Extension of VAT Deregistration Power to Facilitators of Fraud under the Kittel-Ablessio Abuse Principle

Introduction

This case, Impact Contracting Solutions Ltd v Revenue and Customs ([2025] EWCA Civ 623), came before the England and Wales Court of Appeal on 16 May 2025. It concerns the scope of HMRC’s power to cancel VAT registration where a taxable person has not themselves defaulted on VAT but allegedly facilitated another party’s fraudulent evasion. The appellant, Impact Contracting Solutions Ltd (“ICSL”), challenged the Upper Tribunal’s confirmation that (1) HMRC may deregister anyone who “knew or should have known” they were aiding VAT fraud, even if they did not themselves default; (2) deregistration may occur despite the person continuing to make legitimate taxable supplies above the registration threshold; and (3) such deregistration does not automatically breach EU principles of proportionality, fiscal neutrality, or legal certainty.

ICSL operated in the labour supply market, purchasing services from some 3,300 “mini-umbrella companies” (“MUCs”). HMRC concluded those MUCs had contrived arrangements to evade VAT and purged ICSL’s input tax claims of about £47 million. It then cancelled ICSL’s VAT registration on the ground it was “using its VAT registration solely or principally for fraudulent purposes.” ICSL appealed to the First-tier Tribunal on preliminary legal questions, and thereafter to the Upper Tribunal, which dismissed its challenge. ICSL now appeals to the Court of Appeal.

Summary of the Judgment

The Court of Appeal dismissed ICSL’s appeal.
It held that EU law—specifically the VAT Abuse Principle established in Halifax and extended in Kittel—encompasses both refusal of registration and deregistration against a party that “knew or should have known” it was facilitating another’s VAT fraud.
Deregistration may be imposed even if the taxpayer continues or intends to make “untainted” supplies that would otherwise require registration, so long as the measure is proportionate in the circumstances.
Such deregistration does not necessarily breach EU principles of proportionality, fiscal neutrality, or legal certainty, provided HMRC’s decision is based on solid, objective evidence and an overall assessment of the risk of fraud.

Analysis

Precedents Cited

The court’s reasoning draws on a line of CJEU authorities that progressively developed an “abuse of rights” principle in VAT:

Halifax (C-255/02): Established that EU VAT cannot be used for “abusive or fraudulent ends,” and set out objective tests for identifying abusive practices.
Kittel (Joined C-439/04 & C-440/04): Held that a taxable person who “knew or should have known” of participation in a fraudulent transaction must be treated as an accomplice, losing input-tax deduction rights.
Ablessio (C-527/11): Concerned refusal of initial VAT registration; confirmed Member States may take measures “necessary to prevent misuse” of VAT IDs, provided not disproportionate or undermining VAT neutrality.
Italmoda (Joined C-131/13, C-163/13 & C-164/13): Extended Kittel’s “knew or should have known” test to other VAT rights (exemptions, refunds) and confirmed that EU law rights cannot be claimed for abusive ends regardless of national law.
Cussens (C-251/16): Reaffirmed that the abuse principle applies to all rights and advantages under EU law, free-standing from specific Treaty provisions.
Butt v R&C (2019 EWCA Civ 554): Domestic confirmation that the abuse principle is inherent in EU law and can ground penalties absent express UK legislative backing.
Cityland (C-164/24): Confirmed that VAT deregistration without full examination of conduct and seriousness of breaches is disproportionate and infringes legal certainty and proportionality.

Legal Reasoning

The Court of Appeal’s decision unfolds in three steps:

Scope of the Abuse Principle: Having traced the roots in Halifax and its expansion in Kittel (accomplice treatment for “knew or should have known”), the court held that EU law’s abuse principle extends to VAT registration and deregistration. Although Ablessio dealt with initial registration, the same rationale applies prospectively to existing registrants.
Facilitation Versus Direct Fraud: The court rejected ICSL’s argument that Ablessio only covers persons who themselves defraud VAT. Kittel already treats facilitators who know or should know of upstream or downstream fraud as participants—“fraudulent conduct” in EU terms.
Proportionality and Fundamental Principles: While deregistration is a serious step (it removes the right to charge VAT and recover input tax), EU law permits it where supported by “sound evidence” and an overarching assessment of the risk of VAT mis-use. The court stressed that deregistration need not be precluded simply because the taxpayer makes or intends legitimate supplies. Principles of proportionality, fiscal neutrality, and legal certainty yield to the abuse principle when applied on a case-by-case basis.

Impact

This judgment clarifies that HMRC may deregister any taxable person—defaulter or facilitator—who “knows or ought to have known” of participation in VAT fraud, so long as the deregistration decision rests on:

Objective, credible evidence of risk or misuse of the VAT registration;
An overall proportionality assessment considering the seriousness of misconduct and any continuing legitimate activity;
Compliance with EU principles by ensuring measures do not exceed what is necessary to safeguard tax revenue and combat fraud.

Future tribunals and courts will look to this ruling when assessing HMRC’s deregistration decisions, ensuring both effective anti-fraud tools and procedural fairness.

Complex Concepts Simplified

“Knew or Should Have Known” Test: If a business takes part in a chain of transactions and either actually knows or is expected, by exercising ordinary commercial diligence, to know that some link in the chain is fraudulent, that business is treated as an accomplice—even if it makes no profit from the fraud.
Input-Tax Deduction: VAT-registered businesses usually recover VAT paid on purchases (“input”). Under the abuse principle, HMRC may deny that deduction if the purchases are tied to fraudulent activity.
VAT Registration/Deregistration: To charge VAT and recover input tax, businesses must register. HMRC can cancel that registration (deregistration) if a business abuses VAT—removing both the right to charge VAT and to recover input tax.
EU Abuse Principle: An overriding rule that no one can claim any VAT-related right (deduction, exemption, refund, registration) if they use the system for fraudulent or abusive ends.
Proportionality and Fiscal Neutrality: Even anti-fraud measures must be balanced. HMRC must show deregistration is not more onerous than necessary and does not unfairly distort competition among legitimate businesses.

Conclusion

The Court of Appeal’s ruling in Impact Contracting Solutions Ltd v R&C solidifies the principle that EU law empowers tax authorities to deregister not only direct VAT defaulters but also facilitators who “knew or should have known” of fraud. It affirms that such deregistration—though punitive in effect—may lawfully be imposed so long as it is supported by sound, objective evidence and a proportionate balancing of the taxpayer’s legitimate activities against the need to prevent abuse. This decision will shape future VAT disputes, ensuring HMRC retains an effective deterrent against sophisticated VAT fraud schemes while safeguarding taxpayers through the procedural requirements of proportionality, fiscal neutrality, and legal certainty.