If a business has input tax recovery disallowed by HMRC because there is a connection with fraud, ofthe four tests applied by the courts, it is the ‘knew or should have known test’ on which the case willnormally turn. Therefore, businesses and their advisors should familiarise themselves with this legalprinciple.The ‘knew or should have known’ test is subjective – how much due diligence a customer shouldexercise over their suppliers depends upon the circumstances of the transactions, therefore each casewill turn on its own merits. It is important to bear in mind that the test is also limited – naivety inbusiness dealings does not automatically result in the threshold for the ‘should have known test’ to bepassed.
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