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Why liquidation is NOT the answer to disputes with the VAT man

24 November 2022

Why liquidation is NOT the answer to disputes with the VAT man

By Martin O’Neill, Keystone law

Having experienced first-hand HMRC’s attempts to combat serious tax losses, one of the features of tax litigation over the last 15 years has been the prevalence of so-called ‘Kittel’ cases. These are cases in which HMRC seeks to deny repayments of VAT to companies buying goods in circumstances where HMRC has identified a fraud further up the supply chain, often many companies distant. They can involve significant amounts of VAT and form a substantial pillar of HMRC’s compliance strategy.

Clients often ask, “Why should I contest an HMRC assessment – isn’t putting the company into a voluntary liquidation a better option?” In the case of complex appeals, such as Kittel cases, which can be long and drawn-out, the question can be an especially pressing one. As a company director faced with a large VAT bill, the attraction of liquidating the company and starting again may be attractive. Tax litigation can take time, money and will be stressful. In the short term it might seem like an appealing choice to write off your losses and move on with a clean slate. In taxation, however, the choice isn’t that simple.

HMRC has wide-ranging powers to pursue company directors and senior company officers, personally, for VAT debts that were caused by their own dishonesty. More frequently, the same approach to personal penalties is being applied by HMRC to cases of Kittel ‘means of knowledge’. This means, as a matter of HMRC policy, that officers of companies that ‘knew or should have known’ of links to fraud in their transaction chains will find themselves running the gauntlet of punitive financial demands, and other measures, having a long-lasting legacy on their lives and careers.

In this article, our tax partner Martin O’Neill will consider the two possible outcomes facing a taxpayer in VAT disputes.


Before making any decision not to pursue an appeal against a Kittel decision, and to put the taxpayer company into liquidation, long-term ramifications of such a decision must be considered, as tax enquiries do not necessarily die with the liquidation of the company.

Most companies are penalised because they, subjectively, ‘should have known’ of a fraud committed by someone else (often many companies distant up a supply chain) which is deeply unfair and they will elect to contest it.

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