KITTEL Investigations and Appeals
You need to read this if HMRC have decided to deny your company the right to deduct input tax (VAT) because you knew or should have known of a connection to fraud (the Kittel principal), or HMRC are investigating your procedures and supply chains.
Getting experts on board as early as possible is critical to preventing the denial of input tax, and you should not be worried about upsetting HMRC Officers, or believe that, by taking on legal advisors, this will indicate some sort of guilt. We hear that this was a concern from many clients who came to us a little late in the day. HMRC advise you to seek advice, so you should do so at the first sign of trouble.
OUTSOURCING PAYROLL – KITTEL PRINCIPLE
While this article is relevant to any industry, this is particularly so if you outsource your payroll. The prevalence of VAT fraud in payroll outsourcing is such that you should seek advice even if you have had no warnings of a potential fraud in your supply chain.
There are 3 general situations that require the services of specialist Kittel advisors:
- HMRC’s MTIC/Fraud Investigation Teams are asking questions about your trading and have requested commercial documents and due diligence material on your suppliers and customers.
- HMRC have concluded their enquiry and have yet to reach a final decision on what action to take, if any. This is a critical time.
- HMRC have denied input tax because they state you knew or should have known of a connection to fraud.
We deal below with final decisions that need to be appealed to the Tax Tribunal, but there are possibilities to prevent such a final decision being made in the first place.
It is vital to seek advice before engaging with HMRC in an MTIC/Kittel situation. Mistakes are often made in correspondence and conversations with Officers, or are unknowingly present in the documents provided to HMRC. These mistakes can be very damaging and are sometimes terminal to a later appeal.
Show full cooperation by presenting HMRC with a full report into your trading, together with all relevant commercial and due diligence documentation. Refrain from attending meetings until such time as HMRC have that full report.
Having been involved in over 150 MTIC appeals at various stages, we are fully aware of every possible allegation that could be raised by Officers in a final decision. It is vital to address each point in detail prior to that decision being made.
When reaching a decision on whether to deny input tax, or not, HMRC’s Case Office, Team Leader, Policy Unit and Solicitors Office, sit on a panel and review all information, together with recommendations from the Case Officer.
Their job is to decide if there is sufficient evidence to succeed in Tribunal if they denied your claim to input tax deduction. It is that simple. Using our experience at Kittel Tribunal hearings, our job is to make sure that panel is aware of every single positive aspect to your case, so that they know they will not succeed at Tribunal. This could save you substantially on costs and time, not to mention reducing stress and anxiety that comes with a full Tribunal appeal.
MTIC Statutory Review
Once HMRC have decided to deny input tax via this panel, it is virtually impossible to have that overturned on a Statutory Review, i.e. a review by an independent Officer. The process that Officers go through to reach a decision means that a review cannot change matters. The decision-making Officer will have already sought agreement with his Team Leader, Solicitors Office and the Policy Team before denying input tax. It is, therefore, very rare that a Review Officer will overturn the decision.
However, we have success in stopping the decision in the first place by providing substantial evidence to the standard that would be presented to Tribunal. That evidence, in effect, shows HMRC that they are unlikely to be successful at Tribunal.
Rarely do HMRC withdraw after a Tribunal appeal has been lodged and their Policy is to simply allow a Tribunal to decide the outcome. However, the HMRC policy is to decide whether they have a greater than 50% chance of success before a decision is even reached.
INCREASE YOUR CHANCE OF SUCCESS AT TRIBUNAL
There are 3 principals that need to be followed in order to be successful in an MTIC/Kittel Tribunal appeal:
- Do not ignore a single HMRC allegation, no matter how insignificant you believe that point to be.
- Where HMRC say a particular pattern of trading (such as back-to-back trading) is indicative of fraud, or they say that a lack of insurance is an indicator of knowledge of the fraud, you must supply evidence to show that these factors are present in non-fraud transactions. Never simply rely on statements; always produce exhibits to back up every point, where possible.
- Ensure you have a legal team that has experience in winning, and fully assist them in the process. You may be surprised that very few firms have had any success at all in Kittel Tribunal appeals, while firms such as Compton Taylor Morgan, have achieved success after success for our clients in Kittel appeals across all industries over 17 years.
Do you need a specialist tax barrister (counsel)?
Many companies are unable to fund counsel to assist but this should not deter you. CTM has, on several occasions, succeeded in large MTIC Tribunal appeals without counsel and we have built up strong expertise in this area over the years.
However, if a legal team is instructed without counsel, a complex and lengthy hearing will be run by one person. Counsel does not just bring along additional expertise, but they bring along assistance at the hearing. Just as counsel prefers not to appear on his/her own because of the workload, neither does CTM.
HMRC often attend such hearings with 2 barristers, a Solicitor, a caseworker and a member from their Policy Team. It is certainly not terminal to your case if you do not have a barrister, but it does increase the chances of success. Having said that, we continue to represent traders without counsel and look forward to more success going forward.
Fees
You do not need just any KC, you need a specialist, skilled tax barrister, such as David Bedenham. Specialist Counsel’s fees for a one-week hearing would be in the region of £45,000 – £55,000 +VAT.
Counsel’s and CTM’s fees depend mainly on the number of witnesses, the number of trading partners and the number of transactions. Those factors determine the number of days at a final hearing, which has an obvious impact on fees.
For cases that we believe are very strong, we are often prepared to offer a reduced fee in return for full payment upfront.
Know your Judge
It is important to ask the Tribunal who the Judge will be for the final hearing. You can then read previous judgments to understand what the Judge likes and, very importantly, what the Judge doesn’t like and adapt your case as necessary.
Cross Examination
The best cases can be won or lost during the cross-examination of witnesses. Directors and other witnesses need to be fully prepared and undergo a rigorous questioning period in order to be ready to be cross-examined by HMRC’s MTIC barristers. Directors who do not put in the time to fully prepare for this are often made to look inconsistent and unreliable when cross-examined by a good barrister. We also advise that you review court transcripts from previous hearings to understand the types of questions that you will face.
Important parts from previous Judgements
The higher courts have ruled that, simply because there was a very high risk of a connection to fraud, this does not mean that HMRC will succeed. In the appeal of Mobilx Limited, the Court of Appeal stated:
“If HMRC was right and it was sufficient to show that the trader should have known that he was running a risk that his purchase was connected with fraud, the principle of legal certainty would, in my view, be infringed. A trader who knows or could have known no more than that there was a risk of fraud will find it difficult to gauge the extent of the risk; nor will he be able to foresee whether the circumstances are such that it will be asserted against him that the risk of fraud was so great that he should not have entered into the transaction. In short, he will not be in a position to know before he enters into the transaction that, if he does so, he will not be entitled to deduct input VAT. The principle of legal certainty will be infringed.”
In other words, it matters not how much risk there was, risk is not enough for HMRC to succeed on the allegation that you knew of the fraud.
What do HMRC Need to Prove?
Again, we look to Mobilx for the lead authority in both tests:
‘Should have known’ test – The Court of Appeal stated:
“If a trader should have known that the only reasonable explanation for the transaction in which he was involved was that it was connected with fraud and if it turns out that the transaction was connected with fraudulent evasion of VAT then he should have known of that fact. He may properly be regarded as a participant for the reasons explained in Kittel.”
What this essentially means is that, if normal commercial arrangements were not in place, and there was no other reasonable explanation for the supplies other than fraud, it will be found that you should have known.
A Tribunal can look at all the facts, including payments terms, large quantities of goods from a supplier new to the industry, poor description of goods, lack of contracts etc. Of course, all the above are also normal in industries not connected to fraud and, so, a detailed defence is required to counter the arguments. You need to show that the way in which you traded was not so unusual as to only point to fraud.
‘Actual knowledge’ test – This is simply a look at the facts again and seeing if a trader must have known it was fraud. It is not everything, but, if you focus on how you behaved, you won’t go far wrong. If you made bank transfers yourself that were uncommercial, or generally traded in a very dubious fashion, then a Tribunal is likely to find that you actually knew of the fraud.
Personal Penalties
Section 69D of the VAT Act 1994, allows HMRC to raise a personal penalty of up to 30% of the input tax denied on any director who knew or should have known of the connection to fraud. It is almost always exactly 30% for every director.
It is deemed by the Tribunal to be an abuse of process to appeal just the personal penalty and not the company VAT Assessment or Company Penalty, because, by not appealing the company assessment, you have accepted that you knew of the fraud.
Many directors walk away from the company assessments and often liquidate the company, later finding that they also have a personal penalty. HMRC have 2 years to issue the personal penalty after denying in put tax, so don’t be fooled into thinking it won’t come. It is HMRC’s policy to issue personal penalties for every Kittel case.
Finally, if you do not appeal the company VAT Assessment or Penalty, a liquidator can find that you have not challenged the allegation that you knew about the fraud. And by that implication, which cannot be challenged later during the insolvency process, they will seek to recover the whole company HMRC liability from you personally. HMRC are also likely to ensure their own liquidator takes over any insolvency process to ensure recover is pursued.
The simple message here is that every Kittel Assessment and penalty will be pursued personally by HMRC and, therefore, if you want to avoid a substantial personal liability, every HMRC decision requires appealing.
Are Legal Fees refunded on Success?
Legal fees will only be refunded if the appeal is categorised as ‘complex’ by the Tribunal and that depends on the amount of tax or penalty being appealed and how complex the issues are.
Kittel cases are generally classed as complex due to the amount of tax involved, and the winning party will recover costs, if that is what you want. However, even in complex cases, a trader can elect to opt out of the costs regime and no party gets its costs; it is solely a matter for the company appealing.
For any advice regarding protecting yourself from being connected to fraud in the payroll, or any other sector, or appealing HMRC’s decision to deny input tax, please speak directly to our Kittel specialist, Liban Ahmed (Tax Director), on 07738 666548 or email liban@ctmlaw.co.uk. Liban has spent 80% of his time involved in Kittel cases at all stages for the past 17 years and can provide invaluable, initial advice at no cost.
This is a highly specialist area and each case requires specific, tailored advice.
