HMRC

HMRC using Kittel Principle to target supply chain VAT fraud

According to Azets, the campaign is shaped by The Kittel Principle, which defines whether a director has been fraudulent, knew about a fraud or should have known about a fraud

Company directors who either commit VAT fraud or fail to demonstrate procedures to prevent VAT fraud in the supply chain are being increasingly targeted by HMRC with a new trader monitoring campaign.

According to Azets, the campaign is shaped by The Kittel Principle, which defines whether a director has been fraudulent, knew about a fraud or should have known about a fraud.

The Kittel Principle, which was set in UK law in 2017, is now being actively implemented by HMRC as the framework against which suspected VAT fraud is assessed. 

In light of this, Azets has warned that company directors need to be aware of The Kittel Principle, and the penalties they could face if they breach the rules. 

It said that directors must not only ensure their business is compliant, but also ensure their supply chain is compliant and any fraud risk is identified and removed. It added that directors must “also demonstrate that clear policies are in place, are fully documented and are being actively implemented”.

Veronica Donnelly, VAT partner with Azets, said: “There is a huge burden of responsibility now on directors to review, assess, check and police VAT and tax compliance in the supply chain, with severe penalties for getting it wrong. And the potential for getting it wrong is vast, with ignorance of the width of the rules being a major issue. 

“Directors are legally obliged to demonstrate that their VAT returns and crucially, VAT charges by any suppliers or contractors, are accurate and truthful. The burden of proof and proactivity is now squarely on directors; it is not incumbent on HMRC to give specific guidance. It amounts to a seismic shift that carries high risks for mistakes, ignorance, taking poor advice and poor data management.” 

She added: “VAT is one of the big three taxes, a source of significant revenue loss to the Exchequer and now a major focus for revenue recovery. Directors and business owners are already responsible for ensuring that VAT reporting is Digital and for ensuring returns are timeous. 

“VAT liability has become a major burden on directors and these monitoring exercises are taking the revenue recovery campaign to a new level. We would encourage directors concerned about their liabilities and the VAT reporting status and across their supply chain to seek advice as soon as possible.”

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