Elphysic Limited & Ors v The Commissioners for HMRC

The power to de-register a taxable person for VAT purposes under Ablessio does not require proof that the company’s directors knew, or should have known, of the fraud. Nor is it necessary to identify a particular fraudster or attribute that person’s conduct to the company. The question is whether sound evidence gives objective grounds for considering it probable that the company’s VAT number will be used fraudulently, assessed proportionately and by reference to all the circumstances. A fraudulent scheme may be established by cumulative findings and inferences from the evidence as a whole. Allegations of fraud must nevertheless be clearly and unambiguously pleaded with sufficient particulars to enable the opposing party to know the case it must meet.

The Lead Appellants were mini-umbrella companies using the flat-rate VAT scheme and claiming employment allowances. HMRC de-registered them from VAT, terminated their flat-rate authorisations and denied employment allowance claims, alleging participation in a large fraudulent scheme.

The First-tier Tribunal allowed the appeals against VAT de-registration but dismissed the appeals concerning the flat-rate scheme and employment allowance: [2024] UKFTT 291 (TC). It held that the directors’ knowledge of the fraud was required under Ablessio, although the scheme as a whole had been sufficiently pleaded as fraudulent. The Upper Tribunal considered HMRC’s appeal on the knowledge requirement and the Lead Appellants’ five grounds concerning pleading, reasoning, procedural fairness and the flat-rate scheme.

1. HMRC’s appeal succeeded. The FTT erred in holding that de-registration under Ablessio required proof that the directors knew, or should have known, that they were facilitating another person’s VAT fraud. The relevant principle is concerned with preventing the misuse of VAT numbers and other VAT fraud. It is not subject to that additional requirement.

2. The decision in Ablessio, read with Halifax, Kittel, Cityland and Impact, requires sound evidence giving objective grounds for considering it probable that the VAT number will be used fraudulently. The assessment must be overall and proportionate. The proximity and extent of involvement in the fraud are relevant factors, but the company’s own VAT number being the means by which the fraud is carried out may itself provide the necessary proximity. The rule is prospective, so the question concerns probable future misuse, although past conduct is relevant.

3. A fraud or abusive scheme may be established by cumulative findings and inferences from the evidence as a whole. It is unnecessary to identify a particular fraudster or establish that a person’s knowledge, acts or omissions are attributable to the company.

4. The pleading challenge failed. Pleadings must enable the opposing party to know the case it has to meet. Fraud must be alleged clearly and unambiguously, with sufficient particulars. HMRC had not sufficiently pleaded the identity of individual fraudsters, but had clearly pleaded that the MUC scheme as a whole was fraudulent. The FTT was entitled to decide that issue by drawing inferences from the fifteen matters pleaded and the evidence.

5. The FTT’s findings that the companies were not independent, were under dominant influence and were closely bound to the organisers by financial, economic and organisational links were open to it. Regulation 55A(2)(b) of the Value Added Tax Regulations 1995 provided an independent route to association; it was unnecessary to establish that the unidentified organisers made supplies in the course of a business.

6. The Upper Tribunal set aside the FTT’s decision on the Ablessio issue and re-made it under section 12(2)(a) and (b)(ii) of the Tribunals, Courts and Enforcement Act 2007. On the facts found, HMRC were entitled to de-register the Lead Appellants. The Lead Appellants’ five grounds of appeal were dismissed.

• Upper Tribunal (Tax and Chancery Chamber): HMRC’s appeal on the Ablessio principle succeeded; the Lead Appellants’ five grounds were dismissed; the FTT’s decision on VAT de-registration was set aside and re-made: [2025] UKUT 236 (TCC).
• First-tier Tribunal (Tax Chamber): VAT de-registration appeals allowed; appeals concerning the flat-rate scheme and employment allowance dismissed: [2024] UKFTT 291 (TC).