In Fulfillment Logistics UK Limited v HMRC [2023] TC08736, the First Tier Tribunal (FTT) found that the Kittel principle did apply to deny input VAT repayment but the customer also had a fixed place of business in the UK for supply purposes, meaning output VAT was due.

  • The business was involved in the importing and reselling of contact lenses to retail customers through the website ''.
  • The appellant's sole director, Mr Lambert, was an accountant who had previously worked for a client, Contact Lenses UK Ltd (CLUK), owned by Mr and Mrs Dreyer.
  • CLUK was a UK business, which operated from Bristol. Mr Lambert became their finance manager and was eventually involved in the day-to-day running of the business.
  • In 2007, CLUK sold its website and database to Contactlenses Ltd (CLL), a company set up in the Seychelles. Mr Dreyer informed Mr Lambert he would be a consultant for CLL but was otherwise not involved. 
  • Mr Lambert arranged for CLL to bank with HSBC in the UK as part of his apparent role as finance manager for the company. The HSBC documents showed Mr and Mrs Dreyer as beneficial owners of CLL.
  • Its employees and other assets were found by the FTT to have been transferred to a UK company set up by Mrs Dreyer, Stratta Ltd. Mr Lambert also became the finance manager of this company. Stratta was to provide outsourced fulfilment and customer services functions for CLL.
  • Following various tax enquiries into CLUK and Stratta, both were shut down and Mr Lambert incorporated the appellant, Fulfilment Logistics Ltd, to take on the roles of both. CLL became the appellant's main customer, representing over 99% of turnover.
  • Overseas orders were placed by CLL or the appellant using the CLL database. The appellant received and paid for the invoices, acted as an importer and Reclaimed the input VAT. CLL was charged for the supply but the appellant stored the goods and arranged onward supply to the retail customer. No output VAT was charged as CLL was not established in the UK.
  • Following enquiries, HMRC issued the following decisions and assessments:
    • Reclaimed input VAT of over £1 million was denied on the basis that the transactions were connected to VAT evasion and the appellant knew or should have known about it. HMRC claimed that Mr Lambert and the Dreyers were so closely connected, not only did he know, but that he was an active part of the fraud.
    • Output tax on the supplies to CLL of nearly £300,000 was due as CLL, as a taxable business, has a fixed establishment in the UK.
  • After an unsuccessful HMRC review, the appellant appealed to the FTT.

The FTT applied the Kittel principle, where the right to reclaim input VAT can be denied where the person knew or ought to have known the transactions were connected to fraud. This includes where the fraud is committed by the customer.

  • The FTT found Mr Lambert not to be a credible witness.
  • The Dreyers knew that the setting up of a Seychelles company did not alter the company's position for VAT and this was fraudulent.
  • Mr Lambert was too closely connected with the business not to know what the reasons for the Seychelles company were. If he did not know, he ought to have.

 In terms of whether CLL, the appellant's customer, was located in the UK:

  • For the Supply of (B2B) services, it is where the business customer has a place of business establishment, or other fixed establishment, that dictates the place of that supply for VAT purposes.
  •  A business establishment is essentially where the head office is located.
  • A fixed establishment is any other place, which has a degree of permanence and suitable human and technical resources to require the services for its own needs.
  • The lack of information available about how CLL was managed made it difficult to establish the location of its business establishment.
  • It was accepted that Mr Lambert was not part of CLL's senior management, but that his role as the finance manager and the activities undertaken in the UK did amount to a fixed establishment.
  • The Dryer's intentions to provide no evidence that they controlled the business and the effort to ensure that the business was run from no one jurisdiction, meant that the business was effectively run on a day-to-day basis by Mr Lambert in the UK.

The appeal was dismissed on both counts.

Useful guides on this topic

Registering for VAT
When should a business register for and charge VAT? What are the VAT registration limits and VAT rules after Brexit? What penalties might HMRC issue for late notification of registration?

Reverse charge: Cross-border services
A UK business may be required to operate the reverse charge on services it receives from abroad.

Reverse charge: Domestic
Domestic reverse charge VAT is a mechanism designed to prevent VAT fraud. When does it apply? How does it operate?

Place of supply: Services
The Place Of Supply (POS) of a service determines whether the supply is within the scope of UK VAT and whether VAT is payable on that supply.

External link

Fulfillment Logistics UK Limited v HMRC [2023] TC08736

Small acorn
If you like our content come and join us.

Thousands of accountants and advisers and their clients use as their primary TAX resource.

Register with us now to receive our receive our FREE SME Topical Tax Update & newletter