Associated company failed to account for output tax

The taxpayer (GC) was a long-established construction company. In 2016 a new company was formed called Grantham Holdings Ltd (GH) which held all of the contracts and received invoices from subcontractors working on GC jobs. It then raised monthly invoices for management services to GC correctly charging 20% VAT as a standard-rated supply. GC claimed input tax but GH failed to account for output tax on its returns from June 2017 to December 2017. HMRC concluded the directors of GC ‘knew or should have known’ that GH would not pay its VAT liabilities to HMRC and disallowed input tax claimed by GC under the Kittel principle.

The director claimed that there was never any intention that GH would be used to evade VAT fraudulently. Rather commercial factors had caused the VAT problem - there were major disputes with three GC contracts which created serious...