Impact Contracting Solutions Limited v The Commissioners for HMRC

HMRC may deregister a taxable person who, although not the direct VAT defaulter, knew or should have known that it was participating in transactions connected with fraudulent VAT evasion. The EU abuse principle treats such participants as involved in the fraud. The power is prospective and may apply even where the person makes or intends to make legitimate supplies unconnected with the fraud. Those supplies are relevant to proportionality but do not create an automatic bar. Deregistration requires sound objective evidence that the VAT number is likely to be used fraudulently and an overall assessment of the circumstances, including the nature and seriousness of the conduct. The action must be proportionate. Fiscal neutrality and legal certainty do not, of themselves, prevent deregistration in such a case.

ICSL was registered for VAT and operated in the labour provision market. HMRC alleged that its arrangements with mini-umbrella companies facilitated fraudulent VAT evasion, denied approximately £47 million of input tax and cancelled ICSL’s VAT registration.

The First-tier Tribunal determined preliminary questions in ICSL’s appeal, holding that the principle in Ablessio extended to a person who knowingly or negligently facilitated another’s VAT fraud. The Upper Tribunal upheld that approach in [2023] UKUT 00215 (TCC). ICSL appealed on the scope of the principle, the effect of legitimate supplies, and the principles of proportionality, fiscal neutrality and legal certainty. The Court of Appeal considered those legal issues without findings on the underlying facts.

1. Disposition. The Court of Appeal unanimously dismissed the appeal. The proceedings concerned preliminary issues only, so whether the particular facts justified deregistration and whether the measure was proportionate remained for the First-tier Tribunal.
2. Scope of the abuse principle. The EU VAT system cannot be relied on for abusive or fraudulent ends. Under Kittel [2006] ECR I-6161 and Italmoda EU:C:2014:2455, a taxable person who knew or should have known that it was participating in a transaction connected with fraudulent VAT evasion is treated as participating in the fraud. The principle is not confined to denial of input tax deductions or to the person who directly defaults. VAT registration is also an advantage, and the principle can support prospective refusal of registration or deregistration.
3. Registration and deregistration. There is no relevant legal distinction between refusal to register and deregistration, since both operate prospectively. Properly understood, Ablessio EU:C:2013:168 permits measures addressing misuse of a VAT number, including participation in a fraudulent transaction chain, where the person knew or should have known of the fraud.
4. Proportionality. Deregistration cannot rest on mere suspicion. There must be sound evidence giving objective grounds for considering that the VAT number is likely to be used fraudulently, followed by an overall assessment of the circumstances. The nature and seriousness of the conduct, the proximity and extent of the facilitator’s involvement, and the extent of anticipated legitimate supplies may all be relevant. The court declined to resolve the parties’ dispute about the judicial review standards discussed in Seabrook [2019] EWCA Civ 1357 and Lumsdon [2015] UKSC 41; the relevant question was whether EU law categorically prohibited deregistration in such cases.
5. Legitimate supplies and EU principles. Legitimate supplies do not automatically prevent deregistration. Fiscal neutrality and legal certainty yield to the inherent abuse principle where the taxable person has participated in fraud. The distinction between inputs and outputs also matters: Kittel denies deductions for fraud-related inputs, while supplies made by the taxable person remain subject to VAT and compulsory registration depends on outputs.

1. Court of Appeal (Civil Division). The appeal from the Upper Tribunal was dismissed. The court held that deregistration may be lawful where the taxable person knew or should have known that it was facilitating VAT fraud, subject to proportionality.
2. Upper Tribunal (Tax and Chancery Chamber). In [2023] UKUT 00215 (TCC), the Upper Tribunal upheld the First-tier Tribunal’s answers on the scope of the Ablessio principle and rejected the proportionality, fiscal neutrality and legal certainty challenges.
3. First-tier Tribunal. In [2022] UKFTT 47 (TC), the Tribunal determined preliminary issues, holding that simple facilitation was insufficient but that knowledge or constructive knowledge of another’s VAT fraud was required.