Aspect of dishonesty

Claim for input tax deduction

HMRC had refused input tax deductions claimed by Citibank and E Buyer on the basis that the taxpayers ‘knew or ought to have known’ that the transactions they were involved with were connected with VAT fraud. The department cited the test in Kittel v Belgium [2008] STC 1537.

The First-tier Tribunal dismissed E Buyer’s appeal. In Citibank the tribunal said HMRC had to prove allegations of dishonesty against the taxpayer relating knowledge of the first limb of the Kittel test.

The appeals progressed to the Upper Tribunal which upheld the decision in Citibank but reversed the one in E Buyer. It found that although the Kittel test did not require dishonesty to be present for either of the limbs to be proved HMRC’s cases against both taxpayers amounted to allegations of dishonesty so this needed to be pleaded. HMRC appealed against both decisions.

The Court of Appeal held the Upper...