The “knew or should have known” standard that came into CIS this April was not invented for CIS. It is a VAT principle with nearly twenty years of UK case law behind it. Here are the six cases that tell construction contractors what HMRC will do next.
Key takeaways
The test is borrowed, not new. Sections 62A and 62B of the Finance Bill 2025-26 import the VAT Kittel principle into CIS. Twenty years of case law already tells us how it will be applied.
HMRC’s threshold is lower than contractors assume. HMRC does not need a whistleblower, a confession, or a named individual to open a case. The bar is corporate knowledge, judged against what a reasonably diligent business should have established.
The personal liability tail is long. A Kittel finding can follow a director personally for nearly two decades, and through liquidation, even after the company is gone. The case at #1 is the warning shot.
From 6 April 2026, principal contractors are jointly liable for CIS fraud anywhere in their supply chain where they “knew or should have known” of the fraud. Sections 62A and 62B of the Finance Bill 2025-26 wrote that test into UK construction law for the first time.
It is not a new test. It is the Kittel principle, lifted directly from the European Court of Justice’s 2006 ruling in Axel Kittel v Belgian State and domesticated for English law by the Court of Appeal in Mobilx v HMRC in 2010. For nearly twenty years, HMRC has used it to deny billions of pounds of VAT input tax claims. Now they are bringing it to construction.
The good news for contractors is that there is no mystery about how this test gets applied. Twenty years of UK case law tells us exactly what HMRC will look for, where the line gets drawn, and what defences hold up. The bad news is that the contractors who are investigated under the new regime will be measured against a standard the courts have spent two decades refining. The first generation of MTIC traders had the benefit of HMRC working out the playbook in real time. Construction will not.
What follows is a countdown of six landmark Kittel cases that show what is coming. We have started with the cases that establish the basic framework and built up to the cases that show what failure costs. Read them in order. The picture they paint together is more important than any single case.
Ammanford Recycling Ltd v HMRC [2023] UKUT 302 (TCC)
The Upper Tribunal confirmed that in a Kittel case, HMRC does not need to identify a specific individual within the appellant company who had knowledge of the fraud. A “someone in the business knew” case can be run without naming the accused. HMRC must amend its pleadings if it later wants to put actual knowledge to a specific witness in cross-examination, but the underlying case can proceed on the basis that knowledge sits somewhere within the corporate body.
The 2026 CIS reality
The threshold for HMRC to begin a Kittel-style investigation against you is lower than most contractors assume. They do not need a whistleblower, a confession, or even a named individual inside your business. They need a basis to argue that the company had the requisite knowledge or means of knowledge. The case is run against the company, and the defence has to be the company’s defence, built on the company’s records.
Red 12 Trading Ltd v HMRC [2010] EWCA Civ 402
The Court of Appeal confirmed that the fraudster does not need to be the trader’s direct supplier. The dishonest party can be anywhere in the chain. As the court put it, whether the fraudster was the importer or someone further down the line is “completely irrelevant and unarguable”. The question is what the trader knew or could have known about the chain as a whole, not just about its immediate counterparty. HMRC’s own internal VAT Fraud Manual cites Red 12 as the controlling authority on this point.
The 2026 CIS reality
A clean immediate subcontractor is not a defence. CIS fraud almost never sits at the first tier. It sits two, three or four layers down the chain, where a labour-only sub-sub-contractor disappears with the deductions. Under the new rules, the principal contractor at the top of that chain is on the hook for a fraudster they may never have met, contracted with, or been able to identify by name. The question your audit trail has to answer is what your processes did to interrogate the chain as a whole, not just the company you signed with.
“Whether the fraudster was the importer or someone further down the line is completely irrelevant and unarguable.”
Mobilx Ltd (in administration) v HMRC [2010] EWCA Civ 517
This is the case that built the test. Moses LJ in the Court of Appeal set the controlling standard for “should have known” in UK Kittel cases: a trader has the requisite knowledge where the only reasonable explanation for the circumstances of the transaction is that it was connected with fraud. Knowledge includes constructive knowledge. A trader who has the means of knowledge available and chooses not to deploy it is treated as having that knowledge. Wilful blindness counts as knowledge. Asking fewer questions does not make you safer.
The 2026 CIS reality
This is the legal heart of the new CIS regime. The test is not what you actually knew. It is what a reasonably diligent business in your position would have established. The means of knowledge available to a Tier 1 contractor today are extensive: HMRC verification, Companies House data, market labour rate benchmarks, physical site verification, payment-pattern analysis. Every one of those is a “means of knowledge” the courts will measure your conduct against. A subcontractor file that records what you checked, when you checked it, and what you concluded is the document that Mobilx forces you to produce.
Fonecomp Ltd v HMRC [2015] EWCA Civ 39
The Court of Appeal closed the door on what tax practitioners had hoped might be a partial escape route. Arden LJ held that a trader does not need to know how the particular fraud was carried out. The trader simply has to know, or have the means of knowing, that fraud has occurred or will occur somewhere in a transaction to which their own transaction is connected. The Supreme Court refused permission to appeal, saying the answer was so obvious it left no scope for reasonable doubt. The decision is credited with protecting around £260 million of tax revenue across roughly sixty connected cases.
The 2026 CIS reality
“I didn’t know how the fraud worked” is not a defence. A principal contractor cannot point to the technical complexity of a multi-tier subcontracting fraud and argue they could not have anticipated the specific mechanism. They need only have known, or had the means of knowing, that something in the chain was wrong. For construction, that shifts the question from “did we understand the fraud” (almost never) to “did we have reason to suspect something” (much harder to deny once HMRC starts pulling files).
“The participant does not need to know how the fraud was carried out in order to have this knowledge.”
Tower Bridge GP Ltd v HMRC [2022] EWCA Civ 998
The Court of Appeal denied a Cantor Fitzgerald VAT group company the right to recover £5.5 million of input VAT on carbon credit purchases. The supplier was not VAT-registered and had fraudulently defaulted on its VAT liabilities. The First-tier Tribunal had found that the appellant should have known its transactions were connected with VAT fraud from June 2009. The Court of Appeal endorsed HMRC’s refusal to exercise discretion in the appellant’s favour partly on the basis that the appellant had failed to carry out reasonable due diligence, despite operating its own internal invoicing, tax, legal and credit departments.
The 2026 CIS reality
Size is not a defence. Internal compliance teams are not a defence. The existence of policies and processes is not a defence if the records cannot show those policies were actually applied to the transactions in question. This is the case that should worry Tier 1 construction contractors most directly. A major City institution with full in-house tax, legal and credit functions still lost a £5.5 million claim because the FTT could not find evidence the relevant due diligence had been done on the relevant transactions. The same pattern, applied to construction, would catch most large contractors as their procurement processes currently stand. Having the policy is not enough. Having the proof you applied the policy is the test.
Hellard v Khan & Anor (Re Phoenix Tech Ltd) [2024] EWHC 1130 (Ch)
Eighteen years after the underlying transactions, the High Court awarded summary judgment of £4,806,550 against a former director personally. The transactions were carousel fraud purchases in 2005 and 2006. The First-tier Tribunal had found in 2014, after an eleven-day hearing, that the director had both means of and actual knowledge of the MTIC fraud, and had denied the company’s input tax claims. The company subsequently entered liquidation. The liquidator then brought a claim against the director under sections 212 and 213 of the Insolvency Act 1986 for fraudulent trading and misfeasance. The director tried to defend himself by re-arguing that he had not known about the fraud. ICC Judge Mullen struck out that defence as an abuse of process: the FTT had already made the finding, and re-litigating it would unfairly burden creditors and waste court resources. Summary judgment for £4.8 million followed. No limitation period applied, because the underlying conduct was fraud.
The 2026 CIS reality
This is the case construction directors need to read twice. A Kittel finding does not stay where you found it. Lose at the FTT once, and the finding can be used a decade or more later in a separate court to make you personally liable for the company’s tax losses, even after the company itself is gone. Liquidating a contractor that has lost a Kittel case does not extinguish the director’s exposure. The director’s house, savings and pension are then in scope. This is the single strongest reason to fight a Kittel denial properly at the FTT, with proper representation, the first time round. A defence not run at the FTT cannot be revived later. The findings the FTT makes about your knowledge will follow you personally through liquidation, through bankruptcy, and effectively forever.
“Eighteen years after the transactions, with the company long gone, summary judgment for £4.8 million landed personally.”
The pattern across these six cases is consistent. HMRC’s threshold to open a case is low (Ammanford). The chain it can investigate is wide (Red 12). The knowledge it has to prove is not what you actually knew, but what you should have known (Mobilx), and you cannot escape liability by claiming ignorance of the specific fraud (Fonecomp). Sophisticated firms with full internal compliance teams have lost (Tower Bridge). And when a Kittel finding is made, it follows the directors personally for as long as it takes to recover the money (Phoenix Tech).
Translate that into the new CIS regime and the operational picture is clear. A simple HMRC verification of a subcontractor’s CIS status is necessary but nowhere near sufficient. Subcontractors paying labour rates well below CIJC, JIB or comparable benchmarks are running a commercial model that needs to be explained. Physical verification matters. And every one of these checks needs to leave a contemporaneous record produced in the ordinary course of business, not pulled together six months after an enquiry begins.
Twenty years of Kittel jurisprudence already tells us what HMRC will look for, because HMRC has been looking for exactly the same things in VAT cases for nineteen years. The contractors who treat the new regime as a paperwork exercise will discover, the way the early MTIC traders did, that the paperwork was the evidence and the absence of it was the case against them.
Before the next HMRC enquiry, have on file:
Verification of CIS and VAT status, with the date the verification occurred
Subcontractor labour rates benchmarked against published market rates, with documented sign-off where the rates are unusual
Physical site verification records, where applicable
A documented, contemporaneous audit trail of the diligence undertaken on each subcontractor
If you want to see what your supply chain exposure looks like measured against this standard, you can request a demonstration of Tax Radar CIS Defence at www.taxradar.ai.
CIS Defence helps you establish systematic due diligence procedures and create the documentation you need to defend against HMRC enquiries.