MTIC Accusations: Your Rights and HMRC’s Burden of Proof

Few letters from HM Revenue & Customs cause more alarm than one alleging that your business was connected to Missing Trader Intra-Community (MTIC) fraud. HMRC says that VAT was stolen somewhere in a chain of transactions and that you either knew about it or should have known. The consequences can include the denial of hundreds of thousands, sometimes millions, of pounds in input tax, a 30% penalty, deregistration for VAT and, in the most serious cases, a winding-up petition or a criminal investigation.

An MTIC accusation is, however, only an accusation. The law places the burden of proving it firmly on HMRC, and the Tribunal has repeatedly allowed appeals where HMRC’s case rested on suspicion rather than evidence. This guide explains the legal test, what HMRC must prove, how Tribunals weigh the evidence, the rights you have from the moment HMRC makes contact and the steps to take now. It draws on the leading authorities and on two recent First-tier Tribunal decisions from 2025.

What Is HMRC Actually Alleging in an MTIC Case?

Missing trader fraud exploits the VAT rule that cross-border supplies within the EU were zero-rated. A missing trader acquires goods free of VAT, sells them on with VAT added and then disappears without paying that VAT to HMRC. The goods often pass through intermediate businesses, known as buffers, before being exported, sometimes returning to the start of the chain in what is called carousel fraud.

The fraudsters are rarely traceable, so HMRC pursues the solvent businesses in the chain by refusing their input tax claims. An accusation typically arrives through an extended verification of a VAT repayment claim, a compliance visit or a decision letter denying input tax. The principle is not confined to mobile phones and computer chips. The 2025 decisions discussed below concerned Apple AirPods sold to EU buyers and, in a very different sector, labour supplied to a construction company. Our VAT appeals and MTIC team sees allegations across all kinds of goods and services.

It is also important not to confuse a denial of input tax with a notice of joint and several liability. VAT Notice 726 explains a separate regime under section 77A of the Value Added Tax Act 1994 for specified goods, where a business can be made liable for another trader’s unpaid VAT if it knew or had reasonable grounds to suspect that the VAT would go unpaid. The tests and defences differ, and HMRC sometimes runs both routes, so you need to know which one you face.

The Legal Test: Kittel and Mobilx

In Axel Kittel v Belgian State (C-439/04), the Court of Justice held that a trader who knew or should have known that, by its purchase, it was taking part in a transaction connected with the fraudulent evasion of VAT must be treated as a participant in that fraud and loses the right to deduct input tax. The Court of Appeal applied the principle in Mobilx Ltd v HMRC [2010] EWCA Civ 517, describing the test as simple and warning that it should not be over-refined.

Mobilx also confirms that a trader who has the means of knowing about the connection and fails to use them loses the right to deduct, not as a penalty for negligence but because the objective conditions for the right are not met. That does not turn carelessness into constructive knowledge. In GSM Export (UK) Ltd v HMRC [2014] UKUT 529 (TCC), the Upper Tribunal stressed that the state of mind remains “knew or should have known”, as opposed to knowingly running a risk that a connection might exist.

The principle survived Brexit. Section 69C of the Value Added Tax Act 1994 expressly refers to Kittel and related Court of Justice decisions made before section 42 of the Taxation (Cross-border Trade) Act 2018 took effect, and the Tribunal continues to apply it.

HMRC’s Burden of Proof: What HMRC Must Establish

Where HMRC relies on Kittel, it must prove each element of the test, for each purchase on which input tax is denied:

1. that there was a tax loss caused by the fraudulent evasion of VAT;
2. that your transactions were connected with that fraudulent evasion; and
3. that you knew or should have known of that connection.

In Mobilx, Moses LJ made clear that if HMRC asserts a trader’s state of knowledge, it must prove that assertion. The standard is the ordinary civil standard. In Re B [2008] UKHL 35, the House of Lords confirmed that there is only one civil standard of proof and that the seriousness of an allegation does not raise it. Nevertheless, in Promeridian Services Ltd v HMRC [2025] UKFTT 296 (TC), the Tribunal held that it is not enough for HMRC to show that transactions might have been, or probably were, connected with fraud. HMRC must prove that they were.

Two further principles protect honest traders. First, as Christopher Clarke J explained in Red 12 Trading Ltd v HMRC [2009] EWHC 2563 (Ch), a transaction that is entirely regular so far as the trader is or ought to be aware cannot cost the trader its input tax merely because there was fraud elsewhere in the chain. Second, the right to deduct is an integral part of the VAT system, so the Tribunal must be satisfied before it is interfered with.

HMRC also has an advantage that traders should understand. In Fonecomp Ltd v HMRC [2015] EWCA Civ 39, which concerned an indirect, “contra-trading” connection to fraud, the Court of Appeal held that a trader need not know how the fraud was carried out. It is enough that the trader knew or should have known that fraud had occurred or would occur somewhere in a transaction connected with its own. HMRC’s burden is real, but it is not impossible to discharge.

Due Diligence and the “Only Reasonable Explanation”

Due diligence is not a free-standing defence. Mobilx warns Tribunals against focusing unduly on it, because even a trader who asked the right questions cannot ignore surrounding circumstances that point to fraud. At the same time, HMRC cannot simply transfer its own investigative role to traders. In Mahagében (C-80/11), the Court of Justice said that a tax authority cannot, as a general rule, require a trader to verify that its supplier has filed returns and paid its VAT.

The phrase “only reasonable explanation” is often misunderstood. In AC (Wholesale) Ltd v HMRC [2017] UKUT 191 (TCC), the Upper Tribunal held that HMRC does not have to eliminate every conceivable innocent explanation. Where the trader advances an explanation, however, HMRC may need to show that fraud was the only reasonable one. The practical lesson is that your explanation must be put forward through documents and witnesses, not left to inference.

How Tribunals Weigh Circumstantial Evidence

Most MTIC appeals turn on circumstantial evidence. The Court of Appeal in Davis & Dann Ltd v HMRC [2016] EWCA Civ 142 and CCA Distribution Ltd v HMRC [2017] EWCA Civ 1899 confirmed that the Tribunal must stand back and consider the whole picture. Circumstantial evidence works like a cord rather than a chain, so several weak strands may together carry real weight. Two 2025 decisions show how differently cases can end.

Promeridian: HMRC’s case fails

HMRC relied on ten factors, including rapid growth in turnover, a prior acquaintance with the supplier’s director, the absence of a written contract, thin profit margins and limited due diligence. The Tribunal found that only two carried real significance. It accepted that the due diligence was adequate, noted that HMRC had produced no objective evidence of normal margins, and allowed the appeals against the denial of input tax, the penalty and the deregistration decision, even though it found the director unreliable on some points.

Zed-UK: HMRC’s case succeeds

In Zed-UK Ltd v HMRC [2025] UKFTT 801 (TC), the Tribunal found no actual knowledge but held that the company should have known. A new supplier had appeared unprompted, six-figure deals followed within weeks, there was no meaningful price negotiation, nobody carried out a video call to check the passport holder (whose identity had been hijacked) and the deals made a loss without the VAT. The company had also been warned by HMRC about back-to-back trading, and the Tribunal drew an adverse inference from the failure to call a director who could have given evidence. Notably, the Tribunal rejected several of HMRC’s own arguments, including those about an FCA-regulated payment platform and non-disclosure agreements, which shows that HMRC’s case is genuinely tested.

Taken together, these decisions show that outcomes depend on commercial rationale, the quality of contemporaneous records and the credibility of witnesses. Careful preparation of witness evidence is therefore as important as the legal argument.

Your Rights When HMRC Makes an MTIC Allegation

The right to confidential legal advice

Legal professional privilege protects what you tell your solicitors and barristers. It does not protect what you tell your accountant. In R (Prudential plc) v Special Commissioner of Income Tax [2013] UKSC 1, the Supreme Court refused to extend legal advice privilege to accountants, even when they give tax advice. Anything you have told your accountant may therefore be obtainable by HMRC. Our lawyers can instruct a forensic accountant on your behalf so that the work is protected. For more, see our guide to privilege and disclosure.

The right to know and test the case against you

A decision letter must set out HMRC’s reasons, and once an appeal is lodged HMRC must set out its case and disclose the documents on which it relies. MTIC appeals are usually allocated to the Complex category, which brings formal disclosure obligations, witness cross-examination of HMRC officers and a costs risk unless the appellant opts out within the short time allowed. Challenging the evidence, including HMRC’s reliance on generalised indicators rather than facts about your transactions, is a core part of the defence.

The right to appeal, and to challenge penalties and deregistration

You generally have 30 days from the date of the decision to ask for a review or appeal to the First-tier Tribunal. If the deadline has passed, late appeals can still be admitted under the approach in Martland v HMRC [2018] UKUT 178 (TCC), but delay damages your prospects. The penalty and any decision to deregister you are separate decisions and carry their own appeal rights. See also the Tribunal guidance on gov.uk and our pages on Tax Tribunal representation and VAT deregistration appeals.

Penalties and Wider Consequences

Under section 69C of the Value Added Tax Act 1994, a penalty of 30% of the potential lost VAT applies where input tax is denied under Kittel and the trader knew or should have known of the connection. HMRC may assess it at the same time as the denial decision and no later than two years afterwards. HMRC’s own guidance, CC/FS42, explains the process. Related provisions allow HMRC to hold company officers personally liable for all or part of a company’s penalty (section 69D) and to publish the details of those penalised where the potential lost VAT exceeds £50,000 (section 69E). The Tribunal can mitigate a penalty under section 70, but its powers are limited, so the better strategy is usually to defeat the underlying denial. For wider guidance, see our pages on HMRC penalties and penalty appeals.

Unpaid assessments can quickly escalate into enforcement. HMRC may require security, issue a statutory demand or present a winding-up petition. A petition advertised in the London Gazette can freeze a company’s bank accounts before the VAT dispute has been heard. We advise on opposing a winding-up petition, obtaining a validation order to keep trading and applications to set aside a statutory demand. Our HMRC debt enforcement team can act urgently. In the most serious cases, HMRC may refer conduct for criminal investigation and prosecution, which is why early legal advice matters before you answer questionnaires or attend interviews. Where HMRC’s decision is procedurally unlawful, judicial review may also be available.

Practical Steps to Take Now

• Pause before responding. Do not answer HMRC questionnaires or attend interviews until a specialist has reviewed your position.
• Diarise the 30-day deadline from any decision letter, and take advice immediately if it has already passed.
• Preserve every record. Keep contracts, invoices, bank statements, emails, messaging apps, inspection reports and serial or IMEI records, together with your due diligence file.
• Map the transaction chain and document the commercial reason for each deal, including why you traded with that supplier and customer and how prices were set.
• Identify your witnesses early. Suppliers, customers and colleagues who can explain how the deals came about may be essential, as the Zed-UK decision illustrates.
• Instruct lawyers, not just accountants, so that your strategy and any forensic accounting remain confidential.

How LEXLAW Can Help

MTIC disputes demand a combination of tax expertise, litigation skill and tactical judgment. Our team includes dual-qualified solicitors and barristers, among them lawyers with experience of acting for HMRC and in Big Four tax litigation. We work from chambers in Middle Temple, close to the Royal Courts of Justice, and handle the whole process, from the first HMRC letter and the Tribunal appeal through to enforcement defence. Our taxation practice and HMRC investigations team will assess the merits of your case at the outset, so you know where you stand before you commit to a strategy. We also advise on HMRC VAT investigations more broadly.

If you have received an extended verification letter, a notice of joint and several liability or a decision denying input tax, do not wait for HMRC’s investigation to advance. Call our VAT and MTIC specialists on 02071830529.