Sometimes—but not automatically. A buyer is not generally made liable for a supplier’s entire tax fraud merely because the supplier later fails to pay tax. The buyer may, however, lose an input-tax credit, be required to repay tax, or face penalties when the law links the transaction to fraud, the buyer knew (or should have known) about that link, or statutory credit conditions were not met.
The answer depends on the country and tax regime. The UK VAT “Kittel” approach and India’s CGST input-tax-credit rules illustrate different tests. They are examples, not a universal GST rule.
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First separate direct fraud liability from loss of input tax
There are several legally different outcomes that are often collapsed into the word “liable”:
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- Interest and penalties: additional amounts may follow an incorrect claim, depending on the jurisdiction and the buyer’s conduct.
- Direct tax liability for the supplier’s fraud: this would make the buyer responsible for the supplier’s unpaid tax or fraudulent acts. A buyer is not automatically placed in this position simply because it bought from a dishonest supplier.
- Criminal exposure: this normally requires proof of the buyer’s own participation or a separate offence; a supplier’s later default does not by itself establish it.
Whether a buyer can keep a credit is usually the immediate dispute. The decisive facts are the statutory conditions for credit, the evidence that a real supply occurred, the buyer’s knowledge when it entered the transaction, and what the buyer did after warning signs appeared.
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Why the country and tax regime change the answer
“GST” is used in many countries, while the United Kingdom uses VAT. Each system defines credit eligibility, evidence and anti-fraud tests differently. A rule developed by a UK tribunal cannot be applied as an Indian GST rule, and an Indian decision about Section 155 of the Central Goods and Services Tax Act does not establish a UK VAT standard.
For a real dispute, identify the country, the tax period, the type of transaction and the credit claimed before assessing risk. Also check whether the cited decision is still good law: the UK cases discussed below are First-tier Tribunal decisions, and the Indian decision described here is one reported decision amid contested case law.
UK VAT: the Kittel test for fraud-connected purchases
HMRC describes three questions for applying the Kittel principle:
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- Was VAT fraudulently evaded?
- Was the buyer’s transaction connected with that evasion?
- When the buyer entered the transaction, did it know or should it have known of that connection?
If all three elements are established, the input-VAT deduction can be denied. This is a denial of the buyer’s deduction; it is not a blanket rule making every customer directly responsible for the supplier’s entire fraud.
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Knowledge is judged at the time of the transaction
The question is not simply whether the supplier eventually disappeared, became insolvent or failed to account for VAT. The analysis asks what the buyer knew, and what a reasonable buyer should have discovered, when it agreed to the purchase. Evidence can include the price, commercial structure, payment route, counterparties, delivery pattern and communications.
“Should have known” does not mean that every business must perform an exhaustive investigation of every supplier. The First-tier Tribunal’s decision in A & A Contractors Midlands Ltd v Revenue and Customs [2026] UKFTT 1093 (TC) explained that, without a specific legislative requirement, a business is not required to carry out due diligence on every supplier before every transaction.
When warning signs change the duty to enquire
The same tribunal found that the transactions were connected with VAT fraud but did not find it established that the taxpayer knew or should have known of the connection from the start. After HMRC notified the taxpayer that transactions with a supplier were linked to tax losses, the tribunal held that a duty to make reasonable enquiries arose for later transactions. It considered that duty capable of extending to similar suppliers and transactions.
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This creates a practical dividing line:
- Ordinary commercial risk: a supplier later defaults, without warning signs known to the buyer, does not automatically prove culpability.
- Specific indications: credible information linking the supplier or transaction chain to VAT losses can require reasonable enquiries.
- Ignoring the indication: continuing to buy without investigating or changing controls can support a finding that the buyer should have known.
The decision is a First-tier Tribunal ruling, not an appellate judgment or a universal checklist. Its importance is the timing analysis: what was known before the warning, what the buyer did after it, and whether the response was reasonable in the circumstances.
UK VAT invoices and alternative evidence
A fraud dispute and an invoice-validity dispute are separate. Even where a buyer did not know of fraud, the input claim can fail if the statutory evidence requirements are not met.
HMRC’s VAT fraud manual says that, when a taxpayer cannot obtain a valid VAT invoice, HMRC may exercise discretion after considering alternative evidence. The guidance identifies these considerations:
- whether the supplier was VAT registered;
- whether the stated supply actually took place;
- whether the purchase furthered the buyer’s taxable business;
- whether normal commercial checks were undertaken; and
- whether normal commercial arrangements existed.
HMRC says alternative evidence should contain a level of detail equivalent to a valid invoice. This is UK guidance, not a universal GST safe harbour, and discretion does not guarantee that a credit will be allowed.
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Records that help establish a genuine transaction
Keep records that show both the commercial reality and the checks made when concerns arose. Depending on the jurisdiction and transaction, useful examples include:
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- the supplier’s invoice, purchase order and contract;
- proof of delivery, timesheets, acceptance records or evidence that a service was completed;
- bank or payment records showing who was paid and when;
- the supplier’s VAT/GST registration details and the date they were checked;
- emails or other correspondence establishing what was ordered, supplied and priced; and
- notes of questions raised about unusual terms, together with the supplier’s answers and the decision to proceed.
These records support a claim; they do not guarantee recovery. A tax authority can still conclude that the transaction was connected with fraud or that a statutory condition was missing.
What the UK case amounts do—and do not—show
Harry Construction Ltd v Revenue and Customs [2025] UKFTT 799 (TC) records an HMRC decision denying £705,741 of input tax on a Kittel basis and £222,246 on invalid-invoice grounds. Those are disputed amounts in one case. They are not a national average, a frequency statistic or evidence that buyers typically lose claims of that size. The decision is useful because it shows that the fraud-connection issue and invoice validity can be analysed independently.
No representative statistic establishes how often UK buyers lose input tax because of supplier fraud. A business should therefore assess its own evidence and facts rather than infer risk from an individual judgment.
India GST: Section 155 and the supplier-payment issue
India’s CGST analysis is not the same legal test as UK Kittel. Section 155 places the burden on the person claiming input-tax credit to prove eligibility. The statutory conditions and the evidence needed to satisfy them must be examined for the relevant tax period.
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In M/S Shree Karni Electrovision v Union of India, a decision dated 17 August 2026, the court’s reasoning linked credit eligibility to statutory conditions that include deposit of the tax by the supplier. It also stated that a bona fide purchaser should exercise due diligence and stop further transactions after learning of supplier non-compliance.
That decision should be read narrowly. Reported Indian cases concerning bona fide purchasers and supplier non-payment have taken differing approaches. The material available here does not establish the current nationwide position, the result of any appeal, or how Section 16 conditions will be applied to every factual pattern. It is therefore unsafe to state either that every genuine purchaser automatically loses credit when a supplier does not pay, or that a buyer’s good faith always preserves the credit.
How to use the Indian decision in practice
If a buyer receives reliable information that a supplier is not complying, continuing unchanged can create additional risk under the reasoning in Shree Karni Electrovision. A prudent response is to pause new purchases where commercially possible, verify the supplier’s registration and filings through the available official process, reconcile invoices with goods or services received, and obtain jurisdiction-specific advice before claiming further credit.
Those steps are risk controls, not a promise that a credit will be accepted. The buyer still has to satisfy the statutory requirements applicable to the transaction and tax period.
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| Issue | UK VAT example | India GST example |
|---|---|---|
| Immediate consequence | Input-VAT deduction may be denied under the Kittel principle when a fraud connection and the buyer’s knowledge or constructive knowledge are established. | Input-tax-credit eligibility is tested under CGST conditions; Section 155 places the burden of proving eligibility on the claimant. |
| Role of supplier non-payment | Supplier fraud or VAT loss is part of the Kittel analysis, but the buyer is not automatically liable for the supplier’s entire debt. | The 17 August 2026 decision discussed links eligibility to conditions including supplier tax deposit; the nationwide effect of that reasoning is not settled by this one decision. |
| Knowledge standard | Whether the buyer knew or should have known of the connection when entering the transaction. | The cited decision emphasizes due diligence by a bona fide purchaser, especially after learning of supplier non-compliance; the precise application depends on statutory conditions and facts. |
| Evidence | Valid invoice, or alternative evidence considered by HMRC, including registration, proof of supply, business purpose and normal commercial checks. | Documents must establish the statutory credit conditions for the relevant period; Section 155 places the evidential burden on the claimant. |
| Effect of a warning | After HMRC notification linking transactions to tax losses, A & A Contractors Midlands found that reasonable enquiries were required for later and similar transactions. | Shree Karni Electrovision states that a bona fide purchaser should stop further transactions after learning of supplier non-compliance. |
A practical response for a buyer facing a fraud concern
Before placing an order
- Confirm the supplier’s legal identity, tax registration and bank-account details using reliable records.
- Check that the price, delivery route, payment terms and intermediary structure make commercial sense.
- Use a purchase order or contract that describes the goods or services, tax treatment and delivery obligations.
- Set an internal approval threshold for unusual discounts, cash requests, third-party payments or rapidly changing bank details.
When the goods or services are received
- Match the invoice to the order, delivery evidence and payment record.
- Record who accepted the goods or confirmed completion of the service.
- Reconcile tax numbers, invoice data and amounts before claiming input VAT or GST.
- Store correspondence and registration checks so the record can be retrieved for the relevant tax period.
After a warning or tax-authority contact
- Preserve the notice, email or other information that created the concern, including its date.
- Identify all open and planned transactions with the supplier and any similar suppliers.
- Make documented, proportionate enquiries about the supply chain, tax registration, invoicing and payment route.
- Pause further purchases or credit claims where the facts cannot be verified and your local law or adviser indicates that suspension is appropriate.
- Obtain advice in the relevant jurisdiction before amending returns, repaying credit or responding to an assessment.
Do not destroy or rewrite records after receiving a notice. Keep the original documents and a dated explanation of decisions taken. A later explanation that is unsupported by contemporaneous evidence is usually less persuasive than a clear record made when the transaction occurred.
Questions a buyer should ask before calling the claim “fraud”
- Is there evidence of fraudulent tax evasion, or only a supplier’s late payment or insolvency?
- Can the buyer prove that the goods or services were actually supplied and used in its taxable business?
- Was the invoice valid under the applicable law, and if not, is equivalent alternative evidence available?
- What did the buyer know at the time, and when did any warning sign first appear?
- What enquiries were made, who made them, and why was it reasonable to continue or stop?
- Which court or tax authority issued the relevant guidance, and is the decision binding, appealed or limited to its facts?
Bottom line
A buyer can suffer a real financial loss when a supplier’s fraud or non-compliance causes an input-tax credit to be denied or repaid. That is different from being automatically liable for the supplier’s fraud. In the UK, Kittel focuses on a fraud connection and whether the buyer knew or should have known, with reasonable enquiries becoming important once credible warnings arise. In India, Section 155 and the reasoning in the 17 August 2026 Shree Karni Electrovision decision place substantial attention on proving credit eligibility and supplier tax payment, but Indian case law remains fact-sensitive and contested. The safest course is jurisdiction-specific advice backed by contemporaneous supplier, transaction and enquiry records.
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