Introduction
The Kittel principle has become one of HMRC’s most powerful weapons in combating VAT fraud, allowing the tax authority to deny input tax deductions to businesses that knew or should have known their transactions were connected to fraudulent VAT evasion. Named after the European Court of Justice’s decision, the principle states that a taxpayer who claims input tax on transactions which he knew or should have known were connected with fraudulent evasion of VAT should be denied his right to claim that input tax. This article examines the key case law that has shaped the application of Kittel assessments, analyses recent tribunal decisions, and identifies the industries currently in HMRC’s crosshairs.
Recent Case Law: Successes and Setbacks for HMRC
Zed-UK Ltd v HMRC (2025)
In this appeal the Tribunal found that the director had little business knowledge and was effectively a passenger in the transactions but concluded that he failed to carry out adequate due diligence and ignored warning signs, such as unusually low prices and payment structures typical of high-risk VAT supply chains.
Sigma Trading Ltd, Central Trading Ltd, and Universal Auto Traders Ltd (2024)
In multiple cases heard in 2024, tribunals determined that the companies knew or should have known that their transactions were linked to VAT fraud, with appeals being dismissed and VAT assessments by HMRC being upheld.
Red Rose Payroll Ltd v HMRC (2025)
The First-tier Tribunal ruled in favour of the appellant Red Rose Payroll, dismissing over £9 million in VAT assessments and penalties after HMRC failed to prove that the company knew or should have known it was participating in transactions connected to the fraudulent evasion of VAT.
The tribunal found that while Red Rose Payroll’s due diligence was imperfect, the company’s responsive actions – including halting VAT payments and ceasing trade upon being notified of its supplier’s deregistration – demonstrated good faith. Judge Malek rejected the notion that the appellant’s decision to continue to trade with its supplier after being notified of deregistration indicated that it knew or ought to have known that its transactions were connected to fraud, noting that when HMRC first contacted the company it was because it believed the supplier had committed VAT fraud, not because it had.
Cheema Construction Services Ltd v HMRC (2025)
In this appeal The First Tier Tribunal found that HMRC had failed to make out the second-limb of the Kittel tests, that the appellant’s transactions were part of fraudulent supply chains. Consequently, the Tribunal found that the Kittel Principle did not apply, meaning the company was entitled to reclaim input VAT.
Although veto letters advising that numerous suppliers of labour were fraudulent had been sent in 2011-12, the VAT periods in question were at least four years later, and this time difference limited the extent to which the director would have been aware of the potential of VAT fraud.
Recent Trends and Targeted Industries
The Shifting Evidential Landscape
The most recent cases from 2024 and 2025 reveal a nuanced picture of HMRC’s Kittel enforcement strategy. While cases like Red Rose Payroll and Cheema Construction demonstrate that tribunals will robustly test HMRC’s evidence and reject assessments where the burden of proof is not met, cases like Zed-UK show that even commercially naive traders face substantial liabilities when they fail to implement adequate safeguards.
The decisions echo a growing body of rulings pushing back against aggressive HMRC Kittel assessments, with tribunals requiring HMRC to meet strict evidentiary standards, not merely point to process imperfections or inference. However, this does not provide comfort to businesses that genuinely ignore red flags or fail to conduct proportionate due diligence.
Industries Under HMRC’s Scrutiny
- Labour Supply and Payroll Services
- Electronics and IT Goods
- Precious Metals and Scrap Metal
- Construction Sector
- Wholesale and Retail Trade
- Phoenix Companies
The recruitment of 5,500 additional compliance officers by HMRC and increased use of artificial intelligence for compliance targeting signals an intensification of HMRC’s enforcement activity across all high-risk sectors.
Practical Implications
For businesses operating in these high-risk sectors, the message from recent case law is clear: reasonable, proportionate due diligence is non-negotiable. While perfection is not required, businesses must demonstrate active engagement with fraud risk, responsive action when concerns arise and documented decision-making processes.
The Kittel principle continues to evolve through case law, with tribunals carefully balancing HMRC’s need to combat fraud against the principle of legal certainty for honest traders. Businesses in high-risk sectors must remain vigilant, invest in robust compliance procedures, and seek specialist advice at the earliest indication of HMRC scrutiny.
If you have received an assessment or are concerned about your supplies and supply chains, we are here to help. Please contact khalil.makonnen@wlegal.co.uk if you would like an introductory meeting concerning Kittel assessments, VAT fraud risk management, or defending against HMRC action.
