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Using the ‘Kittel Principle’ (AKA - the ‘should have known’ principle), VAT Fraud investigations by the HMRC have been on the rise following the notable case of Axel Kittel & Recolta Recycling SPRL. In the above case, the European court of justice established that a taxpayer claiming input tax (on products or services) along the supply chain of Axel Kittel, was found to have been committing VAT Fraud, and therefore Axel Kittel were denied the right to claim their input tax as they ‘should have known’ or must have known the transactions were connected with fraud.

Although this may sound slightly brutal, this case signifies the important part that we all play in ensuring that services are provided legitimately and fairly across the entire supply chain.

Who is up for investigation?

Law specialists Aspire Partnerships state that businesses are eligible to receive a notice of VAT assessment and penalty notice wherever HMRC can prove:

  1. There is a tax loss in a supply chain (of any sort – goods or services)
  2. The tax loss can be linked to the fraudulent evasion of VAT
  3. A taxpayer’s transactions are connected with that tax loss, and
  4. You knew or should have known about the fraudulent evasion of VAT

Recent cases have shown that it is not uncommon for HMRC to issue VAT assessments and fine taxpayers who ‘should have known’, leaving them with a pretty hefty VAT bill. An assessment and subsequent penalty could not only financially cripple a business but also cause great reputational damage. As the saying goes…‘if it’s too good to be true it probably is’

How can I protect myself?

To put it simply…supply chain due diligence. Remaining conscious of the following will leave you in a strong position to protect your business from VAT fraud:

  1. Understanding who is in your current supply chain
  2. Monitoring if extensive due diligence has been carried out on your supply chain
  3. Acting on intelligence that has been uncovered from checks
  4. Documenting due diligence
  5. Frequently reviewing due diligence
  6. Remaining up to date with employment and tax law (using an advisory like Bar2 will give you the support required to stay ahead of the game!)

It’s important to be aware that supply chain due diligence should also include those who are being paid via an intermediary using the PAYE model. You’d be forgiven in just assuming that workers who are ‘PAYE’ have had their employee and employer deductions (Tax, NI, ENI) paid correctly to HMRC but unfortunately, there are some truly bizarre, disguised employment schemes on the market, which are - under the spotlight – not all as they seem!

In the HMRC Employer Bulletin (June 2019 Issue 78), HMRC disclose that although they understand that all or some of your payroll is likely to be outsourced to companies offering legitimate payroll services, it is important to bear in mind that the following types of schemes of potential fraudster payroll companies could put your compliance in jeopardy.


When control and supervision of an employee is split between two or more business entities. There are many potential risks here, the primary concern of HMRC is either of the companies dissolving whilst owing considerable debts to HMRC.

Mini-umbrella companies

The workforce is split between multiple small umbrella companies formed with only a small number of employees within each company. The primary risk here is the smaller umbrella companies exploiting smaller tax allowances available for small companies to reduce the amount of tax due to HMRC.

Read more around how to spot and avoid a Mini Umbrella Company (MUC) and the consequences that including such businesses in your supply chain may have.

Ultimately, these schemes may claim to help provide competitive edge with workable lower margins for both clients or agencies to increase business commercials, however HMRC strongly advises to avoid such schemes and to be vigilant of these types of fraud.

How can we support you?

Here at Bar2, our in-house risk experts offer free consultations to provide support and advice when it comes to ensuring your business and your supply chain are fully compliant.

Book a demo