If HMRC says your business knew, or should have known, that transactions were connected to VAT fraud, one of the first things it will usually look at is due diligence. In many Kittel and MTIC disputes, the argument is not just about what happened in the supply chain. It is about whether your business did enough to understand who it was dealing with, why the trade made sense and whether the warning signs should have been obvious.
That is why due diligence often sits at the centre of these cases. Businesses are frequently told, after the event, that they should have carried out more checks, asked more questions or been more suspicious. The difficulty is that HMRC often applies that analysis with the benefit of hindsight, after it has already pieced together a fraud case somewhere in the wider chain.
At Francis Wilks & Jones, we advise businesses and directors facing HMRC disputes involving denied input tax, VAT fraud allegations and Kittel-related challenges. A proper understanding of due diligence can make a significant difference both to how a case is defended and to how future risk is managed.
At a glance
In Kittel and MTIC cases, due diligence is usually central to whether HMRC says a business should have known that the transactions were linked to fraud.
The issue is rarely just whether some checks were carried out. What HMRC usually wants to know is whether the business approached the trade in a commercially sensible and genuinely inquisitive way.
That often means HMRC will look at:
- who you traded with
- how the deal was introduced
- what checks were carried out
- whether the pricing or margins made sense
- whether the overall transaction had obvious warning signs
Why does due diligence matter so much in Kittel cases?
Due diligence matters because Kittel cases often turn on what the business should have appreciated at the time.
HMRC may accept that your company did not design or run the fraud itself. Its case is often that the surrounding circumstances were such that a reasonable trader should have spotted the problem and either investigated further or refused to proceed.
That means due diligence becomes one of the clearest ways of testing whether the business acted reasonably. If proper checks were carried out, sensible questions were asked and the commercial rationale stands up, that can be highly relevant to whether HMRC’s allegations are sustainable.
At the same time, due diligence is not a magic shield. A pile of documents does not automatically defeat a Kittel allegation if the overall transaction still looks implausible or the checks were superficial. The real issue is whether the business approached the trade in a way that was commercially credible and genuinely alert to risk.
If you need the wider legal framework behind this, it helps to read the Kittel principle explained.
What sort of checks does HMRC expect businesses to carry out?
There is no single checklist that guarantees safety in every case, and that is one of the frustrations for businesses. HMRC usually looks at the checks in context and asks whether they were proportionate to the trade being undertaken.
In practical terms, that often means looking at whether the business understood:
- who the counterparty really was
- whether the company and VAT details checked out
- how the goods were sourced and moved
- whether the deal made commercial sense
- whether the margins or pricing were realistic
- whether there were inconsistencies in the documents or trading pattern
But the key point is this: HMRC is rarely impressed by a process that looks like a box-ticking exercise carried out after the event. What matters more is whether the business can show it genuinely engaged with the commercial and fraud risk at the time of the trade.
A sensible due diligence process is therefore usually one that reflects how a careful and commercially alert trader would actually behave in the circumstances.
What warning signs does HMRC say businesses should have spotted?
This is often where disputes become more contentious.
HMRC frequently says the warning signs were there all along and that a reasonable business should have recognised them. The problem, of course, is that many of those warning signs look much clearer once HMRC has already reconstructed the supply chain with hindsight.
Typical examples may include
- unusual pricing,
- counterparties with little visible trading history,
- unclear commercial rationale,
- rapid or repetitive chains of transactions,
- weak documentation, or
- trading arrangements that appear oddly detached from normal market behaviour.
But whether those issues really amounted to obvious warning signs is often a matter of dispute. What HMRC calls suspicious, a business may describe as commercially explainable. That is why context matters so much.
A tribunal will often be interested not just in whether a feature existed, but in whether it would genuinely have looked troubling to a reasonable trader at the time.
Can good due diligence defeat a Kittel allegation?
Sometimes, yes, but not always in the simple way businesses hope.
Good due diligence can be highly important because it helps show that the business approached the trade carefully, asked sensible questions and did not simply ignore obvious risks. In many cases, that can be a strong part of the defence.
However, these cases are not decided by paperwork alone. A business may have a file of checks, but if those checks were superficial or the transaction still looks commercially implausible, HMRC may argue that the due diligence does not really answer the central problem.
Equally, a business may not have a perfectly polished due diligence file but may still have a credible explanation for why the trade made sense and why the fraud risk was not reasonably apparent.
That is why the strongest defence usually combines both things:
- documentary evidence of checks, and
- a coherent commercial explanation of the transaction
If HMRC has already denied input tax, it may also help to read HMRC denied my input tax: can I challenge the decision?
What should businesses do if HMRC says their checks were not enough?
The first step is to avoid accepting HMRC’s characterisation too quickly.
It is very common for HMRC to say, in broad terms, that the business “failed to carry out sufficient due diligence”. That may sound persuasive, but it does not automatically mean the criticism is fair or legally decisive.
The more useful question is this: what exactly does HMRC say should have been done differently, and would those additional steps really have changed anything?
That is often where a more detailed review becomes necessary. It may involve looking again at the transactions, the trading context, the supplier relationships and the way the checks were actually carried out in practice.
In many cases, the real issue is not that there was no due diligence at all. It is that HMRC has interpreted the available material in a one-sided way or has imposed an unrealistic standard after the event.
If the dispute is already progressing formally, it is also worth understanding appealing a Kittel assessment or penalty.
How can we help?
Due diligence is one of the most heavily contested issues in Kittel and MTIC disputes. Businesses are often judged not only on what happened, but on what HMRC says they should have seen coming.
At Francis Wilks & Jones, we advise businesses and directors facing denied input tax disputes, VAT fraud allegations and HMRC challenges involving due diligence, supply chain scrutiny and appeal strategy.
If HMRC says your checks were not enough, getting the factual and legal position clear early can make a significant difference to the outcome.
