Anti-avoidance ― disallowing input tax

Produced by a Tolley Value Added Tax expert

Value Added Tax

Guidance

This guidance note provides a summary of one of the interventions that HMRC can use where it believes that the business is involved in fraudulent activities.

Background

The entitlement to deduct input tax, and hence the entitlement to the right to repayment where input tax exceeds output tax, is fundamental to the operation of the UK VAT system. If a VAT registered business incurred input tax that is properly allowable, it will be entitled (subject to certain rules) to offset it against the business’ output tax liability and, if the input tax credit due to the business exceeds the output tax liability, it can make a claim for a repayment. However, a VAT registered business that claims input tax on transactions which it ‘knew or should have known’ were ‘connected with fraudulent evasion of VAT’, it shall be denied the right to claim that input tax.

The principle is set out in the CJEU judgement in Axel Kittel & Recolta Recycling SPRL (Kittel) and these are summarised below.

What is the Kittel principle?

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