Penalties on directors & the ‘Kittel Principle’

Here we look at a recent judgment concerning a penalty issued to a director of a company following a VAT assessment on the company. 

The judgment in Turner v HM Revenue & Customs [2024] UKFTT 495 (TC091993) concerned a business, Loy Commodities Ltd (Loy), that traded in scrap metal with other businesses.  It was found by HMRC that a number of supply chains that Loy was involved in were linked to the fraudulent evasion of VAT.

Once a tax loss is discovered, HMRC have the power to disallow the input tax claimed by the customer (under the ‘Kittle Principle’), cancel their VAT registration number and levy substantial penalties.  In addition to all of those powers, HMRC can also transfer the penalty to a director where the company’s actions were wholly attributable to the director.

In the case referred to above, the Personal Liability Notice (PLN) issued to the sole director, Mr Turner, transferring the company’s penalty to him, was appealed to the tribunal on numerous grounds.  One key area for the tribunal, once it had concluded that the transactions were connected with the fraudulent evasion of VAT, was to determine whether the company knew or should have known that each of the transactions were connected to that fraud and whether the actions that led to the penalty on the company were attributable to the director, Mr Turner.

The tribunal found that Loy did carry out some due diligence on its suppliers but despite this, the tribunal found that the checks were only focussed on whether or not the suppliers existed rather than whether the transactions with those suppliers were commercially viable.

The tribunal found that there was little to indicate that there was commercial sense in the transactions and that although Mr Turner, on behalf of Loy, had checked the details about his suppliers, he had not checked the commercial backgrounds nor the commercial standing of his suppliers. 

Loy had also traded with a supplier before doing any due diligence and this was viewed as further evidence that Loy was not really concerned about the integrity of its supply chain.  It was also noted that when the results of Loy’s due diligence did raise red flags no further action was taken to satisfy Loy that these red flags did not indicate fraudulent evasion of VAT by its suppliers. 

The conclusion was therefore that even if Mr Turner did not know that Loy’s transactions were connected with the fraudulent evasion of VAT, he should have known this was the case.  Accordingly, the appeal was dismissed.

There are some important principles for our clients to note that come from this case (and other similar cases):

• Where an assessment is raised on a company under the Kittel principle, the inaccuracy in the taxpayer’s VAT returns will be deemed deliberate and therefore if the actions of the company can be attributed to an officer of the company a penalty levied in respect of the assessment can be transferred to that officer personally.
• Due diligence checks are essential to minimise risk and it is vital that they are not viewed as a box-ticking exercise, but that real attention is given to the responses to checks and that they are considered in light of the commerciality of the trade as well as the correctness of the facts.
• When responses to due diligence checks raise red flags, further information must be sought to satisfy the company that transactions with that supply chain are not connected with the fraudulent evasion of VAT.
• Due diligence checks should be carried out before trading with suppliers as much as is possible, and certainly very quickly after the beginning of a trading relationship if it is impossible to get all the information in time for the commencement of trade.
• Due diligence checks should not be viewed as a one-off exercise, but regularly revisited to ensure that the supply chain continues to be sound.

For further advice, assistance or information in respect of VAT due diligence, please contact the Chartergates Team.