Background
HMRC denied VNS Waste Solutions Limited input-tax deductions of £1,818,418 for three VAT periods, primarily alleging under the Kittel principle that VNS knew or should have known its transactions were connected with fraudulent VAT evasion. HMRC pleaded in the alternative that no taxable supplies had occurred. The transactions allegedly formed a circular waste-removal arrangement in which VNS financed another company’s work by paying it before VNS itself was paid.
VNS applied to bar HMRC from further participation and thereby obtain summary determination of its appeal. It argued that if there were no supplies, its corresponding output-tax liability would also disappear and the assessment would fail; because VNS said it would not seek to prove that supplies occurred, it maintained that HMRC’s Kittel case could not succeed. The First-tier Tribunal refused the application, and VNS appealed that procedural decision to the Upper Tribunal.
The Court’s Holding
The Upper Tribunal dismissed the appeal and upheld the refusal to debar HMRC. It held that HMRC had adequately pleaded a primary Kittel case—that supplies occurred and were connected with fraudulent evasion of VAT—alongside an alternative no-supply case. Although those positions were in tension and could not both ultimately be correct, there was nothing inherently improper in advancing them alternatively when each was properly pleaded and supported by relevant material.
The Tribunal rejected VNS’s contention that the no-supply issue had to be determined separately and before the Kittel case. The First-tier Tribunal should consider all the evidence and arguments together at the substantive hearing. The burden of proof operates as a final means of resolving factual doubt, not as a mechanism by which VNS could ensure a finding of no supply merely by declining to adduce evidence. Given HMRC’s pleadings and the admissions in VNS’s own grounds and witness evidence, HMRC’s Kittel case had a realistic, rather than fanciful, prospect of success.
The Tribunal added that even if HMRC had lacked a reasonable prospect of success, debarring it would have been premature because VNS’s pleadings and evidence were inconsistent, its position had not been clarified, and substantial factual uncertainty remained for exploration at the full hearing.
Key Takeaways
- A Kittel denial requires an underlying taxable supply, but the existence of that supply need not be decided in isolation before the remaining issues.
- HMRC may plead a Kittel case and a contradictory no-supply case in the alternative when both are properly articulated and supported by material capable of proof.
- A taxpayer cannot dictate the factual outcome simply by declining to prove a matter on which it bears the burden; the tribunal must first evaluate all available evidence.
Why It Matters
The decision confirms that debarring is a summary remedy reserved for cases with no realistic prospect of success. Apparent tension between alternative VAT arguments will ordinarily be resolved through examination of the full evidential record, not by striking out one party before the substantive hearing.
For parties in VAT-fraud litigation, the ruling also emphasizes that burden-of-proof rules are a tiebreaker after the evidence has been assessed, rather than a substitute for that assessment. Pleadings and witness evidence supplied by the taxpayer may support HMRC’s case even where the taxpayer later chooses not to advance the same factual position.