A £1.8 million VAT dispute has cleared another procedural hurdle, but not in the way the taxpayer hoped. In VNS Waste Solutions Limited v HMRC [2026] UKUT 00382 (TCC), the Upper Tribunal (UT) upheld a First-tier Tribunal (FTT) decision to refuse VNS’s request to bar HMRC from the case. Had VNS succeeded, it would have won its appeal without a full hearing. The ruling matters to any business facing an input tax denial.

What is the VNS Waste Solutions VAT case about?

HMRC denied VNS the right to deduct input tax of £1,818,418 across the VAT periods ending December 2016, March 2017 and June 2017. It also deregistered the company for VAT from 1 August 2017, although VNS withdrew its appeal against that decision in November 2023.

HMRC’s primary case relies on the Kittel principle. Under Kittel, a business loses its right to recover input tax if it knew, or should have known, that its transactions connected to VAT fraud. HMRC’s alternative case says no taxable supplies took place between 24 October 2016 and 28 June 2017. It argues that VNS held what looked like VAT invoices, but that the deals were a paper exercise.

The transactions formed a circle. A site owner hired T Davies Utilities to remove waste. T Davies wanted Construction Supplies & Consumables Ltd (CSC) to do the work, but could not fund CSC upfront. VNS stepped in, paying CSC first and billing T Davies later. HMRC traced the deals back to T Davies, which it described as a fraudulent defaulting trader. VNS’s sole director, Mr Mehta, said the company agreed to provide finance in return for 4% on each transaction.

Why did VNS say HMRC should be barred?

VNS applied to debar HMRC on the basis that HMRC had no reasonable prospect of success. Its argument centred on HMRC’s own pleaded facts. HMRC said a sole director with no employees could not have handled so many waste deals so quickly. It also said Veolia had confirmed the waste tickets were false, and that the claimed waste volumes were “extraordinary and unachievable”.

VNS argued that these facts show nothing happened. Kittel only applies where a supply has taken place, so HMRC’s primary case could not stand. Because the chain was circular, VNS also said that no supplies to VNS meant no supplies by VNS. Its output tax would fall by more than the input tax HMRC wanted to deny, leaving no VAT due. Both sides accepted that arithmetic. The tribunal observed that “a victory for HMRC on the no supply argument would be a Pyrrhic one”.

Michael Firth KC, for VNS, added that VNS carried the burden of proving any supply. As VNS would offer no proof, he said it would win by doing nothing. He also stressed that HMRC claimed no actual financial loss, and that VNS was itself a victim of fraud, because it paid CSC and was never repaid.

Why did the tribunals refuse the application?

The FTT refused the application in November 2024. The UT heard VNS’s appeal in July 2026 and dismissed it. Mr Justice Marcus Smith and Judge Mark Baldwin released the decision on 13 October 2026.

The UT accepted that HMRC’s two arguments pull in opposite directions. Even so, it found “nothing inherently wrong in seeking to advance both positions”, provided each is properly pleaded and supported by material. It said this approach gives the tribunal flexibility to reach a fair outcome.

The UT also rejected the “win by doing nothing” argument. It explained that the burden of proof is a tiebreaker for cases where a tribunal remains in doubt. It is not a starting point. HMRC can still lead evidence of a supply, and the FTT can still find one, even if VNS stays silent.

The judges noted that VNS’s own documents support HMRC. VNS holds tax invoices, filed its VAT returns on the basis of supplies and admitted the details of its sales and purchases in its grounds of appeal. The UT concluded: “It is not the case that HMRC has no reasonable prospect of success.”

Finally, the UT said that debarring HMRC would be premature in any event. VNS’s pleadings and evidence are inconsistent, and it has not made full disclosure as directed. HMRC also pointed out that VNS applied for a stay, and then to debar, each time its evidence fell due.

What happens next in the VNS case?

The appeal is dismissed, so the case returns to the FTT for a full hearing. The tribunal will consider all the evidence together rather than split the arguments. It will then choose between three outcomes: a supply connected to fraud, a supply not connected to fraud, or no supply at all. An earlier tribunal compared this to Schrödinger’s cat, where the answer only emerges once someone opens the box.

VNS must now clarify its position and serve its outstanding witness evidence. The UT also made a suggestion to HMRC. It wondered whether HMRC might simplify matters by dropping the no supply argument and focusing on Kittel. Any change to HMRC’s statement of case would need FTT permission, so watch for developments.

The judgment does not say whether VNS will seek a further appeal. Any appeal to the Court of Appeal would normally need permission. For now, the FTT hearing is the next milestone.

What this means for your business

The case highlights three points. First, the Kittel test is broad. HMRC can deny input tax where you should have known about a connection to fraud, even without proof that you knew. Strong due diligence on suppliers and customers is your best defence. Second, keep thorough records. Invoices, contracts and evidence of real activity all matter if HMRC questions whether a supply took place. Third, procedural shortcuts rarely succeed. Tribunals prefer to hear all the evidence before they decide.

If HMRC has challenged your VAT recovery, or you want to review your supplier checks, CMA Accountancy can help. Contact our team to discuss your position.