Cheema Construction: VAT Deduction and the Kittel Principle

• The right to deduct input tax is outlined in sections 24-29 of the Value Added Tax Act 1994.
• Section 25 of the Act requires a taxable person to account for and pay VAT on supplies made and entitles them to a credit of input tax.
• Section 26 of the Act allows a taxable person to credit input tax for supplies made in the course or furtherance of their business.
• The Value Added Tax Regulations 1995 set out the evidential requirements for a trader to exercise their right to deduct input tax.
• Regulation 13 requires a registered person to provide a VAT invoice.
• Regulation 14 sets out the requirements for the contents of a VAT invoice.
• Regulation 29 2 requires a trader to hold or provide evidence to support their claim for input tax.
• The Kittel Principle states that a taxable person who knew or should have known that their transaction was connected with fraudulent evasion of VAT loses their right to deduct input tax.
• The principle was elaborated on by Moses LJ in Mobilx Ltd v HMRC where he stated that a person who knows or should have known that their transaction is connected with fraudulent evasion of VAT is to be regarded as a participant and fails to meet the objective criteria for the scope of the right to deduct.
• The Court of Appeal in Mobilx Ltd v HMRC affirmed guidance on the treatment of circumstantial evidence in cases of VAT fraud.
• The court stated that examining individual transactions on their merits does not require them to be regarded in isolation without regard to their attendant circumstances and context.
• The court also stated that a tribunal can draw inferences from a pattern of transactions to discern their true nature.
• The only reasonable explanation test is simply one way of showing that a person should have known that transactions were connected to fraud.
• The Upper Tribunal in AC Wholesale Ltd v HMRC concluded that this test is not a requirement to eliminate all possible reasonable explanations other than fraud.
• The penalty for fraudulent evasion of VAT is contained in section 69C of VATA 1994.
• The penalty requires the Tribunal to be satisfied that the actions of the taxable person were attributable to their sole director, Mr Cheema.

Source: bailii.org

Note that this post was (partially) written with the help of AI. It is always useful to review the original source material, and where needed to obtain (local) advice from a specialist.