What was the First-tier Tribunal case about?
The case formed part of 12 consolidated appeals concerning three construction businesses, two directors and a series of decisions made by HM Revenue & Customs. Following a seven-day hearing in April 2026, the Tribunal allowed the remaining appeals after finding that HMRC had failed to prove a necessary element of its case.
HMRC had denied the companies the right to deduct approximately £3.37 million in input VAT. It alleged that payments connected with labour supplies were linked to the fraudulent evasion of VAT.
The disputed decisions were based on the principles established in Axel Kittel v Belgian State, commonly known as the Kittel principle. Under that principle, HMRC may deny input VAT where a taxpayer knew, or should have known, that its transactions were connected with VAT fraud.
HMRC also imposed penalties on the companies under section 69C of the Value Added Tax Act 1994 and sought to transfer substantial proportions of those penalties to the directors personally under section 69D. The Tribunal expressly recorded that HMRC had not alleged criminality by any of the appellants.
How did FWJ challenge the director’s personal liability?
FWJ acted for one of the directors, whose identity has been withheld for confidentiality. HMRC had determined that he should be personally liable for two-thirds of the penalties imposed on the companies.
- £209,987.20 in relation to the first company
- £307,743.20 in relation to the second company
- £156,522.80 in relation to the third company
The total potential personal liability was therefore approximately £674,253.
The FWJ tax disputes team, led by Andy Lynch, instructed Barrister Colm Kelly of Devereaux chambers to represent the director before the Tribunal.
Why did HMRC’s VAT case fail?
For HMRC to deny input VAT under the Kittel principle, it had to prove four separate matters:
- a VAT loss had occurred
- the loss resulted from fraud
- the appellants’ transactions were connected with that fraudulent loss
- the appellants knew, or should have known, about the connection
The Tribunal found that HMRC had not proved that the relevant payments were connected with the fraudulent loss of VAT. Although it considered that the appellants should have known of the connection had one been established, that finding could not overcome HMRC’s failure to prove that the connection actually existed.
HMRC’s substantive case therefore failed. The associated section 69C penalties and the section 69D personal liability assessments could not stand, and the Tribunal allowed the remaining appeals.
What does the decision mean for the client?
The decision removed a potential personal liability of more than £674,000 for FWJ’s client.
The outcome also demonstrates the importance of examining every part of an HMRC VAT fraud case separately. Concerns about due diligence, unusual transactions or what a taxpayer should have known do not remove HMRC’s obligation to prove that the disputed transactions were connected with an actual fraudulent loss of VAT.
Our client faced a potential personal liability of more than £674,000, with significant financial and personal consequences. From the outset, our priority was to ensure that his position was properly understood and that HMRC was held to the legal burden it was required to meet. The Tribunal’s decision removes that substantial liability and gives our client the clarity and relief he has been seeking throughout these proceedings. We are very pleased to have achieved this outcome for him after a lengthy and demanding appeal.
Andy Lynch, Partner (Non-solicitor)
The Tribunal’s full written decision was released on 10 July 2026. An application for permission to appeal must generally be received within 56 days of the date on which the full written reasons were sent.
How can FWJ help with HMRC tax disputes?
Francis Wilks & Jones advises companies, directors and individuals facing complex HMRC tax investigations and disputes, VAT assessments, tax penalties and personal liability claims.
Our team can assist with HMRC correspondence, statutory reviews, claims by HMRC against directors, appeals to the First-tier Tribunal and proceedings involving allegations that transactions were connected with tax fraud.
