Keystone Law successfully advises Deos Group Ltd on HMRC VAT fraud claim

Keystone Law’s tax partner Martin O’Neill has successfully advised Deos in its dispute with HMRC concerning the withholding of VAT repayments.

Deos purchased a number of consignments of authentic Apple AirPods from suppliers in the UK for sale to customers in mainland Europe. The case concerned an allegation made by HMRC that a company, three companies distant from Deos, in the supply chain committed VAT fraud. Despite Deos having never heard of the fraudulent company, it faced the prospect of being refused its right to claim VAT of £1.2 million and faced a penalty of £364,000 if it could not disprove HMRC’s allegation that Deos either knew or should have known of the alleged fraud in the supply chain.

Keystone advised Deos throughout the dispute, prepared all evidence, and worked with counsel during the Tribunal hearing in June 2025.

HMRC has the power to deny a taxpayer the ability to reclaim VAT on supplies bought for business where it can be shown that someone in the supply chain has committed a fraud and that the taxpayer knew, or alternatively should have known, that this was the case. The principle is known as the Kittel principle or the Mecsek principle.

On appeal, Deos was successfully able to show that HMRC’s grounds for alleging what Deos should have known were unsatisfactory and similarly that HMRC had failed to show that Deos knew that the purchases were connected with fraudulent VAT evasion.

Matthew Smith, Director of Deos, commented:

“We are thrilled with the outcome of this case. Martin’s experience and knowledge of understanding both how HMRC work, and his commercial experience of how trade is conducted in secondary markets ensured we were successful in our appeal.”

Martin O’Neill said:

“The grounds upon which HMRC allege knowledge of fraud in cases like these are questionable, especially when it is the case that the alleged fraudster was a company with no known connection to Deos, and who wasn’t Deos’ immediate supplier. Deos was right to challenge HMRC. In this case, we were able to disprove, in turn, each HMRC argument alleging knowledge of fraud.

“The mantra that taxpayers knew, or should have known, of fraudulent activity by companies several links down a supply chain underpins numerous HMRC compliance and penalty strategies. This case demonstrates how HMRC commonly makes allegations of knowledge of the connection to fraud on the basis of a subjective view of how trade should be conducted, and which holds that any variation to the HMRC ‘ideal’ model is proof of the knowledge of a connection to fraud. This remains a risky strategy as companies can have VAT reclaims denied or can be the subject of VAT or excise penalties. Company directors are also frequently made personally liable for penalties in respect of which they are not directly responsible on subjective evidence.  

“Any allegations made by HMRC can only be overturned on appeal to the Tribunal. 

“It is alarming that companies faced with such decisions who cannot afford the costs of appeals to the Tribunal are being placed into liquidation, unaware that the application of directors’ personal liability means company directors risk losing not only their businesses but also their houses and savings too.”