ICAS ICAS logo

Quicklinks

  1. About Us

    Find out about who we are and what we do here at ICAS.

  2. Find a CA

    Search our directory of individual CAs and Member organisations by name, location and professional criteria.

  3. CA Magazine

    View the latest issues of the dedicated magazine for ICAS Chartered Accountants.

  4. Contact Us

    Get in touch with ICAS by phone, email or post, with dedicated contacts for Members, Students and firms.

Login
  • Annual renewal
  • About us
  • Contact us
  • Find a CA
  1. About us
    1. Governance
  2. Members
    1. Become a member
    2. Newly qualified
    3. Manage my membership
    4. Benefits of membership
    5. Careers support
    6. Mentoring
    7. CA Wellbeing
    8. More for Members
    9. Area networks
    10. International communities
    11. Get involved
    12. Top Young CAs
    13. Career breaks
    14. ICAS podcast
    15. Newly admitted members 2022
    16. Newly admitted members 2023
  3. CA Students
    1. Student information
    2. Student resources
    3. Learning requirements
    4. Learning updates
    5. Learning blog
    6. Totum Pro | Student discount card
    7. CA Student wellbeing
  4. Become a CA
    1. How to become a CA
    2. Routes to becoming a CA
    3. CA Stories
    4. Find a training agreement
    5. Why become a CA
    6. Qualification information
    7. University exemptions
  5. Employers
    1. Become an Authorised Training Office
    2. Resources for Authorised Training Offices
    3. Professional entry
    4. Apprenticeships
  6. Find a CA
  7. ICAS events
    1. CA Summit
  8. CA magazine
  9. Insight
    1. Finance + Trust
    2. Finance + Technology
    3. Finance + EDI
    4. Finance + Mental Fitness
    5. Finance + Leadership
    6. Finance + Sustainability
  10. Professional resources
    1. Anti-money laundering
    2. Audit and assurance
    3. Brexit
    4. Charities
    5. Coronavirus
    6. Corporate and financial reporting
    7. Business and governance
    8. Ethics
    9. Insolvency
    10. ICAS Research
    11. Pensions
    12. Practice
    13. Public sector
    14. Sustainability
    15. Tax
  11. CPD - professional development
    1. CPD courses and qualifications
    2. CPD news and updates
    3. CPD support and advice
  12. Regulation
    1. Complaints and sanctions
    2. Regulatory authorisations
    3. Guidance and help sheets
    4. Regulatory monitoring
  13. CA jobs
    1. CA jobs partner: Rutherford Cross
    2. Resources for your job search
    3. Advertise with CA jobs
    4. Hays | A Trusted ICAS CA Jobs Partner
    5. Azets | What's your ambition?
  14. Work at ICAS
    1. Business centres
    2. Meet our team
    3. Benefits
    4. Vacancies
    5. Imagine your career at ICAS
  15. Contact us
    1. Technical and regulation queries
    2. ICAS logo request

VAT fraud can destroy a business, but relationship vigilance can keep you safe

  • LinkedIn (opens new window)
  • Twitter (opens new window)
Philip McNeil By Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes)

1 July 2020

Key points

  • Missing trader fraud can destroy a business
  • You can be liable for the actions of a fraudulent agent
  • Innocence is no excuse

Philip McNeill looks at some recent VAT cases on missing trader fraud and asks if we, our businesses and our clients would pass muster, and what we should do now.

Guilty yet innocent

Any rule which attributes to someone knowledge which they may not in fact have, is likely to be contentious. The Kittel principle (Kittel v Belgium (Case 439/04) [2008] STC 1537) is no exception. Under Kittel, a business unknowingly involved in a fraudulent supply chain can be denied input VAT on purchases where it had the means of knowing that the supply chain was fake. Actual knowledge is not needed.

The position is particularly fraught where someone acting on behalf of the business is aware of the fraud, but hides it from the business owner.

Common sense

Common sense is not enough. Kittel is designed to protect the state from VAT fraud. This principle would be defeated if business owners could sidestep liability by claiming that they didn’t know what was going on.

Indeed, reckless business owners could deliberately aim to keep themselves in the dark, in an attempt to avoid responsibility. They could avoid asking questions about shady or doubtful transactions. But the potential for the unscrupulous to keep themselves deliberately in the dark means that innocence and common sense are insufficient protection for the majority of innocent business owners.

Business owners must attain a new standard. The standard of vigilance – even in the most unassuming of relationships.

Attributed knowledge

In Nicholas and Charlotte Sandham (Nicholas and Charlotte Sandham T/A Premier Metals Leeds [2020] UKUT 0193 (TCC)), the Sandhams used an agent to deal in primary metals. The agent had wide scope to commit the partnership business. But, unknown to the Sandhams, their agent was knowingly a party to fraud.

Given that the agent was acting directly contrary to the Sandhams’ best interests, and outwith any authority from them, could the Sandhams still be liable for their agent’s offence? Even in a criminal case, such attribution would not be automatic, but the Upper Tribunal found that the agent’s knowledge could be attributed to the business.

In a neat parallel, the Tribunal asked how the business could claim input tax on transactions conducted by the agent while distancing themselves from the fraud.

“On one hand, they assert that [the agent] … bound them into the transactions for the purposes of substantiating their claim for input tax credit. However, when it comes to applying the Kittel principle, they seek to distance themselves from [the agent’s] …. knowledge of fraud.”

Crucially, the Tribunal thought that to deny attribution of knowledge from agent to business defeated the entire purpose of Kittel.

“if the knowledge of the agent who entered into the very transactions giving rise to input tax was not attributed to the principal, we accept HMRC’s submission that it might be possible for taxpayers to avoid the consequence of the Kittel rule by entering into transactions through agents while ensuring that they remain ignorant of the full circumstances of those transactions.”

Thus, while acknowledging the innocence of the Sandhams, the wider public good means that taxpayers should not have the option of hiding behind ignorance.

“we recognise that there is no suggestion that the Appellants themselves engaged in such conduct, but we see no reason why the Kittel principle, intended as it is to guard against fraud, should even give taxpayers the option of doing so.

Vigilance in relationships

Just under two million pounds was at stake for the Sandhams, something reinforcing the need for objectivity and vigilance in business relationships.

This point was reinforced in the case of Beigebell (Beigebell Limited [2020] UKUT 0176 (TCC)). Here a friend of 20 years introduced a new business deal. But the deal was associated with VAT fraud.

Hindsight may have given us the advantage of scepticism, but even the First Tier Tribunal (FTT) relieved the company of liability, accepting one of the director’s key submissions of alternative reasonable explanations for entering the transactions.

The Upper Tribunal overturned the decision and remitted it back to FTT. The case is of interest for its consideration of the Kittel tests of “actual knowledge” and “means of knowledge”. It asked the question

“whether, even if Beigebell did not actually know that its transactions were connected with fraud, a reasonable businessperson with ordinary competence in Beigebell’s position would have known”.

It concluded that the FTT had not given sufficient weight to HMRC’s arguments and the decision needed to be remade.

Conclusion

With missing trader fraud the figures are likely to be large. Vigilance on behalf of the state is an aspect of modern business life. While it may not be a welcome addition to the toolkit of business life, and its incidence may seem remote, prudent risk management indicates relationship vigilance (even more than common sense) is needed to keep potential disaster at bay.

Independent Loan Charge Review – consequences for the tax profession

By Charlotte Barbour, ICAS Director of Taxation

8 January 2020

ICAS evidence to HMRC’s evaluation of powers and safeguards

By Susan Cattell, Head of Tax Technical Policy

20 March 2020

2022-01-xero 2022-01-xero
ICAS logo

Footer links

  • Contact us
  • Terms and conditions
  • Modern slavery statement
  • Privacy notice
  • CA magazine

Connect with ICAS

  • Facebook (opens new window) Facebook Icon
  • Twitter (opens new window) Twitter Icon
  • LinkedIn (opens new window) LinkedIn Icon
  • Instagram (opens new window) Instagram Icon

ICAS is a member of the following bodies

  • Consultative Committee of Accountancy Bodies (opens new window) Consultative Committee of Accountancy Bodies logo
  • Chartered Accountants Worldwide (opens new window) Chartered Accountants Worldwide logo
  • Global Accounting Alliance (opens new window) Global Accounting Alliance
  • International Federation of Accountants (opens new window) IFAC
  • Access Accountancy (opens new window) Access Acountancy

Charities

  • ICAS Foundation (opens new window) ICAS Foundation
  • SCABA (opens new window) scaba

Accreditations

  • ISO 9001 - RGB (opens new window)
© ICAS 2022

The mark and designation “CA” is a registered trade mark of The Institute of Chartered Accountants of Scotland (ICAS), and is available for use in the UK and EU only to members of ICAS. If you are not a member of ICAS, you should not use the “CA” mark and designation in the UK or EU in relation to accountancy, tax or insolvency services. The mark and designation “Chartered Accountant” is a registered trade mark of ICAS, the Institute of Chartered Accountants of England and Wales and Chartered Accountants Ireland. If you are not a member of one of these organisations, you should not use the “Chartered Accountant” mark and designation in the UK or EU in relation to these services. Further restrictions on the use of these marks also apply where you are a member.

ICAS logo

Our cookie policy

ICAS.com uses cookies which are essential for our website to work. We would also like to use analytical cookies to help us improve our website and your user experience. Any data collected is anonymised. Please have a look at the further information in our cookie policy and confirm if you are happy for us to use analytical cookies: