HMRC VAT Fraud Allegations Overturned – Lessons for Mobile & Electronics Traders

HMRC’s power to deny VAT repayments when fraud is suspected anywhere in a supply chain continues to create serious risks for distributors, resellers, and traders. A recent Tribunal ruling involving Deos Group Ltd shows both the financial stakes — and the importance of challenging weak allegations.

The case

Deos purchased consignments of genuine Apple AirPods from UK suppliers for sale across mainland Europe. HMRC alleged that a company three steps further down the supply chain had committed VAT fraud.

Despite having no connection to, or knowledge of, the fraudulent company, Deos faced the loss of £1.2 million in VAT plus a potential £364,000 penalty — unless it could prove it did not “know, or should have known” about the fraud.

The principle

This challenge was made under the Kittel (or Mecsek) principle, which allows HMRC to deny VAT reclaims where it believes fraud has occurred in a supply chain and that the taxpayer was, or should have been, aware of it.

For many in the secondary market, this principle creates a subjective risk: HMRC can allege that any deviation from its “ideal” model of trade indicates knowledge of fraud, even where there is no direct connection.

The outcome

With support from Keystone Law’s tax partner Martin O’Neill, Deos appealed to the Tribunal in June 2025. The Tribunal agreed that HMRC’s arguments were unsatisfactory and had failed to show that Deos had knowledge of, or should have known about, the fraudulent activity.

Deos’ director Matthew Smith said the outcome reflected the value of specialist advice:

“Martin’s experience and knowledge of both HMRC and the realities of secondary market trade ensured we were successful in our appeal.”

O’Neill added that the case highlights the risks for companies that cannot afford to appeal:

“It is alarming that businesses unable to fund Tribunal action are being pushed into liquidation, with directors facing personal liability for decisions based on HMRC’s subjective allegations.”

Why it matters

• VAT reclaims can be denied even if the fraud is committed by a company you have never dealt with.

• Directors can be held personally liable, risking not only their companies but also personal assets.

• Appeals can succeed — but only at Tribunal level, requiring both resources and expert representation.

For traders across mobile, electronics, and IT hardware, this case underscores the need to:

• Maintain robust supply chain records,

• Seek early specialist advice when HMRC raises concerns,

• Recognise that HMRC allegations are not final and can be overturned.

Read Keystone Law’s full case report here