The Upper Tribunal’s decision in Ashley Charles Trees v The Commissioners for HMRC [2026] UKUT 92 (TCC), handed down on 26 February 2026 and published on 3 June 2026, is a landmark ruling every CFO, finance director, and tax adviser with VAT supply chain exposure needs to read. The Tribunal set aside a £1,974,850 director’s liability notice (DLN) — not because the underlying VAT fraud was disputed, but because HMRC’s conduct in pursuing personal liability for dishonesty was an abuse of process. The decision rewrites the rules on how HMRC can use earlier tribunal findings to pursue directors personally.
The Facts: A Decade of Litigation, One Written Assurance That Changed Everything
Ashley Trees was the sole director and shareholder of CCA Distribution Ltd, which traded in the grey market for mobile phones in 2006. HMRC denied CCA’s input tax claims — worth over £9.8 million — on the basis that its transactions were connected to Missing Trader Intra-Community (MTIC) VAT fraud. The litigation that followed ran through multiple FTT hearings, an Upper Tribunal remittal, and the Court of Appeal before the FTT finally found in 2020 that CCA’s transactions were connected to fraud and that Mr Trees knew they were — the classic Kittel test.
Critically, in January 2019 — before the final Kittel hearing — HMRC put this in writing to Mr Trees:
“For the avoidance of doubt, we confirm that HMRC do not seek to allege dishonesty or fraud against CCA or Mr Trees. HMRC’s case is based on the Kittel test of knew or should have known.”
Two years later, in July 2021, HMRC issued CCA with a civil evasion penalty under section 60(1) VATA 1994 — which requires dishonesty, not mere Kittel knowledge — and served a DLN under section 61 on Mr Trees personally for the same £1.97 million. HMRC’s position: the 2020 findings that Mr Trees knew about the fraud were sufficient to infer dishonesty. The FTT upheld this in June 2024. The Upper Tribunal emphatically did not.
The Upper Tribunal’s Ruling: HMRC’s Own Assurance Was Fatal
The UT (Judge Raghavan and Judge Poole) allowed the appeal and set aside the DLN on the ground of abuse of process and material procedural unfairness. The reasoning is surgical. There is a fundamental legal distinction between:
- Kittel knowledge — the EU law test for denial of input tax deduction, based on whether a trader “knew or ought to have known” their transactions were connected to fraud; and
- Dishonesty under section 60 VATA — a higher threshold engaging criminal-standard protections under Article 6 ECHR, requiring deliberate and dishonest conduct.
HMRC had confirmed in writing it was only pursuing the Kittel case. Mr Trees gave evidence in 2020 with that understanding — without the procedural protections that allegations of dishonesty would have triggered. HMRC then used those 2020 findings as the entire evidentiary basis for dishonesty in the DLN proceedings, without calling any additional evidence. The UT found this deprived Mr Trees of a fair hearing. HMRC could not have it both ways.
The Tribunal confirmed the principle from Customs & Excise Commissioners v Han [2001] EWCA Civ 1048: DLNs under section 61 constitute a “criminal charge” in the autonomous Article 6 ECHR sense, and directors are entitled to corresponding procedural safeguards. When HMRC assures a taxpayer it is not alleging dishonesty, then uses tribunal findings obtained on that basis to prove dishonesty later, the process is fundamentally tainted.
Why the Kittel / Dishonesty Distinction Matters for CFOs
This case exposes a fault line that has long existed in HMRC’s enforcement toolkit. The section 60/61 civil evasion penalty regime carries consequences that look and feel criminal — full penalty equivalent to VAT evaded, personal liability piercing the corporate veil — yet HMRC has sometimes pursued them as a follow-on to Kittel-based input tax denials.
The UT’s ruling establishes clearly: if HMRC wants dishonesty, it must plead dishonesty from the outset. It cannot run a “knew or ought to have known” case, obtain findings on that lower standard, then retrofit them as dishonesty findings for a DLN. CFOs and directors operating in supply chains with MTIC or similar fraud risk need to understand this distinction, because the stakes — personal liability for the full penalty amount — are existential.
The HMRC MTIC fraud risk framework remains live. If your business trades in high-risk sectors — electronics, commodity goods, telecoms — and receives input tax denial decisions, the question of whether HMRC is alleging mere Kittel knowledge or actual dishonesty is not semantic. It determines the procedural landscape entirely.
The Section 61 Director’s Liability Notice: CFO Exposure Under VATA 1994
Section 61 VATA 1994 allows HMRC to pursue a director personally for corporate civil evasion penalties where the conduct giving rise to the penalty is “in whole or in part, attributable to the dishonesty” of that director. The corporate veil does not protect you here. For any CFO or finance director of a company in an HMRC inquiry involving fraud allegations, there are three immediate action points:
- Get the allegations in writing — and hold HMRC to them. HMRC’s January 2019 confirmation letter in Trees was decisive. If HMRC confirms it is not alleging dishonesty, that assurance has procedural force. Document every communication about the basis of HMRC’s case.
- Treat the Kittel test and section 60 dishonesty as separate proceedings requiring separate defences. Evidence strategy, disclosure, and witness preparation differ materially between the two. Engage specialist VAT litigation counsel at the Kittel stage, not just after a DLN lands.
- Assert Article 6 ECHR protections early. DLN proceedings are criminal in the Convention sense. That means the right to a fair hearing, adequate time and facilities to prepare a defence, and protection against self-incrimination. These rights need to be asserted, not assumed.
A Warning on HMRC’s Enforcement Sequencing
Trees is also a warning about HMRC’s enforcement sequencing strategy. The pattern here — deny input tax on Kittel grounds, obtain findings, then issue a section 60 evasion penalty and DLN years later — is not unique to CCA. HMRC has used this playbook across a range of sectors. The gap between the initial Kittel assessment (2007) and the DLN (2021) in this case was fourteen years. Directors of companies that faced MTIC or supply chain fraud challenges years ago and assumed the matter was settled may still be exposed if HMRC has not yet issued evasion penalties.
The UT’s decision provides a strong basis to challenge any DLN where:
- HMRC’s case in earlier proceedings was explicitly limited to Kittel knowledge;
- HMRC gave written assurances that dishonesty was not being alleged;
- The DLN relies entirely or primarily on factual findings made in those earlier proceedings without fresh evidence of dishonesty.
Broader Implications: Procedural Fairness as a Shield
The Henderson v Henderson abuse of process doctrine — which the UT applied here — is an increasingly important tool in tax litigation. The principle that HMRC must bring its whole case at the appropriate time, and cannot fragment proceedings to avoid giving taxpayers the full protections they are entitled to, cuts across multiple areas of enforcement. It applies in principle wherever HMRC splits its case across sequential proceedings in a way that denies a fair opportunity to respond.
For advisers and CFOs managing HMRC disputes, Trees adds to a body of authority — alongside cases like CCA Distribution Ltd v HMRC [2017] EWCA Civ 1899 — that procedural unfairness is a substantive ground of appeal, not just a technical objection. HMRC’s enforcement powers are considerable, but they are not unlimited, and where HMRC’s conduct in litigation creates unfairness, the Upper Tribunal will act.
The ICAEW Tax Faculty and CIOT have both highlighted the DLN regime as an area of growing enforcement activity. With HMRC’s compliance resources increasingly focused on high-yield cases, the combination of Kittel-based input tax denials and follow-on section 61 notices is a risk profile that finance teams need to track actively.
CFO Action Points
- If your company is in an HMRC fraud inquiry, establish immediately whether HMRC is alleging dishonesty or proceeding purely on the Kittel knew-or-ought-to-know basis. Get that confirmed in writing.
- If you receive a director’s liability notice, do not treat it as simply an escalation of the corporate inquiry. It is a separate proceeding with full Article 6 ECHR protections. Engage VAT litigation specialists immediately.
- If earlier proceedings concluded on Kittel grounds without dishonesty allegations, obtain copies of all HMRC correspondence from that period. Any assurance that dishonesty was not being alleged may be decisive.
- Review your supply chain due diligence procedures. HMRC’s MTIC enforcement focus has not diminished. The HMRC due diligence guidance on VAT fraud remains the baseline, but documented, contemporaneous checks are what defend Kittel claims in practice.
- Brief your audit committee. DLN exposure for directors of companies in tax disputes is a board-level governance risk that needs to appear in risk registers, not just be handled quietly in the legal budget.
The full decision in Ashley Charles Trees v HMRC [2026] UKUT 92 (TCC) is available on the National Archives case law database. If you are dealing with HMRC compliance action involving VAT fraud allegations, MTIC supply chain risk, or a director’s liability notice, contact Mark at Tanous for a direct conversation about where you stand.