Kittel VAT Fraud – A Liquidator’s High Court Claim

In our article ‘How to win a Kittel Appeal’ we discuss two serious issues if a director fails to appeal (on behalf of his company) an HMRC decision to deny input tax because he knew or should have known of a connection to fraud.

Often directors simply let the VAT Assessment stand unchallenged, as it is a limited company and, either allow it to be wound up, or place the company into voluntary liquidation. In effect, they believe the debt goes down with the company with no personal liability.

Instead, it actually causes a serious risk of personal liability from 2 sources:

  1. An HMRC personal penalty of 30% of the input tax denied (HMRC have 2 years to do this); and
  2. Action by the liquidator to recover the whole company liability from the director on behalf of all creditors (there are no time limits on the liquidator’s claim).

The case we have summarised below dates to periods in 2006, but the action was brought by the liquidator in a High Court case that concluded in 2024.

The director did challenge the allegation that he knew of a connection to fraud when his input tax was denied in 2008, and a Tribunal found in 2014 that he did know of the connection to fraud.

However, when the liquidator brought action against him personally because of fraudulently trading (in part) he tried to challenge the allegation again, but the court ruled it was an abuse of process.

Even if he had not previously been found by a Tribunal to have such knowledge, or if a director doesn’t challenge the allegation that, through him, the company knew or should have known of a connection to fraud, it is still an abuse of process to challenge this later simply because it affects you personally. The only way to prevent a liquidator from taking action against you personally to recover lost VAT is to successfully appeal to Tribunal.

So, the Court started from the position that the director entered into transactions that he knew were connected to fraud and that would have immediately created a VAT liability. The Judge found the director personally liable for nearly £5million.

Below is a summary of that High Court judgment in Hellard v Khan & Anor (Re Phoenix Tech Ltd – Insolvency Act 1986) [2024] EWHC 1130 (Ch), delivered on 14 May 2024 by ICC Judge Mullen. The case involves an application by Kevin Hellard, liquidator of Phoenix Tech Limited, against directors Nizakat Khan and Jasbinder Singh under sections 212 and 213 of the Insolvency Act 1986, alleging fraudulent trading and misfeasance linked to missing trader intra-community (MTIC) VAT fraud.

Background

Phoenix Tech Limited, originally a housing agency, shifted to trading computer components and mobile phones by late 2005. Mr. Khan, a director since 2003 and 50% shareholder, and Mr. Singh, appointed in November 2005, oversaw 11 transactions between November 2005 and May 2006, acting as a “broker” exporting goods to the EU. These transactions were part of MTIC fraud chains, traced to VAT defaults by UK suppliers. Phoenix claimed £4.5 million in input VAT, which HMRC denied in 2008 and 2010, imposing a £607,387 misdeclaration penalty in 2011. The First-tier Tribunal (FTT) dismissed Phoenix’s appeal in 2015, finding Mr. Khan had actual knowledge of the fraud. The company entered liquidation in 2016, with HMRC as the primary creditor (£804,084 in claims).

The Main Application

Hellard alleged Phoenix’s business was conducted with intent to defraud HMRC via MTIC fraud, and that Khan and Singh knowingly participated, breaching their director duties. He sought declarations of fraudulent trading and misfeasance, plus compensation totaling £4,806,550 (covering penalties and denied VAT claims) with interest. Singh resigned in May 2006, limiting his liability to seven transactions (£1,841,155), while Khan faced claims for all 11 (£4,806,550).

Strike Out Application

Hellard sought to strike out Khan’s defence or obtain summary judgment, arguing Khan’s claim of ignorance was barred by the FTT’s findings. Khan admitted the transactions were fraudulent but denied knowledge, asserting he believed they were legitimate.

Legal Issues

  1. Estoppel and Abuse of Process: Hellard argued Khan was estopped from denying knowledge due to the FTT ruling, or that re-litigating it was an abuse of process (unfair to creditors or damaging to justice). The court found no privity between Hellard and HMRC, nor Khan and Phoenix, to trigger estoppel, but assessed abuse under Bairstow principles.
  2. Fraudulent Trading (s.213): Required proof of intent to defraud creditors and knowing participation with dishonesty (Ivey v Genting test).
  3. Misfeasance (s.212): Alleged breaches of directors’ duties to act honestly and in the company’s best interests, especially given insolvency risks.

Findings

  • Abuse of Process: The court struck out Khan’s defence as an abuse. The FTT’s thorough 11-day hearing (2014) established Khan’s knowledge, costing HMRC over £100,000. Re-litigating would unfairly burden creditors (principally HMRC) and waste court resources, bringing justice into disrepute. Public perception supported this, given Khan initiated the FTT appeal.
  • Knowledge and Dishonesty: The FTT found Khan knew of the fraud, rejecting his “innocent dupe” claim. With his defence struck out, the court held this knowledge, paired with filing fraudulent VAT claims as sole director, inevitably implied dishonesty under Ivey’s objective standard. Khan offered no alternative explanation.
  • Fraudulent Trading: Phoenix’s MTIC participation intended to defraud HMRC, with Khan knowingly and dishonestly involved, liable for creditor losses (£4,806,550).
  • Misfeasance: Khan’s dishonest conduct breached his duty, causing insolvency and creditor deficiency, justifying compensation.

 

Outcome

  • Khan’s defence was struck out, and summary judgment granted for Hellard’s claims. Evidence confirmed fraudulent trading and misfeasance.
  • Khan was ordered to pay £4,806,550 (Singh’s liability was not addressed in this ruling). Interest and order details were deferred.
  • No limitation applied due to fraud (s.21, Limitation Act 1980).

Summary

The court upheld Hellard’s claims, finding Khan’s re-litigation attempt abusive given the FTT’s binding findings. His knowledge and dishonest participation in MTIC/Kittel fraud rendered him liable for Phoenix’s creditor losses and reinforcing accountability in insolvency proceedings.

For further comment on this case or general advice regarding any Kittel related matter, 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 appeal 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.