In the case of W. Reilly Ltd v HMRC [2026] UKFTT 641 (TC), the FTT has upheld an appeal against the denial of input VAT recovery under the Kittel principle and the imposition of an associated penalty. Although the assessment was in time, HMRC had not demonstrated that the appellant should have known that it was participating in transactions connected with the fraudulent evasion of VAT.
VALUE ADDED TAX –whether HMRC issued assessments for VAT purposes within the applicable time limit – yes – whether the appellant should have known that its transactions on which input tax was incurred were connected with the fraudulent evasion of VAT by its suppliers and whether a related penalty was due – no – appeal allowed
HMRC had relied on the extended assessment deadline under VATA 1994, s. 73(6), whereby an assessment could be raised “one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge”. The Appellant had challenged this, arguing that HMRC had already been supplied with the necessary information at an earlier date and was relying on the date of a later repeat request to extend the deadline, but the FTT did not agree:
“From the evidence in the bundles it is apparent that the last piece of evidence of this fact of sufficient weight to justify making the assessment was communicated to HMRC when, on 22 May 2022, they were provided with the due diligence documents which the appellant had obtained in relation to Simplify. Whilst they had been provided with the due diligence documents obtained for SMP in August 2020 (and some of these materials were requested and provided again), they did not have the documents relating to Simplify until that time.”
The denial of input VAT under the Kittel principle and the imposition of the penalty required that the trader knew or should have known that its transactions were connected with fraudulent evasion of VAT. The FTT judged that:
“We have concluded that, having regard to how the Kittel test has been applied in the cases (as set out in Part A) and in light of all the evidence set out in Part B, HMRC have not demonstrated that, having regard to objective factors, the appellant should have known that, by the purchase of the relevant supplies from Simplify and/or SMP, it was participating in transactions connected with fraudulent evasion of VAT. We note that, as set out at [11], it is plain that whether a taxable person ‘should have known’ this requires a relatively high threshold; it does not suffice that circumstances are such that a taxable person should have known that by his purchase it was more likely than not that his transaction was connected with fraudulent evasion. Rather the test is satisfied where the taxable person 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. HMRC have not established that is the case here:”
The FTT noted that “In our view, the level of checks and due diligence carried out by the appellant falls within the range of what may be considered reasonable for a relatively small business operating in this sector”, “HMRC’s ‘red flags”’ do not justify a conclusion that at the relevant times the appellant ‘should have known’ that by the purchase of the relevant supplies from Simplify and/or SMP, it was participating in transactions connected with fraudulent evasion of VAT on the basis that Simplify and SMP were not duly accounting for the correct amount of VAT in respect of their supplies to the appellant” and that:
“A mainstay of HMRC’s stance is that, in their view, the appellant could have discovered VAT fraud by Simplify and SMP had the appellant requested, on an annual basis, to see their CIS returns and VAT returns and proof of payment of the relevant sums. However, in our view, (a) for one trader to request such records from another would be unusual and not something that a trader would request in the ordinary course of carrying out due-diligence checks on its suppliers, (b) for the reasons already given, there was nothing in the surrounding facts and circumstances to alert the appellant to the fact that it should make such a request, and (c) it cannot be assumed that, had the appellant made such a request, Simplify and SMP would have provided it with its CIS returns and VAT returns and/or would have provided it with genuine returns/information. A trader such as the appellant simply does not have the same capacity or ability as HMRC does to obtain such information and assess such matters.”
https://caselaw.nationalarchives.gov.uk/ukftt/tc/2026/641
Related content from Claritax Books
Value Added Tax, written by Ciaran McGee MA (Oxon), FCA, CTA, is an extensive volume (over 1,000 pages), written primarily for non-VAT specialist accountants and tax advisers.
