A significant Upper Tribunal decision handed down on 26 February 2026 has important implications for directors of companies that have been, or may be, subject to VAT fraud investigations. The case of Ashley Charles Trees v HMRC [2026] UKUT 00092 (TCC) clarifies the limits of HMRC’s power to pursue individual directors for civil evasion penalties — and underlines the serious personal exposure that directors can face.
Background: What Happened in Trees v HMRC?
Mr Trees was the sole director and shareholder of CCA Distribution Ltd, a company involved in mobile phone trading which HMRC alleged was connected to Missing Trader Intra-Community (MTIC) VAT fraud. In 2020, following lengthy litigation, the First-tier Tribunal found that CCA — through Mr Trees — knew its transactions were connected to fraudulent VAT evasion (the “Kittel test”). Critically, HMRC had expressly confirmed in writing in January 2019 that it was not alleging dishonesty against Mr Trees or CCA.
Despite this assurance, HMRC then issued a Director’s Liability Notice (DLN) against Mr Trees personally in July 2021 for £1,974,850, relying on the very same factual findings from the 2020 proceedings to allege that his conduct had been — after all — dishonest. The Upper Tribunal allowed Mr Trees’ appeal, setting aside the DLN.
What Is a Director’s Liability Notice?
Under sections 60 and 61 of the Value Added Tax Act 1994, where HMRC considers that a company’s VAT evasion involved dishonesty, it may issue a civil evasion penalty against the company and — separately — a DLN against the individual director whose dishonesty it says was responsible. A DLN transfers the penalty liability personally to the director, even after the company has ceased trading or been dissolved.
The financial stakes are severe: in Trees, the personal liability sought was nearly £2 million.
The Key Legal Issues — and the Tribunal’s Findings
The Upper Tribunal (Mr Justice Rajah and Judge Brannan) allowed the appeal on the following core grounds:
- Abuse of process: It was an abuse of process for HMRC to use the findings of the 2020 Kittel proceedings — which were conducted on the basis that dishonesty was not alleged — as the primary evidence of dishonesty in the 2024 DLN proceedings. HMRC should have raised dishonesty during the original Kittel hearing if it intended to rely on that evidence for penalty purposes.
- Fairness and natural justice: Mr Trees gave evidence at the 2020 hearing on the understanding that dishonesty was not in issue. The procedural protections that apply when fraud or dishonesty is alleged — including proper particularisation of the case and the right to respond to those specific allegations — had not been afforded to him.
- The Kittel test ≠ dishonesty: Knowing or ought to have known about a connection to VAT fraud (the Kittel test) is not the same as acting dishonestly. The Court of Appeal had confirmed in HMRC v Citibank/E Buyer [2017] that HMRC does not need to plead dishonesty to deny input tax recovery — but that distinction cannot be exploited to ambush a director with a dishonesty finding in later proceedings.
Key Risks for Directors
This decision, while a victory for Mr Trees, is a reminder of the very significant personal risks that directors face in the context of VAT fraud investigations. Directors should be aware of the following:
- Personal liability is real and substantial. A DLN can make you personally liable for your company’s civil evasion penalty — regardless of whether the company still exists.
- Kittel proceedings carry long-term consequences. Even if dishonesty is not pleaded in the original VAT appeal, findings made in that process can be used — subject to the limits now clarified in Trees — against you in later penalty proceedings.
- HMRC has a two-year window to issue penalties. Under section 77(2) VATA 1994, HMRC has two years from final determination of the tax liability to issue a civil evasion penalty and DLN. The litigation may feel like it has concluded — but the personal exposure may not.
- Assurances from HMRC matter. The Tribunal found it “inherently unjust” that HMRC’s written assurance of no dishonesty allegation was then circumvented. Any such assurances should be carefully documented and any departure from them robustly challenged.
- Being the “controlling mind” of a company binds you. The Tribunal treated Mr Trees as the corporate embodiment of CCA, meaning findings against the company are treated as findings against him personally. Sole directors of owner-managed businesses are particularly exposed.
- Article 6 ECHR protections apply. A DLN constitutes a “criminal charge” for the purposes of the European Convention on Human Rights, entitling you to a fair hearing, adequate time to prepare your defence, and protection against procedural unfairness.
What Should You Do if You Are Contacted by HMRC?
Whether you have received a DLN, been notified of a VAT assessment against your company, or simply received a letter from HMRC raising questions about transactions in which your company was involved, you should take legal advice immediately.
W Legal is able to advise on the full range of HMRC enforcement actions, including VAT assessments, Kittel proceedings, civil evasion penalties, and Director’s Liability Notices.
If you or your company has received correspondence from HMRC, a VAT assessment, or a Director’s Liability Notice, please contact us as soon as possible.
