Impact Contracting Solutions Limited v The Commissioners for HMRC

The Court of Appeal dismissed the appellant's challenge to the Upper Tribunal’s decision that HMRC may deregister a person for VAT where that person has facilitated another’s VAT fraud and the facilitator knew or should have known of that fraud. The court held that the Halifax abuse principle and its development in Kittel and subsequent CJEU authorities (including Italmoda and Cussens) support treating a person who "knew or should have known" they were participating in fraudulent transactions as a participant for VAT purposes. The principle can apply to deregistration as well as refusal to register, subject to an overall proportionality assessment based on sound objective evidence (see Ablessio and Cityland). Deregistration may be lawful even if the person makes or intends to make supplies unconnected with fraud, provided deregistration is proportionate and based on objective evidence.

Background and parties: Impact Contracting Solutions Limited (ICSL) was registered for VAT and operated in the labour provision market, dealing with approximately 3,300 "mini-umbrella companies". HMRC denied input tax deductions of around £47m and immediately cancelled ICSL’s VAT registration on grounds that ICSL was using registration 'solely or principally for fraudulent purposes'. ICSL appealed the denial and the deregistration. The First-tier Tribunal (FTT) heard preliminary legal issues as to the scope of the CJEU decision in Ablessio; the Upper Tribunal (UT) allowed HMRC’s approach; ICSL appealed to the Court of Appeal.

Nature of the appeal and relief sought: ICSL sought to challenge the UT’s legal conclusions. Broadly, ICSL argued that Ablessio does not permit deregistration of persons who did not themselves fraudulently evade VAT but merely facilitated another’s fraud; that any extension of the Kittel "knew or should have known" test to registration/deregistration was impermissible except where there was actual dishonesty; and that deregistration would be disproportionate and breach EU principles where the facilitator also made or intended to make untainted (legitimate) supplies.

Issues framed:

• Whether the Ablessio principle extends beyond refusal to register to permit deregistration of a person who facilitated another’s VAT fraud;
• If so, whether simple facilitation suffices or whether actual dishonesty or the "knew or should have known" standard is required;
• Whether deregistration may be applied where the person also makes or intends to make taxable supplies unconnected with fraud, and whether such deregistration would breach EU principles (proportionality, fiscal neutrality and legal certainty).

Court’s reasoning (concise): The court treated EU law (as retained) as governing. It surveyed the Halifax abuse principle, Kittel (introducing the "knew or should have known" test), Italmoda and Cussens (extending the principle to rights and advantages under VAT law), and Ablessio and Cityland on registration/deregistration. The court concluded that the Halifax/Kittel line permits the refusal of VAT rights and advantages where a person knowingly or constructively participates in fraud; that this reasoning can extend to deregistration as well as to refusal of registration; and that Ablessio and Cityland require that any refusal/deregistration be based on sound objective evidence and be proportionate following an overall assessment of the circumstances. The court rejected ICSL’s argument that any intention to make untainted supplies precludes deregistration, and concluded that EU principles of proportionality, fiscal neutrality and legal certainty do not of themselves bar deregistration in such circumstances. The question whether deregistration is proportionate on the facts was left to be assessed at trial.

Procedural note: The decision concerned preliminary legal issues; primary facts remain to be found by the tribunal considering the substantive appeals.

This is an appellate decision. The appeal is dismissed. The Court of Appeal held that (1) the principle derived from Ablessio, in the context of the Halifax/Kittel line of cases, may apply to allow HMRC to deregister a person who facilitated VAT fraud where that person knew or should have known that they were facilitating fraud; (2) deregistration may be lawful even when the person also makes or intends to make taxable supplies unconnected with the fraud, provided the decision to deregister is based on sound objective evidence and is proportionate; and (3) denial of registration or deregistration in such circumstances does not, of itself, breach the EU principles of proportionality, fiscal neutrality or legal certainty. The court emphasised that proportionality and factual assessment remain necessary and that those matters are for further determination on the facts.

Decision of the First-tier Tribunal (Tax Chamber) [2022] UKFTT 47 (TC) on preliminary issues; appeal to the Upper Tribunal (Tax and Chancery Chamber) Edwin Johnson J and Judge Thomas Scott [2023] UKUT 00215 (TCC); appeal to the Court of Appeal [2025] EWCA Civ 623, which dismissed the appeal on the legal issues raised.