Bachra v HMRC [2023] UKFTT 91 (TC)

HMRC hit a sole director with a personal liability notice for over £1.1 million after her company lost a Kittel input tax fight. The Tribunal drew a sharp line: failing the objective "should have known" test is not the same as HMRC proving she actually knew.

The Facts

Mrs Bachra was the sole director of a company that had been assessed to VAT after HMRC denied its input tax deduction on the basis that the company knew, or should have known, that the relevant transactions were connected with the fraudulent evasion of VAT, applying the Kittel principle. Having imposed a deliberate inaccuracy penalty on the company under Schedule 24 FA 2007, HMRC went on to issue Mrs Bachra with a personal liability notice under paragraph 19 of that Schedule, seeking to recover the penalty of £1,177,422.96 personally from her as the director whose deliberate act, HMRC said, had caused the inaccuracy.

Mrs Bachra appealed, arguing that the finding underlying the VAT assessment, that the company should have known of the connection to fraud, was an objective finding falling short of proving that she herself knew, at the time, that the company's returns were inaccurate. HMRC's position was, in substance, that a should-have-known finding sufficient to deny input tax was also sufficient to establish the deliberateness required for the personal liability notice.

Procedural History

• First-tier Tribunal [2023] UKFTT 91 (TC), 30 January 2023: allowed Mrs Bachra's appeal against the personal liability notice, holding that the should-have-known finding against the company did not, of itself, establish the deliberate inaccuracy required to attribute the penalty to her personally.

The Issues

1. Does a finding that a company should have known its transactions were connected with fraud, sufficient to deny input tax under Kittel, also establish the deliberate inaccuracy required for a Schedule 24 penalty?
2. If a deliberate inaccuracy penalty on the company is nonetheless upheld, does that automatically establish the director's own deliberate act for personal liability notice purposes?
3. What must HMRC separately prove to attribute a deliberate inaccuracy penalty to a specific director under paragraph 19 Schedule 24 FA 2007?

The Ratio: Should-Have-Known Is Not Deliberate

The Tribunal drew on the established distinction, reflected in Auxilium Project Management Ltd v HMRC, between deliberate inaccuracy, which requires actual knowledge that a return is inaccurate, and lesser standards of fault such as carelessness or (in the VAT fraud context) constructive knowledge under Kittel. Should-have-known is, by definition, an objective standard measuring what a reasonable trader in the taxpayer's position ought to have appreciated; it says nothing directly about what the particular taxpayer, or their director, actually knew at the time. HMRC therefore could not simply transplant the Kittel finding from the VAT assessment into the separate deliberate inaccuracy and personal attribution questions required for the penalty and the PLN.

Why the Distinction Matters

The practical stakes in Bachra were considerable: a director facing personal liability for over £1.1 million needed HMRC to establish not merely that the company's input tax claim failed on an objective knowledge standard, but that she herself, subjectively, knew the company's return was inaccurate, and that this knowledge was properly attributable to her personally rather than simply to the company as a corporate entity. Collapsing these into a single question would have exposed directors to very substantial personal penalties on a materially lower evidential threshold than Parliament intended for deliberate inaccuracy penalties.

Authorities

Kittel v Belgian State (C-439/04)

The foundational EU-derived test denying input tax where a trader knew or should have known its transactions were connected with fraudulent evasion of VAT, the objective standard Bachra distinguishes from deliberate inaccuracy.

Auxilium Project Management Ltd v HMRC [2016] UKFTT 249 (TC)

The leading First-tier Tribunal formulation of deliberate inaccuracy as requiring actual knowledge of the inaccuracy and an intention that HMRC rely on it, applied in Bachra to distinguish deliberateness from the lower Kittel threshold.

Finance Act 2007, Schedule 24, paragraph 19

The statutory basis for personal liability notices, requiring HMRC to show the company's deliberate inaccuracy penalty is attributable to the deliberate act of a specific officer before that officer can be made personally liable.

Relevance to PLN and MTIC Disputes

Bachra is directly relevant to any director facing a personal liability notice following an MTIC or Kittel-based VAT denial against their company, since it confirms HMRC must independently establish the director's own subjective knowledge rather than relying on the objective finding that defeated the company's input tax claim. It is equally relevant to HMRC's own case-building in these disputes, since it defines precisely what additional evidence is needed to support a PLN once a Kittel denial has been secured.

Practitioner Application

Assessing a PLN following a Kittel denial after Bachra

• Separate the two questions explicitly. Challenge any PLN that appears to rely solely on the underlying Kittel finding without separate evidence of the director's actual knowledge.
• Scrutinise HMRC's evidence of personal knowledge. Require HMRC to identify what it says the director actually knew, when, and on what evidence, rather than accepting an inference drawn purely from the company's objective failure.
• Do not assume a lost Kittel appeal settles the PLN. A company losing its input tax fight does not resolve, and should not be treated as resolving, the separate question of a named director's personal deliberate act.
• Advise HMRC-side clients on the evidential gap. Where advising on PLN strategy, ensure the case for personal attribution is built independently of the Kittel finding, with its own evidential foundation.

Common mistakes

• Assuming a Kittel should-have-known finding automatically supports a deliberate inaccuracy penalty or PLN.
• Conflating the company's state of knowledge with the individual director's own subjective knowledge.
• Failing to challenge a PLN's evidential basis separately from the underlying VAT assessment.

Frequently Asked Questions