMRC will often refer to a company’s due diligence procedures to say that poor due diligence is evidence that the company knew, or should have known, that they were involved in the fraudulent evasion of VAT. This approach, however, is contrary to HMRC’s own guidance, as set out in their interval manuals, which states that inadequate due diligence should not be used as evidence, and it is also contrary to the Court of Appeal judgements. 

There are other factors to take into account, however; the above commentary provides a starting point for company directors in how to challenge HMRC. This is also important since a company director may be personally liable for tax loss assessed in this way. 

Personal liability of company directors 

Following a decision to refuse to deduct input tax by HMRC, Section 69C VAT Act 1994 provides that a person is liable to a penalty where he has entered into a transaction involving the making of a supply and that the transaction “was connected with the fraudulent evasion of VAT”.

HMRC can carry out a section 69C VAT Act 1994 penalty notice assessment which can result in a Section 69D Vat Act 1994 company officer liability decision notice. The liability is usually 30% of the total amount subject to the denial notice. 

Section 69D provides that if the actions of the company which gave rise to that liability were attributable to an officer of the company, the officer is liable to pay such portion of the penalty (or all) as specified in the “decision notice” (Section 69D VAT Act 1994). 

As with any challenge against a HMRC decision to refuse deduction of input tax, HMRC can be challenged to produce evidence and justification to arrive at the decision that it was a Company Officer’s actions that gave rise to the liability. You have the right to an independent review of the decision and a right of appeal. 

We can expertly assist you in making the necessary representations requiring HMRC to produce the evidence on which they have based their decision, and requiring them to show that they have acted reasonably.

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