A recent Upper Tribunal decision has highlighted an important risk for businesses facing HMRC allegations under the Kittel principle: the relevant knowledge may not necessarily sit with a company director.
In Eurolaser IT Limited v HMRC [2026] UKUT 00324 (TCC), HMRC accepted that the company’s sole director neither knew nor should have known that the disputed transactions were connected with fraudulent VAT evasion. The dispute instead centred on a self-employed consultant who introduced and arranged the relevant transactions.
The First-tier Tribunal found that the consultant knew, or alternatively should have known, of the connection with VAT fraud and that his knowledge could be attributed to the company. On 21 August 2026, the Upper Tribunal dismissed Eurolaser’s appeal and found no material error of law in that decision.
For businesses dealing with a Kittel assessment or denied input VAT, the case demonstrates why an HMRC investigation may extend beyond the knowledge of directors and into the activities of employees, consultants and other individuals who actually arranged the transactions.
What did the Upper Tribunal decide in Eurolaser IT Limited v HMRC?
Eurolaser IT Limited traded in information technology products.
- The First-tier Tribunal had upheld HMRC’s decision to deny the company £1,628,525.16 of input VAT, together with the denial of zero-rating relating to intra-Community supplies of £503,409.29. It also upheld penalties totalling £312,406.16.
- The transactions took place during VAT periods in 2018. The Upper Tribunal expressly noted that they occurred before the UK’s withdrawal from the European Union. The separate issues concerning zero-rated intra-Community supplies therefore need to be understood in that historical context.
- HMRC had accepted on review that Eurolaser’s sole director, Stephen Pallister, neither knew nor should have known that the transactions were connected with fraudulent VAT evasion.
- However, HMRC pursued its case on the basis of the conduct and knowledge of Moshin Darr, a self-employed consultant engaged by Eurolaser.
The First-tier Tribunal found that Mr Darr knew that the transactions were connected with fraudulent VAT evasion. Alternatively, it found that he should have known of that connection. It also concluded that his knowledge or means of knowledge were attributable to Eurolaser.
The Upper Tribunal rejected Eurolaser’s challenge to those findings and dismissed the appeal.
What does the Kittel principle allow HMRC to do?
The Kittel principle can allow HMRC to deny a business the right to deduct input VAT where the required evidence establishes that the business knew, or should have known, that its purchase was connected with the fraudulent evasion of VAT.
Importantly, the existence of fraud somewhere within a supply chain is not, by itself, enough to establish that every other trader within that chain should lose its entitlement to recover input VAT.
The question is what the relevant business knew or should have known, assessed by reference to the evidence and objective circumstances surrounding the transactions.
Businesses facing these allegations should therefore distinguish between two issues. There may be evidence that fraud occurred elsewhere within the supply chain, but HMRC must also establish the necessary connection between that fraud and the knowledge attributable to the trader whose input tax it seeks to deny.
Our detailed guidance on the Kittel principle and MTIC fraud explains how these allegations arise and the issues businesses should consider when HMRC challenges their VAT position.
The FWJ tax disputes keyword research identifies substantial search interest around VAT fraud, MTIC fraud, carousel fraud, the Kittel principle and questions from businesses whose input tax has been denied by HMRC.
Can a consultant’s knowledge be attributed to the company?
This is the particularly significant aspect of Eurolaser.
- HMRC accepted that the company’s sole director did not have the relevant knowledge or means of knowledge. That did not end the enquiry.
- Mr Darr had been responsible for introducing and arranging the transactions which gave rise to the assessments. The First-tier Tribunal found that his knowledge and means of knowledge could be attributed to Eurolaser.
- The Upper Tribunal recorded that the FTT had applied previous authorities concerning attribution and upheld the resulting Kittel assessments and penalties.
For businesses, the practical implication is that it may not be sufficient to focus only on what the board knew.
Where consultants, employees or other individuals have substantial responsibility for identifying counterparties, arranging transactions or managing a particular trading relationship, their role may become highly relevant to an HMRC investigation.
This does not mean that the knowledge of every external consultant will automatically be treated as the company’s knowledge. Attribution is a legal and fact-sensitive question. Eurolaser does, however, demonstrate why businesses should examine who was actually responsible for the transactions rather than assuming that the position of the formal director determines the issue.
What evidence can matter in a Kittel VAT fraud dispute?
The First-tier Tribunal examined the commercial circumstances surrounding Mr Darr’s transactions in considerable detail.
- It found that he had arranged 87 purchase transactions, of which 41 were back-to-back transactions. It considered repetitive trading patterns, identical or near-identical quantities of goods, recurring mark-ups, a confined group of counterparties and differences between the transactions introduced by Mr Darr and Eurolaser’s wider trading activity.
- The tribunal also attached significance to Mr Darr’s previous involvement with another company whose transactions had been considered in earlier MTIC fraud proceedings.
- The FTT concluded that his previous experience meant that he was familiar with the operation of supply-chain fraud. It found actual knowledge and, alternatively, that his earlier experience should have caused him to be particularly alert to comparable arrangements.
- The Upper Tribunal held that previous knowledge, experience or involvement in the type of fraud being alleged could in principle be relevant. Its significance will depend upon the circumstances of the individual case.
This is an important point for businesses defending Kittel allegations. The dispute is rarely confined to whether a due diligence checklist exists.
HMRC and the tribunal may examine the commercial reality of the transactions, the people involved, their previous knowledge and experience, communications, payment arrangements, margins, counterparties and whether the trading made commercial sense.
Our guidance on what due diligence HMRC expects in Kittel and MTIC cases considers the evidence businesses may need when defending these allegations.
What should a business do if HMRC denies its input VAT?
Receiving a Kittel assessment does not automatically mean that HMRC’s conclusions are correct or that the business knowingly participated in fraud.
The first task is to identify precisely what HMRC alleges.
That includes establishing which transactions are challenged, where HMRC says the fraudulent loss occurred, whose knowledge it relies upon and why it says the business knew or should have known about the connection.
The evidence should then be examined in that context. Due diligence documentation can be important, but so can emails, telephone records, invoices, trading histories, payment information and evidence explaining the commercial rationale for the transactions.
Eurolaser also demonstrates the importance of considering the position of everyone substantially involved in the relevant trading activity. A business responding to HMRC may need to understand not simply what its directors knew, but what information was available to the individuals responsible for introducing and arranging the transactions.
If HMRC has already denied input VAT, there may be routes to challenge its decision through review and appeal. Our guide to challenging HMRC when input tax has been denied explains the issues businesses should consider, while our tax disputes and HMRC investigations team advises companies and directors across England and Wales on VAT assessments, Kittel disputes and related HMRC investigations.
The central lesson from Eurolaser is that businesses should not assume that a director’s lack of knowledge necessarily resolves a Kittel allegation. Where someone else had substantial responsibility for the disputed transactions, HMRC may seek to establish that their knowledge should be attributed to the company.
